SEC. 14. FORM OF ARTICLES OF INCORPORATION..........

27
UNIVERSITY OF SAN CARLOS
SEC. 15. AMENDMENT OF THE ARTICLES..........................28
SCHOOL OF LAW &
SEC. 16. GROUNDS FOR DISAPPROVAL OF AOI OR
Business Organization 2
AMENDMENTS.........................................................................29
Revised Corporation Code
Reviewer SEC. 17. CORPORATION NAME.............................................29
SEC. 18. REGISTRATION, INCORPORATION AND
Atty. Eugenio Espedido COMMENCEMENT OF CORPORATION EXISTENCE..........30
EH403 SY 2019-2020 SEC. 19. DE FACTO CORPORATION......................................31
CORPO COMMITTEE: SEC. 20. CORPORATION BY ESTOPPEL...............................31
Gaviola, Keeshia Earl T. Li,
Jinnelyn O. Tagaloguin, SEC. 21. EFFECT OF NON-USE OF CORPORATE CHARTER
Elmar M. Torres, Chezka AND CONTINUOUS INOPERATION......................................34
Bianca P. TITLE III. BOARD OF DIRECTORS/TRUSTEES AND
OFFICERS..............................................................................34
SOURCES
Discussion of Atty. Espedido & Atty. Gaviola (2018-2019) | Herbosa SEC. 22. QUALIFICATIONS OF THE BOD/BOT....................35
| Prior Year Notes: Gaviola, Tanya & Beer Notes | UP Law Notes SEC. 23. ELECTION OF DIRECTORS OR TRUSTEES...........37
2019 | San Beda MemAid 2019
SEC. 24. CORPORATE OFFICERS...........................................39
Disclaimer: This material is not for sale. The authors do not SEC. 25. REPORTORIAL REQUIREMENTS...........................41
guarantee the absolute correctness, completeness or accuracy of SEC. 26. DISQUALIFICATION OF DIRECTORS,
this reviewer. This is intended to be used as a supplement to your TRUSTEES, OR OFFICERS.......................................................42
personal readings. Please be vigilant in cross-referring with your
own notes. We have arranged Atty. E.’s discussion to align with SEC. 27. REMOVAL OF DIRECTORS/TRUSTEES.................42
the codal provisions, and thus this reviewer does not completely SEC. 28. VACANCIES in the board............................................42
follow the flow of his class discussions.
SEC. 29 COMPENSATION OF DIRECTORS OR TRUSTEES
🖝 Kindly note that the portions of these reviewers marked with ........................................................................................... 44
double asterisks (**) were not discussed by Atty. E., but for SEC. 30. LIABILITY OF DIRECTORS, TRUSTEES OR
purposes of the mock bar and/or better understanding, the OFFICERS..................................................................................44
authors thought to include such notes in this material.
🖝 Tip: To easily reach a specific section or title in this document, SEC. 31. DEALINGS OF DIRECTORS, TRUSTEES OR
simply press CTRL + <click the section you want to go to>. OFFICERS..................................................................................45
SEC. 32 INTERLOCKING DIRECTORS...................................46
TABLE OF CONTENTS SEC. 33. DISLOYALTY OF A DIRECTOR...............................47
SEC. 34. EXECUTIVE COMMITTEE.......................................48
TITLE I. GENERAL PROVISIONS, DEFINITIONS AND
CLASSIFICATIONS..................................................................2 TITLE IV. POWERS OF THE CORPORATION......................48
SEC. 1. TITLE OF THE CODE.....................................................2 SEC. 35. CORPORATE POWERS AND CAPACITY................48
SEC. 2. CORPORATION DEFINED............................................4 SEC. 36. POWER TO EXTEND OR SHORTEN
CORPORATE TERM..................................................................50
SEC. 3. CLASSES OF CORPORATIONS..................................11
SEC. 37 POWER TO INCREASE OR DECREASE CAPITAL
SEC. 4. CORPORATIONS CREATED BY SPECIAL LAWS STOCK........................................................................................50
OR CHARTERS..........................................................................14
SEC. 38. POWER TO DENY PRE-EMPTIVE RIGHT...............51
SEC. 5. CORPORATORS AND INCORPORATORS,
STOCKHOLDERS AND MEMBERS........................................14 SEC. 39. SALE OR OTHER DISPOSITION OF ASSETS.........52
SEC. 6. CLASSIFICATION OF SHARES..................................15 SEC. 40. POWER TO ACQUIRE OWN SHARES.....................52
SEC. 7. FOUNDERS’ SHARES..................................................16 SEC. 41. POWER TO INVEST CORPORATE FUNDS IN
OTHER CORPORATIONS/BUSINESSES................................53
SEC. 8. REDEEMABLE SHARES.............................................16
SEC. 42. POWER TO DECLARE DIVIDENDS........................54
SEC. 9. TREASURY SHARES...................................................16
SEC. 43. POWER TO ENTER INTO MANAGEMENT
TITLE II. INCORPORATION AND ORGANIZATION OF CONTRACT................................................................................59
PRIVATE CORPORATIONS..................................................22
SEC. 44. ULTRA VIRES ACTS.................................................59
SEC. 10. NUMBER AND QUALIFICATIONS OF
INCORPORATORS....................................................................22 TITLE V. BYLAWS.................................................................60
SEC. 11. CORPORATE TERM...................................................23 SEC. 45. ADOPTION OF BY LAWS.........................................60
SEC. 12. CAPITAL STOCKS.....................................................23 SEC. 46. CONTENTS OF BYLAWS..........................................61
SEC. 13. CONTENTS OF THE ARTICLES OF SEC. 47. AMENDMENT TO BYLAWS.....................................61
INCORPORATION.....................................................................23 TITLE VI. MEETINGS.............................................................62

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 SEC. 48. KINDS OF MEETINGS...............................................62 R.A. No. 11232
SEC. 49. REGULAR & SPECIAL MEETINGS OF An Act Providing for the Revised Corporation Code of the
STOCKHOLDERS OR MEMBERS...........................................62 Philippines
SEC. 50. PLACE & TIME OF MEETINGS OF
STOCKHOLDERS OR MEMBERS...........................................65 TITLE I. GENERAL PROVISIONS,
SEC. 1. TITLE DEFINITIONS
OF THE CODE
AND CLASSIFICATIONS
SEC. 51. QUORUM IN MEETINGS..........................................65
SEC. 52. REGULAR & SPECIAL MEETINGS OF Section 1. Title of theINTRODUCTION
Code. This Code shall be known as the
DIRECTORS/TRUSTEES; QUORUM.......................................65 “Revised Corporation Code of the Philippines”.
The Revised Corporation Code of the Philippines (RCC) was signed
SEC. 53. WHO SHALL PRESIDE AT MEETINGS...................66
into law by Pres. Rodrigo Duterte on 20 February 2019, and became
SEC. 54. RIGHT TO VOTE OF SECURED CREDITORS & effective on 23 February 2019, following its publication in 2
ADMINISTRATORS..................................................................66 newspapers of general circulation.
SEC. 55. VOTING IN CASE OF JOINT OWNERSHIP OF
In its repealing clause, the Revised Corporation Code expressly
STOCK........................................................................................66
repealed the 1980 Corporation Code, which had no amendments for
SEC. 56. VOTING RIGHT FOR TREASURY SHARES...........67 almost 39 years.
SEC. 57. MANNER OF VOTING; PROXIES............................67
Notes:
SEC. 58. VOTING TRUSTS.......................................................68 From 149 sections, the RCC now has 188 sections. Being a
TITLE VII. STOCKS AND STOCKHOLDERS........................70 special law, it is a combination of substantive and procedural
law.
SEC. 59. SUBSCRIPTION CONTRACT....................................70 The most important innovation is the introduction of the
SEC. 60. PRE-INCORPORATION SUBSCRIPTION................70 OPC, or one-person corporation. This is a very new
concept. We have abandoned the old concept of at least 5
SEC. 61. CONSIDERATION FOR STOCKS.............................71 incorporators being required to make a corporation.
SEC. 62. CERTIFICATION OF STOCK & TRANSFER OF o There is a new concept because many investors
SHARES......................................................................................72 refrain from investing much into businesses,
because when they invest into sole
SEC. 63. ISSUANCE OF STOCK CERTIFICATES...................73 proprietorships, their liability is unlimited.
SEC. 64. LIABILITY OF DIRECTORS FOR WATERED o However, forming a corporation under the old
STOCKS......................................................................................75 law required 5 incorporators, and businessmen
may not be comfortable with doing business with
SEC. 65. INTEREST ON UNPAID SUBSCRIPTIONS..............77 five other persons. So what they did before was
SEC. 66. PAYMENT OF BALANCE OF SUBSCRIPTION 77 they incorporated a corporation together with
family members. Sometimes, they did it with
SEC. 67. DELINQUENCY SALE...............................................78 their drivers, gardeners and laundrywomen, etc.
SEC. 68. WHEN SALE MAY BE QUESTIONED.....................79 The SEC realized that we are just fooling
ourselves, that incorporators can sometimes be
SEC. 69. COURT ACTION TO RECOVER UNPAID had in circumvention of the law. That is why they
SUBSCRIPTION.........................................................................79 now allow the OPC.
SEC. 70. EFFECT OF DELINQUENCY.....................................79 However, note that 80-90% of the Code remains the same
with the Old Code.
SEC. 71. RIGHTS OF UNPAID SHARES, NONDELINQUENT
............................................................................................79
TYPES OF BUSINESS ORGANIZATIONS
SEC. 72. LOST OR DESTROYED CERTIFICATES.................80
TITLE VIII. CORPORATE BOOKS AND RECORDS.............82 (1) Sole Proprietorships
A form of business organization with only one proprietary
SEC. 73. BOOKS TO BE KEPT; STOCK TRANSFER AGENT owner. It is when a person personally or a single individual
............................................................................................82 conducts business under his own name or under a business
SEC. 74. RIGHT TO FINANCIAL STATEMENTS...................86 name.

APPENDIX..............................................................................87 (2) Partnerships

P.D. 902-A...................................................................................87 By a contract of partnership, two or more persons bind
themselves to contribute money, property or industry to a
NATIONALIZED ACTIVITIES (SEC. 8, RA 7042)..................87 common fund, with the intention of dividing the profits among
SEC. 3, R.A. 8179 (AMENDING SEC. 8, RA. 7042).................88 themselves. Two or more persons may also form a partnership
for the exercise of a profession.

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(3) Corporation
Transferrable Needs Does not
An artificial being created by operation of law, having the right
through asset consent of need prior
of succession and the powers, attributes and properties expressly
Transfer- sale all partners consent of
authorized by law or incident to its existence.
ability of (based on the stock-
Interest delectus holders
personae)
SOLE
PART CORPO
PROPRIETOR No right of succession There is
-NERSHIP -RATION
-SHIP Right of right of
Succession succession
Starts upon Created by Created by
selling mere agree- operation of
Commence ment of the law What is the basic distinction between the three?
-ment parties A: The veil of corporation fiction only exists in a corporation, and
not in a sole proprietorship or a partnership.
Sole At least 2 New Law: Atty. Espedido.: A Corporation, such as a One Person
proprietor persons One Person Corporation (OPC) enjoys the veil of corporate fiction and a
Corporation limited liability whereas a Sole Proprietorship’s liability may not
is allowed be limited at all.
No. of
Incorpo- One of the requirements of an OPC to exist is to declare how
Old Law: At
rators much capital he intends so that his liability will be based on that
least 5
incorpora- capital. He must prove that he has separated that capital from
tors his personal funds. The amount declared as capital for the
Corporation has been separated from the personal funds.
No juridical Execution From the date Unless he can do that, he might be liable as a Sole Proprietor.
personality of the of issuance of
contract the Certificate ADVANTAGES OF A CORPORATION
Commence
of Incorpora-
-ment of (1) More capitalization
tion by the
Juridical (2) Limited liability – veil of corporate fiction applies
SEC
Personality (3) Right of succession – upon the death of a stockholder, the
heir becomes the new stockholder which provides stability
for the business to continue
Liable up to Liable Stockholder s (4) Transferability of interest – does not require the consent of
the extent of personally are liable other stockholders
personal and subsi- only to the (5) Easier management – management is centralized in the
properties diarily for extent of Board of Directors
partnershi p their
debts to 3rd investments DISADVANTAGES OF A CORPORATION
persons as
represented (1) Higher Income Tax Liability (May be taxed twice)
by the shares Corporate Income Tax and Income Tax to
subscribed Stockholders
Liability by them
Illustration. When the corporation acquires income, it will
Important: be subject to corporate income tax. When it is distributed to
Veil of the shareholder as cash dividends, it will also be an income
Corporate of the shareholder and such are taxable income of the
Fiction shareholder.
applies
only to a (2) Less Participation in the Management. Participation of
Corpo- stockholders in a corporation is indirect.
ration
Indirect – means the management of the corporation is
Managed by Absence Power to do entrusted to the Board of Directors. The only
the sole of any business is participation of stockholders in the management is in
proprietor agree- vested in the the election of the Board of Directors.
ment, Board of
Manage- every Directors (3) No delectus personae – investing with people you do not
ment partner is (BOT) or know; there is no personal touch; no delectus personae
an agent Board of
of the Trustees (4) Dissolution – dissolution is granted by the State, unlike in a
partner- Partnership which can be dissolved anytime. Dissolution of
ship a Corporation requires consent of the State because it is
imbued with public interest.

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 (5) Greater degree of government control and supervision TYPES OF CORPORATIONS
(6) Difficulty in meeting requirements – high cost of 1. Public corporations
formation and operations Created to govern a portion of the State. Its purpose is for
the general good and welfare (Sec. 3, Act 1456).
SEC. 2. CORPORATION DEFINED
2. Private corporations
Section 2. Corporation Defined. A corporation is an artificial Created for some private purpose, benefit, aim or end. It
being created by operation of law, having the right of succession, may either be stock nor non-stock, government- owned or
and the powers, attributes, and properties expressly authorized by law controlled, or quasi-public.
or incidental to its existence.
3. Publicly-listed corporations
This course is actually called Business Organizations II. Private corporations whose stocks are listed in the PSE
But what will we be studying in this course? (Philippine Stock Exchange).
A: We will be studying about private corporations, as distinguished
from public corporations. Examples:
(1) San Miguel Corporation
Private corporations are different from public corporations in that the (2) Philippine Long Distance Telephone Company
latter are created and governed by special charters. (3) SM Prime Holdings, Inc.

What is a public corporation? 4. Quasi-public corporations

A: It is one created by the State either by general or special act for Private corporations performing public functions. (Example:
purposes of administration of local government or rendering VECO)
services in the public interest.
5. Government-Owned and Controlled Corporations
PRIVATE CORPORATION VS. PUBLIC CORPORATION Private corporations created by the Congress through a
special charter and the majority of its shareholdings are
PRIVATE CORPORATION PUBLIC CORPORATION owned by the government.
Formed for a private Formed or organized to
purpose, benefit or end. govern a portion of the A GOCC has a personality of its own, separate and distinct
State. from that of the government.

Examples: Examples:
1. Municipalities (1) Development Bank of the Philippines
2. Provinces (2) Philippine Ports Authority
3. Autonomous Regions (3) Philippine Amusement and Gaming
such as the ARMM and Corporation
the CAR (4) Land Bank of the Philippines
(5) Manila International Airport Authority
What about Region 7?
A: It is not a public corporation because its purpose is for **NOTES:
geographical determination and there is no election of Regional 1. The test to determine whether a GOCC or private corporation:
Representatives. Its only purpose is for the clustering of the provinces if a corporation is created by its own charter for the
forming part of that region. exercise of a public function, then GOCC; if by
incorporation under the general corporation law, then
How about ARMM and CAR? private corporation (Baluyot vs. Holganza, 2000)
A: These are autonomous regions that have their own governors and
boards. These are public corporations. What about the Department of Education?
A:
It is not a public corporation. It is an instrumentality of the
How do we define private corporations? government under the Executive Branch.
A: They are corporations that are established for a private purpose or
benefit. What is a government instrumentality?
A: It is not a private or a public corporation, but an instrumentality of
What do you think about PAGCOR? the government performing functions of a particular branch of the
A: It is an artificial being. government.

A: It has. If the employees of a GOCC are illegally dismissed, where

Does it have the right of
do they go?
The Philippine Airlines before was a private corporation. A: It depends on what is written on their special charter. They
And it was government-owned. Now, it has been
are not covered under the Revised Corporation Code, and they
privatized. Meaning, the shares of stock of the government are also not covered in the Labor Code. Moreover, many of them are
were sold to private persons. PAGCOR is a private covered by the Civil Service Rules even if they are private
corporation. corporations.

Therefore, we have demonstrated the fact that private

corporations may be?
A: They can be private or government-controlled.
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 CONSEQUENCES OF BEING A CORPORATION XPNs:
What are the consequences of a corporation existing as an (1) When the crime is punishable by a special law;
artificial being? Atty. Espedido: The special law must specify that it
A:
(1) It has a separate and distinct personality from its members imposes
be able penalties
to punishon the
the officers
officers,of the
the corporation.
law should
or shareholders, thus incurs separate liability specifically provide that in case the corporation
(2) It enjoys rights separate from the stockholders becomes liable, the officers shall be directly
(3) Properties of the corporation are separate from the punishable for the commission of the act or violation,
properties of the stockholders. and that they will suffer the penalty of imprisonment.
Otherwise, they
cannot be held
RIGHTS OF A CORPORATION
(2) When the penalty imposed is a fine;
What rights does a corporation have? A corporation can be made criminally liable by being made
A: to pay a fine. Fines are not civil obligations, but are penalties.
(1) Constitutional rights
(2) Civil rights (3) When the corporation violates the Anti-Money
(3) Economic rights Laundering Act (AMLA)

Note: A corporation does not have political rights. Penalties in the AMLA include:
a. Suspension
Civil and Economic Rights: b. Revocation of license
(1) Right to sue or be sued c. Fine
(2) Right to own and dispose of properties
(3) Right to enter into contracts PRINCIPLE OF LIBERALITY OF CONTRACTS
(4) Right to non-impairment of contracts
Rule: Anyone can stipulate any provision in a contract as long as
Constitutional Rights: such provision is not contrary to law, morals, public policy, and
(1) Right to due process and equal protection of the law public order. This right is enjoyed by both natural and juridical
persons.
Section I, Article III of the Constitution
“No person shall be deprived of life, liberty or property Note: A corporation also enjoys the right to liberality of contracts.
without due process of law, nor shall any person be denied However, there is an additional condition: a corporation is not
the equal protection of the law.” only bound by the limitations imposed under the principle of
liberality of contracts, but is also bound by the provisions in the
(2) Right against unreasonable searches and seizure Articles of Incorporation.
(3) Right against non-impairment of contracts
(4) Right against self-incrimination Thus, a corporation’s existence must be within the
boundaries of the Revised Corporation Code and its
Note: An artificial being has a separate set of rights from Articles of Incorporation.
that of natural persons. Artificial persons enjoy certain
rights that persons also enjoy, but not all rights. Atty. Espedido: In other words, you cannot just say that you
can enter into any contract under the principle of liberality of
What rights can a corporation not exercise? contracts but the contract must also be confined within the
A: privilege granted by the State.
(1) Political rights – for example, the right to vote and be
voted for
(2) – granted only personality in accordance to Important: Although you can enter into any contract, your authority
Right to
law or power to enter into a contract must be confined
(3) Right to liberty – a corporation is not a corporal being (it within the authority granted to you by the State.
has no physical existence) which can be detained unlike a
natural person. A corporation cannot move, and therefore it LIABILITY OF CORPORATIONS IN CASE OF DEBT
is impractical to send the corporation to jail.
Consequence of having a separate juridical personality: The debts of
CRIMINAL LIABILITY OF A CORPORATION the corporation cannot be demanded by the creditors against the
stockholders.
GEN: A corporation cannot be held criminally liable under the
Revised Penal Code. Stockholders cannot be held personally liable because their liability is
limited to the extent of their investments. It is unlike a Partnership
Rationale: Crimes under the RPC have the element of intent where the partners can be held personally liable.
which corporations are not capable of, as it has no mind of its
own. As a creature of the law, its intention cannot be determined. It Reason: In a corporation, there is a veil of corporate fiction. The
can also not be sent to jail because it has no corporal or physical main difference between the two is that, while both partnership and
existence. corporation are juridical persons, the veil of corporate entity applies
only to corporations.

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Illustration. Do you think that the sheriff can go after Corporation B?
A corporation incurred debts and its assets are not A: Normally, the sheriff might be hesitant. The sheriff will not
sufficient to pay its debts. Can the creditors demand want to violate the rights of Corporation B.
payment from its stockholders?
A: Generally, no. If the assets are not enough, it will be considered as Atty. Espedido: But lawyers have a way of pursuing Corporation
losses on the part of the creditor. B. They can proceed to Corporation B by proving that the
assets were actually owned by Corporation A through
Atty. Espedido: In case the corporation incurs debts and their establishing that the stockholders of Corporation A are the
assets are no longer sufficient, the creditors may organize same stockholders of Corporation B.
themselves and discuss the matter with the corporation. To aid
the creditors for whatever is due to them, they could agree to Show that the assets were only transferred to defraud the
pursue rehabilitation. creditors. So this is an instance when the corporate veil may
be lifted.
In a rehabilitation, the assets of the corporation will be
gathered. It will not be enough so the court will apply a receiver RELATIONSHIPS OF A CORPORATION
who will determine how the creditors will be paid.
When we organize or form a corporation, we will establish various
The receiver’s job is to settles as much as possible – keep the relationships. Relationships are necessary.
business of the Corporation going, such as appoint some
managers, so that the business will continue, earn income, and Relationships formed by a corporation
such profits will be now distributed to the creditors. However,
this may not be a one-time payment. They will now program (1) Relationship between Corporation and the
the payment. In this manner, the creditors will be protected. Shareholders
Which is why it is necessary to execute the Articles of
VEIL OF CORPORATE FICTION Incorporation. It manages the relationship between the
corporation and the shareholders.
A corporation has a separate and distinct personality from its
shareholders, officers, and directors. Once said corporate fiction is (2) Relationship among Shareholders themselves
created, the veil hides the stockholders such that when a corporation The articles and the law provide the regulation and
incurs liability, the stockholders are shielded from liability. In so far monitors this relationship
as the law is concerned, we are only dealing with the corporation.
(3) Relationship between the Corporation and the
Otherwise, without the veil, would you still like to be a State
stockholder? A corporation is created by the State. It is the state that
Atty. Espedido: There is no point. In other words, that veil is granted the privilege; thus, it can also be withdrawn by the
the protection of the stockholders. state. Therefore, you must be compliant with the provisions
of the law. Any violation will cause the suspension or
Can the veil of corporate fiction be enjoyed by a eventual revocation.
partnership?
A: No. While a corporation and a partnership are both juridical (4) Relationship between the Corporation and the
persons, the veil of corporate fiction only applies to corporations. Public
The public here includes the clients.
PIERCING THE VEIL OF CORPORATE FICTION
In forming a corporation, your objective is to gather friends and
When can there be piercing of the veil of corporate fiction? people in order to get funds or ask for investments.
A: When the corporate veil: (Memory Aid: PDFJ)
1. Defeats public convenience; Atty. Espedido: In forming a corporation, the main purpose is
2. Is used to perpetuate fraud; fundraising. Because when you do not have money or
3. Is used to defend a crime; investments, it will be difficult to run a business.
4. Is used to justify a wrong.
The easiest option is to borrow. But if you do not have financial
Illustration. assets, do you think the bank will lend to you? What will the
Corporation A defrauds its creditors by transferring its bank require? Financial statements. The FS however will show
assets to Corporation B that you have zero assets. No bank will lend to you. Because if
the manager lends to you without collateral, he will lose his job.
Corporation A has five (5) stockholders. Corporation A incurred If you do not pay your debt, you might even be sent to jail
debts and has already received a demand letter. Corporation A is now because you defrauded the bank.
anticipating that the creditor might proceed against their assets. On the other hand, if you form a corporation, even if you do not
earn profits, can the investors demand payment from you? Are
Corporation A now created Corporation B and made it appear that the you obliged to return their money?
assets of Corporation A were already sold to Corporation B.
A: No. By contributing money, they have exposed themselves to
When the sheriff came to attach the property of Corporation A, the risk. In business, you do not guarantee profits.
sheriff was shown a document that the assets are sold to Corporation
B. On the other hand, if you borrowed money from the bank and
you cannot return it, there will be interest to be paid,
compounded interest, and the bank may foreclose your
property.
Page 6 of 88 | EH403 2019-2020 Corporation Law
 DIFFERENCE BETWEEN A LENDER & AN INVESTOR RELATIONSHIP BETWEEN THE CORPORATION
AND STATE
LENDER INVESTOR
A corporation is a creation of the law. In other words, it is a privilege
No risk presumed Takes the risk because there
granted by the State. The term extended or granted by the state is
is no guarantee of success or
subject to the condition that the corporation will comply with the
profits in
reportorial requirements and behave within the bounds of the law.
business.
Otherwise, the State may revoke or cancel the license. It may also
Note: When you invest, you share opportunities. You share suspend and/or charge a fine.
risks as well.
What is the difference between an investor and a lender? PARTNERSHIP VS CORPORATION
A: The investor takes a risk.
PARTNERSHIP CORPORATION
Atty. Espedido: Nobody can guarantee success. But more or
less, if there is hard work and perseverance, success follows. Manner of Created by mere Created by law or by
Creation agreement of the operation of law
parties
RELATIONSHIP
The relationship betweenBETWEEN A CORPORATION
the corporation & is well
and the stockholders
THE SHAREHOLDERS
established in the Articles of Incorporation (AOI). The AOI is No. of At least 2 One Person
considered as the contract or agreement of the Corporation and the Incorporators persons Corporation
Stockholders. Since this is their agreement, the AOI binds their Old law: at least 5
relationship and regulates their relationship. incorporators

Illustration. Commencement Moment of From the date of the

A funeral parlor is turned into a hospital of Juridical execution of the issuance of the
Personality contract Certificate of
The primary purpose of the corporation is to maintain, Incorporation by the
operate, run and manage a funeral parlor. May the SEC
corporation maintain, operate and manage a hospital
instead? Powers May exercise Exercise power only
A: It cannot, because their agreement is to engage in a funeral power authorized expressly granted by
business. by the partners law or implied from
those granted or
What can the stockholder do? incident to its
A: Even if the Board of Directors (BOD) want to have a hospital, existence
they cannot immediately do so if the Articles of Incorporation is not
amended. The stockholders must ratify it, and there should be an Management Absence of any Power to do
amendment of the Articles of Incorporation agreement, every business is vested in
partner is an agent the Board of
The moment the corporation intends to pursue another business, the of the partnership Directors or Board
stockholder may ask for an amendment of the Articles of of Trustees
Incorporation to reflect such changes. Otherwise, the contract will be
violated. Effect of Partner can sue a Suit against the
Mismanagement co-partner member of the BOD
Note: Amending the Articles of Incorporation is basically or BOT must be in
amending the contract between the shareholders and the the name of the
corporation. corporation

RELATIONSHIP AMONG SHAREHOLDERS THEMSELVES Rights of No right of Has right of

Succession succession succession
This is still an agreement among themselves. This can be found in
their by-laws. Extent of Liable personally Stockholders are
Liability to 3rd and subsidiarily liable only to the
Content of the By-Laws of the Corporation Persons for partnership extent of their
(1) How many boards and officers will be elected debts to 3rd persons investments as
(2) Term of office represented by the
(3) Functions and Powers shares subscribed by
them
(4) Manner of
(5) When will the stockholders and/or board meet
(6) Definition of various types of shares Transferability Needs consent of Without prior
(7) Etc. of Interest all partners (based consent of other
on delectus stockholders
personarum)

Term of Any period of Perpetual

Existence time

Page 7 of 88 | EH403 2019-2020 Corporation Law

 Old law: 50 years cash dividends, it will also be an income of the
and extendible for shareholder and such are taxable income of the
another 50 years shareholder.

Firm Name For limited May adopt any (2) Less participation in the management of the business
partnership, name as long as it is Shareholders only have an indirect participation in
requires LTD in not the same or the management of the corporation
its name similar to other o “Indirect” – means that the management of the
registered firm corporation is entrusted to the Board of Directors.
name The only participation of the stockholders in the
management is the election of the Board of
Dissolution May be dissolved Dissolved only with Directors.
anytime by the will consent of the State
of any or all (3) No delectus personae
partners A shareholder will be investing in the business with
people he doesn’t know; there is no personal touch;
Governing Laws Civil Code Governed by a there is delectus personae.
general law which
is the Revised (4) Dissolution
Corporation Code
or a special charter Dissolution is granted by the State, unlike in a
partnership which can be dissolved anytime. The
Why is management in a corporation better? dissolution of a corporation requires the consent of the
A: State because it is embued with public interest.
1. There are fewer members, and as a result, it is easier to
(5) Greater degree of government control and supervision
convene and communicate, while in a partnership,
“everyone talks”.
2. Management is vested on persons with expertise. (6) Difficulty of organization
Organizing a corporation requires a high cost of
Basic Distinction formation and operations
The veil of corporate fiction only applies to corporations, and is not to
sole proprietorships or partnerships. Summary of Differences between a Partnership and
Corporation (Note: Only these were highlighted during
recitation)
Atty. Espedido: A corporation, such as a One Person
Corporation (OPC) enjoys the veil of corporate fiction and a
PARTNERSHIP CORPORATION
limited liability, whereas a sole proprietorship’s liability may not
be limited at all. Manner of Created by mere Created by law or
Creation agreement of the by operation of law
One of the requirements for an OPC to exist is to declare how parties
much capital he intends so that his liability will be based on
that capital. He must prove that he has separated that capital Commencement Moment of From the date of the
from his personal funds, that the amount declared as capital for of Juridical execution of the issuance of the
the corporation has been separated from the personal funds. Personality contract Certificate of
Unless he can do that, he will be liable as a sole proprietor. Incorporation by the
SEC
ADVANTAGES OF A CORPORATION
Management Absence of any Power to do business
(1) More capitalization agreement, every is vested in the
(2) Limited liability (the veil of corporate fiction applies to partner is an agent Board of Directors or
corporations) of the partnership Board of Trustees
(3) Right of succession (upon the death of a stockholder, the
heir becomes the new stockholder which provides stability
for the business to continue) Rights of No right of Has right of
(4) Transferability of interest – does not require the consent of Succession succession succession
the other stockholders
(5) Easier management – management is centralized in the Extent of Liable personally Stockholders are
Board of Directors Liability to 3rd and subsidiarily for liable only to the
Persons partnership debts to extent of their
DISADVANTAGES OF A CORPORATION 3rd persons investments as
represented by the
(1) Higher income tax liability shares subscribed by
them
The profits of the corporation is taxed twice:
corporate income tax and income tax on the
Transferability Needs consent of Without prior
stockholders for the dividends
of Interest all partners consent of other
(based on stockholders
Illustration. When the corporation acquires income, it
delectus
will be subjected to corporate income tax. When it is
personarum)
Page 8 of 88 | EH403 2019-2020 Corporation Law
distributed to the shareholder as

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Atty. Espedido: The life of the corporation begins in the When will the balance be due?
issuance of the Certificate of Incorporation issued by the SEC. A: It depends on the Board. The Board may indicate the date when
the balance will be due or will simply announce or make a call on the
CONTENTS OF THE
(1) Name of the Corporation balance.
(2) PurposeARTICLES OF
(a) Primary Purpose – main business How is it paid?
Example: Operate and establish the best funeral A: The paid-up capital may either be done in cash or property
parlor of all time and name it “Libing Things” equivalent to the amount you intend to pay.
(b) Secondary purpose – may refer to incidental or
related products or activities If payment is through property, how will the equivalent of
(3) Nature of the business the property be determined?
A:
(4) Term – perpetual term; you could exist for as long as you
(1) The value will be determined through an appraisal.
wish. If you want to stop, just dissolve it along the way
(a) The SEC will send an appraiser OR
(5) Address – Purpose: In order that the SEC will know where
(b) You will be required to submit an appraisal report of your
to send notices or serve you summons
(6) Names of the Stockholders property done by a duly accredited appraiser, together with
(7) Names of the Incorporators the Articles of Incorporation, to the SEC.
Note: Incorporators may now be juridical persons so long
(2) The SEC personnel will verify WON the paid-up capital has
as they present appropriate authority. (Old law: only natural
been deposited to the bank in addition to the certified bank
persons)
deposit, which shall accompany the Articles of Incorporation.
(8) Capital Structure of the Corporation

CAPITAL STRUCTURE (3) The treasurer’s affidavit will indicate that at least 25% of the
subscribed capital has been paid, OR under the present code,
Three levels of capital structure: there will be now a verification. (Does not necessarily by the
treasurer but some other officers of the corporation, indicating
(1) Authorized Capital Stock (ACS) – the maximum amount among others that at least 25% of the subscriptions have been
paid and that it was made with cash or properties.
that a corporation intends to invest on a business

(2) Subscribed Capital Stock (SCS) – the number of shares a APPLICATION WITH THE SEC
stockholder intends to invest in the corporation which he
commits himself to pay – it is the committed investment Atty. Espedido: More or less these are the contents of an
of the stockholder Article of Incorporation. You may submit this to the SEC.

(3) Paid-Up Capital – stock actually paid for by the (1) Verification – The SEC will go over your Article of
stockholders; it is the initial amount that the stockholders are Incorporation and verify the name. Before you submit your
obliged to pay. This is the initial amount that shall be used in Articles of Incorporation, you have to confirm or verify the
starting the corporation. name that you intend to use.

If you are a new corporation, how much should be Otherwise if the SEC discovers that somebody is already using
subscribed? the same name, SEC might deny or return to you your papers
A: The Revised Corporation Code does not require a minimum and come up with another name.
subscribed capital stock.
To save time, they require you to give 3 alternative names. SEC
Reason: To attract the formation of more business is free to choose from those 3 alternative names.
organizations.
(2) Issuance of the Certificate of Incorporation – If all the
XPN: However, the the 25% subscribed capital stock is requisites are in order, the SEC will issue the Certificate of
compulsory when there is an increase in the capital stock. Thus, Incorporation.
it requires that at least 25% must be subscribed, and 25% must
be paid-up. That is the official document that will give the birth of your
corporation. Once you receive this, all the stockholders will be
convened and we will have the first stockholders meeting.
A/N: Under the Old Corporation Code, newly formed
corporations were required to have 25% of their ACS
subscribed, of this subscribed capital stock, 25% must be paid- STEPS AFTER THE BIRTH OF THE CORPORATION
up (paid-up capital stock). However, this requirement has now
been removed under the Revised Corporation Code. (1) Organization meeting of the stockholders
The main agenda is the election of the Board.
Note: You do not have to pay the subscription
immediately. The balance or may be due or payable later. (2) Meeting of the Board of Directors, Election of Officers
Once the Board of Directors are elected, they could adjourn the
stockholders meeting and the directors themselves will now hold
its first Board Meeting.

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 In that meeting, they will elect the officers based on the ballots Illustration 3.
(President, Chairman, Vice President, Secretary, USC + Dance lessons after class
Treasurer). If they may want to, they will select the COO
(child of the owner). After class hours, the entire school will be vacated. The
best way to succeed is to maximize the use of assets.
RIGHT OF SUCCESSION Thus, the priests hired dancing instructors and offered
dancing lessons to interested matrons and engaged the
If a stockholder or a member dies, withdraws, is insolvent, or suffers services of macho dancing instructors. At least they can
incapacity, the corporation will still continue and not be dissolved. earn some more for two (2) hours.
When all the stockholders die, the heirs will become stockholders. Can they engage in maintaining and operating a dancing
The rights, as well as the interests of the deceased stockholders will school?
now be transferred to the heirs at the moment of death because A: No, because this is not incidental. Offering academic courses is
succession starts at the moment of the death of the deceased person. the principal purpose of USC. Thus, the dancing school is beyond its
purpose.
POWERS, ATTRIBUTES, PROPERTIES
Illustration 4.
These rights may be determined in the Articles of Incorporation, the Mining Company + Postal Service
Corporation Code, and the By-Laws. These are the sources of rights
and obligations of the stockholders. There was a mining company in the mountain and to travel
from the mining site from the big city was very difficult. So
Illustration 1. the EEs communicated with their families through mail (no
Transportation Company + Big building for Garage cellphones at this time). The mails were carried by the
company facilities and delivered to the city. The EEs
If you are a transportation company, you are managing, requested that their mails could be coursed through the
operating, and maintaining a fleet of buses. What do you company parcels.
think your powers could be?
A: Demand fare. You have the power to pursue and engage in the The company agreed for it is for the benefit of the EEs
business of transportation provided that the EEs will make payment – a subsidized
mailing payment.
Your neighbors are complaining because your business is
transportation, but you also own a big building. Do you LBC complained because the mining company is now
think you can maintain a big building as a garage? engaged in delivering parcels and mails. There is now a
A: Yes, it is allowed. Maintaining a big building is incidental to the competition between the company engaged in mining and
business. the company carrying parcels.
Illustration 2. What do you think?
Cement Factory + Electricity A: SC said that it is still incidental because at that time,
transportation was very difficult, no more cellphones or any other
You are operating a cement factory. It requires a big mode of communication.
volume of power, so much that the services of VECO may
not be enough, prompting you now to maintain your own Illustration 5.
power plant. Railroad Company + Buying Tracts of Land
You now have your own power plant within the cement A railroad company was buying tracts of land where they
factory. You have officers and employees residing within could install their railings.
your cement factory. Because you have extra power for
your cement factory, you started selling this extra power Somebody complained that they cannot expropriate since
to your EEs inside the compound. the company’s power is merely to engage in railroad
business. They argued that the company cannot compel
If you are VECO, do you have a reason to complain? owners to sell their land to the company because only the
A: The best approach would be to ask the EEs who they would want government has the power to do so.
to provide electricity for them. They will definitely side with the
cement factory because the rates are subsidized. SC Ruling: The buying of the lands is for the furtherance of the
business of the railroad. It is incidental to being a railroad company.
The corporation may argue that it is not doing business per se but
only providing assistance to their EEs – extending facilities to their Atty. Espedido: These are some of the several illustrations of
EEs. primary powers and incidental powers.
Important: So long as you can justify that the act is incidental to
the main purpose, you are allowed to execute such power.

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 EFFECT OF (I) As to its nationality**
INCOMPLETE 1. Philippine national
2. Foreign corporation
Rule: Failure to acquire or comply with the requirements for an
issuance of a Certificate of Incorporation does not justify making it (A) AS TO PURPOSE
into a partnership.
(1) Public Corporation
Atty: Espedido: If the papers are not in order, the SEC will not created to govern a portion of a State
issue a Certificate of Incorporation. The incorporators will have
to make the necessary corrections. (2) Private Corporation – created for private ends
(a) Publicly listed – private corporations that are publicly
If the incorporators will not comply, the SEC will have to deny listed in the Philippine Stock Exchange which means their
the issuance of a Certificate of Incorporation. shares can be bought and sold on the PSE Examples: San
Miguel Corporation,
The incorporators cannot engage in business as a corporation. Ayala Land Corporation
They also cannot argue that they are now a partnership
because the intention is not to pursue a partnership but to (b) Quasi-Public Corporations – private corporations
organize a corporation. performing public functions
Example: VECO providing electricity
SEC. 3. CLASSES OF CORPORATIONS
(c) Government Owned and Controlled Corporations
Section 3. Classes of Corporations. Corporations formed or (GOCC) – created by Congress through a special
organized under this Code may be stock or nonstock corporations. charter for which the government is the majority
Stock corporations are those which have capital stock divided into stockholder
shares and are authorized to distribute to the holders of such shares, Examples: PAGCOR, Landbank of the
dividends, or allotments of the surplus profits on the basis of the Philippines, SSS, GSIS
shares held. All other corporations are nonstock corporations.
(B) UNDER THE REVISED CORPORATION CODE
VARIOUS TYPES OF CORPORATIONS (Outline) (1) Stock Corporation
Those which have capital stock divided into shares and are
(A) As to purpose
authorized to distribute to the holders of such shares,
1. Public Corporation
dividends, or allotments of the surplus profits on the basis
2. Private Corporation
of the shares held.
(a) Publicly Listed
(b) Quasi-Public It has capital stocks divided into shares and distributed to
(c) Government Owned and Controlled the holders.
Corporation (GOCC) A stock corporation is also considered as a
corporation for profit.
(B) Under the Revised Corporation Code Purpose of dividing shares: Determine the share in the
1. Stock Corporation profits.
2. Non-Stock Corporation
(2) Non-Stock Corporation
(C) As to number of corporators All other corporations; they do not issue shares and
1. Corporation Sole do not distribute profits to its members.
2. One Person Corporation However, they still own profits for expenditures and to
3. Corporation Aggregate improve their facilities. They cannot distribute the profits to
its members. They have to plough this back to the
(D) Whether it is Open or Close corporation for the benefit of the members in terms of
1. Open Corporation improvement of facilities.
2. Close Corporation
(C) AS TO NUMBER OF CORPORATORS
(E) As to Legal or Corporate Existence
1. De jure corporation (1) Corporation Sole – one member or corporator; for purely
2. De facto corporation religious purposes
(F) Whether it is for a religions purpose or not (2) One Person Corporation – one member or corporator
1. Ecclesiastical Corporation also but not limited to purely religious purposes
2. Lay Corporation
(3) Corporation Aggregate – consisting of more than one
(G) As to Formation corporator or member
1. Domestic Corporation
2. Foreign Corporation Basis why the State is liberal in the establishment of
religious corporations as a corporation sole: Constitutional
(H) As to their relation to another corporation right to Freedom of Religion and Separation of Powers between
1. Holding or Parent Corporation the Church and the State.
2. Subsidiary Corporation
3. Affiliated Corporation Atty. Espedido: Any attempt of preventing anyone from
Page 12 of 88 | EH403 2019-2020 Corporation Law
exercising his religion, from establishing his own church, can
be

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considered as a violation to his freedom of religion. Thus, the (F) WHETHER IT IS FOR A RELIGIONS PURPOSE OR NOT
State would just want to know where you are located and the
funds that the church has earned. (1) Ecclesiastical Corporation
for religious purposes
Notes:
Corporation sole – one formed for the purpose of (2) Lay Corporation
administering and managing, as trustee, the affairs, purpose other than religion
property and temporalities of any religions denomination,
sect, or church, by the chief archbishop, bishop, priest, **Other types of religious/charitable corporations:
rabbi, or other presiding elder of such religious
denomination, sect or church. (3) Corporation Sole
incorporated by one person
(D) AS TO WHETHER IT IS OPEN OR CLOSE a corporation formed for the purpose of administering and
managing, as trustee, the affairs, properties and
(1) Open Corporation temporalities of any religious denomination, sect or church,
open to any person who may wish to become by the chief archbishop, bishop, priest, rabbi or other
shareholders. Most of these are publicly listed. presiding elder of such religious denomination, sect or
church.
(2) Close Corporation A corporation sole has no nationality but for the purpose of
limited to selected persons or members of a family. applying nationalization laws, nationality is determined not
This qualification is contained in the Articles of by the nationality of its presiding elder, but by the
Incorporation (AOI) and the Stock Certificate. The stock nationality of the its members constituting the sect in the
certificate indicates that these holders shall not be allowed to Philippines.
dispose the shares UNLESS he offers it to the existing holders o Thus, the Roman Catholic Church can acquire
first. lands in the Philippines even if it is headed by the
Pope (Roman Catholic Apostolic, et. al. vs.
IOW, it cannot be an absolute prohibition. Otherwise, it Register of Deeds of Davao City, G.R. No. L-
will violate the right of an owner which includes the right to 8451)
own, right to possess, and right to dispose.
(4) Corporation Aggregate (Religious Society)
Relative Prohibition – you are required to offer this to
A religious organization incorporated by more than one
existing stockholders. Only when there are no
existing stockholders that would buy that you can person
sell it to others.
(5) Eleemosynary Corporation
Atty. Espedido: Disqualifications on the sale of shares of a One organized for a charitable purpose
close corporation can be found in the articles of incorporation,
or in the certificates of stock. (G) AS TO FORMATION

(1) Domestic Corporation

For example, in the Stock Certificate, you may place a
qualification that “The holder of these shares cannot sell these a corporation formed, organized or existing under the laws
shares UNLESS the existing holders exercise their right of of the Philippines.
first refusal xxx”
(2) Foreign Corporation
Note: formed under any laws other than those of the Philippines
Close corporation – one whose articles of incorporation
provide that: (H) Corporation
AS TO THEIR RELATION TO
1. All issued stock, exclusive of treasury shares, shall be (1) Parent
ANOTHER CORPORATION
held by persons not exceeding 20; corporation which holds ownership of various corporations,
2. All issued stock shall be subject to one or more thereby having control over such corporations. It has the
specified restrictions on transfer; and capacity to elect or control other corporations.
3. The corporation shall not list in any stock exchange or ** A holding company is a parent corporation which has no
make any public offering of its stock of any class. other business aside from the holding of the shares of its
subsidiaries, which it controls
Notwithstanding the foregoing, a corporation shall not be
deemed a close corporation when at least 2/3 of its voting (2) Subsidiary Corporation
stock or voting rights is owned or controlled by another owned and controlled by the holding or parent corporation.
corporation which is not a close corporation. The holding corporation elects the Board of Directors
(BOD) for the subsidiary.
(E) AS TO LEGAL OR CORPORATE EXISTENCE
(3) Affiliated Corporation
(1) De jure corporation those related to the parent corporation or subsidiary
corporation existing in fact or in law
corporation
(2) De facto corporation
existing in fact but not in law

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 **(I) AS TO NATIONALITY
**NOTES:
PLACE OF INCORPORATION TEST:
What is the difference between an affiliate and a
Where the corporation was created:
subsidiary?
A: The difference lies in the level of ownership of the parent
(1) Domestic Corporation
company in a certain corporation.
(2) Foreign Corporation
The terms “affiliate” and “associate” corporation are used
CITIZENSHIP OF STOCKHOLDERS
synonymously to describe a company whose parent only
possesses a minority stake in the ownership of the company.
(1) Philippine National
On the other hand, a subsidiary is a business whose parent 100% owned by the Filipino citizens, even if
holds a majority stake or is a majority shareholder of 50% or incorporated abroad.
more of all shares. Some subsidiaries are even wholly owned, Sec. 3, Foreign Investment Act of 1991 (R.A.
meaning the parent corporation owns 100% of the subsidiary. 7042):

Definition:
The term "Philippine national" shall mean a
(4) Sister Company citizen of the Philippines or a domestic
fellow subsidiary with respect to another subsidiary; both partnership or association wholly owned by
owned by the parent corporation citizens of the Philippines; or a corporation
organized under the laws of the Philippines of
Although performing other activities, these activities are very which at least sixty percent (60%) of the capital
much related or part of the other companies (e.g. they are stock outstanding and entitled to vote is owned
part of the supply chain perhaps). Thus, if the owner of the and held by citizens of the Philippines; or a
company creates another corporation related to the other trustee of funds for pension or other employee
corporation, then it can be considered sister companies. retirement or separation benefits, where the
trustee is a Philippine national and at least sixty
Illustration. (60%) of the fund will accrue to the benefit of the
Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own
stocks in a Securities and Exchange Commission
(SEC) registered enterprise, at least sixty percent
(60%) of the capital stocks outstanding and
entitled to vote of both corporations must be
owned and held by citizens of the Philippines and
at least sixty percent (60%) of the members of
the Board of Directors of both corporations must
be citizens of the Philippines, in order that the
corporations shall be considered a Philippine
A trucking company is engaged in hauling products. The owner noted national.
that the products are brought to various warehouses that are owned by
other people. Thus, the owner of the logistics company decided to (2) Foreign-owned corporation
construct a warehouse. Majority of the stockholdings are owned by
foreigners, even if incorporated in the Philippines.
The owner of the trucking company also convinced the producer and
the manufacturer that he can assign someone to monitor the products. TESTS TO DETERMINE CITIZENSHIP OF STOCKHOLDERS
Thus, a third business was made – Warehouse Management. The (Applies when the corporation is not 100% owned by Filipino citizens)
owner also created another one as a marketing arm, thus a Sales
Force company. A. Control Test
At least 60% of the outstanding capital stock which are
Summary: So the Trucking Company here is the parent entitled to vote are owned by Filipino citizens
corporation, and it owns the subsidiaries: (1) Warehouse Company
for leasing, a (2) Warehouse Management and a (3) Sales Force B. Grandfather Rule
Company. These various businesses, in relation to each other, are
If the percentage of Filipino ownership is less than
called sister companies and would constitute a complete chain – they
60%, then only the number of shares corresponding to
are related to each other.
such percentage shall be counted as Philippine
nationality.
Another example: Aboitiz Company as the owner of Union Bank,
VECO, real estate, and many other activities. So these are the
Narra Nickel vs. Redmont
subsidiaries of Aboitiz – the more generic term would be affiliates.
The control test is still the prevailing mode of determining whether
or not a corporation is a Filipino corporation, within the ambit of Sec.
2, Art. II of the 1987 Constitution. When in the mind of the Court
there is doubt, based on the attendant facts and circumstances of the
case or in the 60-40 Filipino equity ownership, then it may apply the
Grandfather Rule.

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What do you mean by “doubt”? This is not a circumvention of the law. It is a valid structure
A: “Doubt” is any circumstance which renders the beneficial UNLESS it is established that it is used to truly circumvent the law
ownership and control of the corporation outside of Filipino or the Constitution.
ownership. It is not when a corporation’s Filipino ownership falls
below 60%. Basis: The Foreign Investment Act, where it only requires that 60%
of the investee corporation and investor corporation’s outstanding
Where does the 60% requirement apply to, the voting capital stock entitled to vote be owned by Filipino citizens, and that at
shares or the outstanding shares? least 60% of their Board of Directors should be composed of Filipino
Atty. Gaviola: The interpretation wherein the SC said that the citizens.
restriction must apply to each type of share (Gamboa vs.
Teves,
G.R. 176579) is the correct interpretation. This is because SEC. 4. CORPORATIONS CREATED BY SPECIAL
when you say outstanding capital stock entitled to vote, that is LAWS OR CHARTERS
very general.
Section
Who 4. persons
are the CorporationsinvolvedCreated
in the by Special Laws
organization of a or
You cannot say that preferred stocks are not entitled to vote in Charters. – Corporations created by special laws or charters shall
corporation?
the election of directors. Only when they are deemed non- beThey
A: governed
are: primarily by the provisions of the special law or
voting expressly can they be deprived of their right to vote, but charter creating or applicable to (4)
(1) Incorporators them, supplemented by the
Promoters
only in the election of directors. For all the other items provisions of this Code, insofar as they
(2) Corporators (5)are applicable.
Underwriters
enumerated in the RCC, they are required to vote. (3) Board of Directors/ (6) Founders
SEC. 5. CORPORATORS AND
Trustees
A/N: This was lifted from the IBL class of Atty. Gaviola. INCORPORATORS, STOCKHOLDERS
INCORPORATORS
**NOTES Section 5. Corporators and Incorporators, Stockholders
Incorporators
and Members. are the –organizers of theare
Corporators corporation upon compose
those who its inception.
a
NATIONALIZED ACTIVITY They are mentioned
corporation, whetherin the AOI as originally
as stockholders forming andincomposing
or shareholders a stock
the corporation,
corporation and
or as who areinsignatories
members a nonstockthereof.
corporation. Incorporators
This is determined by looking at the Foreign Investment Negative are those stockholders or members mentioned in the articles of
List (FINL), which enumerates activities which are limited to or Under
incorporation
the New as originally
Code, juridical
formingpersons
and composing
can now bethe
incorporators.
corporation
reserved for Filipinos. It is a list of economic activities whose foreign and who are signatories thereof.
ownership is limited to a maximum of 40% of the equity capital. Of Under the Old Code, only natural persons can be incorporators.
the enterprise engaged therein. PARTIES INVOLVED IN THE ORGANIZATION OF
CORPORATORS A CORPORATION
If the activity is listed, then that activity can be performed even by a
corporation which is 100% foreign-owned, even if such corporation Corporators are those who fund the corporation. These refer to the
was incorporated in the Philippines. stockholders, investors, and incorporators themselves. They are
people who have interest over the corporation.
Sec. 8 of RA 7042 (Foreign Investments Act of 1991)
enumerates the activities that are limited to Filipinos. Stockholders – in a stock corporation
Members – in a non-stock corporation
These activities include, but are not limited to:
1. Natural resources exploration, development and use; BOARD OF DIRECTORS OR TRUSTEES
2. Public utility corporations;
3. Land ownership; The Board of Directors or Board of Trustees are the group of people
4. Educational institutions; and who manage the corporation.
5. Advertising companies.

Atty. Gaviola: It is an erroneous belief among foreigners and

their attorneys that they need Filipino stockholders in order to
incorporate in the Philippines.

Get rid of the notion that you need to have citizenship in order
to incorporate because to be an incorporator, all that is
required is to be a resident. In fact, only a majority need to be
residents.

Take note that a domestic corporation can be foreign-owned.

This happens when a corporation incorporated in the
Philippines is composed of foreigners. In the same way, a
foreign corporation can be considered a Philippine national
when 100% of its capital stock or its stockholders are Filipino
citizens.

CORPORATE LAYERING

This is a type of arrangement whereby a corporation has for its

stockholder another corporation. (i.e. Corporation B is the
stockholder of Corporation A).

Page 16 of 88 | EH403 2019-2020 Corporation Law

PROMOTERS **NOTES:
The promoters promote the corporation itself. They convince the An underwriter is any party that evaluates and assumes
people to invest. They tell the people that they are organizing such another party’s risk for a fee. The fee is often a
corporation. However, they are not committed to buy the shares, and commission, premium, spread, or interest.
are purely salesmen. Underwriting services are provided by some large financial
institutions, such as banks, or insurance or investment
**NOTES: houses, whereby they guarantee payment in case of damage
or financial loss and accept the financial risk for liability
Promoters are persons who, acting alone, or with others, take arising from such guarantee. An underwriting arrangement
initiative in founding and organizing the business or enterprise of the may be created in a number of situations including
issuer and received consideration thereof (Sec. 3.10, RA 8799, The insurance, issues of security in a public offering, and bank
Securities Regulation Code) lending, among others.

LIABILITY OF THE PROMOTER FOUNDERS

GEN: The promoter binds himself personally and assumes the The founders are those who came about the idea – they are the think
responsibility of looking to the proposed corporation for tanks of the corporation.
reimbursement.
As a matter of fact, they are given privilege. They are entitled to an
XPNs: exclusive right to vote and be voted for, but limited for 5 years only
1. Express or implied agreement to the contrary from date of inception of the Corporation.
2. Novation, not merely adoption or ratification, of the
contract What is the purpose of having the exclusive right to vote
and be voted for?
LIABILITY OF THE CORPORATION FOR THE A: To ensure that the corporation will eventually succeed because
PROMOTER’S ACTS they are the ones who envisioned the Corporation. They have the idea
of how the business shall proceed.
GEN: A corporation is not bound by the contract. A corporation,
until organized, has no life and no legal existence. It could not have Thus, the laws provide that for a period of 5 years or less – they have
had an agent (the promoter) who could legally bind it. the right to vote and be voted upon. NO ONE ELSE have the right
to nominate and elect. This is used to guide the infant corporation.
XPNs: A corporation may be bound by the contract if it makes the
contract its own by: The certificate of the founders’ shares defines the privilege that the
holders of this share shall have.
1. Adoption or ratification of the entire contract after
corporation **Notes on Founders’ Shares
2. Acceptance of the benefits under the contract with
knowledge of the terms thereof Changes in founder’s share expressly provided that the exclusive
3. Performance of its obligation under the contract right to vote and be voted on founders share in the election of
directors should not violate the Anti-Dummy Law and the Foreign
Note: The contract must of course be one which is within the powers Investments Act.
of the corporation to enter.
Anti-Dummy Law
UNDERWRITERS Persons not allowed to have an interest in nationalized corporations
often just nominate Filipino citizens to be legal stockholders when in
Underwriters are mostly banking companies. reality, it is the prohibited persons who are actually controlling the
corporation. This is a violation of the Anti- Dummy Law, and is a
As distinguished from promoters who have no commitment since criminal offense.
they simply promote, underwriters have commitment such that they
guarantee the sale of stocks and if these were not sold, they will be SEC. 6. CLASSIFICATION OF SHARES
the ones who will buy the shares. The underwriters therefore assume
liability. Section 6. Classification of Shares. – The classification of shares, their corr

Example: The underwriters commit that 60% of the stocks will be The shares in stock corporations may divided into classes or series of shares, or bo
bought. If they cannot sell such committed shares, they will guarantee
that they will buy such stocks themselves.

What are roadshows?

A: Roadshows are usually done by big corporations. If you want to
promote the formation of a corporation, you may conduct a
roadshow. You go around the country or the world and do a
roadshow.

You tell them about the corporation and the business, and convince
them to join – usually accompanied by the underwriters who help
convince.

Page 17 of 88 | EH403 2019-2020 Corporation Law

Holders of nonvoting shares shall nevertheless be entitled to vote on the following matters: SEC. 8. REDEEMABLE SHARES

Amendment of the articles of incorporation; Section 8. Redeemable Shares. - Redeemable

SEC. 9. TREASURY SHARES shares may be
Adoption and amendment of bylaws; issued by the corporation when expressly provided in the articles of
Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially incorporation.
all of the corporateTheyproperty;
are shares which may be purchased by the
Incurring, creating, or increasing bonded indebtedness; Section
What 9. Treasury
are “shares”?
corporation. They are sharesShares. - Treasury
which may beshares are shares
purchased by the of
Increase or decrease of authorized capital stock; A:stock which
Shares have
represent been
the issued
interest and
or fully
the paid for,
investment but
corporation from the holders of such shares upon the expiration ofof subsequently
a stockholder
Merger or consolidation of the corporation with another corporation or other corporations;
inreacquired
a afixed
corporation.
period,by regardless
the issuingof the corporation through purchase,
existence of unrestricted retained
Investment of corporate funds in another corporation or business in accordanceredemption,
with this Code; and
earnings in the books of the corporation, and upon suchSuch
donation, or some other lawful means. othershares
terms
Dissolution of the corporation. may
and again
**NOTES: be disposed
conditions stated ofin for
thea reasonable
articles of price fixed by the
incorporation andboard
the
of directors.
certificate of terms
The stock “share”
representing the shares,
or “stock” may besubject to rules and
used interchangeably
Except as provided in the immediately preceding paragraph, the vote required under this Code
regulations to approve
issued
to refer toby a particular
the
shares Commission.
of stock incorporate act shall be deemed to refer only t
a corporation.
A share of stock is a unit of division of the capital stock
The shares or series of shares may or may not have a par value: Provided, That banks, trust,ofinsurance, and preneed
a corporation. The stock companies, public utilities, building and loan
represents:
1. The right interest or right of the stockholder in the
management
Preferred shares of stock issued by a corporation may be given preference in the distribution of dividends of the
and in the corporation
distribution through the
of corporate exercise
assets in case of liqu
of his voting rights;
Shares of capital stock issued without par value shall be deemed fully paid and nonassessable 2. andThe interest
the holder or right
of such sharesofshall
thenotstockholder in corporation
be liable to the the or
earnings of the corporation in the form of the
dividends to be distributed (for a discussion on
A corporation may further classify its shares for the purpose of ensuring compliance with constitutional or legal requirements.
dividends, see Sec. 42); and
3. The interest or right of the stockholder in the
residual assets of the corporation upon its
dissolution.
A stockholder may own a share even if he is not holding a
certificate of stock

How do we classify shares?

A: Shares are classified as:
(1) Common shares
(2) Preferred shares
(3) Par value shares
SEC. 7. FOUNDERS’ SHARES (4) No-par value shares
(5) Founder’s shares
(6) Redeemable shares
Section 7. Founders’ Shares. – Founders’ shares may be
(7) Treasury shares
given certain rights and privileges not enjoyed by the owners of
(8) Convertible shares
other stock. Where the exclusive right to vote and be voted for in
(9) Voting shares
the election of directors is granted, it must be for a limited period
(10) Non-voting shares
not to exceed five (5) years from the date of incorporation:
(11) Shares in escrow
Provided, That such exclusive right shall not be allowed if its
exercise will violate Commonwealth Act No. 108, otherwise
DOCTRINE OF EQUALITY OF SHARES
known as the "Anti-Dummy Law"; Republic Act No. 7042,
otherwise known as the "Foreign Investments Act of 1991"; and
Each share shall be equal in all respects to every other share, except
otherwise known as "Foreign Investments Act of 1991"; and other
as otherwise provided in the AOI and stated in the certificate of
pertinent laws.
stock.

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 **OTHER IMPORTANT PRINCIPLES TO REMEMBER **NOTES:
Stocks which are given preference by the issuing
(1) Authorized Capital Stock
corporation in:
Refers to the amount of capital stock as specified in the AOI.
Additional shares may not be issued unless the AOI is amended (1) Distribution of dividends;
by the vote of the stockholders. However, unissued authorized (2) Distribution of the assets of the corporation in
shares may be issued at a later date without amendment of the case of liquidation; or
AOI or approval of the shareholders. (3) Such other preferences as may be stated in the
AOI which do not violate the Code.
(2) Subscribed Capital Stock Unless the right to vote is clearly withheld, a preferred
It is the amount of capital stock subscribed (purchased), whether stockholder would have such right as it is incident to stock
fully paid or not. It connotes an original subscription contract for ownership.
the acquisition by a subscriber of unissued shares in a Limitations:
corporation and would, therefore, preclude the acquisition of 1. Preferred shares can only be issued with par value
shares by reason of subsequent transfer from a stockholder or 2. Preferred shares must be stated in the AOI and in the
resale of treasury shares. COS.
3. The BOD may fix the terms and conditions only when
(3) Outstanding Capital Stock so authorized by the AOI, and such terms and
It is the portion of the capital stock which is issued and held by conditions shall be effective upon the filing of a
persons other than the corporation itself. certificate with the SEC.

(4) Paid-up Capital Stock **PREFERENCE AS TO DIVIDENDS

The portion of the subscribed/outstanding capital stock that has
been fully paid. Participating vs. Non-participating
Those which, after getting their fixed
(5) Unissued Capital Stock dividend preference, share with the
Participating
That portion of the capital stock that is not issued or subscribed. common stocks with the rest of the
It cannot vote, and draws no dividends. dividends.
Those which, after getting their fixed
(6) Legal Capital Non- dividend preference, have no more right to
It is the amount equal to the aggregate part value and/or issued participating share in the remaining
value of the outstanding capital stock. When par value shares are dividends with the common stocks.
issued above par, the share premium or excess is not Unless otherwise provided, preferred shares are deemed
considered as a part of the legal capital. non-participating.

In the case of no-par value shares, the entire consideration Cumulative vs. Non-cumulative
received forms part of the legal capital, and shall not be Regardless of lack of profits in any given
available for distribution as dividends. year, and lack of declaration of dividends,
the arrears (amount of dividends
(7) Shareholder’s Equity (Subscribed Capital) undeclared or unpaid) have to be paid to
Cumulative
That portion of the capital of the corporation that is composed of the preferred stocks in a subsequent year
all the investments that the subscribers put in (meaning, for (once profits are made), before any
stock corporations issuing par value shares at a price above par, dividends can be
the share premium is included). It is also known as the paid to the common stocks.
subscribed capital of the corporation. Entitlement to receipt of dividends
Non-cumulative essentially depends on the declaration of
COMMON VS. PREFERRED SHARES said dividends.
Unless otherwise stipulated, preferred stocks are deemed
COMMON SHARES cumulative.

Entitle the holders to a pro rata share in the profits of the KINDS OF PREFERRED SHARES AS TO DIVIDENDS
corporation without preference over the other stockholders.
They are given voting rights (a) Preferred participating shares
**The most common type of shares, which enjoy no (b) Preferred cumulative shares
preference, but the owners thereof are entitled to
management of the corporation (via the exclusive right to PREFERRED PARTICIPATING SHARES
vote), and to equal pro-rata division of profits after
preference. It represents a residual ownership interest in the Preferred shareholders already earned premium for their preferred
corporation. shares and they still participate in the distribution of the common
shares. They take both – they have preference and they also
PREFERRED SHARES participate.

Shares having certain rights and privileges not available to Who can issue preferred shares?
A: Every corporation can issue preferred shares.
holders of common shares.
CUMULATIVE PREFERRED SHARES

Shares which entitle the holder not only to the payment of current

Page 19 of 88 | EH403 2019-2020 Corporation Law

dividends but also to dividends in arrears.

Page 20 of 88 | EH403 2019-2020 Corporation Law

 Illustration.
The entire consideration received by the corporation shall
Corporation has cumulative preferred shares.
be treated as capital, and shall not be available for
distribution as dividends.
Year 1 – the corporation has not declared dividends Year 2 –
the corporation decided to declare dividends The AOI must state the fact that the corporation issues no-
par value shares and the number of such shares
In this case, if the stipulated dividend is not paid in Year 1, it shall be No-par shares cannot be issued as preferred stocks
added to the dividend which shall be due in Year 2 and the
accumulated dividends must be paid to the holder of said preferred Who cannot issue no-par value shares?
share before any dividend may be paid to the holders of common A: Corporations who have access to public funds, such as:
stock. (1) Banks;
(2) Trusts;
Even if the Corporation has profits, is it obliged to give (3) Insurance and pre-need companies;
dividends? (4) Public utilities;
A: No. (5) Building and loan associations; and
(6) Other corporations authorized to obtain funds from the
If the Corporation does not declare dividends for a long public (whether publicly-listed or not)
time, what does the BIR assess?
A: The BIR will assess the corporation for Improperly Accumulated **Note: Building and loan associations are organizations with
Earnings Tax (IAET). the object of accumulating money from their members. The
money is then collected in periodical payments into the
PAR VALUE VS. NON-PAR VALUE SHARES treasury thereof, to be invested, from time to time, in loans to
the members upon real estate for home purposes.
PAR VALUE SHARES
DISTINCTION BETWEEN PAR-VALUE AND NO-PAR
Par value is the minimum issue price of a share of stock which must VALUE SHARES
be stated in the AOI and in the Certificate of Stock (COS). If the
incorporators agreed to the price, that is the price at which the shares If the assets of the corporation have all been exhausted
will be sold to the public. and there are still creditors, can the creditors go after the
shareholders?
Who can issue par value shares?
A: Any stock corporation is free to issue par value shares as indicated Non-Par Value Par-Value
in its AOI. No – the creditors cannot go Yes – the creditors can go after
after such holders. The non- the shareholders.
**NOTES: par value shares are
These are shares with a stated value set out in the AOI. This deemed fully paid. The subscribers are liable
remains the same regardless of the profitability of the to corporate creditors for
corporation (in comparison, the market or fair value of a their unpaid subscriptions
share of stock fluctuates depending on the company’s
profitability). This gives rise to financial stability and is the
reason why banks, trust corporations, insurance companies Can a corporation lower the par value of shares?
and building and loan associations must always be A: No. This is because the value of the par value is stated in the AOI,
organized with par value shares. and changing it will mislead the public.

NO-PAR VALUE SHARES The practice of selling shares for a price lower than its par value is
called watering down of stocks, and these shares are known as
These are shares without a stated value. “watered stocks”.

You still have to pay for these shares, but its value is not stated in the WATERED STOCKS
AOI and in the COS. There is no fixed value stated in the Articles of
Incorporation but issued for a consideration not less than five (5) These are stocks sold or issued at a price less than the stocks’ par
pesos per share. value. The value of these shares is diluted, in that the public is not
apprised of the real value of the corporation.
**NOTES:
A no-par share does not purport to represent any stated Illustration.
proportionate interest in the capital stock measured by
value, but only an aliquot part of the whole number of such A corporation has 100Mn authorized capital shares, each with a par
shares of the issuing corporation (Agbayani) value of P1.00.
No-par value shares cannot have an issue price of less than
Normally, the public would expect that the corporation has
P5.00 per share
authorized capital in the amount of P100,000,000 (100Mn shares x
Once issued, they shall be deemed fully paid and non- P1.00 par value).
assessable, and the holders of such shares shall not be liable
to the corporation or to its creditors in respect thereto. Now let’s say that the corporation initially issued 99.5Mn shares for
P1.00, and issued the remaining 500k shares for P0.50 only.

How much is now the authorized capital of the

corporation?

Page 21 of 88 | EH403 2019-2020 Corporation Law

A: Still P100,000,000.

Page 22 of 88 | EH403 2019-2020 Corporation Law

But how much capital actually came in? What happens after the five-year limit is over?
A: Only P99,750,000. Founders shall have equal rights with the holders of common shares.
Computation: REDEEMABLE SHARES
99,500,000 shares X P1.00 = P99,500,000
500,000 shares X P0.50 = + 250,000
Total P99,750,000 These are shares which permit the issuing corporation to redeem
or purchase its shares.
What is the effect?
A: The corporation is misleading the public. It is not fair to the Redeemable shares are redeemable at a fixed date or at the
public, and does not anymore reflect the actual capital structure of the option of either the issuing corporation or the stockholder or
corporation both at a certain redemption price.

FOUNDER’S SHARES These shares may be issued by the corporation when expressly
provided in the articles of incorporation.
**These are shares, classified as such in the AOI, which are given
certain rights and privileges not enjoyed by the owners of other They are shares which may be purchased by the corporation
stocks. from the holders of such shares upon the expiration of a fixed
period, regardless of the existence of unrestricted retained
Where exclusive right to vote and be voted for in the election of earnings in the books of the corporation, and upon such other
directors is granted, such right must be for a limited period not to terms and conditions stated in the articles of incorporation and
exceed 5 years subject to the approval of the SEC. The 5- year period the certificate of stock representing the shares, subject to rules
shall commence from the date of approval by the SEC. and regulations issued by the Commission.

What is the purpose for granting founders the exclusive What is the purpose of redeemable shares?
right to vote and be voted for? A: They are issued for the purpose of attracting capital.
A: To ensure that the corporation will eventually succeed because
they are the ones who envisioned the Corporation. They have the idea **LIMITATIONS:
of how the business shall proceed.
(1) Redeemable shares may be issued only when expressly
Thus, the laws provide that for a period of 5 years or less – they have provided for in the AOI.
the right to vote and be voted upon. NO ONE ELSE have the right to (2) The terms and conditions affecting said shares must be
nominate and elect. This is used to guide the infant corporation. stated both in the AOI and in the COS.
(3) Redeemable shares may be deprived of voting rights in
The certificate of the founders’ shares defines the privilege that the the AOI.
holders of this share shall have. (4) The corporation is required to maintain a sinking fund to
answer for redemption price if the corporation is required
What is the rule regarding founders’ rights and privileges? to redeem.
A: They must be clearly expressed in the corporate charter, to (5) The redeemable shares are deemed retired upon
provide adequate information to third parties dealing with the redemption unless otherwise provided in the AOI.
corporation. (6) Unrestricted RE is not necessary before shares can be
redeemed, but there must be sufficient assets to pay the
What are some examples of special rights or privileges creditors and to answer for operations (Republic Planters
that may be given to founder’s shares that are not given to Banks vs. Agana, G.R. No. 51765, 1997)
common shares? (7) Redemption cannot be made if such redemption will result
A: These include: in insolvency or inability of the corporation to meet its
1) Preference in the payment of dividends and/or obligations.
distribution of assets in case of liquidation
2) Right to convert the shares into other shares Atty. E.; instead of borrowing from banks, the corporation is
3) Right to cumulative dividends borrowing money from the public.

What is the purpose of the founder’s shares? There are many ways of acquiring funds from the corporation:
A: It may be given to encourage organizers and promoters to make 1. Borrow from the banks
large investments in the proposed corporation. 2. Borrow from the public

Exclusive right to vote to be voted for You have heard that bonds are floated, this is just the
Note: If the exclusive right to vote and be voted for in the election corporation issuing bonds to the public, telling the public that if
of directors is granted, such right must be limited for a period not you buy these bonds, we will buy this back from you in 5 years
exceeding five (5) years. with interest or premium. Or, redeemable shares, this is an
The limit is non-extendible. option to raise more money with the public.
The limitation is designed to prevent possible abuse of the
Board. A lifetime term of the Board absolutely deprives other We distinguish redeemable shares from the bank, in that banks
stockholders/members of the opportunity to participate in the are lenders and redeemable shareholders are investors.
management of the corporation.

Page 23 of 88 | EH403 2019-2020 Corporation Law

What is the difference? So-called treasury shares, because they are now in the
A: Redeemable shareholders assume a risk, particularly that the custody of the treasurer. So what happens to these
corporation will become insolvent before the expiration of the shares? A: They become part of the capital.
redemption period.
And therefore, while before they were outstanding, are
IOW, as far as the lender is concerned, the moment, the they still so?
loan is due, he may collect. If the corporation has no cash, A: Not anymore. They have been reunited with its parents, it’s now
what will the banks do? back home, it’s no longer outstanding.
A: (1) Demand payment, or (2) Foreclose on the collateral.
However, may it still be entitled to dividends?
Can the corporations say: please do not get our capital? A: No. Because if they are allowed to be entitled to dividends, it
A: They cannot. would create a situation where the corporation would be paying itself.
Bank says not our problem, our problem is to collect, if we However, because these are issued shares, would it have
cannot collect, we get properties. the right to vote?
A: No, because otherwise, the current board would just use these to
On the other hand, when we talk about redeemable vote for themselves, because the board acts on behalf of the
shares? A: If the corporation is insolvent, the shareholder cannot corporation – manage the properties of the corporation, since these
demand redemption. are properties, they will use these properties to cast votes in their
favor pertaining to these shares. So this will allow incumbent
So we can only demand when? directors to perpetuate themselves in office.
A: When we have profits, then we pay.

Can it be obliged to pay? BORROWING REDEEMABLE

A: Yes. That was your promise. To buy back the shares with a FROM A BANK SHARE
premium of course. Dealing with Dealing with investors
Party
lenders/creditors
involved
So here’s the investor, here’s the lender. So that if the
investor now demands for the reacquisition of his shares Compel payment Demand payment on
because the due date has arrived, can the corporation say upon maturity the date of redemption
that they will use their profits for another purpose? date without any
A: No. conditions.
Condition: The
This is what the law calls what? In so far as the investor can compel to
A: Unrestricted retained earnings. creditor is redeem only when
concerned, once it is there are profits. The
Can the corporation even refuse by saying we do not have due and demandable, corporation is obliged
unrestricted RE? the creditor will to buy back the shares
A: No. compel the with a premium.
When
corporation to
demandable pay.
Atty. Espedido: Restricted or not, if you have surplus, pay. The
corporation has to pay, so long as there is surplus, unrestricted NOTE: Regardless
or not. whether it is restricted
or not, as long as there
The only situation where the corporation can refuse to pay is is surplus, it is obliged
when the corporation is insolvent, otherwise, the corporation to pay.
will be touching their capital and will be violating the trust fund
doctrine. Exception:
Corporation is
IOW, clearly, what is the difference between the investor insolvent
and the lender?
A: The investor takes a risk. No assumption of The investor takes the
risks; risk because the
What is that risk? corporation may or may
A: The corporation will not redeem the shares if the corporation Assumption Lender can collect not have retained
becomes insolvent. of Risk upon arrival of the earnings
due date without any
However, since he is an investor, does he enjoy anything? conditions
A: Rights to dividends during the period while he is still the holder
(before the redemption period comes), if dividends are declared. Not entitled to During the period
dividends; only while he is still the
On the other hand, if there are such dividends declared, paid for the holder (before the
can the lender also collect on such dividends? balance + interest period comes), he is
Distribution
an investor. Thus, when
A: No, he of dividends
dividends are
So, once reacquired, what happens? declared, he is
A: The redeemable shares become treasury shares. entitled to such.

Page 24 of 88 | EH403 2019-2020 Corporation Law

 TREASURY SHARES Reason: It is issued to gain more capital and the public
is aware that these are just redeemable shares.
What are treasury shares?
A: These are stocks and were fully paid, but were reacquired by the (6) It can be resold by the corporation
corporation through:
1) Purchase, (7) It is not considered as outstanding shares because it is
2) Donation, back to the corporation – it is in already
3) Sale, and
4) Other lawful means. **NOTES:
Nature of Treasury Shares
Such shares may be disposed of again for a reasonable price
Treasury shares are part of capital. When these shares were bought or
reacquired, surplus money will be used and not capital money. fixed by the BOD.
Otherwise, we will be violating the Trust Fund Doctrine. Treasury shares have no voting right as long as such shares
remain in the Treasury.
Being part of capital, the treasury shares can be sold again. As to how Pre-emptive right of stockholders in close corporations shall
much, it is the Board that will decide. extend to reissuance of treasury shares unless otherwise
provided in the AOI.
Special Features of Treasury Shares
Generally, is the corporation authorized to buy back all of
(1) Once reacquired, it shall form part of its capital as a its shares?
corporate asset. A: No.

(2) They can only be reacquired if there are unrestricted Why not?
retained earnings. A: It would violate the trust fund doctrine. Such that when you
keep expending funds to buy back all the shares, it would
(3) It is not entitled to dividends because in effect, the disadvantage creditors, because it will reach a point where the capital
corporation is paying itself, which is absurd. Otherwise, it will used up.
will involve double sale for the same shares.
THE
By way TRUST FUND DOCTRINE
of exception, however?
(4) It is not entitled to the right to vote because the
The
A: If Trust Fund Doctrine
it is specifically meansforthat
provided the AOI,
in the capitalsuch
stock, properties
as redeemable
corporation is not a stockholder. If allowed and the BOD
and other assets of a corporation are regarded as equity in trust for
shares.
exercises such right as representative of the corporation, it
the payment of corporate creditors.
can be subject to abuses.
CONVERTIBLE SHARES
Stated simply, the trust fund doctrine states that all funds received
If they are were voting shares when issued, now
that they are back, who may vote? Abytype
the corporation
of preferredin payment
stock thatof the shares
holderofcan
stock shall be for
exchange helda
in trust for the
predetermined corporate
number creditors
of common and at
shares other stockholders
a specified time. of the
Answer: NO ONE. Treasury shares have no voting
corporation. Under such doctrine, no fund shall be used to buy back
rights.
the issued shares of theVS.
VOTING stock except only inSHARES
NON-VOTING instances specifically
allowed by the Code. (Boman Environmental Development
If the law were to give them voting rights, since these
Corporation
GEN: No sharevs.
mayCA,beG.R. No. of
deprived 77860,
voting1988)
rights.
treasury shares are owned by the corporation, the BOD
necessarily will act on behalf of the corporation. If they XPNs:
were given voting rights, the BOD will definitely vote for 1. Preferred non-voting shares;
them all the time. 2. Redeemable shares;
3. Shares as provided by the Code (treasury shares)
(5) They can only be reacquired if there are unrestricted
retained earnings. There shall always be a class/series of shares which have
complete voting rights.
Unrestricted retained earnings – assets less
liabilities; not allocated for anything; absolutely
free; no restrictions or appropriations.

GEN: When it comes to treasury shares, the

corporation is not always free to buy back the shares.
It requires that there should be unrestricted retained
earnings, otherwise, the corporation will violate the
Trust Fund Doctrine because if they were to buy it
back without unrestricted retained earnings, the
creditors cannot go after the corporation to satisfy
unpaid debts because there is no more capital to speak
of.

XPN: Redeemable Shares – which can be issued

regardless of WON there are unrestricted retained
earnings

Page 25 of 88 | EH403 2019-2020 Corporation Law

VOTING SHARES SHARES IN ESCROW
Shares that are provided with voting rights on any issue on the Issued or committed to a particular shareholder, but deposited with a
corporation. The voter can participate in any meeting and on any 3rd person or a deposit account pending the fulfilment by that 3rd
issue that may be raised during the meeting. person for which it was reserved of the conditions expressly provided
in the certificate of stocks
Reason: A shareholder is a part-owner of the corporation. Since the
shareholder cannot interfere with the management, he can only Share is subject to an agreement; share is deposited with a 3rd person
exercise his ownership by voting on certain issues. As part- owner, he to be kept by the depositary until the performance of a certain
has the right to protect his ownership. Hence, entitles him to vote. condition.
TITLE II. INCORPORATION AND ORGANIZATION
NON-VOTING SHARES OF PRIVATE CORPORATIONS
Shares that are not provided with voting rights but subject to
exceptions. SEC. 10. NUMBER AND QUALIFICATIONS
OF INCORPORATORS
Exceptions: Holders of non-voting shares shall nevertheless be
entitled to vote on the following matters: Section
Who 10. Number and Qualifications of Incorporators.
are incorporators?
– Any
A: Theyperson,
are thepartnership,
individuals association
who form the or corporation,
corporation. singly
They orare
(1) Amendment of the articles of incorporation jointly with
typically others but
nominated not more
directors than fifteen
or members, who(15)
willininitially
number, may
manage
(2) Adoption and amendment of the bylaws organize
the a corporation for any lawful purpose or purposes:
corporation.
(3) Sale, lease, exchange, mortgage, pledge, or other Provided, That natural persons who are licensed to practice a
disposition of all or substantially all of the corporate profession,
Under the old and law,
partnerships
there wasor aassociations
minimum organized
requirement for of
the5
property purpose of practicing
incorporators, but under a profession,
the new law, shalla not be allowed
single person may to organize
form a
as a corporation unless otherwise provided under special laws.
corporation.
Note: In determining whether there is a disposition of all or Incorporators who are natural persons must be of legal age.
substantially all of the corporate property, the guide is However, for purposes of practicality and convenience, there
when such sale already affects the operations of the Each incorporator
remains of amore
the limit of not stockthan
corporation must own in
15 incorporators or abe a
stock
corporation. When the corporation could no longer carry subscriber toHowever,
corporation. at least one
the (1) shareofoftrustees
number the capital
maystock.
be more than 15.
out its business, then that will be the point when it will have
to be open for voting, including non- voting shares. A corporation
Who with a single stockholder is considered a One Person
can be incorporators?
Corporation
A: asjuridical
Natural and described in Title XIII, Chapter III of this Code.
persons.
SC ruled that 80% is considered “substantially all”.
For natural persons:
(4) Incurring, creating, or increasing bonded indebtedness 1) Must be of legal age
(5) Increase or decrease of authorized capital stock 2) Must have capacity to contract
(6) Merger or consolidation of the corporation with another
corporation or other corporations Note: The law does not prescribe a residency requirement.
(7) Investment of corporate funds in another corporation or Unlike the old code, majority of the incorporators need not be
business in accordance with this Code; and residents of the Philippines.
(8) Dissolution of the corporation
What is the requirement for incorporators?
Reason why a stockholder with non-voting shares is still A: Whether natural or juridical, they must be subscribers and have
entitled to vote on these issues: financial interest in the corporation.
Because the fundamental contract of these parties is the Articles of
Incorporation.

In obligations and contracts, we have learned that if we change the

terms and conditions of the contract, we can novate the contract.
What is necessary in novation is the consent of both parties. If you
need to change anything in the AOI, you need consent. All parties
must be able to participate WON they agree on the change of the
agreement.

RIGHT OF APPRAISAL

For those who dissent the proposed agreement, they could exercise
their right of appraisal. Such right can be exercised by a stockholder
who disagrees with the decision of the Board of Directors to amend
the Articles of Incorporation. The dissenting stockholder can demand
the corporation to buy back his shares at their fair market value.

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 Section 11. Corporate Term. – A corporation shall have
perpetual existence unless its articles of incorporation provides
otherwise. SEC. 11. CORPORATE TERM SEC. 12. CAPITAL STOCKS

Corporations with certificates of incorporation issued prior to the

effectivity of this Code and which continue to exist shall have Section 12.
Authorized Minimum
Capital StockCapital Stock Not Required of
perpetual existence, unless the corporation, upon a vote of its StocktoCorporations.
Refers the maximum amount—Stock ofcorporations
capital whichshall
the not be required
corporation will
stockholders representing a majority of its articles of incorporation: to havewhen
receive a minimum
it issues capital stock, except as otherwise specifically
all its shares.
Provided, That any change in the corporate right of dissenting provided by special law.
stockholders in accordance with the provisions of this Code. Subscribed Capital Stock
Refers to the committed amount of capital which the corporation will
A corporate term for a specific period may be extended or receive from its existing subscribers
shortened by amending the articles of incorporation: Provided,
That no extension may be made earlier than three (3) years prior to Paid-Up Capital
the original or subsequent expiry date(s) unless there are justifiable Refers to the amount of capital which the corporation already
reasons for an earlier extension as may be determined by the received from its subscribers. This represents the paid portion of the
Commission: Provided, further, That such extension of the subscribed capital.
corporate term shall take effect only on the day following the
original or subsequent expiry date(s). If you are a new corporation, how much should be
subscribed?
A corporation whose term has expired may apply for revival of its A: The Revised Corporation Code does not require a minimum
corporate existence, together with all the rights and privileges subscribed capital stock.
under its certificate of incorporation and subject to all of its duties,
debts and liabilities existing prior to its revival. Upon approval by Reason: To attract the formation of more business organizations.
the Commission, the corporation shall be deemed revived and a
certificate of revival of corporate existence shall be issued, giving it Exception: However, the 25% subscribed capital stock is
perpetual existence, unless its application for revival provides compulsory when there is an increase in the capital stock. Thus, it
otherwise. requires that at least 25% must be subscribed, and 25% must be paid-
up.
No application for revival of certificate of incorporation of banks,
banking and quasi-banking institutions, preneed, insurance and
trust companies, non-stock savings and loan associations Section [Link]. 13. CONTENTS
Contents OF THE
of the Articles ARTICLES
of Incorporation. - All corporations
OF INCORPORATION
(NSSLAs), pawnshops, corporations engaged in money service
business, and other financial intermediaries shall be approved by The name of corporation;
the Commission unless accompanied by a favorable
GEN: A corporation
recommendation shall
of the have a perpetual
appropriate existence.
government agency. The specific purpose or purposes for which the corporation is being formed. Wher
XPN: When the AOI provides otherwise.

When the Corporation was The place where the principal office of the corporation is to be located, which mus
Effect
Formed
The corporation shall have a The term for which the corporation is to exist, if the corporation has not elected pe
After 3 February 2019 perpetual existence, unless
its AOI provides otherwise. The names, nationalities, and residence addresses of the incorporators;
The corporation shall be
deemed to have a perpetual The number of directors, which shall not be more than fifteen
existence, unless the (15) or the number of trustees which may be more than fifteen (15);
corporation, upon a vote of its
stockholders representing a
Before 3 February 2019 (g) The names, nationalities, and residence addresses of persons who shall act a
majority of its outstanding
capital stock, notifies the SEC
that they intend to retain its
original term pursuant to
the corporation’s AOI.

REVIVAL OF A CORPORATION

Rule: A corporation whose term has expired may apply for a revival
of its corporate existence to the Commission. Upon the approval by
the Commission, the corporation shall be deemed revived and a
certificate of revival of corporate existence shall be issued.

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regular directors or trustees are duly elected and qualified in accordance with this [Link];
If it be a nonstock corporation
1. the amount of its capital
2. which
(h) If it be a stock corporation, the amount of its authorized capital stock, number of shares into the itnames,
is divided, nationalities, and names,
the par value of each, residential
nationalities, and
addresses of the contributors, and
3. amount contributed by each
If it be a nonstock corporation, the amount of its capital, the names, nationalities, and residence addresses of the contributors, and amount contributed by each; an
j. Such other matters consistent with law and which the
Such other matters consistent with law and which the incorporators may deem necessary and convenient.
incorporators may deem necessary and convenient.

An arbitration agreement may be provided in the articles of incorporation pursuantNAME

to Section
OF 181
THEofCORPORATION
this Code.1âwphi1(See also Sec. 17)

Essential
The Articles of incorporation and applications for amendments thereto may be filed with thetoCommission
the existenceinofthethe corporation
form since it document,
of an electronic is through in
it accordance
that wi
the corporation can sue and be sued, and perform all legal acts.

Importance: For identification purposes; the name is important in

order to distinguish it from other organizations.

A corporate name shall be disallowed by the SEC if the proposed

name is either:
1. Identical or deceptively or confusingly similar to that of
any existing corporation or to any other name already
protected by law; or
2. Patently deceptive, confusing, or contrary to existing laws

CONTENTS OF THE ARTICLES OF INCORPORATION What are the limitations on the name of the corporation?
A: A corporation cannot use a name:
a. The name of the corporation; (1) That is already reserved or registered for the use of
another corporation;
b. The specific purpose or purposes for which the corporation is (2) That is protected by law;
being formed. Where a corporation has more than one stated (3) That is contrary to law, rules and regulations;
purpose, the articles of incorporation shall indicate the primary (4) That is identical or confusingly similar with other
purpose and the secondary purpose or purposes: Provided, That corporations’ names.
a nonstock corporation may not include a purpose which would
change or contradict its nature as such; Illustration 1.
Haplos-Haplos Corporation vs. Hapyod-Hapyod
c. The place where the principal office of the corporation is to be Corporation
located, which must be within the Philippines;
If the business of the corporation was to provide most
d. The term for which the corporation is to exist, if the corporation effective and comfortable massage in the city, that’s the
has not elected perpetual existence; principal business, what do you want to call your
corporation? Remember, it has to be descriptive of the
e. The names, nationalities, and residential addresses of the corporation.
incorporators; A: Haplos-Haplos Corporation.

f. The number of directors, which shall not be more than fifteen So that, if one corporation is already registered as Haplos-
(15) or the number of trustees which may be more than fifteen Haplos Corporation, do you think the SEC will allow you
(15); register as Hapyod-Hapyod Corporation?
A: No, because if it confuses the public, then the SEC will now allow
g. The names, nationalities, and residential addresses of persons it.
who shall act as directors or trustees until the first regular
directors or trustees are duly elected and qualified in accordance Illustration 2.
with this Code; Planter’s Peanuts vs. Grower’s Peanuts

h. If it be a stock corporation: What about Planter’s Peanuts and Grower’s Peanuts?

1. the amount of its authorized capital stock Atty. Espedido: It violates!
2. number of shares into which it is divided
3. the par value of each, Illustration 3.
4. names, nationalities, and residence addresses of the Efficascent Oil
original subscribers
5. amount subscribed and paid by each on the One corporation came out with “Efficient Oil Corporation”,
subscription, and do you think somebody will complain?
6. a statement that some or all of the shares are A: Yes! The Efficascent Oil will complain. Especially if you follow
without par value, if applicable; the color scheme, samot na!

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 Illustration 4. franchise – which is intended for the carrying out of a specific
United Nations Food Corporation business.
United Nations Food Corporation, what do you think? The fact that you are given a primary franchise is not a
A: No. It would fall under limitation #2. guarantee that you can immediately pursue any business that
you want, especially if the business that you are trying to
If you are a fan of food, what will go into your mind if you pursue would involve public interest or public utilities.
see that name?
A: This must be run by the United Nations. Purpose?
A: It’s important to state this in the AOI, because it would serve as
So if the SEC will have to examine that, it might be the guideline within which the corporation can operate.
disapproved. This is misleading. The public might believe
this is operated, maintained and run by the United Nations. Otherwise?
The best chefs in the world, if you were the SEC, what A: It could mislead the public.
would be a good name? So that if you perform something not within the purpose?
A: International Food Corporation. A: It would consist an ultra vires act.
Atty. Espedido: In practice, SEC will ask you to submit three Ultra vires acts?
corporation names to save time. So that, if one name is not A: These acts will be deemed as void acts, and not binding on the
allowed or accepted by SEC, then they will just pick from the corporation. It’s beyond your powers as a corporation.
remaining names submitted.
So all these must be indicated in the AOI. Could you
**NOTES: change any one of these?
A: It’s possible.
Right to a Corporate Name – A corporation’s right to use its
corporate and trade name is a property right, a right in rem, How?
which it may assert or protect against the whole world in the A: Majority of the BOD + 2/3 of the OCS or the members.
same manner as it may protect its tangible property against
trespass or conversion. What happens to the 1/3 shares?
A: They may exercise their right of appraisal. (Purchase shares at fair
Statutory Limitations on the Form and Use of market value).
Corporate Name:
1) In respect to a corporate name already registered or Atty. Espedido: As a creation of law, the corporation have to
otherwise protected by law, the proposed name must not work within the boundaries of the privilege extended by the
be: State.
a. Identical
b. Deceptively or confusingly similar; It will serve as a guide in determining WON the corporation is
2) Patently deceptive, confusing or contrary to law; acting within its authority or powers as indicated in the Articles
3) Must contain either: of Incorporation.
a. “Incorporated” or “Inc.”, or
b. “Corporation” or “Corp.”; If it is beyond the powers prescribed by law – it becomes an
4) Must not consist solely of generic, geographical and/or ultra vires act which is deemed void, meaning it is not binding.
descriptive terms and names; and
5) Must comply with other policies provided by SEC **NOTES:
Memorandum No. 14, Series of 2000 A corporation can only have one (1) primary purpose.
However, it can have several secondary purposes.
Doctrine of Secondary Meaning as Applied to Corporation A corporation has only such powers are as expressly
Names – The doctrine of secondary meaning originated in the field granted to it by law and by its AOI, those which may be
of trademark law. Its application has, however, been extended to incidental to such conferred powers, those reasonably
corporate names since the right to use a corporate name to the necessary to accomplish its purposes, and those which
exclusion of others is based upon the same principle which underlies may be incident to its existence.
the right to use a particular trademark or tradename (Lyceum of the A corporation may not be formed for the purpose of
Philippines vs. CA, G.R. No. 101897, 1993) practicing a profession like law, medicine or accountancy.
PURPOSE CLAUSE Limitations on the Purpose of a Corporation
(1) A non-stock corporation may not include a purpose which
(1) Primary Franchise – right to exist as a corporation would change or contradict its nature as such.
(2) Secondary Franchise – intended for the carrying out of (2) The SEC shall reject the AOI or disapprove any
a specific business amendment when the stated purpose/s of the corporation
are patently unconstitutional, illegal, immoral, or contrary
Atty. Espedido: Once you are issued a certificate of to government rules or regulations.
incorporation, this is called primary franchise – this means you
have the right to exist as a corporation. Stretching the Purpose Clause
It is legal to stretch the meaning of the purpose clause to cover new and
If you are dealing or engaged in the jeepney business, you will unexpected situations. There is no need to amend the
also be given another franchise by the LTFRB – a secondary

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AOI to accommodate new situations. (SEC Opinion No. 08-24, allowed since the corporation ceases to exist already,
October 22, 2008) and there is nothing to extend.

PRINCIPAL OFFICE
INCORPORATORS
Importance: For the SEC to be able to locate and identify where the
(See Sec. 5 for a discussion on incorporators).
corporation is and to know where to serve summons and notices.
(See Sec. 10 for the number & qualifications of incorporators.)
Address? Why, what’s important about it?
A: Because this address is where summons and notices will be sent
DIRECTORS/TRUSTEES
by the court/s or SEC or other government agencies.
If you are a stockholder, can you be a director?
So that you would know where to serve. Alright.
A: Yes, to be a director, it is a requirement that such is at least a
holder of one (1) share.
So that if the address is “somewhere in the hinterlands of
Mindanao”? Requirements for a President and Vice President
A: This would not be in compliance with the requirement because it
President – must be a director, thus, a holder of 1 share
would be impossible to identify the exact location, because it’s not
Vice President – does not require to be a holder of 1 share
specific.
but once he assumes presidency, he is required to be a
holder of at least 1 share
**NOTES:
**NOTES:
Salient Points:
1. Must be located in the Philippines;
Qualifications for Directorship/Trusteeship Under Other
2. Must specify the city or province;
Sections of the RCC
3. The street/number is not necessary;
4. Important in determining venue in an action by or against
Trustees of educational
the corporation, or on determining the province where a
institutions organized as
chattel mortgage of shares should be registered.
Board of Trustees of nonstock corporations shall
Educational Institutions not be less than 5 nor more
Principal Office Address
(Sec. 106) than 15, provided that the
The AOI must state the place where the principal office of the
number of trustees shall be in
corporation is to be located, which must be within the Philippines.
multiples of 5.
All stockholders are
Purposes of Fixing the Principal Office Address
considered members of the
1. To fix the residence of the corporation in a definite
Close Corporations board of directors, thus
place, instead of allowing it to be ambulatory;
allowing 20 members in the
2. For purposes of the stockholders’ or members’ meeting;
board
3. To determine the place where the books and records of the
corporation are ordinarily kept. A corporation sole may be
formed by the chief
archbishop, bishop, priest,
TERM OF EXISTENCE Corporation Sole
minister, rabbi, or other
(Sec. 108)
(See Sec. 11.) presiding elder of such
religious denomination, sect
or church
**NOTES:
The single stockholder shall be
The corporate term is necessary in determining at what One Man Corporation
the sole director and president
point in time the corporation will cease to exist or (Sec. 121)
of the OPC
have lost its juridical personality.
Sec. 139 of the Code provides that a corporation The RCC provides for the minimum qualifications and
shall nevertheless be continued as a body corporate disqualifications of the directors/trustees which the corporation
for three (3) years after the effective date of may not do away with. However, the by-laws may provide for
dissolution, for the purpose of: additional qualifications and disqualifications.
1. Prosecuting and defending suits by or
(See Sec. 46. Contents of Bylaws) – A private corporation
against it;
may provide the following in its by-laws:
2. Enabling it to settle and close its affairs;
(f) The directors’ or trustees’ qualifications, duties and
3. Dispose of and convey its property; and
4. Distribute its assets. responsibilities
For further discussion:
Extension of corporate term prior or earlier than 3
o See Sec. 22 for Qualifications of Directors
years is allowed only if there is justifiable reason.
o See Sec. 26 for Disqualifications of Directors
On the day of the expiration of the corporate term,
extension is still allowed. However, after the
expiration of its term, extension is no longer

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 SEC. 14. FORM OF ARTICLES OF INCORPORATION Eight: That the number of shares of the authorized capital stock-
stated has been subscribed as follows:
Section 14. Form of Articles of Incorporation. - Unless
otherwise prescribed by special law, the articles of incorporation of No. of
all domestic corporations shall comply substantially with the Name of Amount Amount
Nationality Shares
following form: Subscriber Subscribed Subscribed Paid

Articles of Incorporation
of

(Name of Corporation)

The undersigned incorporators, all of legal age, have voluntarily (Modify No. 8 if shares are with no-par value. In case the corporation
agreed to form a (stock) (nonstock) corporation under the laws of the is nonstock, Nos. 7 and 8 of the above articles may be modified
Republic of the Philippines and certify the following: accordingly, and it is sufficient if the articles may be modified
accordingly, and it is sufficient if the articles state the amount of
First: That the name of said corporation shall be " ", capital or money contributed or donated by specified persons, stating
Inc. Corporation or OPC"; the names, nationalities, and residence addresses of the contributors
or donors and the respective amount given by each.)
Second: That the purpose or purposes for which such corporation is
incorporated are: (If there is more than one purpose, indicate primary Ninth: That has been elected by
and secondary purposes); the subscribers as Treasurer of the Corporation to act as such until
after the successor is duly elected and qualified in accordance with
Third: That the principal office of the corporation is located in the the bylaws, that as Treasurer, authority has been given to receive in
City/Municipality of , Province of the name and for the benefit of the corporation, all subscriptions,
, Philippines; contributions or donations paid or given by the subscribers or
members, who certifies the information set forth in the seventh and
Fourth: That the corporation shall have perpetual existence or a term eighth clauses above, and that the paid-up portion of the subscription
of years from the date of issuance of the in cash and/or property for the benefit and credit of the corporation
certificate of incorporation; has been duly received.

Fifth: That the names, nationalities, and residence addresses of the Tenth: That the incorporators undertake to change the name of the
incorporators of the corporation are as follows: corporation immediately upon receipt of notice from the Commission
that another corporation, partnership or person has acquired a prior
Name Nationality Residence right to the use of such name, that the name has been declared not
distinguishable from a corporation, or that it is contrary to law, public
morals, good customs or public policy.

Eleventh: (Corporations which will engage in any business or activity

reserved for Filipino citizens shall provide the following):
Sixth: That the number of directors or trustees of the corporation
shall be ; and the names, nationalities, "No transfer of stock or interest which shall reduce the ownership of
and residence addresses of the first directors or trustees of the Filipino citizens to less than the required percentage of capital stock
corporation are as follows: as provided by existing laws shall be allowed or permitted to be
recorder in the proper books of the corporation, and this restriction
Name Nationality Residence shall be indicated in all stock certificates issued by the corporation."

IN WITNESS WHEREOF, we have hereunto signed these Articles of

Incorporation, this day of , 20 in the
City/Municipality of , Province of
, Republic of the Philippines.

Seventh: That the authorized capital stock of the corporation is

PESOS (₱ ), divided into
shares with the par value of PESOS
(₱ ) per share. (In case all the shares are without par
value): That the capital stock of the corporation is
shares without par value.
(Names and signatures of the incorporators)
(In case some shares have par value and some are without par value):
That the capital stock of said corporation consists of
shares, of which
shares have a par value of
PESOS (₱ ) each, (Name and signature of Treasurer)
and of which shares are without par
value.

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 **CERTIFICATE OF INCORPORATION What are unrestricted retained earnings?
A: The surplus profits of the corporation which are not allocated for
The SEC has the ministerial duty to approve an application for anything.
registration and issue the Certificate of Incorporation provided all the
requirements of law with respect to the AOI are complied with. IMPROPERLY ACCUMULATED EARNINGS
The corporation to avoid double taxation may not declare dividends.
A corporation commences to have corporate existence and juridical
personality and is deemed incorporated only from the moment the Illustration.
SEC issues to the incorporators a Certificate of Incorporation under Travelling to Europe as an incentive instead of declaring
its official seal. dividends
SEC. 15. AMENDMENT OF THE ARTICLES Instead of declaring dividends, they will not declare dividends and
tell all the stockholders “we will go to Europe as your incentive, and
Section 15. Amendment of Articles of Incorporation. - undergo training and observe the latest trends. You can bring your
Unless otherwise prescribed by this Code or by special law, and for family.”
legitimate purposes, any provision or matter stated in the articles of
incorporation may be amended by a majority vote of the board of Everybody travelled to Europe. They were given pocket
directors or trustees and the vote or written assent of the money and per diem. Did they distribute dividends?
stockholders representing at least two-thirds (2/3) of the A: No dividends distributed, yet the stockholder enjoyed the part
outstanding capital stock, without prejudice to the appraisal right of from the corporation.
dissenting stockholders in accordance with the provisions of this
Code. The articles of incorporation of a nonstock corporation may Will they be taxed?
be amended by the vote or written assent of majority of the trustees A: If the government is aware that this is being done, the government
and at least two-thirds (2/3) of the members. can charge them for IAET (Improperly Accumulated Earnings Tax).

The original and amended articles together shall contain all They must declare the dividends, otherwise, they will be penalized by
provisions required by law to be set out in the articles of the BIR.
incorporation. Amendments to the articles shall be indicated by
underscoring the change or changes made, and a copy thereof duly What do they do now?
certified under oath by the corporate secretary and a majority of the A: They can present expansion plans. This is a restriction of their
directors or trustees, with a statement that the amendments have earnings. IOW, they can say that they do not have unrestricted
been duly approved by the required vote of the stockholders or earnings because these are earmarked already for future expansions.
members, shall be submitted to the Commission.
Another Exception: Loan condition – borrowing huge amounts of
The amendments shall take effect upon their approval by the money from the bank. When you loan from the bank, the bank
Commission or from the date of filing with the said Commission if imposes a lot of conditions. Usually, one of the conditions imposed is
not acted upon within six (6) months from the date of filing for a that the corporation cannot declare dividends without the consent of
cause not attributable to the corporation. the bank. The bank wants to be sure that it can collect its credit.

WHEN AMENDMENT TAKES EFFECT

How do we amend the Articles of Incorporation? What happens after the amendment?
A: Initiated by the Board itself. A: It requires the approval by the SEC to take effect.
What are the requirements for amending the AOI? When will it take effect?
A: A:
(1) By a majority vote of the Board of Directors or Board of (1) From date of approval by the SEC
Trustees (2) From of filing when there is inaction by the SEC
(2) Vote or the written assent of the stockholders of at least 2/3 within 6 months from filing
representing the outstanding capital stocks
**NOTES
What is the option of the 1/3 of the OCS or members that
dissented? Limitations
A: Dissenting stockholders may exercise their APPRAISAL RIGHT. 1. Requirements imposed by the Code or by special laws
2. Must be for a legitimate purpose
APPRAISAL RIGHT 3. Must be approved by the directors/trustees, and the
Right of the dissenting stockholder to leave the corporation stockholders/members through the vote requirement
by determining the value of his shares, and demand the 4. Appraisal right
corporation to buy back his shares at their fair market value 5. Both the original and the amended articles together must
(FMV) contain all the provisions required by law to be set out in
Another instance where the corporation can buy back the the articles
shares 6. Will take effect only:
Note: But unlike redeemable shares, in this case, the
dissenting stockholder can be paid only if there are
unrestricted retained earnings.

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 a. Upon their approval by the SEC by the issuance 4. Percentage of Filipino ownership of capital stock under
of a certificate of amended articles; or existing laws or the Constitution is not complied with.
b. From the date of filing with the SEC, if the SEC
did not act upon it within 6 months from the **INDUSTRIES REQUIRING PRIOR AUTHORITY
date of filing for a cause not attributable to the 1. Banks
BEFORE INCORPORATION (REGULATED
2. Banking and quasi-banking institutions
corporation.
3. Pre-need, insurance and trust companies

Procedure
1. The original and amended articles together shall contain all 4. Non-stock savings and loan associations (NSSLAs)
provisions required by law to be set out in the AOI 5. Pawnshops
2. The articles, as amended, shall be indicated by 6. Other financial intermediaries
underscoring the change/s made
3. A copy shall be submitted to the SEC: Note: These industries cannot incorporate or apply for amendment
a. Duly certified under oath by the corporate without the prior authority of the government agencies governing or
secretary and a majority of the directors or controlling them. (Ex. Certificate to Incorporate from the BSP before
trustees incorporating a bank)
b. Stating the fact that the amendment/s have been
duly approved by the required vote of the The Certificate of Incorporation is to be attached to the Articles of
stockholders or members Incorporation.

SEC. 16. GROUNDS FOR DISAPPROVAL OF AOI **NOTES

OR AMENDMENTS
Only substantial and not strict compliance is required.
The above grounds are not exclusive. Example of another
ground is the capital requirement.
Section 16. Grounds When Articles of Incorporation or
Amendment May be Disapproved. The Commission may If there is no valid ground for disapproval, the SEC is duty-
disapprove the articles of incorporation or any amendment thereto bound to approve the same, it being the SEC’s ministerial duty
if the same is not compliant with the requirements of this Code: given the right to association.
Provided, That the Commission shall give the incorporators,
directors, trustees, or officers as reasonable time from receipt of the **DUE PROCESS IN THE REJECTION OF THE AOI
disapproval within which to modify the objectionable portions of
the articles or amendment. The following are ground for such Before rejecting the AOI, the SEC should give the incorporators
disapproval: reasonable time within which to correct or modify the objectionable
portions of the articles or amendments.
(a) The articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein; Any decision of the Commission rejecting the AOI or disapproving
any amendment thereto is appealable by Petition for Review to the
(b) The purpose or purposes of the corporation are patently CA in accordance with the pertinent provisions of the Rules of Court.
unconstitutional, illegal, immoral or contrary to government rules
and regulations; SEC. 17. CORPORATION NAME

(c) The certification concerning the amount of capital stock Section 17. Corporation Name. - No corporate name shall be allowed by the
subscribed and/or paid is false; and
A name is not distinguishable even if it contains one or more of the following:
(d) The required percentage of Filipino ownership of the capital
stock under existing laws or the Constitution has not been The word "corporation", "company", incorporated", "limited", "limited liability", o
complied with.
Punctuations, articles, conjunctions, contractions, prepositions, abbreviations, diffe
No articles of incorporation or amendment to articles of
incorporation of banks, banking and quasi-banking institutions,
The Commission upon determination that the corporate name is: (1) not distinguis
preneed, insurance and trust companies, NSSLAs, pawnshops and
other financial intermediaries shall be approved by the Commission
unless accompanied by a favorable recommendation of the
appropriate government agency to the effect that such articles or
amendment is in accordance with law.
**GROUNDS TO DISAPPROVE INITIAL APPLICATION
FOR INCORPORATION AND AMENDMENT OF
1. Articles or amendment is not substantially in accordance with
the form prescribed by law;
2. The purpose/s of the corporation is patently unconstitutional,
illegal, immoral, or contrary to government rules and
regulations.
3. Certification concerning the amount of capital stock subscribed
and/or paid is false.

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 Illustration: under the amended name.
approval of the new corporate name, the Commission shall issue a certificate of incorporation
Trade Name: Penshoppe
If the corporation fails to comply with the Commission's order, the Commission mayCorporate Name:
hold the Goldenand
corporation ABCits responsible directors or officers in contempt and

**GROUNDS TO QUESTION CORPORATE NAME

(1) Complainant corporation has acquired prior right over the use of
such corporate name; and
(2) Proposed name is either:
a. Identical;’ or
**REQUIREMENTS FOR A VALID CORPORATE NAME b. Deceptively or confusingly similar to that of any
existing corporation or to any other name already
(1) Distinguishable from a name already reserved or registered for protected by law; or
the use of another corporation. c. Patently deceptive, confusing or contrary to existing
laws.
T/N: A name is not distinguishable even if it contains one or
more of the following: **TEST IN DETERMINING IDENTITY/SIMILARITY
(a) The word “corporation”, “company”, “incorporated”,
“limited”, “limited liability”, or an abbreviation of one If it has the tendency to mislead a person using ordinary care and
of such words; and discrimination.
(b) Punctations, articles, conjunctions, contractions,
prepositions, abbreviations, different tenses, spacing, What if the corporation desires to incorporate a
or number of the same word or phrase. subsidiary? Atty. Gaviola: Usually you will have the same
name. The SEC allows it, provided that the corporation which
(2) One that is not yet protected by law; had a priority right will send you a letter of consent. In this
case, you cannot reserve your name online. You will have to
(3) Not contrary to law, rules, and regulations. write a letter to the SEC main office in Manila to basically grant
permission for the subsidiary to use the name of the parent.
Atty. Gavi: Upon determination by the Commission that the So, just because it’s similar, it’s automatically not allowed. So,
corporate name violates either of the three requirements, it if the corporation with the prior right consents, then, it will be
may summarily order the corporation to immediately cease and allowed. But it has to be proven that there is a parent-
desist from using such name, and to register a new one. It shall subsidiary/affiliate.
also cause the removal of visible signages, marks, ads, etc.
bearing such corporate name. See also discussion of Corporate Name under Sec. 13.

Upon approval of the new corporate name, the Commission SEC. 18. REGISTRATION, INCORPORATION
shall issue a certificate of incorporation under the amended AND COMMENCEMENT OF CORPORATION
name. Section 18. Registration, Incorporation and
Commencement of Corporation Existence. - A person or
**EFFECT OF FAILURE TO COMPLY WITH SEC ORDER group of persons desiring to incorporate shall submit the intended
(in corporate name to the Commission for verification. If the
Commission finds that the name is distinguishable from a name
The corporation and its responsible directors or officers may be held: already reserved or registered for the use of another corporation,
1. In contempt, and/or not protected by law and is not contrary to law, rules and
2. Be administratively, civilly and/or criminally liable regulation, the name shall be reserved in favor of the incorporators.
under the Code and other applicable laws, and/or The incorporators shall then submit their articles of incorporation
3. May result in the revocation of the corporation’s and bylaws to the Commission.
registration
If the Commission finds that the submitted documents and
Atty. Gaviola: Late December 2017, SEC came out with a new information are fully compliant with the requirements of this Code,
regulation concerning corporate names. Under the Intellectual other relevant laws, rules and regulations, the Commission shall
Property Code, the moment you create a trade name and start issue the certificate of incorporation.
using a trade name, it is already protected even if it is not yet
registered under the Intellectual Property Code. But under this A private corporation organized under this Code commences its
new regulation, if the corporation is doing business under a corporate existence and juridical personality from the date the
trade name different from its corporate name, the trade name Commission issues the certificate of incorporation under its official
should be included in its AOI. In that regard, the protection seal thereupon the incorporators, stockholders/members and their
granted by Sec. 17 of the RCC is extended to that trade name. successors shall constitute a body corporate under the name stated
in the articles of incorporation for the period of time mentioned
What is the effect if the trade name is not included in the therein, unless said period is extended or the corporation is sooner
AOI? dissolved in accordance with law.
A: SEC Rules provide that such trade name can be used by some
other corporations subject to the consent of the owner of the trade After the requirements are complied with, the SEC shall now issue
name. the Certificate of Incorporation.

Note: The trade name and corporate name need not be the
same.

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What would the issuance of the Certificate of with the requirements to organize a corporation as provided by law.
Incorporation mean?
A: It is considered the birth of the corporation and the corporation If someone really wants to question the existence of this corporation,
commences its juridical personality. it should only be the Solicitor General representing the government,
who is supposed to extend the privilege. Only the Solicitor General
Importance: The COI is the best evidence of the corporation’s can question the existence of the corporation through a quo warranto.
existence.
Rule: The State must bring a direct proceeding to question the
We can now classify ourselves as what kind of validity of its corporate existence through the Solicitor General by
corporation? A: It will now become a de jure corporation – which filing a quo warranto proceeding. Its existence as a corporation
is a corporation in fact and in law. cannot be collaterally attacked either by the State or by private
individuals.
SEC. 19. DE FACTO CORPORATION
Section 19. De Facto Corporations. - The due incorporation SEC. 20. CORPORATION BY ESTOPPEL
of any corporation claiming in good faith to be a corporation under
this Code, and its right to exercise corporate powers, shall not be
required into collaterally in any private suit to which such Section 20. Corporation by Estoppel. - All persons who
corporation may be a party. Such inquiry may be made by the assume to act as a corporation knowing it to be without the
Solicitor General in a quo warranto proceeding. authority to do so shall be liable as general partners for all debts,
What is a de jure corporation? liabilities and damages incurred or arising as a result thereof:
A: it is one created with substantial conformity to the mandatory Provided, however, That when any such ostensible corporation is
statutory requirements in the Corporation Code of the Philippines. sued on any transaction entered by its as a corporation or on any
tort committed by it as such, it shall not be allowed to use on any
What is a de facto corporation? its lack of corporate personality as a defense. Anyone who assumes
A: An association of persons existing under a valid law under which an obligation to an ostensible corporation as such cannot resist
it may be incorporated after having attempted in good faith to performance thereof on the ground that there was in fact no
incorporate, and assuming corporate powers (Seventh Day corporation.
Adventist Conference Church of Southern Phils. Vs.
What is a corporation by estoppel?
Northeastern Mindanao Mission of Seventh Day Adventists,
A: A group of persons who assume to act as a corporation knowing it
Inc., GR. No. 150416, 1950)
to be without authority to do so, who shall be liable as general
partners for debts, liabilities and damages incurred or arising as a
What are the requisites to be considered a de facto
result thereof.
corporation?
A:
**NOTES:
(1) There is a valid law that deems to establish a corporation;
A group of persons which holds itself out as a corporation and enters
(2) Substantial compliance with the requirements or a
into a contract with a third person on the strength of such appearance
colorable attempt to organize a corporation under such
cannot be permitted to deny its existence in an action under said
law;
contract.
(3) Good faith on the part of the corporation in exercising
corporate powers.
“One who assumes an obligation to an ostensible corporation
as such, cannot resist performance thereof on the ground
Illustration.
thereof that there was in fact no corporation.”
Group exercised good faith in substantially complying
with the requirements – De Facto Corporation
These are corporations who have exercised rights as a corporation
and has undertaken obligations as a corporation, even without validly
A group of five (5), after signing their Articles of Incorporation and
incorporating. In which case, the persons who made up the
having it notarized, told someone else to file it at the SEC and did not
corporation are estopped from claiming that they are not. But they
bother to follow up. It did not even tell anyone to check on the
cannot, because there is no real corporation, they will not be liable as
papers. Nevertheless, it went to say that it is now a corporation since
a corporation. They will be liable as partners. They will be solidarily
they have executed the articles. They assumed credit with a supplied,
liable in their personal capacity.
and the supplier failed to deliver, despite the transaction.
Lack of corporate personality is not a defense that it can avail.
They secured everything and applied with all the requirements. They
were able to receive the certificate of incorporation. They entered into
Requirements of a Corporation by Estoppel:
the same transaction above. The supplier argued that the corporation
cannot sue them because the suppliers went to SEC and discovered
(1) Representation by a group to the public;
that the AOI did not contain any information on its capitalization
(2) Knowing that they do not have the authority to act as a
(which is a fatal defect).
corporation; and
(3) Third parties contracting with them are induced to believe
Can the suppliers file a motion to dismiss?
that they have the authority to act as a corporation.
A: No. In this case, the corporation is considered a de facto
corporation because of its good faith in substantially complying
**NOTE:
Estoppel is a defense available only to third persons against the
ostensible corporation. When there is no third person involved,

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and the conflict arises only among those assuming the form of a Illustration 1.
corporation, who therefore know that it has not been registered, there No papers were submitted to SEC
is no corporation by estoppel. (Lozano vs. De Los Santos, G.R.
No. 125221, 1997) There were 5 individuals who did not submit anything to SEC and
entered into a transaction with someone else.
Illustration.
Group merely executed the articles and later transacted Can they be considered as a corporation?
with a supplier – Corporation by Estoppel A: No. There is no corporation at all.
A group of five (5), after signing their Articles of Incorporation and Illustration 2.
having it notarized, told someone else to file it at the SEC and did not Five people misrepresented themselves as a corporation
bother to follow up. It did not even tell anyone to check on the and borrowed money from a bank
papers. Nevertheless, it went to say that it is now a corporation since
they have executed the articles. They assumed credit with a supplied, If the five of them went to the bank and told the bank that we they are
and the supplier failed to deliver, despite the transaction. a corporation – they called themselves the “Omnibus Corporation”.
The bank lent them money. However, they failed to pay the bank and
Can they sue the supplier? sued them as the Omnibus Corporation. The lawyer of the Omnibus
A: Yes, they can sue the supplier as a CORPORATION BY Corporation filed a motion to dismiss arguing that it has no juridical
ESTOPPEL, but not as a corporation de facto. ICAB, there is no personality.
substantial attempt at organizing a corporation – merely executing the
articles is not an attempt. Can the bank sue them as a corporation?
A: Yes, they are deemed a corporation by estoppel.
CORPORATION DE FACTO
VS. CORPORATION BY What happens to the Motion to Dismiss?
A: It shall not be granted on the ground that they are considered as a
corporation by estoppel
Corporation de Corporation by
Facto Estoppel
Who will pay the amount?
A corporation that A group of persons
exists in fact, but not who assume to act A: They will be treated as general partners – they will be solidarily
in law. as a corporation liable.
knowing it to be
without authority to So what is the point of complying with all of these
do so, who shall be requirement when they will be only treated on as a
Definition liable as general corporation?
partners for debts, A: The law treats them as a corporation by reasons of equity. It is not
liabilities and for purposes of giving them the privilege under the Revised
damages incurred or Corporation Code but only for establishing their liability. IOW if they
arising as a result are not treated as corporation, the loan will not be paid.
thereof.
Illustration 3.
1. There is a valid 1. Representation
The Corporation by Estoppel lends money to someone;
law that deems by a group to the
debtor fails to pay
to establish a public;
corporation;
Let’s reverse the situation. Somebody borrowed from the five people
2. Knowing that they
because they misrepresented themselves as a corporation. The
2. Substantial do not have the
debtors did not pay. So the Omnibus Corporation are now demanding
compliance authority to act as
payment from the debtor. The debtor filed a motion to dismiss
with the a corporation; and
arguing that they misrepresented themselves as a corporation.
requirements or a
bona fide 3. Third parties
Will the motion to dismiss be entertained?
attempt to contracting with
Requisites A: No. The debtor likewise cannot free itself from his liability of the
organize a them are
unpaid debts by invoking that he transacted with a corporation by
corporation under induced to
estoppel.
such law; and believe that they
have the
Atty. Espedido: Bottom line: Once you have enjoyed certain
3. Good faith on authority to act as
advantages, you cannot now question the existence of that
the part of the a corporation.
corporation by estoppel. You cannot now say “I will not pay you
corporation in
because you are not a corporation”.
exercising
corporate
This is taken in a sense that a 3rd party cannot take advantage
powers.
of the fact that the lender is not a corporation. In the same
manner that the corporation by estoppel itself cannot pursue
any transaction because it does not have any juridical
personality.

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But if that relationship ripens into a transaction, by rule of transaction and only insofar as the parties are
equity, that relationship may be recognized and the parties concerned.
may be afforded a protection of the law. (2) Outside of that, it does not enjoy any privilege of a
corporation at all.
IOW, a corporation by estoppel is established only between the
parties. It does not have a juridical personality. The relationship
only exists between the parties. We are not saying that they QUESTIONING
Rule: Assuming that a THE VALIDITY
de facto OF actually exists, its
corporation
gained juridical personality. Only that the law gives protection. CORPORATE
existence as a corporation cannot EXISTENCE
be collaterally attacked either by
RULE ON EQUITY requires that the rights of the parties the State or by private individuals.
must be protected.
The State must bring a direct proceeding to question the validity of its
Illustration 4. corporate existence through the Solicitor General by filing a quo
No substantial compliance of the requirements warranto proceeding.

There is another group that has signed and executed their AOI and Why the State?
notarized it. After being authorized, they now entered into a A: A corporation is a creation by law. It is a privilege granted by the
transaction. State so that it is only the State that can take it away. It is the state
Can they be considered as a corporation? that issues the Certificate of Incorporation. If it does not issue, only
A: We have to qualify. If it is shown that they have substantially the State can say that you do not exist as a corporation. For all intents
complied with the requirements in good faith, they will be considered and purposes, the de facto corporation is considered as existing
as a de facto corporation. insofar as the public is concerned, except the State.

However, in the facts at hand, it was not mentioned that they **NOTES
substantially complied with the requirements. They did not even file
the requirements. There act only ended upon the notarization. ICAB, GOOD FAITH
there was no honest intention.
The issuance of the COI is essential to the claim of good faith.
Illustration 5. An association of persons to claiming to exercise the powers of a
Substantial compliance of the requirements and good corporation knowing that no COI had yet been issued to them
faith of the corporation are both present cannot claim to be exercising such powers in good faith. (Hall
vs. Piccio, G.R. No. L-2598, 1950)
The group failed to indicate the capital of the corporation. However,
for reasons we do not know, the examiners of the SEC issued them an
If after incorporation, the incorporators discovered that they
Articles of Incorporation.
have not complied substantially with the law and still continued
Believing now that they received the juridical personality, transacting business as a corporation, without doing anything to
is it now a corporation? correct the defect, the privilege of a de facto existence can no
A: It could now be considered as a de facto corporation because there longer be invoked in good faith.
was substantial compliance and good faith on the part of the
corporation. PURPOSES OF THE DE FACTO DOCTRINE

HOWEVER, if they were subsequently notified of the defects of the 1. To promote the security of business transactions and to
requirements they have submitted and they still failed to comply with eliminate quibbling over irregularities.
the requirements. They will not be considered as a corporation de 2. A third person dealing with a corporation will rarely be
facto because it lacks the element of good faith prejudiced if the company is recognized as a corporation in
spite of minor defects in formation.
BUT PRIOR to that notification from the SEC, believing that it 3. Seldom would it be just to allow a wrongdoer to quibble
fulfilled the requirements and it proceeded into entering the over such objections to escape liability or wrongdoing.
transactions – they are considered a corporation de facto. 4. It would be unjust to allow a claimant against a supposed
company to assert the individual liability of innocent
What do you think is the justification of the law for treating passive investors on the ground of flaws in the formal steps
them as a corporation de facto? of incorporation, when they have attempted in good faith to
A: For stability of business transactions – this is to promote security comply with the statutory requirements and the objecting
of business transaction and to eliminate quibbling over irregularities. party is not prejudiced. (Villanueva, Corporate Law)
It is also for the protection of the 3rd persons and consideration of
equity.
REASONS FOR TREATING A CORPORATION
BY ESTOPPEL AS A CORPORATION WHEN DE FACTO DOCTRINE DOES NOT APPLY

(1) Principle of Equity

1. A corporation whose purpose is prohibited by law or is
(2) Unjust Enrichment – “No one shall unjustly enrich himself
contrary to public policy;
at the expense of another.”
2. A corporation created for the practice of learned profession
in the absence of a law expressly permitting the
LIMITATIONS
organization of such corporations. (Note: The business
(1) The law only recognizes the transaction and the
organization for the practice of profession shall be by
rights of the parties in relation to that particular
particular partnership.)

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INSTANCES WHEN THERE IS A DE FACTO CORPORATION EFFECT OF FAILURE TO ORGANIZE AND COMMENCE
1. Failure to give the notice required by the statue for the Rule: When the corporation does not formally organize and
meeting for its organization; commence its business within five (5) years FROM the date of its
2. Failure to fix and limit the amount of capital stock of the incorporation – the Certificate of Incorporation (COI) will be deemed
company at the first meeting; revoked or cancelled on the day following the end of the five-year
3. Failure to issue stocks; period
4. Informalities in the proceedings of corporate meetings;
5. Lack of Certificate of Organization filed or executed; EFFECT OF FAILURE TO OPERATE
6. Lack of elected BOD;
7. Irregularities with respect to the number, term, place of Rule: If the corporation becomes subsequently inoperative for at least
residence, and of meeting of the Board of Directors; five (5) consecutive years – AFTER due notice and hearing, the
8. Some of the persons elected as directors are disqualified; Commission will place the Corporation under delinquent status
and
9. In general, when there is a defect in the organization of the NOTE: There is no automatic revocation. The SEC will place the
corporation and not on its creation (Chung Ka Bio vs. corporation under a delinquent status and the delinquent corporation
IAC, G.R. No. 71837, 1988) shall be given a period of two (2) years to resume the operations and
comply with the prescribed requirements of the Commission.
CONSEQUENCE OF DE FACTO STATUS
Once complied – the delinquent status is lifted and the corporation
For all intents and purposes, a de facto corporation has all the same will have de jure status
rights, powers, obligations, and liabilities as a de jure corporation.
The only difference is that the due incorporation of a de facto Failure to comply – cause the revocation of the Corporation’s
corporation may be directly inquired into by the Solicitor General in Certificate of Incorporation
a quo warranto proceeding.
GROUNDS FOR SUSPENSION
Conversely, in contrast to a de facto corporation, a de jure
corporation can successfully resist a suit brought by the State (a) The articles of incorporation or any amendment thereto is not
challenging its existence. substantially in accordance with the form prescribed herein;
(b) The purpose or purposes of the corporation are patently
SEC. 21. EFFECT OF NON-USE OF unconstitutional, illegal, immoral or contrary to government
Section 21. Effects of Non-Use of Corporate Charter and
CORPORATE CHARTER AND CONTINUOUS rules and regulations;
Continuous Inoperation. - If a corporation does not formally
(c) The certification concerning the amount of capital stock
organize and commence its business within five (5) year from the
subscribed and/or paid is false; and
date of its incorporation, its certificate of incorporation shall be
The required percentage of Filipino ownership of the capital
deemed revoked as of the day following the end of the five (5)-year
stock under existing laws or the Constitution has not been
period.
complied with.
However, if a corporation has commenced its business but
subsequently becomes inoperative for a period of at least five TITLE III. BOARD OF DIRECTORS/TRUSTEES
(5) consecutive years, the Commission may, after due notice and AND OFFICERS
hearing, place the corporation under delinquent status.
The law makes a distinction between ownership and
A delinquent corporation shall have a period of two (2) years to management. The board (management) controls, operates and
resume operations and comply with all requirements that the exercises the powers of the corporation, while the owners
Commission shall prescribed. Upon the compliance by the periodically elect, or when demanded by the circumstances
corporation, the Commission shall issue an order lifting the replace the board.
delinquent status. Failure to comply with the requirements and
resume operations within the period given by the Commission shall The Corporation Code follows the stakeholder-centered rather
cause the revocation of the corporation's certificate of than the shareholder-centered model. Under this model, owners
incorporation. are only one of the many corporate stockholders, who have
diverse and varied interests. The corporation, through its board,
The Commission shall give reasonable notice to, and coordinate must take into account and rank such interests in its actions.
with the appropriate regulatory agency prior to the suspension or
revocation of the certificate of incorporation of companies under Who are the corporation’s stakeholders?
their special regulatory jurisdiction. A: They include but are not limited to:
(1) Creditors
After the Issuance of the Certificate of Incorporation (2) Employees
(1) The stockholders will convene to elect the Board of (3) Customers
Directors. (4) Suppliers
(2) Once the BOD is elected, they will convene to have set of (5) Government
officers. (6) Community where the corporation operates

Whom do we elect?
A: President, Secretary, Treasurer, all officers listed in the by- laws
of the corporation.

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 Note: Stakeholders are different from shareholders. from among the members of the corporation. Each director and trustee shall hold o

Shareholders are those individuals or entities who own the The board of the following corporations vested with public interest shall have inde
corporation by holding the corporation’s share of stocks. On the other
hand, stakeholders are those who have an interest in the operations of
Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise known
the corporation, an interest which is not necessarily pecuniary or
financial. While a shareholder is always a stakeholder, a stakeholder
is not always a shareholder. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money ser

**DOCTRINE OF CENTRALIZED MANAGEMENT Other corporations engaged in businesses vested with public interest similar to the

All business of the corporation shall be conducted and all its An independent director is a person who apart from shareholdings and fees receiv
properties shall be controlled and held by the Board of Directors or
Trustees. A corporation can act only through its directors and Independent directors must be elected by the shareholders present or entitled to vo
officers. Acts of management pertain to the board and those of
ownership to the stockholders. (PSE vs. Litonjua, G.R. No.
204014, 2016)

While stockholders and members are entitled to receive profits, the

management and the direction of the corporation are lodged with
their representatives and agents – the board of directors/trustees.
Acts of management pertain to the board; and those of ownership to
the stockholders/members. (Tan vs. Sycip, G.R. No. 153468,
2006)

The concentration in the board of the powers of control of corporate

business and of appointment of corporate officers and managers is
necessary for efficiency in any large organization. Stockholders are
too numerous, too scattered, and unfamiliar with the business of a
corporation to conduct its business directly. And so the plan of
corporate organization is for the stockholders to choose the directors
who shall control and supervise the conduct of corporate business.
(Filipinas Port vs. Go, G.R. No. 161886, 2007)

The power to purchase real property is vested in the Board of

Directors or Trustees. While a corporation may appoint agents to
negotiate for the purchase of real property needed by the corporation,
the final say will have to be with the Board, whose approval will
finalize the transaction. A corporation can only exercise its
powers and transact its business through its Board of
Directors, and through its officers and agents when authorized
by a board resolution or by its by-laws. (Sps. Firme vs. Ukal
Enterprises and Development Corp., G.R. No. 146608, 2003)

[Link]
In theDOCTRINE OF CENTRALIZED
case of an Executive CommitteeMANAGEMENT
duly authorized in the
NOT APPLICABLE
by-laws; **QUALIFICATIONS FOR A DIRECTOR
2. Where a corporate officer acts within the scope of his
authority under the by-laws or board resolution; (1) Must own at least 1 share of stock.
3. In case of close corporations, the stockholders may directly By ownership, what is required is legal ownership
manage the business of the corporation instead, if the AOI so which is determined through the stocks and transfer
provides. book reflecting one’s name as the owner or holder
thereof. Beneficial ownership is not necessary.
SEC. 22. QUALIFICATIONS OF THE BOD/BOT
(2) Must not possess any of the disqualifications (See Sec.
Section 22. The Board of Directors or Trustees of a Corporation; Qualification26.).
and Term. - Unless otherwise provided in this Code, the board of d

Note:registered
Directors shall be elected for a term of one (1) year from among the holders of stocks Majorityinofthe
thecorporation's
directors must
bookbewhile
residents of the
trustees shallPhilippines.
be elected for a term
Majority, not all. There is no citizenship requirement, except for
nationalized industries. Even foreigners can be voted as directors.

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 INDEPENDENT DIRECTOR The wisdom of their decision, whether bad or good, cannot be
reversed by the stockholders. Otherwise, it is useless to put
Who are independent directors? them there only to be reversed by the stockholders. However, it
A: They are persons believed to be of independent mind. No does not mean that they can decide on certain business
relationship at all with the corporation except for some token judgments by disregarding all existing limitations.
shareholdings.
**NOTES:
Instances when an Independent Director is required:
(1) Corporations vested with public interest such as financial GEN: Directors cannot be held liable for mistakes or errors in the
institutions or corporations that have access to public funds, exercise of their business judgment as long as they acted in good
borrow from the public, or corporations that issue or float faith, with due care and prudence. Contracts entered into by the BOD
bonds – they solicit capital from the public are binding upon the corporation and courts will not interfere.

(2) Corporations covered under the Securities Regulation

XPNs:
Code, namely:
(1) If the contracts are so unconscionable and
(b) Securities registered with the Commission
oppressive as to amount to a wanton destruction of
(c) Corporations listed with an exchange
the rights of the minority. (Ingersoll vs. Malabon
(d) Corporations with assets of at least 50M pesos,
Sugar, G.R. No. L-27770, 1927)
and having 200 or more holders of shares, each
(2) If they violate their duties under Sec. 30 (director
holding at least 100 shares of a class of its equity
willfully and knowingly assents to patently unlawful
shares
acts of the corporation, or are guilty of gross
negligence or bad faith); and
(3) Banks, quasi-banks, NSSLAs, pawnshops, corporations
(3) If they violate Sec. 33 (disloyalty of a director who
engaged in money service business, preneed, trust and
acquires for himself a business opportunity that should
insurance companies, and other financial intermediaries
have belonged to the corporation, unless his act is
ratified by a 2/3 vote of the stockholders).

Note: Independent Directors shall make up at least 20% of the board

CONSEQUENCES OF THE BUSINESS JUDGMENT RULE
such that when there are 10 members of the BOD, it requires at least
two independent directors.
1. The resolution, contracts and transactions of the board cannot be
overturned or set aside by the stockholders or members, and not
COMPLIANCE OFFICER even the courts under the principle that the business of the
corporation has been left to the hands of the Board.
Rule: Other than the President, Treasurer, and Secretary, a 2. Directors and duly authorized officers cannot be held
compliance officer is also appointed in corporations vested with
personally liable for acts or contracts done with the exercise of
public interest.
their business judgment.
ELECTION CONTESTS
XPNs:
a. When the Code expressly provides otherwise;
- Must follow the prescribed procedure in the by-laws, including
b. When the directors or officers acted with fraud,
the period of instituting the same.
gross negligence or bad faith;
- The matter should be referred to arbitration, if provided for in
c. When the directors or officers act against the
the by-laws or the charter.
corporation in conflict of interest situations.
- In the absence of such procedure and/or period in the by- laws,
the election contest must be filed within 15 days from the date of
REMEDIES IN CASE OF MISMANAGEMENT
election.
a. Removal of directors pursuant to Sec. 27.
POWERS OF THE BOARD b. Derivative suit or complaint filed with the RTC.
c. Receivership.
3-Fold Powers or Authority of the Board
d. Injunction if the act has not yet been done.
(1) Corporate powers
e. Dissolution if abuse amounts to a ground for quo
(2) Conduct all business
warranto but the SolGen refuses to act.
(3) Control or administer all properties of the corporation
Note: Dean Villanueva opined that a derivative suit may be an
Nature of the Powers of the Board: Generally, the powers of
exception to such Rule: this occurs when it is apparent that the Board
the BOD cannot be delegated.
is not in a position to validly exercise its business judgment for the
protection of the corporation, e.g.:
Exception: Ministerial functions
a. When the Board itself has committed an act causing
damage to the corporation, or
PRINCIPLE OF BUSINESS JUDGMENT RULE b. When the Board is placed in a conflict of interests
scenario whereby it is unlikely that it would use such
Under this principle, the stockholders cannot review the decisions of
business discretion to file such suit for the best interest
the Board. If they do not want the decision of the Board, they cannot
of the corporation.
go to court and change the decision.

Atty: Espedido: The BOD can tell the stockholders that they
have no authority to question or change their decision.

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 LIMITATIONS OF THE POWERS OF THE BOARD
If no election is held, or the owners of majority of the outstanding capital stock or
It is subject to limitations imposed by:
(1) Constitution
The directors or trustees elected shall perform their duties as prescribed by law, ru
(2) Laws
(3) By-laws
(4) Articles of Incorporation

NATURE OF THE BOARD OF DIRECTOR’S POWER

Their power is original – it comes from the law or the State. It is the
law which defines the Board’s powers. So long as the power is
exercised within the law, nobody can question this.
HOW ELECTIONS ARE CONDUCTED
However, if the Board’s decision is illegal, the Business Judgment
Rule does not mean that they could do anything even if it is illegal. Normally, how do we replace officers?
Business judgment rule is confined to the decision of the board A: Through an election.
purely on business, and within the boundaries of the law, within the
boundaries of the AOI. Who calls the meeting?
A:

SEC. 23. ELECTION OF DIRECTORS OR TRUSTEES (1) It is called by the secretary

a. On the order of the President
b. By a written demand of the stockholders
Section 23. Election of Directors or Trustees. - Except when the exclusive right is reserved for holders of founders'
representing at shares
least under Section of
a majority 7 ofthe
this Code, ea
outstanding capital stock, or a majority of
the members
At all elections of directors or trustees, there must be present, either in person or through a representative authorized entitled
to act to vote
by written proxy, the owners of majorit

A stockholder or member who participates through remote communication or in absentia, shall (2) be Called
deemedbypresent
any for
stockholder
purposes oforquorum.
member of the
corporation signing the demand by directly addressing
the stockholders or members – if there is no secretary,
The election must be by ballot if requested by any voting stockholder or member.
or the secretary despite demand, refuses or fails to call
the meeting
In stock corporations, stockholders entitled to vote shall have the right to vote the number of shares of stock standing in their own names in the stock books of the
(b) cumulate said shares and give one (1) candidate as many votes as the number of directors
**When areto the
be elected multiplied
elections held?by the number of shares owned; or (c) distrib
A: Elections must be held once every year. The Code does not
provide when the first election of directors or trustees shall be held. It
authorizes the corporation to provide in the by-laws the time for the
holding of the annual election of directors or trustees.

Who can elect?

A: Majority of the stockholders

Rule: At all elections of directors or trustees, there must be present,

either in person or through a representative authorized to act by
written proxy, the owners of majority of the outstanding capital
stock, or if there be no capital stock, a majority of the members
entitled to vote. When so authorized in the bylaws or by a majority of
the board of directors, the stockholders or members may also vote
through remote communication or in absentia. [Section 23, paragraph
2]

Shareholders or members must be present either:

(a) In person;
(b) Through a representative authorized to act by written
proxy;
(c) Remote communication or
(d) In absentia

What happens if only a few stockholders appear and there

is no quorum?
A: A meeting cannot be validly held because as we said a quorum
refers to the number of people required to validly hold a meeting. To
constitute a valid meeting, the majority of the stockholders must be
present.

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What happens if the stockholders present for the holding PROXY
of such election are/is less than the majority? What
happens? A: In this case, plurality vote sets in, which means that A proxy is a written document which contains the authority given to
the nominee receiving the highest number of votes shall be declared someone to represent the stockholder and cast his vote during the
elected, even if the majority requirement was not reached. meeting.
Atty. Espedido: Generally, a meeting cannot be validly held. IOW, these documents are what we might consider as Management
However, under the circumstances in our illustration, the law Control Devices which are tools that the management uses to control
provides that “notwithstanding any provision of the articles of the decisions.
incorporation or bylaws to the contrary, the shares of stock or
membership represented at such meeting and entitled to vote Atty. Espedido: If you are part of management, and you want to
shall constitute a quorum for purposes of conducting an secure the issues you want to be approved in a meeting or the
election under this section. [Section 25 paragraph 4] persons you want to be elected in the election, you try to
gather as many proxies as you can, and cast the vote in behalf
How do we proceed with the elections? of the stockholders. You will cast the vote yourself because
A: you are the duly authorized representative.
(1) Presiding officer will call for nominations. Everyone
who has at least 1 share of stock is entitled to be If you notice you have some PLDT subscriptions, you are a
nominated. stockholder of PLDT. And from time to time, you will receive
(2) Presiding officer will determine if the nominees have notices from the PLDT. If management or the board would
all of the qualifications and none of the want to approve something during the meeting, they would
disqualifications advise you to send proxies as well.
(3) Other nominees will be tabulated **NOTES:
QUORUM Proxies shall be in writing, signed by the stockholder or
member and filed before the scheduled meeting with the
Rule: In the meeting of the stockholders, at least majority of the corporate secretary. Unless otherwise provided by the
owners of the outstanding capital stock should be present. Otherwise, proxy, it shall be valid only for the meeting for which it
we do not have a quorum. was intended. No proxy shall be valid and effective for a
period longer than 5 years at any one time. (See Sec. 57.)
What is a quorum?
A: It is the number of stockholders or members sufficient to conduct VOTING TRUST AGREEMENT (See Sec. 58.)
a valid meeting.
A Voting Trust Agreement is a document similar to a proxy but
In a meeting of the board of directors, the majority usually constitutes longer in application or existence. It contemplates a situation wherein
a quorum, but the by-laws can provide for another. the group of stockholders agree among themselves that in cases of
issues to be presented for approval, they will bot as one (block vote),
Kinds of Quorum and cast the vote as one.

(1) Simple majority How many directors do we elect?

- The traditional kind. 50% + 1 A: It depends on the by-laws of the corporation.

(2) Qualified majority **NOTES

- The number stated in the by-laws. It can be more than
a simple majority, but it can never be lower than the Election of Directors
simple majority (1) Done at any meeting called for the election of BOD and
- Any number higher than 50% + 1 as provided for in voted for by the stockholders. At all elections, owners of
the articles of incorporation (e.g. 2/3 or 3/4) the majority of the outstanding capital stocks must be
presented either:
a. In person;
Note: Corporations can determine by themselves what
b. Through a representative authorized to act by
would constitute a quorum. There can be instances when
written proxy (in absentia), e.g. proxy or trust;
the quorum set by the corporation is less than the majority.
Do not confuse quorum for majority. c. If allowed by the by-laws or majority of the
BOD, through remote communication (e.g.
**NOTES: telephone conference or video conference)
1. In absence of the required majority, there will be failure of
election. Note: Such modes of attending the meeting and voting may
2. The law follows plurality voting, wherein the nominee with be utilized by corporations vested with public interest
the highest number of votes shall be elects as a director. although not provided in their by-laws.
3. The election is generally done through straight voting
4. Cumulative voting is generally not permitted in a non- (2) The election must be by ballot if requested by any voting
stock corporation, where each member may not cast more stockholder. Hence, voting by viva voces or roll call
than 1 vote for 1 candidate. (raising hands) is valid except when there is a request that it
be by ballot.

(3) Stockholders shall have the right to vote the number of

shares of stock standing in their own names (1 share = 1
vote) as long as the total number of votes cast shall

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not exceed the number of shares owned by the stockholders In this case, A B C D E will win in the elections, but
as shown in the books of the corporation multiplied by the not F. This scenario illustrates the cumulative voting.
whole number of directors to be elected.
What is the purpose of cumulative voting?
Formula: A: The intention of such mode of voting is to
No. of votes = No. of shares x No. of vacant seats protect the interest of the minority shareholder and
ensure that the minority has representation in the
Methods of voting: Board of Directors.
a. Straight voting c. Cumulative voting by distribution
Vote such number of shares for as many persons as Distribute them on the same principle as many
there are directors to be elected. candidates as may be seen fit.
Example. A owns 100 shares. If there are 5 directors Note: Comparison with non-stock corporations:
to be elected, A is entitled to 500 votes multiplying Members may cast as many votes as there are trustees
100 by 5. He may give to the 5 candidates 100 votes to be elected, but may not cast more than 1 vote for 1
each. candidate, unless otherwise provided in the AOI or in
the by-laws. They cannot cumulate.
b. Cumulative voting (for 1 candidate) Illustration.
Cumulate said shares and give 1 candidate as many B, C, D, E and F agreed among themselves that they
votes as the number of directors to be elected will be the directors with the exclusion of A. Each will
multiplied by the number of shares owned. have 50 votes. In order for them to be elected, they
should use cumulative voting. They cannot prevent A
The privilege of cumulative voting is permitted for the from being elected, if they don’t want him to be a
purpose of giving minority stockholders representation member of the board. Their plan however will not
in the BOD. Stockholders shall have the right to vote work because the law says, “protect the minority”.
the number of shares of stock standing in their own That’s the intention of the law in cumulative voting.
names.
(4) No delinquent stock shall be voted.
A director elected because of the vote of the minority
stockholders who untied in cumulative voting cannot Delinquent stocks – declared by the Board as
be removed without cause. delinquent because of their subscribers’ failure to pay the
balance after the same was due or after the Board called for
Illustration. payment
There are 6 nominees for the 5 slots as a director,
nominees A B C D E have 20 shares each. However, (5) Nominees for directors or trustees receiving the highest
B C D E agreed to gang up against A, so the four (4) number of votes shall be declared elected.
of them agreed to give F one share each so that F will
now be qualified to be nominated since he will be (6) If no election is held, or the owners of the majority of the
holding four shares. OCS or majority of the members entitled to vote are not
present in person, by proxy or through remote
How much shares do they have now? communication or not voting in absentia at the meeting,
A: such meeting may be adjourned, and the corporation shall
A 20 shares follow the procedures laid out in Sec. 25.
B 19 shares
C 19 shares
SEC. 24. CORPORATE OFFICERS
D 19 shares
E 19 shares
F 4 shares Section 24. Corporate Officers. - Immediately after their
election, the directors of a corporation must formally organize an
Do you think they can ease out A? elect: (a) a president, who must be a director; (b) a treasurer, who
A: No, they cannot ease A out because in this case, A must be a resident of the Philippines; and (d) such other officers as
can cumulate all his shares to vote for himself. Thus: may be provided in the bylaws. If the corporation is vested with
public interest, the board shall also elect compliance officer. The
Votes same person may hold two (2) or more positions concurrently,
Shares (Shares X No. of except that no one shall act as president and secretary or as
Directors) president and treasurer at the same time, unless otherwise allowed
A 20 100 (20 x 5) in this Code.
B 19 95 (19 x 5)
C 19 95 (19 x 5) The officers shall manage the corporation and perform such duties
D 19 95 (19 x 5) as may be provided in the bylaws and/or as resolved by the board
E 19 95 (19 x 5) of directors.
F 4 20 (4 x 5)

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 REQUIREMENTS TO BECOME PRESIDENT TREASURER
President – must be a director, who is a holder of at least 1 share
The treasurer must be a resident of the Philippines. The law
Vice President – not required to be a holder of at least 1 share, but considers his immediate availability being the primary custodian
by the time he succeeds as President, the VP is required to have at of the corporate funds, which is needed in the running of
least one share by then corporate affairs and implementation of the board decision.
Has control over the funds and/or other assets of the corporation
**BASIC CORPORATE OFFICERS Has authority to receive in the name and for the benefit of the
corporation, all subscriptions, contributions or donations paid or
(1) The president (must be a director) given by the subscribers or members
(2) The treasurer (must be a resident of the Philippines) Certifies the information set forth in 7th and 8th clauses of the
(3) The corporate secretary (must be a citizen and resident of the AOI, and that the paid-up portion of the subscription for the
Philippines) benefit or credit of the corporation has been received
(4) In the case of public interest company, the compliance He is one of the main signatories of financial statements
officer
(5) Other officers as provided for in the by-laws CORPORATE SECRETARY
**RULE ON DUAL POSITIONS
Tasked to maintain corporate records, including the stock and
GEN: Any director may hold 2 or more positions concurrently. transfer book
XPN: (1) President & secretary Upon order of the President, he sends notices and takes
(3) President & treasurer minutes of meetings
XPN2: (1) Unless otherwise allowed by the RCC Logically, he is the corporate officer with whom a dissenting
(2) In an OPC, the president can be a treasurer director must register his objection to a particular corporate
resolution, such as the issuance of a watered stock Primary
Rationale: To ensure faithful performance to their functions. officer tasked to make reports to the SEC
Primary officer tasked to attest to corporate resolutions
CHAIRMAN He should thus ensure that none of the information or statements
in a report or certification required by the code is: (1)
Not a statutory corporate officer incomplete, (2) inaccurate, (3) false or (4) misleading.
When his appointment is provided for in the by-laws, he Otherwise, he may be liable for willfully certifying a report
generally sets the meeting and its agenda, and is the default Together with the President, he is authorized to use stock
officer to preside the same certificates
He may be an independent director, provided he must not hold Restrictions:
an executive position and should not be involved in the a. Should be a different person from the compliance
corporation’s day-to-day operations officer
He may be a non-Philippine national, even in corporations b. Should not be a member of the BOD
requiring Filipino ownership, provided he limits his role to that
of a presiding officer during meetings COMPLIANCE OFFICER
Required only in corporations that are vested with public interest
PRESIDENT
Ensures that the members of the board and corporate officers
The president must be a director comply with law, the corporate charter and by-laws
Primary officer tasked to implement the decision of the board Should not be a member of the board
Regarded as the principal agent of the corporation
He shall manage the corporation and perform such duties as may OTHER CORPORATE OFFICERS
be provided in the by-laws and/or resolved by the board of
directors By-laws may sanction the appointment of other corporate
He is primarily authorized to initiate meetings, and in the officers, who have special roles in running the affairs of the
absence of a Chairman, to preside them corporation
He is the main signatory of the stock certificates, and in Normally, they assist the president in managing the corporation
exceptional cases, the financial statements They are agents of the corporation relative to their authority
stipulated in the by-laws
VICE PRESIDENT
What is the significance of distinguishing between a
The law does not require the board to elect a vice president corporate and non-corporate officer?
He/She ensures succession to the presidency A: Only corporate officers may bind the corporation, provided he acts
It is not provided by law that a vice-president should own at within the scope of his authority. He may be terminated at will,
least one share of stock. However, for him to succeed the whereas a non-corporate officer may only be terminated for just or
president, he must own 1 share of stock at the time of ascending authorized causes.
into the office of the president.
Further, dispute over the separation from office of a corporate officer
is considered an intra-corporate dispute, which falls under the
jurisdiction of the regular courts.

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 **TERM OF CORPORATE OFFICERS  The report shall specify the new date for the election, which
shall not be later than 60 days from the scheduled date.
(1) BOD – 1 year
(2) Officers – generally coterminous with the Board, but (C) NO QUORUM ON SECOND DATE
the by-laws may provide that they have a longer term.  The Commission shall have the power to issue a summary order
that an election be held. The SEC shall have to power such
Note: Unlike regular employees or subordinate officers who enjoy orders as may be appropriate, including orders directing the
security of tenure, purely corporate officers and/or executive issuance of a notice stating the time and place of the election,
directors enjoy protection from their respective contracts with the designated presiding officer, and the record date or dates for the
corporation determination of stockholders or members entitled to vote.
**VACANCIES IN THE POSITION OF THE OFFICERS Reason for SEC calling the election:
Atty. Espedido: There are new relationships created. While in
They are filled a vote of majority of the board of directors, and the the Old Code, the objective of the SEC was more focused on
elected replacement officer has a term of only the unexpired portion stockholders. In the New Code, it does not only focus on
of his predecessor. stockholders but to stakeholders as well.
SEC. 25. REPORTORIAL REQUIREMENTS The stakeholders include creditors, customers, clients,
employees. These are now relationships that the corporation
will have to establish. It is no longer focused within the
Section 25. Report of Election of Directors, Trustees and corporation. The law now seems to protect all the stakeholders.
Officers, Non-holding of Election and Cessation from They are involved insofar as the existence of the corporation is
Office. - Within thirty (30) days after the election of the directors, concerned, and the manner in which the corporation is being
trustees and officers of the corporation, the secretary, or any other managed and operated.
officer of the corporation, the secretary, or any other officer of the
corporation, shall submit to the Commission, the names, If there seems to be a problem, the SEC seems to assume.
nationalities, shareholdings, and residence addresses of the
directors, trustees and officers elected. Who calls the meeting?
A: The President orders the Secretary to send notices to the
The non-holding of elections and the reasons therefor shall be stockholder.
reported to the Commission within thirty (30) days from the date of
the scheduled election. The report shall specify a new date for the However, if one of the agenda is the removal of the
election, which shall not be later than sixty (60) days from the president, is the corporation and stakeholders helpless?
scheduled date. A: No, not anymore. Under the Old Code, there was what is
called HOLDOVER CAPACITY. The old provision says, “until
If no new date has been designated, or if the rescheduled election is the successor is elected and assumed office.”
likewise not held, the Commission may, upon the application of a
stockholder, member, director or trustee, and after verification of In the New Code, however, it cannot be done. Now, how could they
the unjustifiable non-holding of the election, summarily order that be elected if there is no election? So now, the law now has a
an election be held. The Commission shall have the power to issue compulsory intervention by the SEC.
such orders as may be appropriate, including other directing the
issuance of a notice stating the time and place of the election, HOLDOVER CAPACITY
designated presiding officer, and the record date or dates for the
determination of stockholders or members entitled to vote. Illustration 1.
Notwithstanding any provision of the articles of incorporation or In a situation where there is no President, the Vice President
by laws to the contrary, the shares of stock or membership succeeds. However, if the VP cannot succeed, a special election
represented at such meeting and entitled to vote shall constitute a will be called.
quorum for purposes of conducting an election under this section.
Illustration 2.
Should a director, trustee or officer die, resign or in any manner President refuses to call a meeting for his removal
case to hold office, the secretary or the director, trustee or officer of
the corporation, shall, within seven (7) days form knowledge
A meeting is scheduled for the removal of the President. However,
thereof, report in writing such fact to the Commission. the president himself will not call the meeting.

In such a case, the usual provision in any organization in case an

(A) AFTER ELECTION election of new officers cannot be held is that the old set of officers
 After the election of the Members of the Board, the corporate will continue – there will be a hold-over. The hold-over capacity is
secretary shall submit a report to the SEC for the results of the the abuse that the law wants to resolve.
election within 30 days after the election of directors, trustees,
and officers of the corporation. In order to resolve such scenario, the New Code now provides that
the SEC will summarily order an election to be held.
(B) IF NO ELECTION
 The secretary shall still submit a report and reasons therefor to
the SEC within 30 days from the date of the scheduled election.

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 SEC. 26. DISQUALIFICATION OF DIRECTORS,

meeting of the stockholders or members for the purpose of removing any director or trustee must be called by the secretary on order of the president, or upon w

The Commission shall, motu propio or upon verified complaint, and after due notice and hearing, order the removal of a director or trustee elected despite the
Section 26. Disqualification of Directors, Trustees or
Officers. - A person shall be disqualified from being a director,
trustee or officer of any corporation if, within five (5) years prior to
the election or appointment as such, the person was:

(a) Convicted by final judgment:

(1) Of an offense punishable by imprisonment for a period

exceeding six (6) years;

(2) For violating this Code; and

(3) For violating Republic Act No. 8799, otherwise known as

"The Securities Regulation Code";

(b) Found administratively liable for any offense

involving fraudulent acts; and

(c) By a foreign court or equivalent foreign regulatory

authority for acts, violations or misconduct similar to
those enumerated in paragraphs (a) and (b) above.

The foregoing is without prejudice to qualifications or other

disqualifications, which the Commission, the primary regulatory
agency, or Philippine Competition Commission may impose in its
promotion of good corporate governance or as a sanction in its
administrative proceedings. SEC. 28. VACANCIES IN THE BOARD

GROUNDS FOR DISQUALIFICATION Section 28. Vacancies in the Office of Director or Trustee; Emergency

If within five (5) years PRIOR to the election or appointment as such, When the vacancy is due to term expiration, the election shall be held no later than
the person was:
(3) Convicted by final judgment: However, when the vacancy prevents the remaining directors from constituting a q
a. Of an offense punishable by imprisonment for a period
Page 46 of to
Any directorship or trusteeship 88be
| EH403
filled 2019-2020 Corporation
by a reason Law in the numbe
of an increase
 exceeding six (6) years;
b. For violating this Code; and
c. For violating Republic Act No. 8799, otherwise
known as "The Securities Regulation Code";
(4) Found administratively liable for any offense involving
fraudulent acts; and
(5) By a foreign court or equivalent foreign regulatory
authority for acts, violations or misconduct similar to those
enumerated in paragraphs (a) and (b) above.

Atty. Espedido: The SRC simply controls, manages, and

monitors the activities of the stock market. The stock market is
a market where only shares of stocks are being sold. If you
want to share your shares of stock, all you have to do is
register with the stock market. Before you could register, you
would have to undergo the process of registering as an IPO.
Once you comply with all the requisites, then you could already
sell your shares to the public.

SEC. 27. REMOVAL OF DIRECTORS/TRUSTEES

Section 27. Removal of Director or Trustees. - Any director or trustee of a corporation may be removed from office by vote of the stockholders holding or

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by an election at a regular or at a special meeting of stockholders or members duly called for the purpose, or in the sameBOARD
EMERGENCY meeting authorizing the increase of direc

Rule:
In all elections to fill vacancies under this section, the procedure set forth in Section When
23 and 25 ofthe
thisvacancy prevents
Code shall apply. the remaining directors from
constituting a quorum and emergency action is required to prevent
grave, substantial, and irreparable loss or damage to the corporation,
the vacancy may be temporarily filled from among the officers of the
corporation by unanimous vote of the remaining directors or trustees.

Cause of Vacancies: DARI-DREI Illustration.

(1) Death
(2) Abandonment If there were 5 members of the board and we have
(3) Resignation removed 3, how do we fill this up?
(4) Incapacity A: Since there are only 2 members of the board left, the vacancy may
(5) Disqualification be temporarily filled from among the officers of the corporation by
(6) Removal unanimous vote of the remaining directors or trustees.
(7) Expiration of Term
(8) Increase in the number of Directors/Trustees The emergency board can now proceed to act on the emergency. The
action by the designated director or trustee shall be limited to the
RULES IN FILLING UP VACANCIES emergency action necessary.

(A) For Removal So if the emergency is to borrow 10M, the Emergency Board has the
Filled up by the stockholders or members in a regular or special power and authority to borrow 10M. After such, the term shall cease
meeting called for that purpose within a reasonable time from the termination of the emergency or
upon election of the replacement director or trustee, whichever comes
When – same day of the meeting authorizing the removal
earlier.
(B) For Expiration of Term
We still have a vacancy again. What do we do now?
Filled up by the stockholders or members in a regular or special A: We now go to the regular route – calling for a regular
meeting called for that purpose stockholder’s meeting.
When – not later than the day of such expiration at a meeting
called for that purpose either through a special or regular **REMOVAL
meeting
WHO MAY REMOVE
(C) For Increase in the Number of Directors or Trustees
Filled up by the stockholders or members in a (1) Stock corporation
(a) regular or special meeting called for that purpose or in the Vote of the stockholders holding or representing at least
same meeting 2/3 of the outstanding capital stock
(b) When – in the same meeting authorizing the increase of
directors or trustees if so stated in the notice of the meeting (2) Non-stock corporation
Vote of at least 2/3 of the members entitled to vote
(D) For other causes (DARID; death, abandonment,
resignation, incapacity, disqualification) HOW REMOVAL IS DONE
Filled up by at least the majority of the remaining directors
or trustees if still constituting a quorum – existing board By the stockholders through a regular or special meeting. If in
will fill the vacancy a special meeting, the special meeting shall be called for the
When – not later than 45 days from the time the vacancy purpose of removing the director.
arose o It must be called by the secretary on order of the
president, or upon written demand of the
stockholders representing or holding at least a
Term expiration  Meeting should be called no later
majority of the outstanding capital stock, or a majority
than the day of expiration at a
of the members entitled to vote.
meeting called for that purpose
Removal by  Meeting may be held on the same If there is no secretary, or if the secretary, despite demand, fails
stockholders or day as the meeting authorizing the or refuses to call the special meeting or to give notice thereof,
members removal, provided it must be stated the stockholder or member of the corporation signing the
in the agenda and notice of the demand may call for the meeting by directly addressing the
meeting stockholders or members.
Increase in the (1) At a regular or at a special meeting of Notice of the time and place of such meeting, as well as the
number of stockholders/members duly called for information to propose such removal, must be given by
directors or such purpose, or publication or by written notice prescribed in this Code by SEC
trustees (2) in the same meeting authorizing the Upon verified complaint, and after due notice and hearing, order
increase of directors or the removal of a director or trustee elected despite the
trustees if so stated in the notice of disqualification, or whose disqualification arose or is discovered
the meeting. subsequent to an election.
All other reasons  Meeting must be held no later than
45 days from the time the vacancy
arose

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Atty. Gaviola: If there is an emergency situation, in order to (3) Voted upon by the stockholders representing the
prevent grave, substantial or irreparable loss or damage to the majority of the outstanding capital stocks
corporation, the vacancy must be temporarily filled from the
officers of the corporation. Temporary only. After the XPN to XPN: A vote of at least of the majority of the outstanding
emergency, the Stockholders would have to fill in the vacancy, capital stock or majority of the members entitled to vote grants the
because the Board does not form a quorum anymore. directors compensation in a meeting specifically called for that
purpose.
Note that in emergency situations, the Board, even if they do
not constitute a quorum, may temporarily fill-in the vacancy If they are given compensation, is there a limit?
from the officers of the corporation. A: Yes. They should not receive more than 10% of the net income
before tax of the preceding year.
Rationale: The reason why the law allows the directors to fill-in
the vacancies is for convenience because it’s very hard to call Why are they not paid?
a stockholder’s meeting, especially if you have a lot of A: Being shareholders, they also receive a share in the dividends.
stockholders. It will be difficult to get quorum, and it’s also the
directors who manage the corporation. So, if the BOD cannot Herbosa: Appointment to the board is a consequence of corporate
act because they’re missing a member, then that is not good ownership. An owner or member is ordinarily expected to assume the
for the corporation. post of director or trustee, and manage the corporation for his
So, the law allows the directors to fill in a vacancy. But only in ultimate benefit. Thus, the law does not generally authorize the
certain instances. However, if the stockholders really insist on payment of compensation to a shareholder/member as a director or
holding a meeting to fill a vacancy, then that is their trustee.
prerogative. Because the power of the Board to fill in a
vacancy is merely a delegated power coming from the Illustration.
stockholders. It’s inherent in the stockholders to fill in or elect
members of the Board. (Valle Verde Country Club, Inc. vs. Director A owns 75% of the shares. It is not mentioned in the bylaws
Africa, G.R. No. 151969, 4 September 2009) that the directors shall receive compensation. Thus, the other
directors move that they be given compensation per month. All of the
EXPIRATION stockholders (including A) agreed that they shall be compensated for
30K per month.
How should this be filled up?
A: Filled up by the majority of the stockholders representing 2/3 of Is it valid?
the outstanding capital stock in a regular or special meeting called for A: It is an invalid approval because the director cannot vote on the
that purpose same meeting. As provided by law, the directors cannot participate in
the determination of their own per diems or compensation.
When shall it be filled up?
A: Not later than the day of such expiration at a meeting called for Absurdity of the provision (as observed by Atty.
that purpose. Espedido):
SEC. 29 COMPENSATION OF DIRECTORS OR TRUSTEES (a) If the remaining directors vote (excluding Director A
who owns 75%) – the remaining directors cannot approve
Section 29. Compensation of Directors or Trustees. - In
because the law requires a vote of at least a majority of the
the absence of any provision in the bylaws fixing their
outstanding capital stock
compensation, the directors or trustees shall not receive any
compensation in their capacity as such, except for reasonable per
(b) If Director A participates – it cannot be approved because
diems: Provided, however, That the stockholders representing at
the law also prohibits his participation
least a majority of the outstanding capital stock or majority of the
members may grant directors or trustees with compensation and
Atty. Espedido: This provision is probably intended for publicly
approve the amount thereof at a regular or special meeting.
listed corporations where rarely someone owns a share that is
50% or more. That might be the intention there.
In no case shall the total yearly compensation of directors exceed
ten percent (10%) of the net income before income tax of the
corporation during the preceding year. SEC. 30. LIABILITY OF DIRECTORS, TRUSTEES
OR OFFICERS
Directors or trustees shall not participate in the determination of
Section 30. Liability of Directors, Trustees or Officers. - Directors or trus
their own per diems or compensation.

Corporations vested with public interest shall submit to their A director, trustee or officer shall not attempt to acquire, or any interest adverse to
shareholders and the Commission, an annual report of the total
compensation of each of their directors or trustees.

GEN: The directors or trustees shall not receive any compensation in

their capacity as such.

XPN:
(1) Reasonable per diems
(2) As stipulated in their by-laws fixing their
compensation

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 behalf; otherwise, the said director, trustee or officer shall be liable as a trustee What
for theiscorporation
important isand
thatmust
afteraccount forthe
weighing thepros
profits
andwhich
cons, otherwise
the benefitwould have
of the corporation outweighs the negative, as a BOD, opt for what is
more beneficial to the corporation, in this case the patently unlawful
act. In short, the Business Judgment Rule prevails.
LIABILITY OF DIRECTORS
Business Judgment Rule vs. Gross Negligence
The directors/trustees are liable to the corporation for the commission
of the following: SUMMARY: Based on the BJR, the acts of the BOD bind the
corporation. As such, it cannot be questioned or reviewed by the
(1) Knowingly and willfully vote or assent to patently unlawful stockholders or the courts.
acts
(2) Guilty of gross negligence or bad faith Insofar as the BOD exercises their powers under the BJR, the
(3) Acquire any personal or pecuniary interest in conflict of duty in contract is valid but due to gross negligence they can be held liable.
conducting the affairs of the corporation
Following the BJR, when the Board enters into transactions with the
NATURE OF LIABILITY third parties, the sale is perfectly valid. However, because of their
negligence, then the BOD can be held liable for damages the
As such, directors or trustees shall be liable solidarily for all damages corporation suffered.
suffered by the corporation, the stockholders, or members and other
persons. Personal and Pecuniary Interest

In the case of acquiring conflict of interest – the director, trustee or SUMMARY: A certain type of trust is expected of a director of a
officer shall be liable as a trustee for the corporation and must corporation similar to that of the degree of trust among partners in a
account for the profits which otherwise would have accrued to the partnership. A director needs to fully disclose whatever benefits he
corporation. may have received by virtue of his position as a director in the
corporation and he will have to remit such benefits to the corporation.
Illustration 1.
Corporation’s property was sold for 5Mn while an adjacent While there is no fiduciary trust among stockholders, there lies a
property was sold for 15Mn certain degree of trust to be had among the board and the corporation.

The Board in a meeting decided to sell one of the corporation’s

SEC. 31. DEALINGS OF DIRECTORS, TRUSTEES
properties for 5M. All of the Board except one approved the sale.
OR OFFICERS
The following day, a property owned by somebody else which is
adjacent to the property recently sold by the Corporation was able to
sell it for 15M.

The director who did not approve the earlier sale now questioned the Section 31. Dealings of Directors, Trustees or Officers with the Corpo
sale approved by the Board. The Board argued that the said sale was
fair and reasonable. The presence of such director or trustee in the board meeting in which the contrac

That director was mad because he was the lone dissenter and now he The vote of such director or trustee was not necessary for the approval of the cont
wants to vindicate himself.
The contract is fair and reasonable under the circumstances;
What could happen? If you were the one who approved,
how would you answer the dissenting stockholder?
A: Generally, the stockholders cannot question the decision of the In case of corporations vested with public interest, material contracts are approved
board because of the principle of the Best Judgment Rule. In this
case, the Board may invoke the Best Judgment Rule and argue that In case of an officer, the contract has been previously authorized by the board of d
said sale was fair and reasonable. Provided that there is no defect in
the contract of sale, it is perfectly valid. Where any of the first three (3) conditions set forth in the preceding paragraph is a

HOWEVER, in situations wherein the corporation suffers great loss

due to their gross negligence, we can say that although the sale is
valid, the BOD may still be held liable provided that they were
grossly negligent.

In our illustration, what is their liability?

A: They are solidarily liable for all damages suffered by the
corporation and must account for the 10M difference of the price
– they have to pay for whatever losses the Corporation may have
realized because of the transaction.

Business Judgment Rule vs. Patently Unlawful Acts

SUMMARY: Directors who assented to the patently unlawful act

cannot be liable if such act is drawn from a justifiable reason such as
the business judgment rule.

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 involved is made at such meeting and the contract is fair and reasonable under the circumstances.
In the absence of the conditions, what could happen to the
contract of lechon. Do you think you can be paid?
A: Yes, provided that it is ratified by a vote of 2/3 of stockholders
Summary: In the case of self-dealing directors, it is not considered representing the outstanding capital stock (OCS)
wrong in itself. However, if any of the conditions under the law is
lacking, the contract entered into can be voided at the option of the Illustration 2.
corporation. Quorum attained even without the presence of the Self-
Dealing Director
GEN: A contract of the Corporation with 1 or more of its directors,
trustees, officers, or their spouses and relatives within the 4th civil Let us assume that all of the 5 Directors are present to approve the
degree of consanguinity or affinity is VOIDABLE, at the option of contract.
the corporation
Do you think there is a problem?
XPN: The contract is held valid provided that the following A: There is no problem. Even if the self-dealing director is present,
conditions are present: his presence will not be necessary to constitute a quorum.
(1) Presence of the director or trustee in the BOD meeting Illustration 3.
in which contract is approved was not necessary to Quorum cannot be attained without the presence of the
constitute a quorum for such meeting; Self-Dealing Director
(2) Vote of such director or trustee was not necessary for
the approval of the contract Only 3 of the Directors appeared, including the self-
(3) The contract is fair and reasonable under the dealing director. Do we have a problem?
circumstances A: Yes. Because without the presence of the self-dealing director,
(4) In case of corporations vested with public interest, there would be no quorum and the votes to be cast in approving the
material contracts are approved by at least two- thirds contract cannot take place. In this case, the vote of the self-dealing
(2/3) of the entire membership of the board, with at director is necessary to approve the contract.
least a majority of the independent directors voting to
approve the material contract; and The contract may be voided at the option of the corporation.
(5) In case of an officer, the contract has been previously HOWEVER, although it is voidable, it can be ratified by a vote of 2/3
authorized by the board of directors. of the stockholders representing the outstanding capital stock.

Note: Only conditions 1-3 were mentioned during the recits If you were the holder of 75% of the shares, do we have a
problem?
RATIFICATION BY A VOTE OF 2/3 A: No problem, provided that it is fair and reasonable.

Although the contract is VOIDABLE, the contract may be ratified by Nevertheless if it is not fair and reasonable, how can it be
the vote of the stockholders representing at least 2/3 of the cured?
outstanding capital stock. Provided, that full disclosure of the director A: It can be cured through ratification by a vote of 2/3 of the
or trustee’s adverse interest is made at such meeting and the contract stockholders representing the outstanding capital stock.
is fair and reasonable.
SEC. 32 INTERLOCKING DIRECTORS
Illustration 1.
Self-Dealing Director owns a business of selling lechon
and contracts with the corporation Section 32. INTERLOCKING
Contracts Between DIRECTOR Corporations with
Interlocking Directors. - Except in cases of fraud, and provided
You are Director of a corporation and the corporation planned to hold the contractdirector
Interlocking is fairrefers
and toreasonable
a director under
of two the circumstances
corporations havinga a
a big party. At the same time, you have your own business of selling contract between
transaction twoother
with each (2) or more corporations having interlocking
lechon. directors shall not be invalidated on that ground alone: Provided,
That A
GEN: if contract
the interest of the
between twointerlocking
(2) or moredirector in onehaving
corporations (1)
Can you deal with your corporation? corporationdirectors
interlocking is substantial andbe
shall not theinvalidated
interest inonthe other
that corporation
ground alone.
A: Yes. or corporations is merely nominal, the contract shall be subject to
the provisions of the preceding section insofar as the latter
Is there a problem? corporation or corporations are concerned.
A: There is no problem for as long as the conditions for a
contract with a self-dealing director are complied with, namely: Stockholding exceeding twenty percent (20%) of the outstanding
capital stock shall be considered substantial for purposes of
(1) That the presence of the director is not necessary to constitute a
quorum for such meeting, interlocking directors.
(2) The vote of the director is not necessary to approve the
contract
(3) Contract is fair and reasonable

Otherwise, absence of any of the conditions, the contract may be

deemed VOIDABLE, at the option of the corporation.

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XPN: Illustration 3
(1) Cases of fraud; and The Interlocking Director argues that the remedy is
(2) Contract is not fair and reasonable discriminatory on his part

Note: In the case of an interlocking director who has a substantial

The director argues that this is discriminatory on his part and he will
interest in one corporation and a nominal interest in another
be deprived of his right to exercise his right to vote and be voted
corporation, the provisions of the Self-Dealing Directors shall apply.
upon.
The following requisites must be present, namely:
(1) Presence of the director is not necessary to constitute a How do you think would the SC will resolve that?
quorum
A: SC will rule in favor of the stakeholders because it will be a
(2) Vote is not necessary to approve the contract
disaster if we allow this type of directorship to continue.
(3) Contract is fair and reasonable
Atty. Espedido: To allow him – there will be a conflict of
Atty. Espedido: IOW, the interlocking directorship is perfectly
interest. If we were to tolerate these things, the other
valid UNLESS it involves a substantial interest in one
corporation will be destroyed. And if the other corporation is
corporation and a nominal interest in the other, in which case,
destroyed, it will be the bigger corporation that will alone
the requirements under the Self-Dealing Director should be
survive. So there is no more competition and so it gets all the
complied with in order for it to be considered valid. Otherwise,
market. That will be a disaster! So the Court shall allow the
the status of the contract is deemed VOIDABLE.
amendment of the By-Laws for the protection and preservation
of the other corporation. Competition must be promoted.
Note: Stockholdings exceeding twenty percent (20%) of the
outstanding capital stock shall be considered substantial for purposes
SEC. 33. DISLOYALTY OF A DIRECTOR
of interlocking directors.

Is there something wrong of being an interlocking

director? Section 33. Disloyalty of a Director. - Where a director, by
A: Generally, nothing is wrong. 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
DISADVANTAGE OF HAVING AN
latter all such profits, unless the act has been ratified by a vote of
INTERLOCKING DIRECTOR
the stockholders owning or representing at least two-thirds (2/3) of
Atty. Espedido: However, even if it is valid, the law recognizes the outstanding capital stock. This provision shall be applicable,
the disadvantages of an interlocking directorship – it is prone to notwithstanding the fact that the director risked one's own funds in
DANGER. the venture.

Illustration 1. DISLOYAL DIRECTOR

Getting the list of the Top 20 Customers
GEN: A director, by virtue of such office, ACQUIRES A
In a case where the director owns 90% of a beer company and 10% in BUSINESS OPPORTUNITY belonging to the corporation, (that
another company – there is NOTHING WRONG but the law should have benefitted the corporation itself), thereby obtaining
recognizes some evils. profits to the prejudice of the corporation, must ACCOUNT FOR
AND REFUND the corporation for ALL PROFITS.
For example, while in the meeting, the Director starts questioning
why the sales were going down. He asked the Sales Manager about it XPN: Ratification by the stockholders owning at least 2/3 of the
and asked for the list of the Top 20 Customers of the Corporation. He outstanding capital stock .
took photos of the list and later went to these big customers and
convinced them to buy instead in the other corporation. THUS, DISTINCTION
although it may be said that there is nothing wrong, there is Liabilities Disloyalty
DANGER. This is the evil contemplated by the law. (1) Willfully and By virtue of his office,
knowingly assent ACQUISITION OF A
Illustration 2. or vote to patently BUSINESS
Merger of two Corporations – No more competition unlawful acts OPPORTUNITY
(2) Gross negligence belonging to the
Currently, the biggest telephone companies right now are PLDT and or bad faith in corporation and
Globe. If one is a Director in both corporations, he could just propose directing the affairs OBTAINING
that the companies should merge and become one. Thus, only one Grounds of the corporation; PROFITS to the
corporation will remain which could result in a monopoly and there or prejudice of the
will be no more competition in the business. They could either (3) Acquiring any corporation
eliminate the competition or come out with a disastrous competition. personal or
pecuniary interest
In that illustration, how do you think will they prevent? in conflict with
A: A remedy is to amend the bylaws and have a stipulation that if their duty as a
there is a director with substantial interest in a company similar to director or trustee
their business, he should be disqualified. IOW, that person who owns Liable as a trustee and ACCOUNT for and
the 90% will be disqualified. must account for the REFUND to the
profits which corporation ALL
Liability
otherwise would have PROFITS
accrued to the
corporation
Page 52 of 88 | EH403 2019-2020 Corporation Law
 prerogatives in managing the corporation’s business affairs.
Solidarily liable
Liable for ALL ACTUAL DAMAGES TITLE IV. POWERS OF THE CORPORATION
Damages damages resulting suffered (unrealized
therefrom profit) SEC. 35. CORPORATE POWERS AND CAPACITY

SEC. 34. EXECUTIVE COMMITTEE

Section 35. Corporate Powers and Capacity. - Every

Section 34. Executive Management, and Other Special corporation incorporated under this Code has the power and
Committees. - If the bylaws so provide, the board may create an capacity:
executive committee composed of at least three (3) directors. Said
committee may act, by majority of vote of all its members, on such (a) To sue and be sued in its corporate name;
specific matters within the competence of the board, as may be
delegated to it in the bylaws or by majority vote of the board, (b) To have perpetual existence unless the certificate of
except with respect to the: (a) approval of any action for which incorporation provides otherwise;
shareholders' approval is also required; (b) filing of vacancies in
the board; (c) amendment or repeal of bylaws or the adoption of (c) To adopt and use a corporate seal;
new bylaws; (d) amendment or term is not amendable or
repealable; and (e) distribution of cash dividends to the (d) To amend its articles of incorporation in accordance with the
shareholders. provisions of this Code;

The board of directors may create special committees of temporary (e) To adopt bylaws, not contrary to law, morals or public policy,
or permanent nature and determine the members' term, and to amend or repeal the same in accordance with this Code;
composition, compensation, powers, and responsibilities.
EXECUTIVE COMMITTEE (f) In case of stock corporations, to issue or sell stocks to
subscribers and to sell treasury stocks in accordance with the
A smaller committee given delegated powers by the board. It is provisions of this Code; and to admit members to the corporation if
composed of not less than three (3) members, who are to be it be a nonstock corporation;
appointed by the board.
(g) To purchase, receive, take or grant, hold, convey, sell, lease,
T/N: The board can delegate, except matters which are pledge, mortgage, and otherwise deal with such real and personal
discretionary. However, the intention of creating the committee property, including securities and bonds of other corporations, as
is for purposes of expediency so that the board doesn’t have to the transaction of the lawful business of the corporation may
meet at all times to ake a decision, because it can be difficult to reasonably and necessarily require, subject to the limitations
convent the board sometimes. prescribed by law and the constitution;

Matters which cannot be delegated to the Executive (h) To enter into a partnership, joint venture, merger,
Committee (SVB – EC) consolidation, or any other commercial agreement with natural and
(1) Approval of any action for which shareholders’ approval is juridical persons;
also required;
(2) Filling of vacancies within the board; (i) To make reasonable donations, including those for the public
(3) Amendment or repeal of bylaws, or adoption of new welfare or for hospital, charitable, cultural, scientific, civic, or
bylaws; similar purposes: Provided, That no foreign corporation shall give
(4) The amendment or repeal of any resolution of the board donations in aid of any political party or candidate or for purpose s
which by its express terms is not so amendable or of partisan political activity;
repealable;
(5) A distribution of cash dividends to the shareholders. (j) To establish pension, retirement, and other plans for the benefit
of its directors, trustees, officers, and employees; and
**NOTES
(k) To exercise such other powers as may be essential or necessary
Executive Committee to carry out its purpose or purposes as stated in the articles of
incorporation.
Committee which exercises powers within the competence
of the Board that requires authority under the by-laws. The SPECIFIC POWERS OF A CORPORATION
Board cannot just create their own executive committee if
such committee will be exercising the powers of the Board. (1) To sue and be sued in its corporate name
(2) To have perpetual existence unless the certificate of
Special Committee incorporation provides otherwise
Can be created by the Board even without the authority (3) Adopt and use a corporeal seal
under the by-laws. (4) Amend its Articles of Incorporation
Any other committee exercising a mere recommendatory (5) Adopt, amend, or repeal bylaws
power whose actions require ratification and confirmation (6) Stock corporations – issue or sell stocks to subscribers and
by the board. It cannot approve resolutions on its own. The sell treasury stocks
reason here is that the Board is the corporation’s governing a. Nonstock corporation – admit members to the
body, clearly upholding the power to exercise the corporation
corporation’s (7) Deal with real and personal property, including securities
and bonds of other corporations

Page 53 of 88 | EH403 2019-2020 Corporation Law

 (8) Enter into commercial agreeements with natural and They need not be expressly laid out in the AOI, but exist
juridical persons by virtue of the express powers.
(9) Make reasonable donations
(10) Establish pension, retirement, and other plans for the Examples:
benefit of its directors, trustees, officers, and employees a. Acts in the usual course of business
(11) Other powers essential or necessary to carry out its purpose b. Acts to protect debts owing to a corporation
c. Embarking on a different business
Illustration. d. Acts in part or wholly to protect or aid employees
Stockholders winning the lotto and engaging in the buy e. Acts to increase business
and sell of second-hand cars
(3) Incidental/Inherent powers
There are 5 stockholders of XYZ Corporation. After receiving their - Powers that are necessary to the existence and operation of
dividend, they decided to use their dividend and use it to buy lotto – the corporation;
thereafter, they won. - **Powers which a corporation can exercise by the mere fact
of it being a corporation; or
When they won the lotto, they put up a business of their own. They - This refers to powers which are necessary to the corporate
will deal in the buying and selling of second hand cars. In one existence and are, therefore, impliedly granted. Being
instance, the second hand car that they sold did not function well. The powers inherent in the corporation as a legal entity, these
buyer sued XYZ Corporation. powers exist independently of the express powers.
What would happen? Will the case prosper? Atty. Gaviola: These are the powers which are there by
A: No, XYZ Corporation has a separate personality of its own, so it virtue of your being a corporation, so your ability to sue
cannot be sued by the acts of the stockholders doing personal acts. and be sued, to buy and sell properties, everything that is
enumerated under Sec. 35 basically. Regardless of the
Although they are stockholders, the money they used were not the [primary] purpose [of the corporation], incidental powers
funds of the corporation. Moreover, the business that the stockholders exist.
were engaged in was not the business of the corporation.
There was a problem before on the secondary purpose
**NOTES [clause of the AOI] because people just enumerated the
secondary purpose[s], and among the secondary
KINDS OF POWERS OF THE CORPORATION [purposes they listed was subparagraph (g), which is] to
sell or lease property. A few years back, BIR came up with
(1) Express powers a rule which they strictly enforced, which is that if a
- Those expressly stipulated in the AOI and in the by- property was classified as an ordinary asset, then VAT
laws and income tax will be imposed on it, but if it was classified
- **This refers to the power expressly conferred upon as capital asset, then it will be meted with capital gains
the corporation by law. These powers can be tax.
ascertained from the special law creating the
corporation, or from the general incorporation law Ordinarily, you can say that a certain item or property is an
under which it was created, the general laws of the ordinary asset of the corporation if it is related to the
land applicable to the corporation (i.e. the Revised corporation’s primary purpose. Thus, real estate is
Corporation Code), and its AOI. considered an ordinary asset if the corporation owning it is
engaged in the real estate business. [On the other hand], if
Atty. Gaviola: Ordinarily, the express powers are provided the corporation is engaged in retail, then a parcel of land it
in the primary purpose clause of the AOI. In the primary owns will be considered a capital asset unless it is used
purpose clause of the AOI, the powers contained in Sec. for business.
35 are not actually enumerated there. If you think about it,
the powers under Sec. 35 are incidental powers – they The problem with the BIR is that, if they see “to purchase,
exist by virtue of the juridical personality of the corporation. receive, take or grant real and personal property” [under a
corporation’s secondary purposes, then they will consider
To be strict about it, express powers will only exist if they the corporation to be a real estate company].
are expressly provided in the primary purpose in the AOI.
Thus, there is a disconnect between the SEC and BIR.
(2) Implied powers Corporations who copied the incidental powers in their
- Powers that are necessary to carry out the express secondary purposes clause [will be assessed with VAT
powers plus the 30% income tax as against the 6% capital gains
- **Those powers which are reasonably necessary to tax whenever it sells land, even though it is actually not a
exercise the express powers and to accomplish/carry real estate company].
out the purposes for which the corporation was
formed. POWER TO SUE AND BE SUED IN ITS CORPORATE NAME
Atty. Gaviola: The implied power of the corporation is one As a juridical entity, the corporation can directly pursue all actions to
which is related or exist by virtue of the express power of enforce its rights. It does not have to go through its stockholders in
the corporation, even if they are not expressly provided. order to bring a suit. At the same time, a corporation can directly be
held liable for its obligations. The creditor does not have to go
through the stockholders.

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 SEC. 36. POWER TO EXTEND OR SHORTEN (b) The amount of the increase or decrease of the capital stock;
CORPORATE TERM
(c) In case of an increase of the capital stock, the amount of capital
stock or number of shares of no-par stock thereof actually subscribed,
Section 36. Power to Extend or Shorten Corporate Term.
the names, nationalities and addresses of the persons subscribing, the
— A private corporation may extend or shorten its term as stated in
amount of capital stock or number of no-par stock subscribed by
the articles of incorporation when approved by a majority vote of
each, and the amount paid by each on the subscription in cash or
the board of directors or trustees, and ratified at a meeting by the
property, or the amount of capital stock or number of shares of no-par
stockholders or members representing at least two-thirds (2/3) of
stock allotted to each stockholder if such increase is for the purpose
the outstanding capital stock or of its members. Written notice of
of making effective stock dividend therefor authorized;
the proposed action and the time and place of the meeting shall be
sent to stockholders or members at their respective place of
(d) Any bonded indebtedness to be incurred, created or increased;
residence as shown in the books of the corporation, and must be
deposited to the addressee in the post office with postage prepaid,
(e) The amount of stock represented at the meeting; and
served personally, or when allowed in the bylaws or done with the
consent of the stockholder, sent electronically in accordance with
(f) The vote authorizing the increase or decrease of the capital stock,
the rules and regulations of the Commission on the use of
or the incurring, creating or increasing of any bonded indebtedness.
electronic data messages. In case of extension of corporate term, a
dissenting stockholder may exercise the right of appraisal under the
Any increase or decrease in the capital stock or the incurring, creating
conditions provided in this Code.
or increasing of any bonded indebtedness shall require prior approval
of the Commission, and where appropriate, of the Philippine
POWER TO EXTEND OR SHORTEN CORPORATE LIFE Competition Commission. The application with the Commission shall
be made within six (6) months from the date of approval of the board
How do we extend or shorten the corporate life? of directors and stockholders, which period may be extended for
A: The law now presupposes that their term will be perpetual. justifiable reasons.
However, there is still use of this provision because the corporation
has the option to avail of corporate existence or not. It may choose to Copies of the certificate shall be kept on file in the office of the
shorten the term. corporation and led with the Commission and attached to the original
articles of incorporation. After approval by the Commission and the
Rules: issuance by the Commission of its certificate of filing, the capital
1. If issued prior to the effectivity of the New Code – deemed stock shall be deemed increased or decreased and the incurring,
perpetual UNLESS elects to retain original corporate term creating or increasing of any bonded indebtedness authorized, as the
2. If issued under the New Code – perpetual existence certificate of filing may declare: Provided, That the Commission
UNLESS otherwise specified in the Articles of shall not accept for filing any certificate of increase of capital stock
Incorporation unless accompanied by a sworn statement of the treasurer of the
corporation lawfully holding office at the time of the filing of the
RIGHT TO SUCCESSION certificate, showing that at least twenty-five percent (25%) of the
increase in capital stock has been subscribed and that at least twenty-
Do we still have the right to succession? Is there a need to five percent (25%) of the amount subscribed has been paid in actual
have right of succession? cash to the corporation or that property, the valuation of which is
A: Yes. Because there is a difference between succession and equal to twenty-five percent (25%) of the subscription, has been
perpetual existence. transferred to the corporation: Provided, further, That no decrease in
Section 37. Power to Increase or Decrease Capital Stock; Incur, Create capital stock shall
or Increase be approved
Bonded by the Commission
Indebtedness. if its effect
— No corporation shall
shall increase or
prejudice the rights of corporate creditors.
SEC. 37 POWER TO INCREASE OR DECREASE
A certificate must be signed by a CAPITAL
majority of STOCK
the directors of the corporation and countersigned by the chairperson and secretary of the stockholders' meeting, setti
Nonstock corporations may incur, create or increase bonded
indebtedness when approved by a majority of the board of trustees
(a) That the requirements of this section have been complied with; and of at least two-thirds (2/3) of the members in a meeting duly
called for the purpose.

Bonds issued by a corporation shall be registered with the

Commission, which shall have the authority to determine the
sufficiency of the terms thereof.

REQUISITES FOR AN INCREASE OR DECREASE

OF CAPITAL STOCK:
1. Done in a stockholder’s meeting duly called for the purpose
2. There must be a written notice of the proposed increase or
diminution of the capital stock
3. Majority vote of the board of directors.
4. 2/3 vote of the stockholders representing the outstanding
capital stock

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5. A certificate signed by a majority of the directors and XPN: Stockholders are denied their pre-emptive right in the
countersigned by the chairman and the secretary of the following instances:
stockholders’ meeting
6. Accompanied by the sworn statement of the treasurer showing (1) When it is expressly prohibited under the Articles of
that at least 25% of such increased capital stock has been Incorporation
subscribed and that at least 25% of the amount subscribed has
been paid (2) Shares issued in compliance with the laws requiring
7. Submitted to and approved by the SEC. stock offerings or minimum ownership by the public
8. Approval by the Philippine Competition Commission a. When the corporation decides to go public,
the SEC requires the corporation to earmark
LIMITATION IN THE DECREASE OF CAPITAL STOCK some shares for the employees (salary
deduction, easy instalment payment)
Up to what extent do you think can you increase or b. Under existing laws – earmark existing
decrease capital stock? shares to the public
A:
(a) For the increase – no problem, as long as they follow the Atty. Espedido: At least 20% must be
subscribed capital stock, and the paid-up capital stock sold to the public
(b) For the decrease – to the extent that it will not prejudice (3) Shares to be issued in exchange of properties to retire
creditors existing debts
What could be the problem if we decrease the capital Illustration 1.
stock? A: Subscribed capital stock is already part of capital. Thus, Corporation sells the unsubscribed 20M shares to a
if we decrease the capital, we are trying to return some part of the stranger
capital – thus in effect, violating the Trust Fund Doctrine. It will
prejudice the rights of the corporate creditors. Corporation has 100M ACS and 100M shares. There are 5
stockholders.
**NOTES
One of them, Mr. A, takes 60% or 60 million. The other four
INCREASE IN BONDED INDEBTEDNESS subscribed 5M each. There is a total of 80M subscribed capital stocks
with a remaining 20 million unsubscribed.
Bonded indebtedness is an indebtedness that is evidenced by a
bond. It is a debt instrument that is long-term in nature which is The board then decided to sell the remaining 20 million because
issued by a corporation. somebody else was interested to buy. The board said, “Let’s sell it to
Mr. Stranger.”
It is different from a promissory note. A promissory note is more of a
short or medium-term, and it is normally issued to a particular person A who subscribed for 60M opposed and argued that he has a pre-
(payee) which is not the case in a bond. emptive right over the 20M.
SEC. 38. POWER TO DENY PRE-EMPTIVE RIGHT The board countered that A was already given hischance to subscribe,
yet he did not. Thus, they are selling it to others.
Section 38. Power to Deny Preemptive Right. - All
stockholders of a stock corporation shall enjoy preemptive right to Is stockholder A entitled to use his preemptive right?
subscribe to all issues or disposition of shares of any class, in A: Yes. The purpose of this right is for the stockholder to maintain its
proportion to their respective shareholdings, unless such right is power or influence. Moreover, the language of the law is not limited
denied by the articles of incorporation or an amendment thereto: to issuances, it includes disposition as well.
Provided, That such preemptive right shall not extend to shares
issued in compliance with laws requiring stock offerings or Illustration 2.
minimum stock ownership by the public; or to shares issued in Corporation decided to increase its authorized capital
good faith with the approval of the stockholders representing two- stock
thirds (2/3) of the outstanding capital stock in exchange for
property needed for corporate purposes or in payment of previously If you were Mr. A who owned 60 million, and the corporation
contracted debt. decided to increase its authorized stock for another 100 million
because many are interested.
POWER TO DENY PRE-EMTPIVE RIGHT
How much will you be able to subscribe for the second
GEN: Pre-emptive right is a preferential right granted to the existing 100 million?
stockholders to subscribe to the newly issued stocks before it is being A: Another 60 million.
offered to the public.
Can the corporation say, “Somebody is already going to
Reason: In order for the existing stockholders to protect subscribed 80 million shares. You can subscribe 20
their interest in the corporation and the shares that they million.” Is this allowed?
hold representing their ownership. A: No, because this will reduce Mr. A’s influence or dilute his share
– instead of 60% influence, he will only have 40% influence.
It is to allow the stockholders to retain the extent of their
power.

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Can the subscriber say, “I will subscribe shares (pay the such property and assets shall be appropriated for the conduct of its remaining
delinquent shares), but I will pay them when I have my
share of the profit.”?
A: It depends. We have to distinguish if the cash dividends are GEN: A corporation can dispose its assets by a majority vote of its
already due and demandable or not. board of directors or trustees.
If the cash dividends are due and demandable, then compensation is XPN: If the disposition of all or substantially all assets of the
allowed. But if the dividends are not due and demandable, corporation, the following requisites must be present:
compensation is not allowed. (1) Vote of the majority of the board
(2) Authorized by the stockholders representing 2/3 of the
SEC. 39. SALE OR OTHER DISPOSITION OF ASSETS outstanding capital stock
⮡ XPN to the ratification of the stockholders:
Section 39. Sale or Other Disposition of Assets. - Subject to a. Necessary in the usual and regular course of
the provisions of Republic Act No. 10667, otherwise known as the business of the corporation; or
"Philippine Competition Act", and other related laws a corporation b. Proceeds of the sale or other disposition of
may, by a majority vote of its board of directors or trustees, sell, property and assets shall be appropriated for
lease, exchange, mortgage, pledge, or otherwise dispose of its the conduct of its remaining business.
property and assets, upon such terms and conditions and for such
consideration, which may be money, stock, bonds, or other TEST FOR DETERMINING WON 2/3 VOTES IS REQUIRED:
instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem If it will render the corporation incapable of continuing its business –
expedient. based on jurisprudence, this refers to disposition of at least 80% of
its assets.
A sale of all or substantially all of the corporation's properties and Illustration.
assets, including its goodwill, must be authorized by the vote of Transportation company sells 20 buses out of 100 buses
stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or at least two-thirds (2/3) of the members, meeting A transportation company operating 100 passenger buses decides to
duly called for the purpose. sell only 20 buses.

In nonstock corporations where there are no members with voting What vote is required?
rights, the vote of at least a majority of the trustees in office will be A: It only needs to be approved by a majority vote of the Board of
sufficient authorization for the corporation to enter into any Directors. Selling 20 out of 100 buses cannot be considered
transaction authorized by this section. substantial to make the company incapable of continuing the business
or incapable of performing its stated purpose.
The determination of whether or not the sale involves all or
substantially all of the corporation's properties and assets must be If it sells 80 buses out of 100?
computed based on its net asset value, as shown in its latest financial A: It needs the approval of the stockholders representing 2/3 of the
statemments. A sale or other disposition shall be deemed to cover outstanding capital stock as it can already be considered as all or
substantially all the corporate property and assets if thereby the substantially all of the corporate property and assets.
corporation would be rendered incapable of continuing the business
or accomplishing the purpose of which it was incorporated. Illustrations on the exceptions to ratification:
Exception 1 – necessary in the usual course of business
Written notice of the proposed action and of the time and place for of the corporation
the meeting shall be addressed to stockholders or members at their
places of residence as shown in the books of the corporation and The corporation is selling subdivision lots.
deposited to the addressee in the post office with postage prepaid,
served personally, or when allowed by the bylaws or done with the Do you think every time they sell 80% of the subdivision
consent of the stockholder, sent electronically: Provided, That any lots available for sale, they have to secure the ratification
dissenting stockholder may exercise the right of appraisal under the of the shareholders?
conditions provided in this Code. A: No, because this is in the usual course of business of the
corporation.
After such authorization or approval by the stockholders or members,
the board of directors or trustees may, nevertheless, in its discretion, Exception 2 – if the proceeds of the sale would be plowed
abandon such sale, lease, exchange, mortgage, pledge, or other back to the business of the corporation
disposition of property and assets, subject to the rights of third parties
under any contract relating thereto, without further action or approval There is no need of approval. Whatever proceeds, the corporation can
by the stockholders or members. use it back.

Nothing in this section is intended to restrict the power of any SEC. 40. POWER TO ACQUIRE OWN SHARES
corporation, without the authorization by the stockholders or
members, to sell, lease, exchange, mortgage, pledge, or otherwise Section 40. Power to Acquire Own Shares. - Provided, That the corporatio
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
proceeds of the sale or other disposition of

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To eliminate fractional shares arising out of stock dividends;

To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold d

To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code.
Section 41. Power to Invest Corporate Funds in Another
Corporation or Business or for Any Other Purpose. -
Subject to the provisions of this Code, a private corporation may
invest its funds in any other corporation, business, or for any
SEC. 41. POWER TO INVEST CORPORATE FUNDS purpose other than the primary purpose for which it was organized,
IN OTHER CORPORATIONS/BUSINESSES when approved by a majority of the board of directors or trustees
and ratified by the stockholders representing at least two-thirds
GEN: A corporation is not allowed to acquire its shares. (2/3) of the outstanding capital stock, or by at least two-thirds (2/3)
of the outstanding capital stock, or by at least two-thirds (2/3) of
Reason: Because it is in effect liquidating, to the damage the members in the case of nonstock corporations at a meeting duly
and prejudice of its creditors. If the corporation buy out the called for the purpose. Notice of the proposed investment and the
shares of the stockholders, we are trying to liquidate which time place of residence as shown in the books of the corporation
is a violation of the Trust Fund Doctrine. Sooner or later, and deposited to the addressee in the post office with the postage
there will be no more stockholders since the corporation is prepaid. Served personally, or sent electronically in accordance
buying out the shares. If all the stockholders get back all with the rules and regulations of the Commission on the use of
their investment – there will no longer be any investments electronic data message, when allowed by the bylaws or done with
for the corporation to continue to operate. the consent of the stockholders: Provided, That any dissenting
stockholder shall have appraisal right as provided in this Code:
XPN: Provided, however, That where the investment by the corporation
(1) Prevent fractional shares arising from stock dividends
is reasonably necessary to accomplish its primary purpose as stated
⮡ In distributing stock dividends based on the amount, in the articles of incorporation, the approval of the stockholders or
there will be an instance where 1/2 or 1/4 share is members shall not be necessary.
given. Instead of giving fractional shares, the
corporation will just buy it back.
(2) Satisfy delinquent shares Requisites:
(3) Pay dissenting stockholders – in the exercise of their (1) Vote of the majority of the Board of Directors
appraisal right, which means that when the stockholder (2) Vote of the stockholders representing 2/3 of the
does not agree with the decision of the board, it may outstanding capital stock
exercise such right and the corporation shall be compelled
to buy-back the shares Illustration.
Airline Corporation buys 60% of a Shipping Company
Condition for the exceptions to apply: There must be
unrestricted retained earnings. A corporation is engaged in an airline business – operating aircrafts.
Since it has a lot of aircrafts, they noticed that their idle funds in the
Why would these exceptions not violate the trust fund bank are not earning much.
doctrine?
A: Because it can only be exercised when it has unrestricted retained The corporation decided to buy 60% of a shipping company.
earnings which simply means that such retained earnings are not
earmarked for any purpose – SURPLUS OF PROFITS. If the corporation buys 60% of the shipping company,
what would be required?
HOWEVER, if there are no surplus profits or URE – this will already A: A vote of the majority of the Board of Directors and a vote of the
affect the creditors. The Trust Fund Doctrine will be violated. stockholders representing 2/3 of the outstanding capital stock

ADVANTAGES AND DISADVANTAGES Can the corporation say that there is no need of the
ratification since the shipping company is still a
If the corporation reacquires the shares and you are one transportation company?
of the remaining stockholders whose shares were not A: No. It is already a deviation of its principal purpose.
reacquired, will you be happy?
A: It depends. What if we have 10 stockholders. How many stockholders
will have to approve the decision of the board?
Advantageous A: It depends on the stockholders representing 2/3 of the outstanding
If the company is expected to earn profits, then they would have capital stock. It may even be just one stockholder because the Code
bigger dividends because of the fewer stockholders who will be talks about 2/3 of the outstanding shares. It is not on the number of
dividing the profits. directors but on the number of shares.

Disadvantageous Atty. Espedido: Our TEST is the PRINCIPAL PURPOSE. A

If the company expecting losses, then only a few stockholders will be company may invest so long as it is within the bounds of the
sharing the losses, which is prejudicial on their part. primary purpose. Otherwise, it requires a vote of the
MAJORITY OF THE BOARD AND 2/3 vote of the stockholders
Also, if shares were bought back using other shares, then the shares representing the OUTSTANDING CAPITAL STOCK.
used as payment could have been used as stock dividends.

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Note: Other than the primary purpose, THERE IS NO NEED FOR without their consent, and such consent has not yet been
RATIFICATION IF THE NEW BUSINESS WILL BE: secured
(1) Necessary accomplish its primary purpose (3) When it can be clearly shown that such retention is
(2) It falls under the express, implied, inherent, and apparent necessary under special circumstances obtaining in the
powers of the corporation corporation, such as when there is need for special reserve
(3) There is a logical relationship to the primary business or if for probable contingencies.
it is in furtherance of the business
How are dividends payable?
Atty. Espedido: This is the test in determining WON it A: It depends. There are several ways that dividends can be paid:
is express, implied, inherent, or an incidental power. whether in cash, property, stock or a combination of any of the three.
Otherwise, without the ratification of the stockholders, Can the stockholders demand for the declaration of
it becomes an ultra vires act which is an dividends?
unenforceable act. A: No. The decision to declare dividends lies with the Board. The
Board has the power to manage the corporation. Hence, when the
SEC. 42. POWER TO DECLARE DIVIDENDS corporation has profits, it is the Board who decides what to do with it.
The Board, using its discretion, may not declare dividends but rather
Section 42. Power to Declare Dividends. - The board of use it for business expansion projects.
directors of a stock corporation may declare dividends out of the
unrestricted retained earnings which shall be payable in cash, Exception: When there is improper accumulation of profits. This
property, or in stock to all stockholders on the basis of outstanding happens when the corporation retains surplus profits in excess of
stock held by them: Provided, That any cash dividends due on 100% of its paid-in capital stock. In such case, the shareholders may
delinquent stock shall be first be applied to the unpaid balance on demand for the declaration of dividends.
the subscription plus costs and expenses, while stock holders until
their unpaid subscription is fully paid: Provided, further, That no Illustration. You are a shareholder, and in April of a taxable
stock dividend shall be issued without the approval of stockholders year, you heard that the BOD intends to declare dividends.
representing at least two-thirds (2/3)of the outstanding capital stock Per your computation, your tax for the year would be high,
at a regular or special meeting duly called for the purpose. not yet including the taxes you will incur upon receiving
the dividends. Would you be happy that the BOD will
Stock corporations are prohibited from restraining surplus profits in declare dividends?
excess of one hundred percent (100%} of their paid-in capital A: No. You would tell the BOD not to declare dividends because of
stock, except: (a) when justified by the definite corporate the additional taxes you will incur from it.
expansion projects or programs approved by the board of directors;
or (b) when the corporation is prohibited under any loan agreement Can you however compel the corporation to declare
with financial institutions or creditors, whether local or foreign, dividends if the retained earnings has not reached more
from declaring dividends without their consent, and such consent than 100% of the paid-in capital?
has not yet been secured; or (c) when it can be clearly shown that A: No.
such retention is necessary under special circumstances obtaining
in the corporation, such as when there is need for special reserve CORPORATE PRACTICE OF ACCUMULATING EARNINGS
for probable contingencies.
When the corporation acquires income, it will be subject to the
corporate income tax. Then, when it distributes cash dividends to the
DIVIDENDS shareholders, such dividends will become the income of said
shareholders, and thus will be subject to individual income tax. In
What are dividends? effect, there is double taxation. This makes the BOD hesitant to
A: These are part of the PROFITS distributed as shares to the declare dividends, and so even though the corporation has cash, it
stockholders. If there are no profits, there are no dividends. will find ways to make it appear that the “dividends” of the
corporation were “expenses” to avoid paying taxes on them.
GEN: The Board has the sole authority to declared dividends. The
declaration of dividends is the sole prerogative of the board. Illustration. The shareholders will attend a seminar abroad to observe
the latest trends of the business, and all expenses will be paid by the
XPN: The Board may be compelled to issue dividends when the corporation.
retained earnings of the corporation EXCEED 100% of their paid-in
capital stock. The amount to be spent is equal to what should have been the
dividends to the shareholders, but instead of declaring said amount as
Note: If they still do not declared dividends, they will be charged dividends, the amount will now be made to appear as an expense of
with Improperly Accumulated Earnings Tax (IAET) – in which the company to finance the shareholders’ seminar abroad. It will not
case the corporation is prone to penalties under the NIRC for undue be considered as income on the part of the shareholder, and thus will
accumulation. not be subjected to income tax.
XPN to XPN: A corporation may not be compelled to declare
dividends even if the profits exceed 100% of the paid-in capital in the
following instances:
(1) When justified by definite corporate expansion projects or
programs approved by the board of directors
(2) When the corporation is prohibited under any loan
agreement with financial institutions or creditors, whether
local or foreign, from declaring dividends
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IMPROPERLY ACCUMULATED EARNINGS TAX Atty. Espedido: As much as possible, corporations do not
declare cash dividends because it is taxable twice: (1) when
However, the BIR discovered this scheme. They came up with an declared as income by the corporation and (2) when declared
amendment to the NIRC to impose improperly accumulated income by the stockholders upon distribution.
earnings tax (IAET) as a penalty for erring corporations.
(B) STOCK DIVIDENDS
GEN: The corporation will be liable for IAET when its undistributed
profits exceed 100% of the paid-up capital. Rule: It shall be withheld from the delinquent stockholders UNTIL
their unpaid subscription is fully paid.
XPN: When accumulated earnings are allowed, such as when:
1. When justified by definite corporate expansion projects or Offsetting in cash dividends does not apply in stock dividends. You
programs; cannot issue any stock dividends UNTIL the unpaid stock are fully
2. When the corporation is prohibited under any loan paid.
agreement with any financial institution or creditor from
declaring cash dividends without securing its/his/her Note: Issuing stock dividends requires a majority vote of the BOD
consent; or and a ratification of 2/3 vote of the stockholders representing the
3. When it can be clearly shown that such retention is outstanding capital stock
necessary under special circumstances, such as when there
is a need for special reserves for possible contingencies Illustration. If your subscription has not yet been paid and
(e.g. typhoons). declared due by the Board, can you say “just charge my
unpaid subscription to future dividends”? Can a
When will dividends be taxed on the side of the shareholder refuse to pay by saying that?
shareholder? A: No, because there is no assurance whether indeed dividends will
A: It depends on the type of dividend that will be received: be declared in the future, or how soon. If the subscription becomes
due, it has to be paid. Otherwise, the subscriber will be declared as a
1. Cash dividend  the stockholder is liable for tax since it delinquent shareholder.
is income already.
2. Stock dividend  it is not yet taxable, even though they However, if dividends were declared, and the shareholder
already have value. It is not considered income because still has unpaid subscriptions?
there is no transfer of cash. A: The dividend will first have to be applied to the unpaid
subscription.
Important: Until the shareholder is able to encash stock
dividends, the shareholder is not considered to have earned an
income. Stock dividends are not subject to income tax because it EFFECT
What are delinquent OF DELINQUENCY
stocks?
is not yet cash. This is so because the value of the shares of ON THE
A: These are unpaid RIGHT TO
subscriptions that have become due and
stock may fluctuate depending on the market value, book value demandable, and yet no payment is made.
or par value of said share. Because their value fluctuates, they
are not taxable because still being unrealized gain, the When do unpaid subscriptions become due and
shareholder would not know their actual value. demandable?
A:
Recall: 1. Upon the arrival of the specified date or period for
payment; or
1. Book value  Net assets ÷ no. of outstanding shares 2. Upon the call of board (considered as a demand to pay).
2. Market value  The value that buyers in the market are
willing to buy and the value that shareholders are willing to RULES ON DELINQUENT STOCKS
sell. It generally increases if the business of the corporation
is doing well, and decreases if the business is doing bad. It When cash dividends are declared, and there is still an
may be higher or lower than the par value. unpaid subscription, will the shareholder still receive his
3. Par value  A pre-determined value or her dividends? If yes, how?
A: Cash dividends due on delinquent stock shall first be applied to
TYPES OF DIVIDENDS the unpaid balance of the subscription. If there is an excess amount,
(1) Cash dividends then it will go to the shareholder.
(2) Property dividends
(3) Stock dividends Atty. Espedido: Apply first the receivable declared cash
(4) Combination of the different kinds of dividends dividends to the unpaid subscription of the stockholder, then
the excess will be given to him. Offsetting will apply.
(A) CASH DIVIDENDS
Here, there is a debtor-creditor relationship between the
Rule: If there are delinquent shares, the cash dividends shall be corporation and the stockholder.
applied to the unpaid subscription which is due and demandable of
the shareholder – OFFSET. On one hand, the corporation is a creditor with regards to the
unpaid subscription, but a debtor with regards to the declared
Note: Issuing cash dividends requires a vote of majority of the cash dividends.
Board of Directors without need of ratification from the stockholders

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On the other hand, the stockholder is a creditor with regards to Illustration. If the original authorized capital stock (ACS) of the
the declared cash dividends, but a debtor with regards to the corporation is 1Mn, and is fully subscribed, and they increased it by
unpaid subscription. another 1Mn, the SCS should be 250k of the increased ACS, and the
paid-up capital should be 62.5k (remember, increase in paid-up
When stock dividends are declared and there is still an capital has a 25%-25% requirement: 25% of the increase must be
unpaid subscription, would the shareholder still receive subscribed, and 25% of such subscription must be paid up).
dividends? If yes, how?
A: Stock dividends will be withheld from the delinquent shareholder However, there are Unrestrained Retained Earnings of the
until his unpaid subscription is fully paid. corporation which the corporation wanted to declare as dividends,
just enough to pay the minimum requirement for subscriptions.
Atty. Espedido: We are assuming that the unpaid subscriptions
are now delinquent because they are due and demandable for Therefore, there is enough money from the corporation. The money,
payment. if declared as cash dividends, may be used by the shareholders to pay
for their new subscriptions. However, once declared as dividends, the
If it is not yet due, no offsetting/withholding will apply. Even if corporation cannot be sure whether or not the SH will really invest in
there are unpaid subscriptions, and there are cash dividends the new stocks, since the shareholders cannot be compelled to invest
declared and to be distributed, if these unpaid subscriptions back.
are not yet due and demandable, no offsetting or withholding
will occur. The corporation cannot compel the shareholder to KTG (medyo libog, so here is an attempt to clarify the
first pay the unpaid subscriptions. There can be offsetting only illustration): If a corporation increases its ACS, it is required to
when both debts are due and demandable. fulfill two requirements:
1. 25% must be subscribed; and
CONVERSION 2. Of the subscriptions, 25% must be paid up.
Important: The lawOF EARNINGS
permits INTO CAPITAL
the corporation to convert its earnings
THROUGH
into capital, through DECLARATION
the declaration OF STOCK
of stock dividends.
In this case, the corporation needs to put up 25% x 25% x
In this manner, the board may use such earnings for the general or P1Mn (which is equals to 62.5k). The corporation has such
specific corporate purpose. It becomes part of the corporate trust fund money in the form of its unrestricted retained earnings (URE).
and may no longer be used for dividend distribution. This is an However, the corporation wants to declare the URE as
effective way to retain earnings without having to explain to dividends.
SEC/BIR.
So the corporation now has a problem: should it use the
INCREASING THE AUTHORIZED CAPITAL STOCK amount of URE as the paid-up capital, or should it declare the
same as dividends?
If there are no more stocks, can we still distribute stock
dividends? If the corporation declares it as cash dividends, it gives the
A: Yes. We can increase the authorized capital stock which is done existing stockholders enough money to possibly purchase or
by amending the Articles of Incorporation. This is done through the pay-up the new ACS (remember, existing stockholders have a
following processes: pre-emptive right to shares). However, the corporation is not
1. A stockholder’s meeting duly called for the purpose assured if the existing shareholders will really buy the new
2. A written notice of the proposed increase or diminution of ACS, since they cannot be compelled to invest in the
the capital stock corporation.
3. Majority vote of the Board of Directors
4. A vote of 2/3 of the stockholders representing the To make sure that the money will remain with the
outstanding capital stock corporation, what kind of dividends should the
5. A certificate signed by a majority of the directors and corporation declare instead?
countersigned by the chairman and the secretary of the A: The corporation should declare stock dividends by transferring the
stockholder’s meeting URE to capital asset.
6. Accompanied by the sworn statement of the treasurer
showing that at least 25% of such increased capital stock In effect, the capital stock is increased without any corresponding
has been subscribed and that at least 25% of the amount increase in the corporate assets.
subscribed has been paid
7. Submitted to and approved by the SEC De Leon: If the actual capital is increased by accumulated profits and
8. Approval by the Philippine Competition Commission such profits are distributed to the stockholders in the form of stock
dividends, the capital stock is increased, for the profits are reinvested
Note: In this case, we are now increasing the capital stock and the it in the corporation by transferring the same from surplus account to a
is the corporation who will pay because instead of paying cash, the capital account. The amount corresponding to the stock dividends
shareholders will no longer need to pay since the corporation will use declared may be used to cover the required 25% subscription to
the profits that they already have. increase the authorized capital stock and, if sufficient, will obviate
the necessity of taking in new subscription.
**Tanya Notes
NON-TAXABILITY OF STOCK DIVIDENDS
Atty. Espedido: If the authorized capital stock of the
corporation has all been subscribed, and additional capital is Stock dividends are NOT TAXABLE because these are not realized
income but are considered investments.
needed, the corporation has the option to increase the
authorized capital stock.

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 STOCK SPLITS REVERSE STOCK SPLIT
Stock Split Decreases the number of shares held by each stockholder. However,
This is an increase in the number of shares, but no increase in the it will still retain the same capital value.
capital value of such shares.
Illustration. There are occasions where the par value of the **Illustration:
share appears to be expensive, and fractional shares
cannot be issued, so to attract investors, what must the ABC Corporation currently has 300,000 outstanding shares of stock
corporation do? For example, the value of each share was with a par value of P1. It issues a 1-for-5 stock split as dividends.
10, 000 and somebody was willing to invest only 5, 000.
Since the corporation cannot issue only one half, what Before reverse stock split:
must they do instead?
A: Do a stock split since issuance of fractional shares is neither Value per
allowed nor encouraged. In fact, the corporation should eliminate the No. of Shares Capital
Share
fractional shares by buying them. So, instead of selling it a share at a A 100,000 P200,000 P2.00
value of 10, 000 per share, if only to attract more investors, the B 100,000 P200,000 P2.00
corporation may split said share. We now have 2 shares with 5, 000 C 50,000 P100,000 P2.00
per share. D 25,000 P50,000 P2.00
E 12,500 P25,000 P2.00
**Illustration. F 12,500 P25,000 P2.00
ABC Corporation currently has 300,000 outstanding shares of stock
After reverse stock split:
with a par value of P1. It issues a 2-for-1 stock split as dividends.

The effect will be as follows: Value per

No. of Shares Capital
Share
Before stock split: A 20,000 P200,000 P10.00
B 20,000 P200,000 P10.00
C 10,000 P100,000 P10.00
Value per D 5,000 P50,000 P10.00
No. of Shares Capital
Share E 2,500 P25,000 P10.00
A 100,000 P200,000 P2.00 F 2,500 P25,000 P10.00
B 100,000 P200,000 P2.00
C 50,000 P100,000 P2.00 A/N:
D 25,000 P50,000 P2.00 1. A reverse stock split reduces the number of shares held by
E 12,500 P25,000 P2.00 each shareholder but with proportionally more valuable
F 12,500 P25,000 P2.00 shares.
2. A reverse stock split does not directly impact a company's
After stock split: value.
3. A reverse stock split, however, often signals a company in
In a 2-for-1 stock split, each stockholder will receive an additional distress since it raises the value of otherwise low-priced
share of stock for each share he/she holds. shares.
4. The desire to increase share prices to remain relevant and to
Value per avoid being delisted are the most common reasons for
No. of Shares Capital
Share corporations to pursue this strategy.
A 200,000 P200,000 P1.00
B 200,000 P200,000 P1.00
CONFLICTING VIEWS ON ISSUANCE OF
C 100,000 P100,000 P1.00
CASH DIVIDENDS WHEN THERE ARE NO
D 50,000 P50,000 P1.00
PROFITS (UNLAWFUL DECLARATION OF
E 25,000 P25,000 P1.00
F 25,000 P25,000 P1.00 If it was discovered later that there were no profits at all
but the Board has already declared and distributed cash
A/N: dividends and somebody complained, should we now
(3) A stock split is a corporate action in which a company require the stockholders to return?
divides its existing shares into multiple shares to boost the A: There are conflicting views among authorities:
liquidity of the shares.
(4) The primary motive is to make shares seem more (1) If solvent corporation:
affordable to small investors even though the underlying
value of the company has not changed. View 1 – No need to return since creditors are still
(5) The most common split ratios are 2-for-1 or 3-for-1, which protected. They will not be prejudiced since the
means that the stockholder will have two or three shares, corporation still has capital
respectively, for every share held earlier.
(6) Reverse stock splits are the opposite transaction, where a View 2 – Must still be returned as it violates the Trust
company divides, instead of multiplies, the number of Fund Doctrine
shares that stockholders own, raising the market price
accordingly. (2) If insolvent corporation – it needs to be returned

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Atty. E’s opinion: If the corporation is still solvent, the Trust
Fund Doctrine is not violated since capital remains intact. DECLARING DIVIDENDS FROM THE CAPITAL: PAID-
Thus, there is no need to return. UP CAPITAL
GEN: Dividends cannot be distributed out of the capital. It violates
**NOTES the trust fund doctrine. Under such doctrine, the corporation cannot
return capital to the stockholders unless all the creditors have been
RETAINED EARNINGS paid first.
XPN (exclusive exceptions):
Accumulated profits of a corporation in its previous operations. It
includes all income accumulated throughout the years during which 1. If the dividend is a liquidating dividend – dividends that
the corporation was operating. are distributed during the liquidation of a corporation.
Here, the trust fund doctrine no longer applies because the
So, if the corporation has been experiencing losses, there will be no corporation is already being liquidated. This means that
retained earnings. Rather, there will be deficits. Retained earnings before the corporation can even distribute the liquidating
can only exist if the corporation has been operating at a profit. dividends, it has to pay its creditors. The remainder is what
will be distributed as liquidating dividends.
TYPES OF RETAINED EARNINGS
2. When the corporation is a wasting asset corporation.
(1) Restricted Retained Earnings
- In general, retained earnings are restricted if they are Wasting Asset Corporation
not available for dividend declaration A type of corporation which has a limited life because its
assets are consumed during its operations and cannot be
(2) Unrestricted Retained Earnings replenished.
- If available for dividend declaration. Example:
- Mining – If a corporation is created to mine only a certain
RESTRICTING RETAINED EARNINGS area, then once the minerals in that area has been fully
depleted, the corporation’s purpose ceases to exist. So
1. Appropriated by the Board of Directors for corporate slowly, as the area’s minerals are consumed, the assets
expansion projects or programs. of the corporation are also slowly being depleted.
Example: If the Board of Directors say that out of the In that sense, the corporation is allowed to return
P50Mn retained earnings, they are going to allocate P15Mn capital to its stockholder because the idea is that the
for a future expansion, then that P15Mn will be considered corporation will exist only for a limited period – the
restricted retained earnings. Therefore, out of the P50Mn, period that its assets still exists. Once the assets are
P15Mn cannot be declared as dividends. depleted, then the corporation can return its capital to
its stockholders.
2. Covered by a restriction for dividend declaration under a
loan agreement. RELEVANT DATES IN DIVIDEND DECLARATION
Contractual Covenants (1) Declaration Date
If, for example, there is a loan agreement, and the creditor - Before the declaration date, the dividends are not a liability
expressly provides that the corporation cannot declare of the corporation. In fact, the corporation is not obliged to
dividends out of a certain amount of its retained earnings. declare dividends even if it has unrestricted retained
That portion that is restricted under the covenant becomes earnings. The BOD cannot be compelled to declare
restricted retained earnings. dividends. Dividends only become a liability of the
corporation once they are declared. The moment of
3. Required to be retained under special circumstances declaration is the time the corporation recognizes such
obtaining in the corporation, such as when there is a need liability.
for special reserves for probably contingencies.
(2) Record Date
Example: When a corporation acquires treasury shares, it - This refers to the date when the corporation determines
is required to restrict a portion of its retained earnings in who among its stockholders are entitled to receive
the same amount as the treasury shares that they acquired. dividends. The stockholders on record in the stock and
That portion becomes restricted retained earnings, and transfer book as of the record date are the stockholders who
cannot be available for dividend declaration. will receive dividends.
- Before the record date, the stocks are considered sold
If the corporation has been experiencing losses, such that it dividends on. This means that before the record date,
has zero or negative retained earnings, then it cannot stocks are sold with the right to receive dividends on it. In
declare dividends at all. So there has to be unrestricted effect, it means that there is actually a premium on the
retained earnings for a corporation to declare dividends. price of those shares because they carry the right to receive
dividends.
- When stocks are sold after the record date, the stocks are
commonly referred to as being sold dividends off, because
even if they are sold or transferred, the one

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 who will be receiving dividends on them is the person who MANAGEMENT CONTRACT
was the owner of such as of the record date.
An agreement under which a corporation delegates the management
Illustration. of its affairs to another corporation for a certain period. Two
corporations are involved: (1) the managing corporation and the (2)
Declaration Date March 10 managed corporation
Record Date March 30
GEN: Management contract is entered into by a MAJORITY vote of
A is the holder of the share on declaration date. On March 15, A the Board of Directors and stockholders of both the managing and
sells the shares to B. Those shares are considered sold managed corporation
dividends on.
XPN: Approved by the stockholders of the managed corporation
If B sells the shares to C on March 25, those shares are still owning at least 2/3 of the outstanding capital stock or of members in
considered sold dividends on. two instances:
On March 30, or the record date, if C is still the owner of those (1) The stockholder representing the same interest of both
stocks, then C is the one entitled to receive dividends on the managing and managed corporation owns or control
shares. MORE THAN 1/3 of the outstanding capital stock entitled
to vote of the managing corporation; and
If on April 5, C sells the shares to D, then it is still C who is (2) Majority of the members of the BOD of the managing
entitled to receive dividends on them. On this date, the shares corporation also constitutes majority of the members of the
are considered sold dividends off. BOD of the managed corporation .
(3) Payment Date
- Date when the dividends are actually paid by the What could this mean, STATUS OFhappens
what THE BODtoOF the Board of the
corporation. When a corporation declares dividends, it will THE MANAGED
managed corporation, do they still function as a board?
normally say when the record and the payment dates are. A: Yes, this is not an abandonment. The BOD of the managed
- If the corporation’s resolution for the declaration of corporation still retains the control of how the corporation should
dividends is silent as to the record date, then the record date exist.
is considered the same as the declaration date.
The only thing is that, on the operational side of the managed
SEC. 43. POWER TO ENTER INTO corporation is now given to the managing corporation. There are
MANAGEMENT CONTRACT companies whose business is just to manage certain portions or
Section 43. Power to Enter into Management Contract. - operations of other corporations. The board of the managed
No corporation shall conclude a management contract with another corporation still functions as to the remaining operations.
corporation unless such contract is approved by the board of
directors and by the stockholders owning at least the majority of Examples: ship management corporation, audit managers
the outstanding capital stock, or by at least a majority of the
members in the case of a nonstock corporation, or both the SEC. 44. ULTRA VIRES ACTS
managing and the managed corporation, at a meeting duly called
for the purpose: Provided, That (a) where a stockholder or Section 44. Ultra Vires Acts of the Corporations. - No
stockholders representing the same interest of both the managing corporation shall possess or exercise corporate powers other than
and the managed corporations own or control more than one-third those conferred by this Code or by its articles of incorporation and
(1/3) of the total outstanding capital stock entitled to vote of the except as necessary or incidental to the exercise of the powers
managing corporation; or (b) where a majority if the members of conferred.
the board of directors of the managing corporation also constitute a
majority of the members of the board of directors of the managed What is the effect of an ultra vires act?
corporation, then the management contract must be approved by A: An ultra vires act is an unenforceable act. Since it is not
the stockholders of the managed corporation owning at least two- enforceable, the contract is not binding to the corporation.
thirds (2/3) of the total outstanding capital stock entitled to vote, or
by at least two- thirds (2/3) of the members in the case of a The State looks ultra vires acts with disfavor. It will create more
nonstock corporation. problems than solutions. If we strictly enforce the concept of ultra
vires act, the entire business community will be affected.
These shall apply to any contract whereby a corporation undertakes
to manage or operate all or substantially all of the called services Atty. Espedido: Imagine the inconvenience and discomfort of
contracts, operating agreements or otherwise: Provided, however, trying to review AOI of every stockholder for every transaction
That such service contracts or operating agreements which relate to that we do. Trying to analyze: “Is this inherent, apparent,
the exploration, development exploitation or utilization of natural necessary?” If we do this, we would lose a lot of time before
resources may entered into such periods as may be provided by the we could enter into business transactions.
pertinent laws or regulations.
So, the authorities came out with solutions on how this could
No management contracts shall be entered into for period longer be resolved.
that five (5) years for any one term.

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 RESOLVING ULTRA VIRES ACTS Notwithstanding the provisions of the preceding paragraph, bylaws maybe adopte

How do we resolve ultra vires acts? In all cases, bylaws shall be effective only upon the issuance by the Commission o

GEN: It is not binding. The Commission shall not accept for filing the bylaws or any amendment thereto
XPN:

INSTANCE SOLUTION
i. Contract is completely Leave them as they are – we do
performed or fulfilled by not have to dig up what
both parties (parties are happened
estopped)
ii. Only one party has been Return what has been
benefited (one of the received
parties already executed
the contract; partial
fulfillment)
iii. Contract is not yet acted Do not perform or proceed What are bylaws?
upon A: They are the internal rules and regulations of a corporation.

TRUE OR FALSE When should a corporation file its bylaws?

A:
1. All illegal acts are ultra vires acts – TRUE 1. Within one (1) month after the receipt of the official
notice of the issuance of its certificate of incorporation
2. All ultra vires acts are illegal acts – FALSE, because they from the SEC, or
may also be unauthorized acts. 2. They may be adopted and filed prior to incorporation,
together with the AOI.
RATIFICATION OF ULTRA VIRES ACTS
Note: You can already submit your by-laws even if you have not
RULES: yet been given the authority to exist.

(A) Illegal ultra vires acts – cannot be ratified What are the requisites for the adoption of by-laws?
1. Vote of the stockholders representing at least a majority of
(B) Unauthorized ultra vires act – can be cured through a the OCS in case of stock corporations or members in case
ratification by a vote of 2/3 of the stockholders of non-stock corporations;
representing the outstanding capital stock so long as it 2. Approved and signed by all incorporators; and
DOES NOT AFFECT THIRD PARTIES. 3. Submitted to the SEC.

**NOTES What is the binding effect of bylaws to the public?

GEN: It does not bind the public.
Ultra Vires Act XPN: A third person may be bound by the bylaws where has
One not within the express, implied and incidental powers of the knowledge about it, either actual or constructive.
corporation, conferred by the RCC or the AOI.
**NOTES
Consequence of an Ultra Vires Act
Merely voidable, which may be enforced by performance, TIME AND PROCEDURE FOR THE ADOPTION OF BYLAWS
ratification, or estoppel. (De Leon)
1) PRE-INCORPORATION
Note: According to Atty. E, an ultra vires act is unenforceable Submitted or filed before the SEC together with the AOI. (This
rather than voidable. is the one now required in practice; you cannot incorporate
without it.)
TITLE V. BYLAWS
Requirements:
SEC. 45. ADOPTION OF BY LAWS 1. Approved and signed by all incorporators; and
2. Submitted to the SEC together with the AOI.
Section 45. Adoption of Bylaws. - For the adoption of bylaws by the corporation, the affirmative vote of the stockholders representing at least a majority of t
Additional requirements for banks and other special
corporations:
Accompanied by a certificate of the appropriate
government agency to the effect that such bylaws or
amendments are in accordance with law.

2) POST-INCORPORATION
Basically, everything that you need to do post-incorporation in
order to commence the transacting of business.

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 Requirements: The required quorum in meetings of stockholders or members and the manner
1. Affirmative vote and signature of stockholders The modes by which a stockholder, member, director, or trustee may attend me
representing the majority of the OCS or members in The form for proxies of stockholders and members and the manner of voting them
case of nonstock corporation; The directors’ or trustees’ qualifications, duties and responsibilities, the gu
2. Duly certified by the majority of the BOD/BOT; and The time for holding the annual election of directors or trustees and the mod
3. Filed with SEC, to be attached to the original AOI. The manner of election or appointment and the term of office of all officer
The penalties for violation of the bylaws;
CONSEQUENCES OF FAILURE TO ADOPT BYLAWS In the case of stock corporations, the manner of issuing
stock certificates; and
Note: This may not be applicable to the Revised Corporation Such other matters as may be necessary for the proper or convenient transa
Code. But this was not discussed by Atty. [Gaviola] after the
revision. An arbitration agreement may be provided in the bylaws pursuant to Sec. 181 o

Non-filing of the bylaws on time will not result in the automatic

dissolution of the corporation. Such consequence is not provided
under the Corporation Code.

However, pursuant to Sec. 6 (i) (5) of P.D. No. 902-A (see Sec.
19), the failure to file the bylaws within one (1) month from the date
of incorporation with the SEC shall render the corporation liable to
the revocation of its registration, to wit:

Section 6. In order to effectively exercise

such jurisdiction, the Commission shall
possess the following powers:

xxx

i) To suspend, or revoke, after proper notice SEC. 47. AMENDMENT TO BYLAWS

and hearing, the franchise or certificate of
registration of corporations, partnerships or Section 47. Amendment to Bylaws. – A majority of the board
associations, upon any of the grounds 1. Required
of directors votes and
or trustees, are met:
the owners of at least a majority of the
provided by law, including the following: a. Approved
outstanding capital stock, or atbyleast
a majority of the
a majority of BOD/BOT;
the membersand of a
b. Approved
nonstock corporation, by aormajority
at a regular of the OCS
special meeting in caseforof
duly called
xxx stock corporations,
the purpose, may amend or a majority
or repeal the bylaws or adoptof new
the members
bylaws.
in the case
The owners of two-thirds of of
(2/3) nonstock corporations.
the outstanding capital stock or
5. Failure to file by-laws within the required 2. File
two-thirds withofSEC
(2/3) thefor approval.
members in a nonstock corporation may
period; 3. SEC
delegate to theissues
boardCertificate
of directors ofor Approval.
trustees the power to amend or
There must, first of all, be a hearing to determine the existence of repeal the bylaws or adopt new bylaws: Provided, That any power
the ground, and assuming such finding, the penalty is not necessarily delegated to the board of directors or trustees to amend or repeal
dissolution, but may only be revocation. the bylaws or adopt new bylaws shall be considered as revoked
whenever stockholders owning or representing a majority of the
Under the rules and regulations of the Commission, the failure may outstanding capital stock or majority of the members shall so vote
merely by the imposition of a fine. at a regular or special meeting.

PERSONS BOUND & NOT BOUND BY THE BYLAWS Whenever the bylaws are amended or new bylaws are adopted, the
corporation shall file with the Commission such amended or new
1. Persons bound by the bylaws: bylaws and, if applicable, the stockholders’ or members’ resolution
a. Corporation authorizing the delegation of the power to amend and/or adopt new
b. Directors or trustees bylaws, duly certified under oath by the corporate secretary and a
c. Stockholders majority of the directors or trustees.

2. Persons not bound by the bylaws: The amended or new bylaws shall only be effective upon the
a. Any person who has no actual knowledge of the issuance by the Commission of a certification that the same is in
bylaws of the corporation; accordance with this Code and other relevant laws.
b. Employees of the corporation

SEC. 46. CONTENTS OF BYLAWS PROCESS OF ADOPTION, AMENDMENT

OR REPEALING OF BYLAWS
Section 46. Contents of Bylaws. – A private corporation may provide the following in its bylaws:

The time, place and manner of calling and conducting regular or special meetings of the directors or trustees;
The time and manner of calling and conducting regular or special meetings and mode of notifying the stockholders or members thereof;

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 T/N: Once approved (as evidenced by the certification TITLE VI. MEETINGS
from SEC), the amended by-laws become the new by-
laws of the corporation. SEC. 48. KINDS OF MEETINGS
A/N: The power to adopt, amend or repeal bylaws can be delegated
by 2/3 of the OCS or members to the BOD or BOT. However, this Section
How many 48. Kinds
types of of Meetings.
meetings do –we
Meetings
have? of directors,
delegated power is immediately revoked whenever majority of the trustees,
A: stockholders,
There are 4 kinds of or members
meetings, may be regular or special.
namely:
OCS or members vote at a special or regular meeting for the 1. Meetings of Directors
adoption, amendment or repealing of bylaws. 2. Meetings of Trustees
3. Meetings of Stockholders
What must be done if new bylaws are amended or 4. Meetings of Members
adopted?
1. File with SEC the new bylaws or amended bylaws; Which may either be:
2. If applicable, the stockholders’ resolution authorizing the 1. Regular, or
delegation of the power to amend and/or adopt new bylaws, 2. Special
which must be duly certified under oath by the corporate
secretary + majority of the BOD/BOT.
SEC. 49. REGULAR & SPECIAL MEETINGS
OF STOCKHOLDERS OR MEMBERS
Illustration.
Gokongwei Case

A director and owner of a beer company A, was also a SH Section 49. Regular and Special Meetings of Stockholders or Member
of another beer company B. He wanted to become a
director of the beer company B so he bought more shares
At each regular meeting of stockholders or members, the board of directors or trus
so that he can be elected for the board next year. So Beer
Company B amended there by laws stating that “no
person holding at least 10% of shares in another The minutes of the most recent regular meeting which shall include, among others
competing company shall be allowed to be elected for the
board.” Was this amendment discriminatory? Can the A description of the voting and vote tabulation procedures used in the previous m
director complain?
A description of the opportunity given to stockholders or members to ask question
A: No, he cannot complain. The amendment disqualifying a director
in a corporation whose business is in competition with or is The matters discussed and resolutions reached;
antagonistic to another corporation from election to the board of
directors of the latter corporation is valid.
A record of the voting results for each agenda item;
Secondly, it is not discriminatory as the terms of the amended by-
laws provides that, “No person shall be allowed to be elected who is A list of the directors or trustees, officers and stockholders or members who attend
also a director of another corporation who is in competition or
antagonistic to thereto.” This provision is general in nature it does not Such other items that the Commission may require in the interest of good corporat
single out a particular individual such as the party involved herein.
A members’ list for nonstock corporations and, for stock corporations, material in
Third, it does not also run counter to the prospective application of
the amendment as the party involved has yet to be elected.
A detailed, descriptive, balanced and comprehensible assessment of the corporatio
Atty. Espedido: This is a case involving Gokongwei and San
Miguel. The lawyers of Gokongwei said it is discriminatory
because no one else in the Philippines owns so much in Asia
Brewery and at the same time own stocks in San Miguel; thus,
it should be an invalid amendment and should not be
approved.

But the keyword here is ANTAGONISTIC. In other words, the

Supreme Court did not only look at the prospective or
retroactive effect but more on its being antagonistic, fierce
competition, or direct clash between two corporations involved
in the same market. The SC is just trying to prevent a situation
whereby one could take advantage over the other.

Because imagine if Gokongwei in one meeting of San Miguel

says “I understand that the sales of our corporation are going
down, maybe there is problem with the formula, it no longer
tastes the way it should taste.” Most probably, the brew master
might be compelled to present themselves to the board and
explain what happened, and be required to present the
formula. Once he gets his own copy of the formula, he will give
it to the rival company. We have copied the bottle; we will now
copy the [Link] said we do not want that situation.

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d) A financial report for the preceding year, which shall include Unless the bylaws provide for a longer period, the stock and transfer book or mem
financial statements duly signed and certified in accordance with
this Code and the rules the Commission may prescribe, a In case of postponement of stockholders’ or members’ regular meetings, written n
statement on the adequacy of the corporation’s internal controls
or risk management systems, and a statement of all external
The right to vote of stockholders or members may be exercised in person, through
audit and non-audit fees;

e) An explanation of the dividend policy and the fact of payment

of dividends or the reasons for nonpayment thereof;

f) Director or trustee profiles which shall include, among others,

their qualifications and relevant experience, length of service in
the corporation, trainings and continuing education attended,
and their board representations in other corporations;

g) A director or trustee attendance report, indicating the attendance

of each director or trustee at each of the meetings of the board
and its committees and in regular or special stockholder
meetings;

h) Appraisals and performance reports for the board and the criteria WHEN MEETINGS ARE CONDUCTED
and procedure for assessment;
REGULAR MEETING SPECIAL MEETING
i) A director or trustee compensation report prepared in (1) Held annually on a date At any time deemed necessary
accordance with this Code and the rules the Commission may fixed in the bylaws; or by the BOD/BOT or as
prescribe; (2) On any date after April provided for in the bylaws.
15 of every year, as
j) Director disclosures on self-dealings and related party determined by the
transactions; and/or BOD/BOT.

k) The profiles of directors nominated or seeking election or Why are regular meetings held only after April 15?
reelection. A: For purposes of filing income tax return. By that time, the
financial statements are already done. All the data, information,
A director, trustee, stockholder, or member may propose any other figures are already available.
matter for inclusion in the agenda at any regular meeting of
stockholders or members. NOTICE OF MEETING

Special meetings of stockholders or members shall be held at any WHEN GIVEN

time deemed necessary or as provided in the bylaws: Provided,
however, That at least one (1) week written notice shall be sent to all REGULAR MEETING SPECIAL MEETING
stockholders or members, unless a different period is provided in the Sent to all stockholders of At least one week prior to the
bylaws, law or regulation. record at least 21 days prior meeting, a written notice shall
to the meeting unless a be sent to all stockholders,
A stockholder or member may propose the holding of a special different period is required in unless a different period is
meeting and items to be included in the agenda. the bylaws, law or regulation. provided for in the bylaws,
law or
Notice of any meeting may be waived, expressly or impliedly, by any regulation.
stockholder or member: Provided, That general waivers of notice in
the articles of incorporation or the bylaws shall not be allowed: CONTENTS OF A NOTICE OF MEETING
Provided, further, That attendance at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a In order to be a proper notice of meeting, the following must be
meeting for the express purpose of objecting to the transaction of any contained:
business because the meeting is not lawfully called or convened.
1. Shall state the time and place of the meeting;
Whenever for any cause, there is no person authorized or the person 2. The agenda for the meeting;
authorized unjustly refuses to call a meeting, the Commission, upon 3. A proxy form which shall be submitted to the corporate
petition of a stockholder or member on a showing of good cause secretary within a reasonable time prior to the meeting;
therefor, may issue an order directing the petitioning stockholder or 4. When attendance, participation, and voting are allowed by
member to call a meeting of the corporation by giving proper notice remote communication or in absentia, the requirements and
required by this Code or the bylaws. The petitioning stockholder or procedures to be followed when a stockholder or member
member shall preside thereat until at least a majority of the elects either option; and
stockholders or members present have chosen from among 5. When the meeting is for the election of directors or
themselves, a presiding officer. trustees, the requirements and procedure for nomination
and election.
6. The minutes of the most recent regular meeting which shall
include, among others:

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 (a) A description of the voting and vote tabulation Appeals1, the Court ruled that it is the Corporate Secretary who is
procedures used in the previous meeting; responsible to serve as custodian of all the records of the corporation,
(b) A description of the opportunity given to to keep the stock and transfer books, and the only person authorized
stockholders or members to ask questions and a to make the entries therein.
record of the questions asked and answers given;
(c) The matters discussed and resolutions reached; Illustration. An individual purchased shares of stock on
(d) A record of the voting results for each agenda March 10 and there is a meeting on March 15. Could he
item; already vote?
(e) A list of the directors or trustees, officers and A: No, he is still not qualified to vote because there is a requirement
stockholders or members who attended the under the law that for regular meetings, the transfer of book shall be
meeting; and closed for at least 20 days PRIOR to the scheduled meeting.
(f) Such other items that the Commission may
require in the interest of good corporate On the other hand, for special meetings, the transfer books shall be
governance and the protection of minority closed for at least 7 days PRIOR to the scheduled date of meeting.
stockholders; The notice shall include this information on the closing of the transfer
book.
Reason for including the minutes of the previous meeting:
The minutes of the previous meeting must be attached and must be POSTPONEMENT OF REGULAR MEETINGS
accompanied by the notices because these will require the approval.
GEN: Written notice and reason thereof shall be sent to ALL
Atty. Espedido: If there is any dissenting stockholder who stockholders at least 2 weeks prior to the date of meeting.
objects, then it could be discussed again in the new meeting.
XPN: A different period is required under the bylaws, law, or
This is important because should there be conflict in the future, regulation.
they could always refer back to the minutes. These will be in
the custody of the secretary. The secretary among others shall UNJUST REFUSAL TO CALL A MEETING
take hold of the AOI, bylaws, all resolutions approved, minutes
of the meeting approved. HOWEVER, when there is unjust refusal to call a meeting, a
stockholder can petition the Commission to order the conduct of a
HOW NOTICE OF MEETINGS ARE SENT meeting.
Notice of meetings shall be sent through the means of • The petitioning stockholder shall preside thereat UNTIL at
communication provided in the bylaws. It can be through: least a majority of the stockholders or members present
(1) Electronic Mail have chosen from among themselves, a presiding officer.
(2) Other means allowed by the Commission • In case where the Commission will order the conduct of the
meeting, ANY NUMBER OF THE STOCKHOLDERS
Atty. Espedido: Because of the E-Commerce Act, the PRESENT shall already be considered as a quorum. Such
electronic records can now be presented in court. that, when out of the 100 stockholders, 5 only came, it shall
be constitute a quorum.
CLOSING OF STOCK OR TRANSFER BOOK
**NOTES
Important: Unless the bylaws provide for a longer period, the stock
and transfer book or membership book shall be closed at least IMPROPERLY CALLED MEETINGS
twenty (20) days for regular meetings and seven (7) days
for special meetings BEFORE the scheduled date of the meeting. Improperly called meetings can be considered valid, provided:
3. All the stockholders attend or are duly represented during
REGULAR MEETING SPECIAL MEETING the meetings;
Closed at least 20 days before Closed at least 7 days before 4. Not one of those stockholders attended just for the purpose
the schedule date of the the schedule date of the of objecting to the calling or holding of such meeting.
meeting. meeting.
T/N: Even if the meeting is improperly held or improperly
**Stock and transfer book called, all transactions or resolutions approved during the said
A stock and transfer book (STB) contains the records of all stocks in meeting can still be considered valid provided that ALL the
the names of the stockholders alphabetically arranged; the installment stockholders attend or are duly represented in that meeting.
paid and unpaid on all stock for which subscription has been made,
and the date of payment of any installment; a statement of every The new amendment added a new caveat: “Provided, that not
alienation, sale or transfer of stock made, the date thereof, and by and anyone of those stockholders attended just for the purpose of
to whom made; and such other entries as the by-laws may prescribe. objecting to the calling or holding of the meeting.”

The STB shall be kept in the principal office of the corporation or in So even if the stockholders are duly represented or are
the office of its stock transfer agent and shall be open for inspection present, but one of them was there just to object the calling or
by any director or stockholder of the corporation at reasonable hours holding of such meeting, then you cannot apply the exception
on business days. In Torres Jr. vs. Court of that the meeting is valid even if it’s improperly called or held.

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 Illustration
SEC. 50. PLACE & TIME OF MEETINGS
Quorum in a non-stock corporation
OF STOCKHOLDERS OR
10 members in a non-stock corporation in order to hold a
Section 50. Place and Time of Meetings of Stockholders
meeting. Before the meeting, 3 already died. What will be
or Members. – Stockholders’ or members’ meetings, whether
our quorum?
regular or special, shall be held in the principal office of the
A: The quorum is 4 because the remaining members are only 7. In a
corporation as set forth in the articles of incorporation, or, if not
non-stock corporation, the dead members cannot be represented.
practicable, in the city or municipality where the principal office of
the corporation is located: Provided, That any city or municipality
Note: In so far as non-stock corporation is concerned, quorum is
in Metro Manila, Metro Cebu, Metro Davao, and other
based on the majority of the living members.
Metropolitan areas shall, for purposes of this section, be considered
a city or municipality.
SEC. 52. REGULAR & SPECIAL MEETINGS
Notice of meetings shall be sent through the means of OF DIRECTORS/TRUSTEES;
Section 52. Regular and Special MeetingsQUORUM of Directors or
communication provided in the bylaws, which notice shall state the Trustees; Quorum. – Unless the articles of incorporation or the
time, place and purpose of the meetings. bylaws provides for a greater majority, a majority of the directors
or trustees as stated in the articles of incorporation shall constitute
Each notice of meeting shall further be accompanied by the a quorum to transact corporate business, and every decision
following: reached by at least a majority of the directors or trustees
constituting a quorum, except for the election of officers which
(a) The agenda for the meeting; shall require the vote of a majority of all the members of the board,
shall be valid as a corporate act.
(b) A proxy form which shall be submitted to the corporate
secretary within a reasonable time prior to the meeting; Regular meetings of the board of directors or trustees of every
corporation shall be held monthly, unless the bylaws provide
(c) When attendance, participation, and voting are allowed by otherwise.
remote communication or in absentia, the requirements and
procedures to be followed when a stockholder or member elects Special meetings of the board of directors or trustees may be held
either option; and at any time upon the call of the president or as provided in the
bylaws.
(d) When the meeting is for the election of directors or trustees, the
requirements and procedure for nomination and election. Meetings of directors or trustees of corporations may be held
anywhere in or outside of the Philippines, unless the bylaws
All proceedings and any business transacted at a meeting of the provide otherwise. Notice of regular or special meetings stating the
stockholders or members, if within the powers or authority of the date, time and place of the meeting must be sent to every director
corporation, shall be valid even if the meeting is improperly held or or trustee at least two (2) days prior to the scheduled meeting,
called: Provided, That all the stockholders or members of the unless a longer time is provided in the bylaws. A director or trustee
corporation are present or duly represented at the meeting and not may waive this requirement, either expressly or impliedly.
one of them expressly states at the beginning of the meeting that
the purpose of their attendance is to object to the transaction of any Directors or trustees who cannot physically attend or vote at board
SEC.
business because the 51. QUORUM
meeting IN MEETINGS
is not lawfully called or convened. meetings can participate and vote through remote communication
such as videoconferencing, teleconferencing, or other alternative
Sectionis [Link]
Quorum in Meetings. modes of communication that allow them reasonable opportunities
Quorum of shareholders needed in– order
Unless otherwise
to validly
provided in this Code or in the bylaws, a quorum shall consist of to participate. Directors or trustees cannot attend or vote by proxy
conduct a meeting.
the stockholders representing a majority of the outstanding capital at board meetings.
2stock
KINDS or OFa majority
QUORUM of the members in the case of nonstock
corporations. A director or trustee who has a potential interest in any related
(1) Simple quorum – 50% + 1 Regular Meeting Special Meeting
party transaction must recuse from voting on the approval of the
(2) Qualified Quorum – any number greater than the Held monthly unless Held anytimewithupon:
related party transaction without prejudice to compliance the
simple quorum the bylaws provide (a) The call of the
requirements of Section 31 of this Code.
When otherwise. president; or
(b) As provided for in
the bylaws.
GEN: Notice of regular or special meetings stating
the date, time and place of the meeting must be
sent to every director or trustee at least two
Notice of
(2) days prior to the scheduled meeting
Meeting
XPN: A longer time is provided in the bylaws.

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 May be done electronically or other means as RIGHT TO VOTE OF SECURED CREDITORS
allowed by the Commission.
How
GEN: In case a stockholder grants security interest in his or her
conducted T/N: Teleconferencing is now very common shares in stock corporations, the stockholder-grantor shall have the
and is now the standard way. right to attend and vote at meetings of stockholders.

Reasons why SEC allows teleconferencing: XPN: UNLESS the secured creditor is expressly given by the
1. In order to take advantage of the advances of technology; stockholder-grantor such right in writing which is recorded in the
2. To save time of the busy members of the board. As long as appropriate corporate books.
the minutes will reflect the true and accurate information,
the BOD or BOT don’t have to conduct a physical meeting. Atty. Espedido: It is still the pledgor who has the right to
participate. Even if the pledgee has the possession of the
NO REPRESENTATION certificate, there is no ownership that is being transferred,
Directors or trustees cannot attend or vote by proxy at board UNLESS the pledgor grants the pledgee the right to vote.
ALLOWED
meetings. This is because IN presence
a director’s A BOARD is personal due to his
qualification and expertise. In which case, the pledgee may demand from the pledgor the right to
vote to be contained in a PROXY.
SEC. 53. WHO SHALL PRESIDE AT MEETINGS (1) Demand right to vote
(2) Demand for a proxy
Section 53. Who Shall Preside at Meetings. – The chairman
or, in his absence, the president shall preside at all meetings of the WHEN STOCKHOLDER IS DEAD
directors or trustees as well as of the stockholders or members,
unless the bylaws provide otherwise. Note: Executors, administrators, receivers, and other legal
representatives duly appointed by the court may attend and vote in
behalf of the stockholders or members WITHOUT NEED OF ANY
WRITTEN PROXY.

SEC. 55. VOTING IN CASE OF JOINT OWNERSHIP

SEC. 54. RIGHT TO VOTE OF SECURED CREDITORS OF STOCK
& ADMINISTRATORS
Section 55. Voting in Case of Joint Ownership of Stock. –
Section 54. Right to Vote of Secured Creditors and The consent of all the co-owners shall be necessary in voting shares
Administrators. – In case a stockholder grants security interest of stock owned jointly by two (2) or more persons, unless there is a
in his or her shares in stock corporations, the stockholder- grantor written proxy, signed by all the co-owners, authorizing one (1) or
shall have the right to attend and vote at meetings of stockholders, some of them or any other person to vote such share or shares:
unless the secured creditor is expressly given by the stockholder- Provided, That when the shares are owned in an “and/or” capacity
grantor such right in writing which is recorded in the appropriate by the holders thereof, any one of the joint owners can vote said
corporate books. shares or appoint a proxy therefor.

GEN: The consent of all the co-owners shall be necessary in voting

Executors, administrators, receivers, and other legal representatives shares of stock owned jointly by two (2) or more persons.
duly appointed by the court may attend and vote in behalf of the
stockholders or members without need of any written proxy. When the shares are owned in an "and/or" capacity by the holders
thereof, any one of the joint owners can vote said shares or appoint a
Certificate of Stock proxy therefor
The best evidence of ownership of shares of stocks.
XPN: Unless there is a written proxy, signed by all the co- owners,
IMPORTANT: Shares are personal properties. Being personal authorizing one (1) or some of them or any other person to vote such
properties, the certificate of stock can be offered as security for any share or shares.
liability or loan to guarantee payments of obligations like in pledge
and mortgage. SUMMARY:
(A) If there are 2 of them – BOTH of them should consent
Who takes possession of the certificate of stock in a to the vote UNLESS one or more of them will authorize the
pledge or mortgage? other to represent them and cast their vote in behalf of the
A: other.

PLEDGE MORTGAGE (B) Owned in an “AND/OR” capacity – EITHER of the

Pledgee takes possession of the The mortgagee does not take co-owners could vote
certificate possession of the certificate
Example: A and/or B – either A or B could vote

There is a transfer of There is no transfer of

possession BUT no transfer possession and ownership
of ownership

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 Illustration. PROXIES
Two owners with contradicting vote
An instrument that refers to the authority given by the stockholder
There are 2 owners. Both of them were together taking to another to represent the former during meeting
lunch and there was an issued that required a vote of WON
there must be an increase of capital stock. How will we Rule: Proxies shall be in writing, signed, and filed by the stockholder
qualify the vote? in any form authorized in the bylaws.
A: If there are 2 stockholders with contradicting votes – NO VOTE;
ZERO VOTE. The best solution: Both should AGREE. (A/N: See discussion on proxies under Sec. 23.)

SEC. 56. VOTING RIGHT FOR TREASURY SHARES

VALIDITY AND EFFECTIVITY OF A PROXY

Section 56. Voting Right for Treasury Shares. – Treasury It shall be valid only for the meeting for which it is intended
shares shall have no voting right as long as such shares remain in UNLESS otherwise provided in the proxy form. However, no proxy
the Treasury. shall be valid and effective for a period longer than 5 years.
Rule: Treasury shares shall have no voting rights. Illustration. If you have a proxy for the year 2020, you cannot use it
for 2021 because it is only intended for that particular meeting unless
Reason: If they were given voting powers, the directors would vote it is extended but in no case shall it be longer than 5 years.
for themselves, thereby perpetuating their position in the board.
A PROXY CANNOT BE SUBSTITUTED
A/N: See Sec. 9.
A proxy cannot be substituted by reason of the trust and confidence
SEC. 57. MANNER OF VOTING; PROXIES reposed upon the person given the authority to represent the other.
The authority cannot be delegated.
Section 57. Manner of Voting; Proxies. – Stockholders and
members may vote in person or by proxy in all meetings of Illustration 1. Jin is given a proxy for a particular meeting.
stockholders or members. It was scheduled on the same day that she has a date and
she preferred to go on that date instead.
When so authorized in the bylaws or by a majority of the board of She cannot delegate her authority to attend said meeting to her sister.
directors, the stockholders or members of corporations may also Her sister cannot attend the meeting because a proxy cannot be
vote through remote communication or in absentia: Provided, That substituted or delegated.
the votes are received before the corporation finishes the tally of
votes. Illustration 2. On the other hand, Jin is given a proxy all
compliant with the requirements. However, at the meeting,
A stockholder or member who participates through remote she was told that she cannot participate for no reason.
communication or in absentia, shall be deemed present for Can it be done?
purposes of quorum. A: No, it cannot be done because she has a vested right as an owner.

The corporation shall establish the appropriate requirements and PROXY GIVEN TO TWO OR MORE PERSONS
procedures for voting through remote communication and in
absentia, taking into account the company’s scale, number of (A) IF TWO PROXY HOLDERS
shareholders or members, structure and other factors consistent If two persons were given a proxy by the same person, both of
with the basic right of corporate suffrage. them cannot vote at the same time in the meeting.

Proxies shall be in writing, signed and filed, by the stockholder or Between two proxy holders, who is entitled to vote?
member, in any form authorized in the bylaws and received by the A: RULES:
corporate secretary within a reasonable time before the scheduled 1. Proxy whose proxy instrument bears the latest date
meeting. Unless otherwise provided in the proxy form, it shall be 2. If same date – Proxy holder whose proxy
valid only for the meeting for which it is intended. No proxy shall be instrument bear the later time
valid and effective for a period longer than five 3. If same time – proxy holder who presents it first
(5) years at any one time. 4. All things being equal (same date, same time, and
present at the same time) – proxy committee decides
MANNER OF VOTING
(B) IF THREE PROXY HOLDERS
Rule: Stockholder or members in all meetings of stockholders or Where a proxy is given to three persons in one instrument, the
members may vote: three of them must agree upon the vote and in case of conflict,
the rule of the majority of the three governs. [See De Leon, Page
(1) In person 512]
(2) By proxy
(3) Through remote communication or in absentia when Atty. Espedido: The most practical approach is to AGREE
authorized: upon the vote and majority shall prevail.
(a) in the bylaws or
(b) by a majority vote of the BOD

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REVOCATION OF PROXY MANAGEMENT CONTROL DEVICES
Illustration. A proxy was declared and recognized as the Management Control Devices
appropriate proxy holder. However, when he went to the These are devices that are used to attain the particular result that the
meeting, the stockholder who gave him the proxy was also management wants. They will be able to control the results or
there. Who is entitled to vote? predetermine the outcome of their acts. They will guarantee the
A: The Stockholder votes. It would constitute a revocation of proxy accomplishment of the objective of the management.
because the rule says that proxies are generally revocable
– expressly or impliedly. Kinds:
1. Management Contract
Important: The presence of the stockholder in the meeting is an 2. Proxy
implied revocation. 3. Voting Trust Agreement
4. Trust Agreement
SEC. 58. VOTING TRUSTS
VOTING TRUST AGREEMENT
Section 58. Voting Trusts. – One or more stockholders of a
stock corporation may create a voting trust for the purpose of It is an agreement in writing whereby one or more stockholders of a
conferring upon a trustee or trustees the right to vote and other stock corporation transfer his or their shares upon a trustee or trustees
rights pertaining to the shares for a period not exceeding five (5) for the purpose of conferring to the latter the right to vote and other
years at any time: Provided, That in the case of a voting trust rights pertaining to the shares for a period not exceeding five years at
specifically required as a condition in a loan agreement, said voting any time.
trust may be for a period exceeding five (5) years but shall
automatically expire upon full payment of the loan. A voting trust Management may influence a group of stockholders, telling them that
agreement must be in writing and notarized, and shall specify the “this is how you should vote”. In order to ensure that they will abide
terms and conditions thereof. A certified copy of such agreement by the agreement on how to vote, they may execute a voting
shall be filed with the corporation and with the Commission; agreement. They could designate any or some to cast their vote in
otherwise, the agreement is ineffective and unenforceable. The behalf of all the other signatories to that voting agreement.
certificate or certificates of stock covered by the voting trust
agreement shall be cancelled and new ones shall be issued in the If the management could have this, more or less they can
name of the trustee or trustees, stating that they are issued pursuant predetermine the outcome of the results/vote. This is a way of
to said agreement. The books of the corporation shall state that the PREDICTING the outcome of the results of any issue that may
transfer in the name of the trustee or trustees is made pursuant to require approval during a stockholders meeting.
the voting trust agreement.
What happens to these voting rights?
The trustee or trustees shall execute and deliver to the transferors, A: The stockholder transfers his voting rights to another (trustee).
voting trust certificates, which shall be transferable in the same
manner and with the same effect as certificates of stock. Illustration. Charles was designated as proxy of a certain
stockholder. He was already recognized as proxy in the meeting.
The voting trust agreement filed with the corporation shall be However, while socializing with the other stockholders, he met
subject to examination by any stockholder of the corporation in the someone holding a Voting Trust Agreement bearing the name of the
same manner as any other corporate book or record: Provided, same stockholder who granted him the proxy. In effect, the person
That both the trustor and the trustee or trustees may exercise the holding the VTA and Charles will be voting in behalf of the same
right of inspection of all corporate books and records in accordance stockholder.
with the provisions of this Code.
The VTA was executed in February 1, 2017 while the proxy
Any other stockholder may transfer the shares to the same trustee was executed in February 5, 2017. Who is now entitled to
or trustees upon the terms and conditions stated in the voting trust vote in the stockholder’s meeting?
agreement, and thereupon shall be bound by all the provisions of A: The Voting Trust Agreement prevails. It is the voting trustee who
said agreement. will be entitled to vote because the voting trustee has the legal title
and the Voting Trust Agreement is irrevocable despite the subsequent
No voting trust agreement shall be entered into for purposes of execution of proxy.
circumventing the laws against anti-competitive agreements, abuse
of dominant position, anti-competitive mergers and acquisitions, What if the proxy was executed in February 1, 2017 while
violation of nationality and capital requirements, or for the the VTA was executed in February 5, 2017. Who is now
perpetuation of fraud. entitled to vote in the stockholder’s meeting?
A: The voting trustee, because the Voting Trust Agreement operates
Unless expressly renewed, all rights granted in a voting trust to revoke the proxy.
agreement shall automatically expire at the end of the agreed
period. The voting trust certificates as well as the certificates of RIGHTS OF A TRUSTEE IN A VOTING TRUST AGREEMENT
stock in the name of the trustee or trustees shall thereby be deemed
cancelled and new certificates of stock shall be reissued in the (1) The right to vote
name of the trustors. (2) The right to be voted upon
(3) The right to be represented
The voting trustee or trustees may vote by proxy or in any manner (4) Right of inspection of all corporation books and
authorized under the bylaws unless the agreement provides records
otherwise.

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Important: Basically, all the rights of the stockholders because he Illustration 1.
has the legal title except the right to dividends because the beneficial Stockholder attends the meeting – proxy is revoked
ownership is retained by the trustor.
You were given the proxy and attended the meeting.
In contrast, the proxy holder has limited rights in attending the However, in the meeting, you saw the stockholder who
meeting (e.g. right to vote) because the proxy holder has no legal title you are representing. When an issue was about to be
of the shares of stock. resolved, the SH voted. What do you think will happen?
A: The stockholder’s vote prevails because the presence of the
TERM OF VTA stockholder revokes the proxy.
Voting Trust Agreement is valid for a period not exceeding five Illustration 2.
(5) years at any one time. Once expired, everything will be Trustor attends the meeting – trustee’s vote prevails; no
returned to the real and lawful stockholder (trustor). revocation of VTA

Voting Trust VOTING TRUST AGREEMENT

Agreement Voting Agreement On the other hand, a voting trustee attended the meeting
VS. VOTING AGREEMENT and the trustor also appeared. Which vote should prevail?
An agreement in writing A written agreement among a
A: The trustee’s vote shall prevail.
whereby one or more group of shareholders, not a
stockholders of a stock joint ownership, wherein they
Illustration 3.
corporation transfers their agree among themselves on
Trustee delegates authority to a proxy
shares to any person/s or to a how they will vote when a
corporation having authority to certain issue arises.
The trustee authorized somebody else to appear in the meeting
act as trustee for the purpose
because he had something else to do. He told his son to represent him
of vesting in such person/s or
(trustee) in the meeting. When the son went there, the stockholder
corporation (as trustee/s)
was also there.
voting or other rights
pertaining to the shares for a
Whose vote will prevail? Can the trustee transfer this right
certain period not exceeding
to someone else? Is this the intention of the law?
the term fixed by the Code
A: The proxy’s right will prevail. Section 58, last paragraph
and upon the terms and
provides: “The voting trustee or trustees may vote by proxy or in any
conditions stated
manner authorized under the bylaws unless the agreement provides
in the agreement.
otherwise.”
PROXY vs VOTING TRUST AGREEMENT
Atty Espedido: That is a very dangerous provision. It is basic
that delegated power cannot be further delegated. But it is the
Proxy Voting Trust Agreement
law.
No legal title to the shares of Acquires legal title to the
the stockholder shares of the stockholder The stockholder precisely executed the trust agreement and
even transferred title to the trustee basically because of trust.
Revocable at any time Irrevocable for a definite and The proxy of the trustee might not be trusted by the
unless coupled with interest limited period of time stockholder. It will be very dangerous if we allow the proxy to
represent.
Can only act at the specified Not limited to any particular
SH’s meeting meeting A delegated power cannot be delegated. BUT it is the law. It is
provided by law.
Votes only in the absence of Can vote and exercise all the
the owner of stock rights of the transferring SH
even when the SH is present **PROHIBITION
Nationalized AGAINST THE USE OF
Corporations
MANAGEMENT
These DEVICES
are corporations which must be either be:
Shorter duration Longer duration (a) Wholly owned by Filipinos
(b) 60% is owned by Filipinos, 40% is of foreign ownership
Need not be notarized nor a Notarized and filed with SEC
copy be filed with the SEC Purpose of 60% requirement
To make sure that the control shall be in the hands of the Filipino
No right of inspection of Has such right stockholders, so that our natural resources will not be exploited by
corporate books foreigners.

Illustration. Koreans gave bonuses to the Filipino Shareholders, in

exchange, they asked that the shareholders execute proxies in their
favor. Thus, 60% of the Filipinos executed the proxy in favor of the
Koreans. As a result, anything that will be decided in the
Stockholders’ meeting will be controlled by the Koreans.

Is there a problem with this?

A: Yes. This violates the nationalization law. Although they were not
forced to sign the proxy, the execution of the proxy is considered
invalid on the ground of being against public policy.

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TN: Although in the books, there are 60% Filipino to stock option because here, person A can already purchase the stock
stockholders/owners, but they have surrendered the power at P10 instead of P15.
which accompanies ownership. The intention of the law, to
maintain the exclusive control with the Filipinos to certain Atty. Espedido: Do not underestimate when you are given an
industries as enshrined in the Constitution, is violated. option. The moment the price will increase, you can sell it to
someone interested to buy it even at a higher price. You may
Important: These management control devices cannot be used to make profit out of the option.
circumvent or violate existing laws against monopoly, restraint of
trade, and other similar laws. PRE-EMPTIVE RIGHT
TITLE VII. STOCKS AND STOCKHOLDERS It is not a privilege but a right of existing stockholders to subscribe to
new unissued shares of the corporation in proportion to their existing
SEC. 59. SUBSCRIPTION CONTRACT shareholdings, so that they can maintain their “hold” or existing % of
holdings in the corporation.
Section 59. Subscription Contract. – Any contract for the
acquisition of unissued stock in an existing corporation or a STOCK OPTION PRE-EMPTIVE RIGHT
corporation still to be formed shall be deemed a subscription within Privilege given by the A right given to stockholders
the meaning of this Title, notwithstanding the fact that the parties corporation by law
refer to it as a purchase or some other contract. Can be given to 3rd parties Only given to existing
stockholders
Subscription Contract No maximum amount. The stockholder has the right to
The agreement entered into when subscribing for shares. Depends on the agreement buy newly-issued shares in an
between the corporation and amount in proportion to him
Important: Like any other contract, it must have the elements of a the person given the options.
contract, namely:

1. Consent – consent of the parties (meeting of the minds) SEC. 60. PRE-INCORPORATION SUBSCRIPTION
2. Object or subject matter – in the subscription contract,
it pertains to the newly-issued stocks
3. Consideration – in the subscription contract, it shall not Section PRE-INCORPORATION
60. Pre-incorporationSUBSCRIPTION Subscription. – A
be less than the par value or issue value of the shares. It can subscription of shares in a corporation still to be formed shall be
be paid through the following means: irrevocable
GEN: for a period
The individual of attoleast
agrees six (6)prior
subscribe months from the date and
to incorporation of
a. Cash subscription,
said contract is unless all of the for
IRREVOCABLE other subscribers
at least 6 monthsconsent to the
b. Property revocation, or the corporation fails to incorporate within the same
c. Labor or services actually rendered periodRevocable
XPN: or withinin athelonger period
following stipulated in the contract of
instances:
d. Amount transferred from URE to capital subscription. No pre-incorporation
(1) ALL subscription
of the other subscribers may
consent to be
the revoked
e. Shares which are reclassified after the articles of incorporation is submitted to the Commission.
revocation;

How can you become a stockholder?

A:
(1) Subscription of an unissued shares of the corporation
(2) Direct purchase of existing shares from another
stockholder
(3) Purchases stock from publicly listed corporations
(4) By exercising stock option

When would you subscribe? (2) The Corporation fails to incorporate within the same
(a) Pre-incorporation subscription – before incorporation period or
(b) Post-incorporation subscription – after subscription (3) Within a longer period stipulated in the contract of
subscription.
STOCK OPTIONS
**XPN to XPN: Irrevocable after the AOI have been submitted to
Stock Options the Commission (post-incorporation subscription).
It is a privilege given by a corporation to persons not necessarily
stockholders, giving them a period within which to decide whether or What is the purpose of the irrevocability?
not to buy shares in a company at a specified price. A: To ensure the creation of the corporation. It gives the organizers the
chance to organize.
Do stock options have value?
A: Yes. They are valuable because they give a person the right to buy Atty. Espedido: If revocation is allowed within the 6 months, the
shares of stock at a specific price. (A/N: Remember, stock prices organization of the corporation will be highly jeopardized, and
fluctuate, so you may have an opportunity to buy shares of stock at a nobody might be able to start at all if the subscribers keep on
lower price). withdrawing. The timetable and the filing of the articles might
be unduly affected.
Illustration. Stock option gives person A, the right to buy shares of
stock of Corp. ABC for a price of P10. Later on, because of the good **RULE ON POST-INCORPORATION SUBSCRIPTION
performance of the corporation, the stocks of the corporation from
P10 already increased to P15. There is value Under post-incorporation, the law is silent as to the revocability or
irrevocability of the subscription, but actually it is irrevocable.

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The moment a subscriber subscribes after the incorporation of a Where the consideration is other than actual cash, or consists of intangible propert
company, he becomes a stockholder and cannot anymore revoke his
subscription. Shares of stock shall not be issued in exchange for promissory notes or future serv

And since he is already a stockholder, he can now enjoy the rights of The issued price of no-par value shares may be fixed in the articles of incorporatio
a stockholder. The basis for this is Sec. 71 of this Code.

Rights of stockholder:
1. He may check the corporate books;
2. He has the right to vote on shares if he has a
voting share;
3. He has the right to dividends when the corporation
declares said dividends.

Atty. Gaviola: There is a rule in Oblicon that generally, a

contract is revocable when it is not consummated. We apply
the same logic here in the sense that when a subscriber pays
for his subscription pre-incorporation, [the shares are issued]
with the condition that [the proceeds coming from them] will be
used for the formation of the corporation. How do you pay for subscriptions?
A:

The failure of such event to happen would allow the subscriber (1) Actual cash paid to the corporation;
to revoke his subscription as provided in Sec. 60, which states (2) Property, tangible or intangible, actually received by the
that the corporation has 6 months to comply with said corporation and necessary or convenient for its use and
obligation. lawful purposes
 at a fair valuation equal to the par or issued value of
However, once the corporation files its AOI, then it is as if the the stock issued;
corporation has already complied with its obligation, thus (3) Labor performed for or services actually rendered to the
making the subscription irrevocable (the contract is already corporation;
consummated). (4) Previously incurred indebtedness of the corporation;
(5) Amounts transferred from unrestricted retained earnings
Meanwhile, for post-incorporation subscription, it is akin to a to stated capital;
valid and binding contract that is already perfected (6) Outstanding shares exchanged for stocks in the event of
(consummated), hence, it is irrevocable. The subscription now reclassification or conversion;
becomes part of the capital stock of the corporation. Hence, (7) Shares of stock in another corporation; and/or
the corporation cannot allow the subscriptions to be revoked (8) Other generally accepted form of consideration
without prejudicing its interests and that of its stockholders.
The corporation must now comply with its obligations to its ACTUAL CASH
stockholders, like the distribution of dividends and allowing
them to exercise their rights as stockholders. GEN: Shares of stock shall not be issued in exchanged for
promissory notes.
SEC. 61. CONSIDERATION FOR STOCKS
XPN: Except if the corporation is the one indebted to the person. If
the corporation
Section 61. Consideration for Stocks. – Stocks shall not be issued for a consideration has debts
less than the paragainst theprice
or issued person, thenConsideration
thereof. the corporation
for the issuan
may allow this by issuing shares of stocks.

PROPERTY (TANGIBLE/INTANGIBLE)
(a) Actual cash paid to the corporation;
When property is used for the payment of subscription, the property
(b) Property, tangible or intangible, actually received by value must be equal to the amount subscribed.
the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued;
This is measured through the fair market value of the property.
And to be sure that the property has been evaluated properly, or
assigned with the proper valuation, the SEC will examine the
(c) Labor performed for or services actually rendered to property.
the corporation;
LABOR OR SERVICES ACTUALLY RENDERED
(d) Previously incurred indebtedness of the corporation;
Rule: Services here do not refer to future services but pertains to
(e) Amounts transferred from unrestricted retained ACTUAL services rendered.
earnings to stated capital;
Illustration. The person planned to join the corporation as a
(f) Outstanding shares exchanged for stocks in the event Vice President. Later on, he was eventually appointed as
of reclassification or conversion; VP. Can he be given shares of stocks by telling the
corporation, “I am paying my shares of stock out of my
(g) Shares of stock in another corporation; and/or salary for the first month.” Is that allowed?
A: No, that is not allowed because services here do not refer to future
(h) Other generally accepted form of consideration. services.
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Why are future services not allowed? OPTIONS IN APPLICATION OF PAYMENT
A: Because of the uncertainty of future services.
In the absence of provisions in the by-laws to the contrary, a
AMOUNTSThe TRANSFERRED corporation may apply payments made by subscribers either:
Illustration. authorized FROM capitalTHEstock (ACS) was
UNRESTRICTED RETAINED
increased from 1m to 2m. Five (5) stockholders EARNINGS owned
TO
(1) Payment pro rata to each and all the entire number of
20% each of the original 1m ACS. They then wanted to
shares subscribed for;
subscribe another 20% each of the 1M increase but they
don’t have cash. However, there are unrestricted retained
Example. Apply the 50,000 to all the 100 subscribed
earnings. What could be done?
shares. In effect, there is no single share fully paid
A: The 5 stockholders may subscribe, and their subscription will be
paid out of the unrestricted retained earnings which should just be
Note: If it is a proportional payment or pro rata – the
transferred to the capital. Hence, instead of issuing cash dividends,
stockholder cannot be issued a Stock Certificate.
the corporation will issue stock dividends to them.
(2) Full payment for corresponding number of shares – apply
Atty. Espedido: A good justification by the corporation in doing
payment to as many shares as may be covered by that
this is that such will increase the capital of the corporation
payment.
considering that the unrestricted retained earnings are
ploughed back to the corporation. In the same way, the
Example: Apply it to the 50 shares. Therefore the 50 shares
investments of the stockholders are also increased.
are fully paid.
WAIVER OF RIGHT TO UNPAID SUBSCRIPTION
Note: The corporation may issue to the stockholder a Stock
Certificate on the appropriate number of shares covered.
Illustration. The Corporation wanted to grant bonuses but
has no cash. Hence, it instead declared that all unpaid
GOODWILL
subscriptions are deemed fully paid. Is it valid?
A: No, it is not allowed because this will violate the trust fund
Rule: Goodwill may be used to pay subscription because this is
doctrine since there will be no more capital coming in the
considered property. To determine the value of a good will, it shall be
corporation. In the books, it is supposed to show that certain stocks
appraised by the SEC.
are still unpaid and therefore, it must be paid.
**What is goodwill?
Atty. Espedido: Waiving the unpaid subscriptions is no different
A: Goodwill is an intangible asset that is associated with the purchase
from just returning to the stockholders their investment. If the
of one company by another. Specifically, goodwill is the portion of
return of stocks is not allowed, then it should not be allowed to
the purchase price that is higher than the sum of the net fair value of
waive the payment of unpaid subscriptions.
all of the assets purchased in the acquisition and the liabilities
assumed in the process. The value of a company’s brand name,
If you declare all unpaid subscriptions as fully paid, you are
solid customer base, good customer relations, good employee
making it appear to the public and to creditors that the capital is
relations, and proprietary technology represent some reasons
inside already when in fact, no money came in. You are
why goodwill exists.
therefore misleading the public.
ISSUED PRICE OF NON-PAR VALUE
If unpaid subscriptions are not paid when the date for payment
arrives or when the Board makes the call for payment, they
(A) It may be fixed in the:
become delinquent shares which means that they are due and
1. Articles of Incorporation; or
demandable and can be sold in a delinquent sale.
2. By the BOD pursuant to authority conferred by
the AOI or the bylaws
MANNER OF PAYMENT
(B) If not fixed by the abovementioned – fixed by the
Are you supposed to pay in full?
A: The stockholder may either pay in full but this is not required. stockholders representing at least a majority of the OCS at
a meeting duly called for the purpose
When is balance payable?
A: The balance shall be paid on: Important: Once the stockholder fully pays, he is given a Certificate
of Stock.
(a) The date indicated in the subscription contract;
or
(b) When the BOD calls for payment. SEC. 62. CERTIFICATION OF STOCK & TRANSFER
OF SHARES
**Atty. Gaviola: The call is only required when there is no date
Section 62. Certificate of Stock and Transfer of Shares. – The capital sto
fixed for the payment of the shares. It is the BOD who will
make the call by resolutions of the BOD in a meeting where
there is a quorum, approved by majority of the directors
present in the meeting.

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parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the
1 CERTIFICATE OF STOCK CAN BE OFFERED
AS COLLATERAL
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.
Note: Shares of stock so issued are personal property.

Once a certificate of stock is given, the stockholder may offer it as

collateral to the bank or he can exercise his right as an owner to
dispose or sell it.

2 CERTIFICATE OF STOCK IS TRANSFERRABLE

It is transferred through indorsement + delivery.

3 A CERTIFICATE OF STOCK IS NOT A

SEC. 63. ISSUANCE OF STOCK CERTIFICATES NEGOTIABLE INSTRUMENT
Distinction between non-negotiability and transferability:
Section 63. Issuance of Stock Certificates. – No certificate
of stock shall be issued to a subscriber until the full amount of the NOT NEGOTIABLE TRANSFERRABLE
subscription together with interest and expenses (in case of
It is not negotiable because it Stock certificate can be
delinquent shares), if any is due, has been paid.
does not contain a transferred from one
**Certificate of Stock promise or order to pay a person to another so as to
(As defined in the case of Anna Teng vs. SEC) sum certain in money constitute the transferee
as the lawful owner
A certificate of stock is a written instrument signed by the proper thereof.
officer of a corporation stating or acknowledging that the person
named in the document is the owner of a designated number of shares Note: Here, it is not negotiable because it does not contain a promise
of its stocks. It is prima facie evidence that the holder is a or order to pay a sum certain in money. Although it may contain an
shareholder of a corporation. order to deliver a certain number of stocks.

A certificate, however, is merely a tangible evidence of ownership of Atty. Espedido: Negotiability presupposes various or many
shares of stock. It is not a stock in the corporation, and merely transfers or subsequent transfers. To constitute the transferee
expresses the contract between the corporation and the stockholder. as the lawful holder of the instrument. There are defenses
available, and he could avail of these defenses. But when we
The shares of stock evidenced by said certificates, meanwhile, are say transferability, it is more on possession.
regarded as property and the owner of such shares may, as a general
rule, dispose of them as he sees fit, unless the corporation has been REQUISITES OF A NEGOTIABLE INSTRUMENT
dissolved, or unless the right to do is properly restricted, or the
owner’s privilege of disposing of his shares has been hampered by Section 1. Form of Negotiable Instruments. – An instrument to be
his own action. negotiable must conform to the following requirements: WUPOD
(a) It must be in writing and signed by the maker or drawer
What are requirements for a certificate of stock? (b) Must contain an unconditional promise or order to pay a
A: sum certain in money
1. It has to be signed by the president or the VP, (c) Must be payable on demand, or at a fixed or determinable
countersigned by the corporate secretary or assistant future time
secretary, and sealed with the corporate seal. (d) Must be payable to order or to bearer
2. It has to state the par value of the share. (e) Where the instrument is addressed to a drawee, he must be
3. The name of the shareholder must be indicated. named or other indicated therein with reasonable certainty.
4. The number of shares must be indicated.
5. The stock number must be indicated. MANNER OF TRANSFERRING

SIGNATURES REQUIRED IN A CERTIFICATE OF STOCK NEGOTIABLE

INSTRUMENT STOCK CERTIFICATE
(1) Signed by the president or vice-president (1) Payable to order
(2) Countersigned by the secretary or assistant secretary indorsement + delivery
indorsement + delivery
NATURE OF CERTIFICATE OF STOCKS (2) Payable to bearer –
delivery
(1) It is a personal property
(2) It is transferrable
(3) It is NOT a negotiable instrument Note: A Certificate of Stock may be transferred through indorsement
+ delivery.

Atty. Espedido: At the back portion of that certificate is an

indorsement portion – it simply states that this certificate
covering a no. of shares is being transferred to xxx. The date

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and place are indicated, and then sign. So, whoever becomes EFFECT
a transferee becomes the shareholder.
It merely transfers the ownership of the shares to the transferee or
PROCEDURE assignee, the latter now being the owner of the shares. There is
already a valid transfer of ownership. However, it does not make the
(1) Indorsement + Delivery transferee/assignee a stock holder just yet.
(2) Transferee presents it to the corporation
(3) It is shown to the Secretary So how can the transferee or assignee become the
(4) The Secretary records it in the stock and transfer book of stockholder?
the corporation. On the other page, it will indicate the name A: The registration of the transfer in the stock and transfer book
of the transferee. makes one a stockholder, regardless of the issuance or non- issuance
(5) Once the transferee is recorded, the name of the new of a new certificate of stock.
stockholder will now be recorded in the stock and transfer
book SCRIPLESS TRADING

EFFECT
Rule: IF NOT however,
No transfer, RECORDED shall IN THE STOCK
be valid, except asAND
between the “The Commission may require corporations
TRANSFER whose securities are traded in trading
parties, until theBOOK
transfer is recorded in the books of the corporation
markets and which can reasonably
demonstrate their capability to do so to issue
Thus, if it is not recorded in the stock and transfer book, the transfer
will only be binding upon the parties. their securities or shares of stocks in
uncertificated or scripless form in
accordance with the rules of the
Atty. Espedido: You should call the corporate secretary and
Commission.”
warn him not to issue it to anyone.
What is a “scrip”?
If it is not in the books, it will not affect third parties. Thus, the
A: A scrip is a duly signed certificate of stock.
stockholder can sell it again.
KTG: A scrip is a certificate or receipt that represents
Summary of effect if not recorded in the stock and transfer
something of value, but has no intrinsic value in itself. What’s
book:
essential is that the issuer and the recipient must agree on
• Valid and binding as to the parties (corporation and
the value that the scrip represents. In other words, it is a
subscriber)
• Not binding to 3rd parties substitute or alternative to legal tender that entitles the
bearer to receive something in return.
PURPOSE OF INDORSEMENT
Applying this to the provision above, a corporation may be
required to issue its shares in the form of scrips. In this case,
The purpose of indorsement is in order to bind third parties. Because
of this indorsement, any third party can go to the secretary and have the scrip will represent each share of stock the shareholder
owns. On or before a specific date, the shareholder could
his name registered in the stock and transfer book.
combine the scrips he has, and convert the value they
represent into actual shares.
Atty. Espedido: But this usually doesn’t happen since the
holder thereof will just call the secretary and warn the secretary
What happens in scripless trading?
as to the fact of the loss of the certificate.
A: There is transfer of ownership of shares without actually
delivering the stock certificates. Instead, the transfer of ownership is
REMEDY
What if theFOR REFUSAL
secretary TO RECORD
refuses to recordTRANSFER
or transfer OFthe done through book entries.
STOCK IN YOUR
stock in your name? NAME
A: You have the right to go to court and FILE A MANDAMUS case. Atty. Gaviola: This kind of trading is usually done when the
You have the right to be recognized – have that right to register the stocks are listed in the stock exchange.
transfer in your name
What is the rationale for this provision on scripless
Note: The secretary only has a ministerial duty to comply with the trading? A: For convenience in the buying and selling of securities.
indorsement. If we strictly follow the traditional way of transferring shares (which
involves delivery of actual certificates), the stock market will not
**NOTES survive because the transactions will take days to months.

How is scripless trading done?

A: A corporation that intends to trade shares in the stock exchange
must:

1. Deliver all their securities or their shares to the

Philippine Depository and Trust Corporation (PDTC);

TWO WAYS TO TRANSFER SHARES

2. The shares in the books of the PDTC will now be assigned
or given to the brokers who purchased the shares;
1. Deliver the stock certificate with an intention to transfer
ownership duly indorsed; or
2. Execute a Deed of Assignment for the shares.

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 3. The corporation’s stock and transfer agent records in the water and then placed inside the freezer so the water becomes
stocks in the Stock and Transfer Book, and issues the ice. When placed in the weighing scale, the chicken now
certificates of stock of the corporation. weighs heavier. So when the chicken’s weight was already
1.2kg, all the water was gone. This is why they call it the
T/N: The entity recorded in the Stock and Transfer watered chicken.
Book will be the PDTC, the holder of the shares.
WATERED STOCKS
4. In turn, the PDTC will make entries in their own records Stocks which are sold at less than the par value. You pay less for
(book entries). more stocks. If you were able to subscribe to a water stock, the value
paid will not reflect the actual value of the shares.
Uplifting of Shares
If the shares are desired to be kept for a long time without intention to How could water stocks exist?
trade them, the shares can be uplifted by: 1. When the value of the thing that you used in paying the
stocks is lower than the par value of the share–
1. Requesting the PDTC to take out the shares from their discounted stocks
custody, and record them in the Stock and Transfer Book 2. Did not pay anything at all – bonus stocks
under the name of a specific purchaser (who could be the 3. Consideration is valued in excess of its fair value
corporation or an actual shareholder).
2. The Stock and Transfer Agent will then issue the What is the effect of watered shares?
certificates of stock to the purchaser. A: Watered stocks are not merely ultra vires, but they are illegal per
se, and they cannot be ratified by any vote of the shareholders, or by
If later on, the purchaser/shareholder decides to sell the shares, the resolution of the BOD. However, if they are sold to a third party, then
stock certificates he or she has must be returned to the Stock and it should be honored by the corporation as a valued stock if the third
Transfer Agent, which will take time. parties acquired it in good faith.
Atty. Gaviola: Note, this is the delay and complication that ** Why would the law allow a stock certificate which has
scripless trading avoids. not been fully paid to be transferred?
A: To maintain economic relations among corporations and the
Key Points on Scripless Trading: public. If we do not allow that, every time a person buys shares of
1. There is only one owner, the PDTC, who is listed as the stocks, the buyer will always ask if it was sold with proper
stockholder in the books of the corporation. consideration and it will lead to the suffering of the economy. That is
2. The PDTC will have its own list of brokers who hold the why certificates are made transferrable even if it is not fully paid.
shares for their clients.
3. Brokers will have their own list of clients as well. The transferability of the certificates would not mean anything if we
have to examine them every time we buy a share of stock because it
Who has ownership of the shares of stock in scripless would cause great inconvenience.
trading then?
A: The legal owner is the PDTC, but the beneficial owner/s are the T/N: We could no longer trust in the certificate and therefore it
client/s of the brokers. loses its credibility. And if no one will trust in them, its
transferability is rendered useless.
If that is the case, then who can vote on such shares
during elections? And so here comes now the transferee, he did not know
A: The beneficial owner should ask for a certification from the broker this was a watered stock. He went to the corporation and
that he is the owner of the specific number of shares that he bought. presented the said stock, duly endorsed. Is the
That certification, which is not a stock certificate, should be corporation obliged to recognize that he is now the
brought by the beneficial owner to the election. It is akin to a proxy stockholder of the certificate?
allowing the holder to vote on shares. A: The corporation must honor because there is nothing wrong with
the certificate. The mistake or deficiency was in the consideration.
SEC. 64. LIABILITY OF DIRECTORS FOR So, so long as the certificate is legitimate then the corporation is
Section 64. Liability of Directors
WATERED for STOCKS
Watered Stocks. – A obliged to honor/acknowledge and effect the transfer.
director or officer of a corporation who: (a) consents to the
issuance of stocks for a consideration less than its par or issued PARTIES LIABLE
value; (b) consents to the issuance of stocks for a consideration
other than cash, valued in excess of its fair value; or (c) having (1) The directors who consented to the sale of the share at less
knowledge of the insufficient consideration, does not file a written than par value
objection with the corporate secretary, shall be liable to the (2) Shareholder who bought the watered stock
corporation or its creditors, solidarily with the stockholder
concerned for the difference between the value received at the time Note: Issuance of watered stock is a valid stock. The issuance is
of issuance of the stock and the par or issued value of the same. valid BUT the purchase is ILLEGAL.

Illustration. Such that when the investor subscribed, he can say that
STORY OF THE WATERED CHICKEN
you cannot get back his shares. He is correct because the issuance is
You go to the market and buy a chicken. When weighed, the
valid BUT he can be compelled to pay the difference.
chicken’s weight is 1.5 kg and then you bought it. However,
when you went home and checked the weight of the chicken, it
Atty. Espedido: What is not valid is the consideration. The
is already 1.2kg. This is because the chicken was injected with
issuance is valid.

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Who was at a loss? Important: If they are given the option to return, the stocks being
A: The corporation because the capital indicated and determined transferrable, it could have already been transferred to another person
through the par value no longer reflect the true capital based on par already.
value.
If the issuance will not be considered valid, the transferee might be
Illustration. 100 shares issued at 1 peso par value = Php 100 capital; holding something which is not valid even if he has already paid
1 share was sold at 50% = Php 99.50 capital fully. The transferee may even have paid more because at the time the
shares were transferred, the value might have already increased.
If a share for example was sold at a discounted 50%, and 100 shares
were all issued at a par value of PHP1/share – the capital should be So that, on watered stocks, what is the prayer in the
Php 100. derivative suit?
A: The difference between the actual price paid and the par value of
But since one share was sold at 50% discount, then the capital is the shares against the directors or officers who consented to/did not
PHP99.50 when it should have been PHP100 if there was no watered object against the issuance of watered shares.
stock.
** Can a creditor file a derivative suit?
Because of that watered stock, our capital is now less than what it A: No, only the stockholders that are stockholders at the time of the
should be. suit can file the derivative suit.
Who are the parties responsible? So we are ready for the derivative suit. Here are
A: The directors who agreed that the sale will be sold at that stockholder now who’s filing against the directors
discounted price. because the directors refuse the file necessary case, so in
the end what would the result of the derivative suit?
How do we compel the directors if they do not pay? A: The BOD will liable for the issuance of the watered stock and the
A: We have to go to court. non-issuance of the certificate of stock, in that manner the directors
shall be solidarily liable.
Who could authorize the filing of the case in a
corporation? A: Normally, it is the directors. But because the In the prayer of the derivative suit to be filed by the
directors themselves is responsible for the watered stock, they will petitioning stockholders prayed that they be awarded with
never authorize the filing of the case. The remedy is to file a damages and they suffered sleepless nights because
derivative suit. watered are issued, why the directors did it to them, do
you think they can recover damages from that?
DERIVATIVE SUIT A: NO. They can’t recover the damages because the purpose of the
derivative it should be in favor of the corporation, and in the instant
What is a derivative suit? case it was not for the benefit of the corporation. Such that the cause
A: A derivative suit is filed by a stockholder in behalf of a of action should belong to the corporation.
corporation.
On the other hand, they had not decided to file derivative
Note: The cause of action belongs to the corporation, but the suit, but a case on their behalf, an individual case, they
stockholder files the action on behalf of the corporation. Instead of trying to recover the unpaid portion belongs to the
the directors filing the suit, it would now be the stockholders. Is it corporation, that should be given to them, then the court
the same as a representative suit? should give to them the unpaid balance, do you think they
A: No. can do that?
A: No. The balance there is considered as a legal capital of the
A derivative suit is not a representative suit because a representative corporation, such that it is the corporation has the right to recover the
suit is a class suit – a person files in behalf of a class who have a balance, moreover if they are allowed to recover the unpaid balance
common interest or are similarly situated. and be given to them the it would violate the trust fund doctrine,
because these are part of the capital of the corporation, and if they
On the other hand, a derivative suit is filed on behalf of a corporation, allowed to recover the balance then that would tantamount to
not on behalf of a person similarly situated to the corporation. It is the liquidation because it is part of the capital. And it is the corporation is
corporation that is injured, not the stockholder. supposed to recover it.
This is allowed by law because the person who is required to act REQUISITES FOR A DERIVATIVE SUIT TO PROSPER
(BOD) refuses to act. 1. Injury to the corporation
2. The person suing must be a stockholder at the time of the
DERIVATIVE SUIT REPRESENTATIVE SUIT injury
Filed on behalf of a A class suit where a person 3. Suing on behalf of the corporation.
corporation files in behalf of a class who
have common interest or are
similarly situated OTHER INSTANCES
1. Disloyalty IN WHICH
of directors A DERIVATIVE
(See Sec. 33) SUIT
MAY
2. PROSPER
Self-dealing directors (See Sec. 31)
3. Interlocking directors (See Sec. 32)
Note: It cannot compel to return the issued stocks because as far as
the issuance is concerned, it is VALID. However, it is the deficient
consideration that is ILLEGAL.

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RR’s answers: REQUISITES FOR DERIVATIVE ACTIONS
1. Directors assent to acts that are patently illegal
2. Grossly negligent 1. That the person instituting the action be a stockholder or
3. Conflict of interest member at the time the act/s or transaction/s subject of the
4. Disloyalty action occurred and at the time the action was filed;
2. That the stockholder/member exerted all reasonable
WATEREDTreasury
Illustration. STOCKS IS APPLICABLE
shares with a par valueONLY TO NEWLY
of Php10/share were efforts, and alleges the same with particularity in the
ISSUED SHARES (VIRGIN SHARES)
sold at Php5/share – not a water stock complaint, to exhaust all remedies available under the
There are treasury shares. The BOD needed cash, and they decided to Articles of Incorporation, bylaws, laws or rules governing
sell these treasury shares. The par value is at PHP10/share. The board the corporation to obtain the relief he desires
decided to sell it at PHP5/share. 3. That there is no appraisal right available for the act/s
complained of;
Is this a watered stock? 4. That the suit is not a nuisance or harassment suit;
A: No, because watered stocks only applies to freshly issued shares. 5. That the suit is brought in the name of the corporation.

There were watered stocks issued. Fortunately, the Important:

corporation was about to be disowned. The existing In derivative suits, the corporation is an unwilling co-
assets were not enough to pay all the creditors. Would the plaintiff; the suing stockholder/member is only a nominal
creditors, in the presence of watered stocks, would it be party.
able to pursue some more other than the existing assets? The number of shares owned by the suing stockholder is
A: Yes. This is supposed to be part of the asset. not material.
The wrong contemplated in a derivative suit is one which
Can the transferee be compelled to pay the unpaid injures the corporation directly. But, the personal injury
portion? A: No. The stocks are not anymore “virgin” stocks when suffered by the stockholder cannot disqualify him from
the transferee bought it since it has been previously issued by the filing said derivative suit.
Corporation to the subscriber. Watered stock only applies to “virgin”
shares. If we allow the transferee to pay, it defeats the transferability. SEC. 65. INTEREST ON UNPAID SUBSCRIPTIONS

Atty. Espedido: We will have to keep asking if it is a watered

stock or not. Thus, insofar as issuance is concerned, it is valid. Section
SEC. 66.65. Interest
PAYMENT OF on BALANCEUnpaidOF Subscriptions.
SUBSCRIPTION –
What is not valid is with regard to the deficient consideration – Subscribers to stocks shall be liable to the corporation for interest
wherein you paid less for more. on all unpaid subscriptions from the date of subscription, if so
Section
required by [Link]
Payment
at the of rateBalance
**NOTES of Subscription.
of interest – Subject
fixed in the subscription
to the provisions
contract. of of
If no rate theinterest
subscription contract,
is fixed the board of directors
in the subscription contract,
**NOTES may, at any the
time, declare duefor
andthepayable to theof
corporation unpaid
How does
the prevailing BOD
legal ratecall
shall apply. payment the balance of
subscriptions
the and may collect the same or such percentage thereof,
subscription?
KINDS OF SUITS in Aeither
A: call iscase,
madewith
by aaccrued
resolutioninterest,
of theifBOD
any,inasa it may deem
meeting where
necessary.
there is a quorum, and approved by majority of the directors present
1. Individual Suit – a suit brought by the shareholder in his
in said meeting.
own name against the corporation when a wrong is directly Payment of unpaid subscription or any percentage thereof, together
inflicted against him. with any interest accrued shall be made on the date specified in the
subscription contract or on the date stated in the call made by the
2. Representative Suit – a suit brought by the stockholder board. Failure to pay on such date shall render the entire balance
in behalf of himself and all the other stockholders similarly due and payable and shall make the stockholder liable for interest
situated when a wrong is committed against a group of at the legal rate on such balance, unless a different interest rate is
stockholders. provided in the subscription contract. The interest shall be
computed from the date specified, until full payment of the
3. Derivative Suit – a suit brought by a stockholder for subscription. If no payment is made within thirty (30) days from
wrongful acts committed by directors/trustees of a the said date, all stocks covered by the subscription shall thereupon
corporation, when the shareholder finds that he has no become delinquent and shall be subject to sale as hereinafter
redress because the directors/trustees are the ones vested by provided, unless the board of directors orders otherwise.
law to decide whether or not to sue.

DERIVATIVE SUITS

It is a suit by a shareholder to enforce a corporate cause of action. It

is a condition sine qua non that the corporation be impleaded as a
party because not only is the corporation an indispensable party,
but it is also the present rule that it must be served with process.

The judgment must be made binding upon the corporation in order

that the corporation may get the benefit of the suit against the same
defendants for the same cause of action.

Page 82 of 88 | EH403 2019-2020 Corporation Law

What is the effect of the failure to pay after a call, or upon (3) Publication of Notice of Sale
the lapse of the date specified in the subscription (a) once a week for two (2) consecutive weeks
contract? A: The BOD may issue another board resolution (b) in a newspaper of general circulation in the province
declaring said subscriptions delinquent. or city where the principal office of the corporation is
located
SEC. 67. DELINQUENCY SALE
Section 67. Delinquency Sale. – The board of directors may,
by resolution, order the sale of delinquent stock and shall (4) Sale at a public auction to the bidder who shall offer to pay
specifically state the amount due on each subscription plus all the full amount of the balance on the subscription together with
accrued interest, and the date, time and place of the sale which accrued interest, costs of advertisements and expenses of sale for
shall not be less than thirty (30) days nor more than sixty (60) days the smallest number of shares or fraction of a share.
from the date the stocks become delinquent.
Who is the “highest bidder”?
Notice of the sale, with a copy of the resolution, shall be sent to A: He is the bidder who offers to pay the highest amount for the
every delinquent stockholder either personally, by registered mail, least number of shares.
or through other means provided in the bylaws. The same shall be
published once a week for two (2) consecutive weeks in a Illustration:
newspaper of general circulation in the province or city where the
principal office of the corporation is located. Their Offer Value per Share
Bidder 1 10k shares for P100k P10/share
Unless the delinquent stockholder pays to the corporation, on or Bidder 2 5k shares for P75k P15/share
before the date specified for the sale of the delinquent stock, the
balance due on the former’s subscription, plus accrued interest, Who is the highest bidder in this case?
costs of advertisement and expenses of sale, or unless the board of A: Bidder 2 is the best bidder. This is because the 2nd bidder bought
directors otherwise orders, said delinquent stock shall be sold at a the least number of shares at the highest price. So if the corporation
public auction to such bidder who shall offer to pay the full amount goes with the best bidder, they can still sell 5k shares to someone else
of the balance on the subscription together with accrued interest, at a good price. The law says best bidder, not highest bidder.
costs of advertisement and expenses of sale, for the smallest
number of shares or fraction of a share. The stock so purchased DATE OF SALE AT PUBLIC AUCTION
shall be transferred to such purchaser in the books of the
corporation and a certificate for such stock shall be issued in the The sale must be held not less than 30 days nor more than 60 days
purchaser’s favor. The remaining shares, if any, shall be credited in FROM the date the stocks become delinquent.
favor of the delinquent stockholder who shall likewise be entitled
to the issuance of a certificate of stock covering such shares. EFFECT OF PAYMENT BY THE SUBSCRIBER BEFORE
THE
Should there be no bidder at the public auction who offers to pay
the full amount of the balance on the subscription together with When the delinquent stockholder pays to the corporation on or before
accrued interest, costs of advertisement, and expenses of sale, for the date specified for the sale of the delinquent stock the balance due
the smallest number of shares or fraction of a share, the corporation on the stockholder’s subscription, the stocks shall be RETAINED by
may, subject to the provisions of this Code, bid for the same, and the stockholder. In which case, he may be issued the certificate of
the total amount due shall be credited as fully paid in the books of stock in his favor.
the corporation. Title to all the shares of stock covered by the
subscription shall be vested in the corporation as treasury shares **NOTES
and may be disposed of by said corporation in accordance with the
provisions of this Code. Illustration 1
Delinquent Stock

PROCEDURE FOR DELINQUENCY SALE Total subscription - 20,000 shares valued at P1Mn
Total paid subs. - 10,000 shares valued at P500k
(1) Resolution by the BOD for the order of sale of delinquent Total unpaid subs. - 10,000 shares valued at P500k
stocks, specifying the following:
(a) Amount due on each subscription In this case, the entire subscription of 20,000 shares is considered
(b) Accrued interest delinquent stock. This is because of the Principle of Indivisibility
(c) Date, time, and place of sale which shall not be less of Subscription. Thus, a delinquent stock shall refer not only to the
than 30 days nor more than 60 days from the date the unpaid subscription, but includes the paid subscription.
stocks become delinquent The winning bidder will be determined by who is willing to pay the
for the most for the least/smallest number of stocks.
(2) Notice of Sale with a copy of the Resolution shall be sent to
every delinquent stockholder either:
(a) Personally
(b) By registered mail, or
(c) Through other means provided in the bylaws

Page 83 of 88 | EH403 2019-2020 Corporation Law

 Illustration 2
Delinquent Stock SEC. 69. COURT ACTION TO RECOVER
UNPAID SUBSCRIPTION
Bidder Bid Value/Sh
Bidder A - 2,000 shares valued at P10k P5.00/share
Bidder B - 1,500 shares valued at P10k P6.67/share Section 69. Court Action to Recover Unpaid
Bidder C - 1,000 shares valued at P10k P10.00/share Subscription. – Nothing in this Code shall prevent the
corporation from collecting through court action, the amount due
In this case, Bidder C should be declared the highest bidder because on any unpaid subscription, with accrued interest, costs and
he is the bidder who is willing to pay the highest amount for the
smallest number of shares or fraction of the share. This means that SEC. 70. EFFECT OF DELINQUENCY
the highest bidder must be the bidder who is willing to pay the
highest amount per share. Section
SEC. 71. 70. Effect
RIGHTS OFofUNPAID
Delinquency.
SHARES, – No delinquent stock
NONDELINQUENT
shall be voted for, be entitled to vote, or be represented at any
Upon payment of the highest bidder, the stock purchased shall be stockholder’s meeting, nor shall the holder thereof be entitled to
transferred to such purchaser in the Stock and Transfer Book of the Section
any of the71. Rights
rightsEFFECTS of Unpaid Shares,
OF DELINQUENCY
of a stockholder except Nondelinquent.
the right to dividends in–
corporation, and certificate/s for such stock shall be issued in the Holders
accordance with the provisions of this Code, until andare
of subscribed shares not fully paid which not
unless
purchaser’s favor. delinquent
As isshall
madehave
to the stockholder,
payment all
byhe the
will
the rights
no ofofsuch
longer
holder aenjoy
stockholder.
the following
delinquent stockrights:
for the
(1) due
amount Right
ontothevote
subscription with accrued interest, and the costs
The remaining shares, if any, shall be credited in favor of the and (2) Rightoftoadvertisement,
expenses be voted for; if any.
delinquent stockholder who shall likewise be entitled to the issuance (3) Right of representation at any stockholder's meeting;
of a certificate of stock covering such shares. (4) Not entitled to any of the rights of a stockholder
⮡ EXCEPT the right to dividends in accordance
Illustration 3 with the provisions of this Code
Excess Shares & No Bidder (5) Stocks will be considered delinquent and shall be subject
to delinquency sale
Excess shares
UPONAfter DECLARATION
Note: OF the DELINQUENCY,
being declared delinquent, A
stockholder cannot return
Based on the illustration above, 1,000 shares out of the 10,000 shares
STOCKHOLDER
the CANNOT RETURN SHARES ALREADY
shares already bought.
shall be given to Bidder C. The remaining 9,000 shares shall be given
BOUGHT
to the delinquent shareholder.
Reason: He cannot return the shares already bought because as
No bidder between the corporation and the subscriber, there is a debtor- creditor
relationship. Thus, the stockholder is obliged to pay the balance. He
If there is no bidder, the corporation is authorized to purchase the cannot just simply return the shares he bought.
shares and the same shall form part of the treasury shares.

Effect

If the bidder is the corporation, there will be no shares given to the

delinquent shareholder. Applying the illustration above, all 10,000
shares will pertain to the shareholder. They will form part of the
treasury shares.

The corporation may go after the delinquent shareholder in

accordance with Sec. 69 of this Code.

Note (Atty. Espedido): The Board may decline any bidder.

SEC. 68. WHEN SALE MAY BE QUESTIONED

Section 68. When Sale May be Questioned. – No action to SUBSCRIBER CANNOT USE FUTURE DIVIDENDS AS
recover delinquent stock sold can be sustained upon the ground of PAYMENT FOR THE BALANCE
irregularity or defect in the notice of sale, or in the sale itself of the Illustration.
delinquent stock, unless the party seeking to maintain such action This coming December, the stockholder is sure that there will be cash
first pays or tenders to the party holding the stock the sum for dividends. So, the stockholder says: “By the time the cash dividends
which the same was sold, with interest from the date of sale at the are issued on December, these dividends will be used to pay the
legal rate. No such action shall be maintained unless a complaint is unpaid subscribed shares.”
filed within six (6) months from the date of sale.
He further says, “I am already sure that the corporation will issue the
dividends since the profits have increased beyond 100% of the paid-
QUESTIONING OF AUCTION SALE
in capital and it is still March. Thus, by December, I am sure that the
corporation is required to declare dividends.”
If there is irregularity in the conduct of the sale, the same may be
questioned.
Is that allowed?
A: No, it is not allowed.
When can you question the conduct of the auction sale?
A: Within 6 months from the date of sale.
Page 84 of 88 | EH403 2019-2020 Corporation Law
Three Justifications [Summary of Answers] SEC. 72. LOST OR DESTROYED CERTIFICATES
Note: This is based on the answers during the recitation
(1) Declaration of dividends when profits exceed the 100%
paid-in capital is subject to exceptions Section 72. Lost orLOST Destroyed Certificates. – The following
CERTIFICATE
(2) Corporation may still incur losses in the future – no procedure shall be followed by a corporation in issuing new
assurance that dividends will be declared certificates
Being of stock in lieu
transferrable, of those
is there anywhich
danger haveorbeen
risklost, stolen or
of loss?
(3) Corporation NEVER PROMISES that a stockholder will be destroyed:
A: Yes. Since it is transferrable, the finder might just try to copy the
given dividends and only the Board can determine as to (a) Theand
signature registered
might beowner
able of
to atransfer
certificate
it toof stock in The
someone. a corporation
transferee,
what type of dividend will be issued (not always cash once heor goes
suchto person’s legalSecretary
the Corporate representative shall filethat
might recognize with thea
it was
dividends) corporation
fraudulent signatureanand
affidavit in triplicate
may decline – IOW, setting forth,is ifprejudiced.
the buyer possible,
the circumstances as to how the certificate was lost, stolen or
Elaboration: Remedy:destroyed,
File an the number
Affidavit of Loss of toshares represented by such
the corporation
Since it is still not certain that there will be cash dividends that will certificate, the serial number of the certificate and the name of
be declared since it is subject to exceptions, namely: the corporation which issued the same. The owner of such
(1) Expansion projects certificate of stock shall also submit such other information
(2) Loan agreement that contains a condition that the and evidence as may be deemed necessary; and
corporation cannot declare dividends UNLESS there is
consent by the creditor (b) After verifying the affidavit and other information and
(3) Emergency purposes evidence with the books of the corporation, the corporation
shall publish a notice in a newspaper of general circulation in
Assuming that none of the 3 exceptions are present, the future cash the place where the corporation has its principal office, once a
dividends (dividends on December) still cannot be used as payment week for three (3) consecutive weeks at the expense of the
for the shares because the corporation may still incur losses in the registered owner of the certificate of stock which has been
future. There is still no assurance that dividends will be declared. lost, stolen or destroyed. The notice shall state the name of the
corporation, the name of the registered owner, the serial
Moreover, assuming that it does not fall under the exceptions and number of the certificate, the number of shares represented by
sure that there are no losses to be incurred, it is still not allowed such certificate, and shall state that after the expiration of one
because when you subscribe, you become a debtor to the corporation (1) year from the date of the last publication, if no contest has
because you paid partially. However, for the balance, you are a been presented to the corporation regarding the certificate of
debtor to the corporation because you undertook to pay when it is due stock, the right to make such contest shall be barred and the
and demandable. corporation shall cancel the lost, destroyed or stolen certificate
of stock in its books. In lieu thereof, the corporation shall
On the other hand, the Corporation never promises that a issue a new certificate of stock, unless the registered owner
stockholder will be given dividends. What was agreed upon is that files a bond or other security as may be required, effective for
the subscriber will invest, and in the meantime, he shall wait WON a period of one (1) year, for such amount and in such form and
the Board will distribute dividends. with such sureties as may be satisfactory to the board of
directors, in which case a new certificate may be issued even
Even if the corporation has already reached the 100% of its paid- in before the expiration of the one (1) year period provided
capital, assuming it is not falling under the exception and sure that no herein. If a contest has been presented to the corporation or if
loss shall be incurred, the subscriber is not sure if he will be given an action is pending in court regarding the ownership of the
cash since the Corporation can either declare cash, stock, or property certificate of stock which has been lost, stolen or destroyed,
dividends. Not even the Internal Revenue Code can dictate the issuance of the new certificate of stock in lieu thereof shall
declaration of cash dividends. Only the Board can determine this. be suspended until the court renders a final decision regarding
the ownership of the certificate of stock which has been lost,
The Internal Revenue Code may only dictate to declare stolen or destroyed.
dividends but not as to what kind of dividends to be issued since
this is the SOLE prerogative of the Board. Except in case of fraud, bad faith, or negligence on the part of the
corporation and its officers, no action may be brought against any
**NOTES corporation which shall have issued certificate of stock in lieu of
those lost, stolen or destroyed pursuant to the procedure above-
EFFECTS OF DELINQUENCY described.

The stockholder will remain a stockholder, but the exercise of the any
of the stockholder’s rights is suspended except the right to
dividends.

The distribution of shares in the dividends by a delinquent

stockholder will be applied in the following manner:

1. If cash or property dividend – the corporation will

offset the payment of the unpaid subscription from the
stockholder’s share in the dividend.
2. If stock dividend – the stockholder’s share in the
dividends is withheld by the corporation until the
subscription is fully paid.

Page 85 of 88 | EH403 2019-2020 Corporation Law

 Illustration The notice shall state:
Stockholder mistakenly used the Certificate of Stock a. the name of said corporation,
after a “toilet situation” :) b. the name of the registered owner and
c. the serial number of said certificate, and the
The stockholder rushed to the nearest toilet. However, after that, he d. number of shares represented by such certificate,
was looking for a tissue paper but there was none. So he pulled out a
white paper from his wallet and used it to clean himself. T/N: If no contest, general rule is after the expiration of one (1)
year from the date of the last publication, the right to make
When he went home, he discovered that he wrongfully used the such contest shall be barred and said corporation shall cancel
Certificate of Stock and hurriedly went back to the toilet. However, it in its books the certificate of stock which has been lost, stolen
was already closed. When he went back the next morning, the or destroyed and issue in lieu thereof new certificate of stock.
trashcan was already empty. The stockholder exerted many efforts to
find the janitor, only to discover that the janitor has already resigned. The exception is: Unless the registered owner files a bond or
other security in lieu thereof as may be required, effective for a
He engaged the services of the NBI to locate the janitor but his period of one (1) year, for such amount and in such form and
address was unknown. He made efforts to retrieve it but became with such sureties as may be satisfactory to the board of
futile. directors, in which case a new certificate may be issued even
before the expiration of the one (1) year period provided
Thus, he executed an Affidavit of loss detailing the circumstances as herein.
to how the certificate was lost. It was signed and notarized.
If a contest has been presented to said corporation or if an
**Illustration action is pending in court regarding the ownership of said
Taxi certificate of stock which has been lost, stolen or destroyed,
the issuance of the new certificate of stock in lieu thereof shall
So if you happen to find a certificate of stocks in a taxi be suspended until the final decision by the court regarding the
worth 10 million pesos, what will you do? Can you sell it? ownership of said certificate of stock which has been lost,
A: Yes Sir I can sell it because certificate of stocks is transferrable. stolen or destroyed.
So you find a buyer and tell him “you see the par value of Summary:
this, this worth 10 million pesos and I will sell it to you for
only 2 million pesos” will you buy it? Of course it’s way General Rule: No action may be brought against any
more than profitable, someone will take them. corporation which shall have issued certificate of stock in lieu
of those lost, stolen or destroyed pursuant to the procedure
It’s important for the corporation not to just issue new above-described. Except In case of fraud, bad faith, or
COS because they want to be sure. For all you know you negligence on the part of the corporation and its officers.
have endorsed it to someone else and that someone will
come in the corporation and claim also. So what does the Alright, if we do not want to wait for 1 year just put up a bond,
law require? and that bond will answer to any other party who present
A; The following procedure shall be followed for the issuance by a himself as the owner who brought the certificate with him and
corporation of new certificates of stock in lieu of those which have prove that it was not lost and in fact it was legally transferred to
been lost, stolen or destroyed: him. That’s how important it is because it is transferrable. You
should execute an affidavit of loss stating the circumstances of
(1) Affidavit. The registered owner of a certificate of stock in a loss “ I Mr J.R.C., and the true and lawful owner stocks
corporation or his legal representative shall file with the certificate number 0-10-0-10, while one evening I was in
corporation an affidavit in triplicate setting forth, if karaoke I drink too much and I left my stocks certificates
possible, the circumstances as to: beside a lady” you should recite the circumstances leading to
a. how the certificate was lost, stolen or destroyed. the loss.
b. the number of shares represented by such
certificate,
c. the serial number of the certificate and PROCEDURE IN ISSUING NEW CERTIFICATES
(1) Filing of an Affidavit of Loss to the corporation
d. the name of the corporation which issued the OF STOCK IN LIEU OF THOSE STOLEN, LOST
same. OR DESTROYED
CONTENTS:
1. Circumstances as to how the certificate was lost,
He shall also submit such other information and evidence stolen, or destroyed
which he may deem necessary; 2. Number of shares represented by such certificate
3. Serial number of the certificate
(2) Publication by the corporation. Corporation shall publish a 4. Name of the corporation which issued the same
notice in a newspaper of general circulation published in 5. Other information and evidence as may be deemed
the place where the corporation has its principal office, necessary
once a week for three (3) consecutive weeks at the expense
of the registered owner of the certificate of stock which has (2) Submission of a Verified Affidavit and other
been lost, stolen or destroyed. information and evidence with the books of the
corporation

(3) Publication of a Notice by the corporation in a

newspaper of general circulation in the place where
the corporation has its principal office, once a week
for 3
Page 86 of 88 | EH403 2019-2020 Corporation Law
 consecutive weeks at the expense of the registered T/N:
owner of the certificate of stock which has been lost, If the transaction is not recorded, then the transaction
stolen, or destroyed is binding merely between the parties to the deed,
and not against the corporation and third persons.
CONTENTS: The mere execution of the deed of assignment does
1. Name of the corporation not make one a stockholder. Rather, it is the
2. Name of the registered owner recording in the Stock and Transfer Book that does.
3. Serial number of the certificate
4. Number of shares represented by such certificate ASSIGNMENT OF SUBSCRIPTION RIGHTS
5. State that AFTER the expiration of 1 year from the
date of the last publication, if no contest has been 1. Although generally, the law says you cannot transfer shares
presented to the corporation regarding the certificate where there is an unpaid subscription, in practice you can
of stock, the right to make such contest shall be barred transfer shares by deed of assignment of subscription
and the corporation shall: rights. What happens is that you assign your rights to the
(a) Cancel the lost, destroyed or stolen COS in its subscription. You don’t assign the shares because you are
books. not allowed.
(b) In lieu thereof, the corporation shall issue a new
certificate of stock 2. The Principle of Indivisibility still exists when you assign
your rights to subscription. Meaning, you assign the
WHEN A NEW CERTIFICATE OF STOCK IS ISSUED subscription as a whole.

(A) AFTER expiration of 1 year from the date of the TITLE VIII. CORPORATE BOOKS AND RECORDS
last publication – if no contest has been presented to the
corporation regarding the certificate of stock SEC. 73. BOOKS TO BE KEPT; STOCK TRANSFER AGENT
Section 73. Books to be Kept; Stock Transfer Agent. – Every corporation
(B) BEFORE the 1-year period provided – if the
registered owner files a bond or other security as may be The articles of incorporation and bylaws of the corporation and all their amendme
required, effective for a period of 1 year, for such amount
and in such form and with such sureties as may be The current ownership structure and voting rights of the corporation, including lis
satisfactory to the BOD

**NOTES The names and addresses of all the members of the board of directors or trustees a

ISSUANCE OF NEW STOCK CERTIFICATE A record of all business transactions;

GEN: There is a 1-year waiting period before the issuance of a A record of the resolutions of the board of directors or trustees and of the stockhol
new certificate of stock. This would give the transferee/assignee the
chance to object to the declaration of lost or destroyed certificates. Copies of the latest reportorial requirements submitted to the Commission; and
If they do not object, the certificate will be issued after 1 year.
The minutes of all meetings of stockholders or members, or of the board of directo
XPN: If the owner gives a bond or security which will be valid for
1 year. That will now allow the issuance of the new certificate/s of Corporate records, regardless of the form in which they are stored, shall be open to
stock even before the lapse of 1 year.

Should a legitimate claimant turn out to have been

jeopardized by the affidavit of loss, what should the
claimant do?
A: The claimant will have the rights over the bond posted.

DEED OF ASSIGNMENT OF SHARES (TRANSFER W/O

STOCK CERTIFICATE)
If there is a certificate of stock, transfer will be done by delivery and
endorsement, and then you record in the stock and transfer book.

If there is no certificate of stock, transfer can be still done by

deed of assignment of shares.

How is it done?
A: It is basically just like a deed of sale.
1. Execute the deed of assignment.
2. Have it recorded in the Stock and Transfer Book.

Page 87 of 88 | EH403 2019-2020 Corporation Law

representative at reasonable hours on business days, and a demand in fixed by the Commission, which shall be renewable annually: Provided, That a
writing may be made by such director, trustee or stockholder at their
expense, for copies of such records or excerpts from said records.
The inspecting or reproducing party shall remain bound by
confidentiality rules under prevailing laws, such as the rules on trade
secrets or processes under Republic Act No. 8293, otherwise known
as the “Intellectual Property Code of the Philippines”, as amended,
Republic Act No. 10173, otherwise known as the “Data Privacy Act
of 2012”, Republic Act No. 8799, otherwise known as “The
Securities Regulation Code”, and the Rules of Court.
It REASON
is the bestFOR THE CORPORATION
evidence TO KEEP
used in cases where THE
conflicts need to be
A requesting party who is not a stockholder or member of record, or BOOKS AND RECORDS
resolved in a corporation. It is a proof of the corporation’s
is a competitor, director, officer, controlling stockholder or otherwise transactions. Also, it is considered as a prima facie official evidence
represents the interests of a competitor shall have no right to inspect of the corporation.
or demand reproduction of corporate records.
BOOKS TO BE KEPT
Any stockholder who shall abuse the rights granted under this section
shall be penalized under Section 158 of this Code, without prejudice What are these books and records?
to the provisions of Republic Act No. 8293, otherwise known as the A: Every corporation shall keep and carefully preserve at its principal
“Intellectual Property Code of the Philippines”, as amended, and office all information relating to the corporation including, but not
Republic Act No. 10173, otherwise known as the “Data Privacy Act limited to:
of 2012”.
(a) The articles of incorporation and bylaws of the
Any officer or agent of the corporation who shall refuse to allow the corporation and all their amendments;
inspection and/or reproduction of records in accordance with the (b) The current ownership structure and voting rights of the
provisions of this Code shall be liable to such director, trustee, corporation, including:
stockholder or member for damages, and in addition, shall be guilty i. lists of stockholders or members
of an offense which shall be punishable under Section 161 of this ii. group structures
Code: Provided, That if such refusal is made pursuant to a resolution iii. intra-group relations
or order of the board of directors or trustees, the liability under this iv. ownership data, and
section for such action shall be imposed upon the directors or trustees v. beneficial ownership;
who voted for such refusal: Provided, further, That it shall be a (c) The names and addresses of all the members of the board
defense to any action under this section that the person demanding to of directors or trustees and the executive officers;
examine and copy excerpts from the corporation’s records and (d) A record of all business transactions;
minutes has improperly used any information secured through any (e) A record of the resolutions of the board of directors or
prior examination of the records or minutes of such corporation or of trustees and of the stockholders or members;
any other corporation, or was not acting in good faith or for a (f) Copies of the latest reportorial requirements submitted to
legitimate purpose in making the demand to examine or reproduce the Commission; and
corporate records, or is a competitor, director, officer, controlling (g) The minutes of all meetings of stockholders or
stockholder or otherwise represents the interests of a competitor. members, or of the board of directors or trustees.

If the corporation denies or does not act on a demand for inspection Contents of the Minutes of the Meeting
and/or reproduction, the aggrieved party may report such to the Such minutes shall set forth in detail, among others:
Commission. Within five (5) days from receipt of such report, the 1. time and place of the meeting held
Commission shall conduct a summary investigation and issue an 2. how it was authorized
order directing the inspection or reproduction of the requested 3. the notice given
records. 4. the agenda therefor, whether the meeting was
regular or special, its object if special
Stock corporations must also keep a stock and transfer book, which 5. those present and absent, and every act done or
shall contain a record of all stocks in the names of the stockholders ordered done at the meeting
alphabetically arranged; the installments paid and unpaid on all
stocks for which subscription has been made, and the date of payment Atty. Espedido: You also have the record of the STOCK
of any installment; a statement of every alienation, sale or transfer of CERTIFICATES. SEC will mark it as received.
stock made, the date thereof, by and to whom made; and such other
entries as the bylaws may prescribe. The stock and transfer book shall You will also show your stock certificates – there is a book
be kept in the principal office of the corporation or in the office of its where there is a perforated portion. Once you issue this
stock transfer agent and shall be open for inspection by any director certificate, secretary removes this perforated portion, but
or stockholder of the corporation at reasonable hours on business there’s a remaining portion.
days.
Summary
A stock transfer agent or one engaged principally in the business of
registering transfers of stocks in behalf of a stock corporation shall be What are the books to be kept?
allowed to operate in the Philippines upon securing a license from 1. Articles of Incorporation
the Commission and the payment of a fee to be 2. By-laws
3. Stock and transfer books

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 4. Stock certificates the corporation. It is a way to check whether the corporation is
5. Minutes of the stockholders meeting operating according to the purpose of the corporation.
6. Minutes of the board meeting
7. Records of all business transactions of the corporation The purpose why the corporation should keep these corporate
(journals, ledgers, financial statements) books and records is because these are the best evidences
that may be used in order to resolve in case there are conflicts.
STOCK TRANSFER AGENT If these books and records are not kept, the conflicting litigants
may just present any records and that will result to chaos.
Atty. Espedido: If there are hundreds and thousands of
shareholders, you will need a STOCK TRANSFER AGENT to One fundamental rule in business is full transparency so that
record all the transactions and transfers of the corporation. everything must be transparent. It is the right of every
• Stock transfer agents are duly licenses and are supposed to stockholder to protect his investment and the only way to do
register with the SEC. this is to know everything.
• The stock transfer agent does nothing except record all
transactions and transfers. Most of these stock transfer Can the stockholder authorize his boyfriend to inspect the
agents are banks. corporate books?
A: Yes. There is no prohibition. There is nothing wrong with it as
Note: A stock transfer agent or one engaged principally in the long as the boyfriend is duly authorized
business of registering transfers of stocks in behalf of a stock
corporation shall be allowed to operate in the Philippines upon **NOTES
securing a license from the Commission and the payment of a fee to
be fixed by the Commission, which shall be renewable annually. CORPORATE BOOKS
1. Records of all business transactions (i.e. accounting
(1) Secures a license from the Commission (which is
REQUISITES TO BE ALLOWED TO OPERATE AS A books, ledgers, journals)
renewable annually)
STOCK TRANSFER AGENT 2. Minutes Book for Stockholders – minutes of meetings of
(2) Payment of a fee to be fixed by the Commission
stockholders
Atty. Espedido: It is good now because we now have 3. Minutes Books for Directors or Trustees – minutes of
computers. Before, it is done manually. meetings of the BOD or BOT
4. Stock and Transfer Book
Other than these books, we have the:
(1) The minutes of the stockholders’ meeting and CORPORATE RECORDS
(2) The minutes of the board’s meeting 1. Charter documents:
a. AOI
There are reports in the meeting that are confidential that you do not b. Bylaws
CONFIDENTIAL MATTERS ARE NOT INCLUDED IN THE c. Amendments, if any
have to include in the minutes. There are confidential matters that
MINUTES 2. Reports filed with the SEC:
you need not have to record – but you must make a reference:
meaning, you report it to the account (which is not part of the a. General Information Sheets (GIS), and
minutes). b. All other reports required under the Securities
Regulation Code (SRC)
RIGHT TO INSPECT BOOKS AND RECORDS
MINUTES BOOK, CONTENTS:
What are your rights as a stockholder? 1. Date and time of meeting
A: A stockholder has the right to inspect such books and records at 2. Place of holding meeting
reasonable hours on business days. 3. How the meeting was authorized
4. The fact that notice was given
Can you also just request to have a copy? 5. Whether the meeting was regular or special
A: Yes, but the stockholder shoulders the expenses. 6. If the meeting was special, the object of the meeting
7. Those present or absent in the meeting
Important: The right as provided in the Code refers only to the right 8. Every act done or ordered at the meeting
to inspect but not the right to copy. If you want to have a copy, you 9. Upon demand of a director, trustee, stockholder or
have to pay for the copy. member:
a. The time when any director/trustee or
Otherwise, can you ask to just bring it to your house? stockholder/member entered or left the meeting
A: No. This cannot be done and is also dangerous because there may must be noted in the minutes;
be delicate matters contained in the books or records. b. A carefully-made record of the yeas and nays
must be taken on any motion or proposition;
Take note: The right to inspect does not include the right to take it c. The protest on any action or proposed action.
out even for a few hours.
STOCK AND TRANSFER BOOK, CONTENTS:
Atty. Espedido: The stockholders have the right to inspect 1. All stocks in the name of the stockholders, alphabetically
these books and records at are reasonable time during arranged;
business days. The purpose of which is for them to be 2. Installments paid and unpaid on all stocks for which
informed of the status of subscription has been made, and the date of any
installment;
3. Statement of every alienation, sale or transfer of stock
made, the date thereof, by and to whom made; and
4. Such other entries as the bylaws may prescribe.

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 Note: corporate records, to comply with Sections 45, 73, 92, 128, 177 a
The Stock and Transfer Book shall be kept in the principal
office of the corporation, or in the office of its stock and The penalties imposed under this section shall be without prejudi
transfer agent.
Only the Corporate Secretary is duly authorized to make
entries in the Stock and Transfer Book. Entries made by the
President or the Chairman are invalid.
The Stock and Transfer Book serves as the best evidence of
the transactions that are entered or stated therein. However,
the entries are only considered as prima facie evidence,
and may be subject to proof to the contrary.

INSPECTION OF CORPORATE RECORDS

The corporate records are open to inspection by any director, trustee,

shareholder, or member of the corporation in person or by
representative at reasonable hours on business days, and a
demand in writing may be made by such director, trustee, REMEDIES OF A STOCKHOLDER REFUSED INSPECTION
shareholder or member at their expense, for copies of such records or If the corporation or its officers refuse to allow a
excerpts from said records. stockholder to inspect, is the filing of a case the only
option of a stockholder?
There are matters that are not covered by the right to inspect A: No. An aggrieved party may report such denial or inaction to the
however. For instance, a corporation engaged in the manufacturing of Commission.
goods can keep the formula of its goods secret.
Sec. 73 of the RCC after all provides:
Reasonable Hours on Business Days “If the corporation denies or does not act on a
(Throwback to Nego) demand for inspection and/or reproduction, the
aggrieved party may report such to the Commission.
When is a day considered a business day considering Within five (5) days from receipt of such report, the
that we have call centers now? Commission shall conduct a summary investigation
Atty. Amago: Follow government service hours. M-F, 8AM- and issue an order directing the inspection or
5PM. reproduction of the requested records.”

REQUISITES Within 5 days from the receipt of such report, the SEC shall conduct
1. It must FOR THE EXERCISE
be exercised at reasonableOF THE
hours RIGHT days.
on business a summary investigation, and issue an order directing the
TO 2.
INSPECT
The stockholder must not have improperly used any inspection/reproduction of the requested records.
information he secured through any previous examination.
3. The demand is made in good faith or for a legitimate VALID DEFENSES FOR REFUSAL
purpose.
1. The person demanding to examine and copy excerpts from
WHO CANNOT INSPECT the corporation’s records and minutes has improperly used
any information secured through any prior examination of
A requesting party who is not a stockholder or member of record, or the records or minutes of such corporation or any other
is a competitor, director, officer, controlling stockholder or otherwise corporation;
represents the interest of a competitor. 2. The person demanding to examine was not acting in good
faith or for a legitimate purpose in making the demand;
LIABILITY 3. The person demanding is a competitor, or a director,
Who can beFOR REFUSAL TO ALLOW INSPECTION OR
liable?
PRODUCTION OF RECORDS officer, controlling stockholder or representative of the
A:
interests of a competitor.
1. Any officer or agent of the corporation who shall refuse to
allow the inspection or production of records shall be
JURISPRUDENTIAL PRINCIPLES
liable;
2. Any director who allows or approves the refusal shall also
JUSTIFIED PURPOSE/S FOR INSPECTION (Terelay vs. Yulo
be guilty of an offense punishable under Sec. 161 of the
citing Ballantine)
Revised Corporation Code.
1. To ascertain the financial condition of the company or the
propriety of dividends;
SEC. 161. Violation of Duty to Maintain Records, to Allow their Inspection or Reproduction; Penalties.
2. The value of the shares of stock for sale or investment;
– The unjustified failure or refusal by the corporation, or by those responsible for keeping and maintaining
3. Whether there has been mismanagement;
4. In anticipation of shareholders’ meetings to obtain a
mailing list of shareholders to solicit proxies or influence
voting;
5. To obtain information in aid of litigation with the
corporation or its officers as to corporate transactions.

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UNJUSTIFIED PURPOSES PRESENTATION OF FINANCIAL REPORT
1. Obtaining information as to business secrets or to aid a The BOD/BOT shall present to such stockholders or members a
competitor; financial report of the operations of the corporation for the
2. To secure business “prospects” or investment or advertising preceding year, which shall include:
lists; 1. Financial statements, duly signed and certified in
3. To find technical defects in corporate transactions in order accordance with this Code;
to bring “strike suits” for purposes of blackmail or 2. Rules the Commission may prescribe.
transaction.
WHEN CERTIFIED UNDER OATH (Treasurer & President
The StockSTOCK & TRANSFER
and Transfer Book isBOOK
still VS.
the primary source of instead of CPA)
GENERAL INFORMATIONS
determining whether a person is a stockholder or not. However, the If the total assets or liabilities of the corporation are less than
General Information Sheet can also serve as a secondary source and P600,000, or such other amount as determined by the Department of
other documents can still be shown that a person is a stockholder of a Finance.
corporation.
SEC. SUBMISSION
177. Reportorial Requirements
TO THE COMMISSION of
GENERAL INFORMATION SHEET Corporations. – Except as otherwise provided in this Code
SEC collects from incorporators, stockholders, directors, trustees, or in the rules issued by the Commission, every corporation,
officers, beneficial owners, external auditor, notary public, personal domestic or foreign, doing business in the Philippines shall
information such as but not limited to full name, signature, submit to the Commission:
nationality, sex, address, accreditation number, roll of attorney
number and taxpayer information number. These are contained within (a) Annual financial statements audited by an independent
the General Information Sheet of a corporation. certified public accountant: Provided, That if the total
assets or total liabilities of the corporation are less than
SEC. 74. RIGHT TO FINANCIAL STATEMENTS Six hundred thousand pesos (P600,000.00), the financial
statements shall be certified under oath by the
Section 74. Right to Financial Statements. – A corporation corporation’s treasurer or chief financial officer; and
shall furnish a stockholder or member, within ten (10) days from
receipt of their written request, its most recent financial statement, (b) A general information sheet.
in the form and substance of the financial reporting required by the
Commission. Corporations vested with public interest must also
submit the following:
At the regular meeting of stockholders or members, the board of
directors or trustees shall present to such stockholders or members (1) A director or trustee compensation report; and
a financial report of the operations of the corporation for the
preceding year, which shall include financial statements, duly (2) A director or trustee appraisal or performance report and
signed and certified in accordance with this Code, and the rules the the standards or criteria used to assess each director or
Commission may prescribe. trustee.

However, if the total assets or total liabilities of the corporation is The reportorial requirements shall be submitted annually and
less than Six hundred thousand pesos (P600,000.00), or such other within such period as may be prescribed by the Commission.
amount as may be determined appropriate by the Department of
Finance, the financial statements may be certified under oath by the The Commission may place the corporation under delinquent
treasurer and the president. status in case of failure to submit the reportorial requirements
three (3) times, consecutively or intermittently, within a
Should it be signed by a certified public accountant? period of five (5) years. The Commission shall give
A: It depends, but generally, yes. But the law allows the financial reasonable notice to and coordinate with the appropriate
statement to be certified under oath by the treasurer and the president regulatory agency prior to placing under delinquent status
if the total assets or total liabilities of the corporation is: companies under their special regulatory jurisdiction.
(a) Less than 600k; or
(b) Any other amount as may be determined appropriate by Any person required to file a report with the Commission may
the DOF redact confidential information from such required report:
Provided, That such confidential information shall be filed in
When will it be required to be signed by a certified public a supplemental report prominently labelled “confidential”,
accountant (CPA)? together with a request for confidential treatment of the report
A: When the total assets or liabilities of the corporation is 600K or and the specific grounds for the grant thereof.
more.

**NOTES
LOSS OF STOCK AND TRANSFER BOOK
WHEN RECENT FINANCIAL STATEMENTS FURNISHED
Within ten (10) days from the receipt of a written request of a
Secondary or extrinsic evidence may be introduced to reconstitute its
stockholder or member, in the form and substance of the financial
contents. The new stock and transfer book should be presented to the
reporting required by the SEC.
SEC for registration, accompanied

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by a sworn statement executed by any responsible offer setting such activities with the view to promote, conserve or rationalize
forth the circumstances attending the loss. investment;
STOCK TRANSFER AGENT h) To pass upon, refuse or deny, after consultation with the Board
of Investments, Department of Industry, National Economic and
Engaged principally in the business of registering transfers of stock in Development Authority or any other appropriate government
behalf of a stock corporation shall be allowed to operate in the agency, the application for registration of any corporation,
Philippines upon securing a license from the Commission and partnership or association or any form of organization falling
payment of a fee to be fixed by the Commission, which should be within its jurisdiction, if their establishment, organization or
renewed annually. operation will not be consistent with the declared national
economic policies.
TRANSFER BY CORPORATION
i) To suspend, or revoke, after proper notice and hearing, the
A stock corporation is not precluded from performing or making franchise or certificate of registration of corporations,
transfers of its own stocks, in which case all the rules and regulations partnerships or associations, upon any of the grounds provided
imposed on stock transfer agents, except the payment of a license fee by law, including the following:
herein provided, shall be applicable.
1. Fraud in procuring its certificate of registration;
APPENDIX 2. Serious misrepresentation as to what the corporation can do
or is doing to the great prejudice of or damage to the
P.D. 902-A general public;
PRESIDENTIAL DECREE No. 902-A 3. Refusal to comply or defiance of any lawful order of the
March 11, 1976 Commission restraining commission of acts which would
amount to a grave violation of its franchise;
REORGANIZATION OF THE SECURITIES AND EXCHANGE
COMMISSION WITH ADDITIONAL POWER AND PLACING 4. Continuous in operation for a period of at least five (5)
THE SAID AGENCY UNDER THE ADMINISTRATIVE years;
SUPERVISION OF THE OFFICE OF THE PRESIDENT
5. Failure to file by-laws within the required period;
Section 6. In order to effectively exercise such jurisdiction, the
Commission shall possess the following powers: 6. Failure to file required reports in appropriate forms as
determined by the Commission within the prescribed
a) To issue preliminary or permanent injunctions, whether period;
prohibitory or mandatory, in all cases in which it has
jurisdiction, and in which cases the pertinent provisions of the j) To exercise such other powers as implied, necessary or
Rules of Court shall apply; incidental to the carrying out the express powers granted to the
Commission or to achieve the objectives and purposes of this
b) To punish for contempt of the Commission, both direct and Decree.
indirect, in accordance with the pertinent provisions of, and
penalties prescribed by, the Rules of Court; NATIONALIZED ACTIVITIES (SEC. 8, RA 7042)
c) To compel the officers of any corporation or association SEC. 8. List of Investment Areas Reserved to Philippine
registered by it to call meetings of stockholders or members Nationals (Foreign Investment Negative List). – The Foreign
thereof under its supervision; Investment Negative List shall have two (2) components lists; A, and
B.
d) To pass upon the validity of the issuance and use of proxies and
voting trust agreements for absent stockholders or members; a) List A shall enumerate the areas of activities reserved
to Philippine nationals by mandate of the Constitution
e) To issue subpoena duces tecum and summon witnesses to and specific laws.
appear in any proceedings of the Commission and in appropriate
cases order search and seizure or cause the search and seizure of b) List B shall contain the areas of activities and
all documents, papers, files and records as well as books of enterprises regulated pursuant to law:
accounts of any entity or person under investigation as may be
necessary for the proper disposition of the cases before it; 1) Which are defense-related activities, requiring prior
clearance and authorization from Department of National
f) To impose fines and/or penalties for violation of this Decree or Defense (DND) to engage in such activity, such as the
any other laws being implemented by the Commission, the manufacture, repair, storage and/or distribution of firearms,
pertinent rules and regulations, its orders, decisions and/or ammunition, lethal weapons, military ordinance,
rulings; explosives, pyrotechnics and similar materials; unless such
manufacturing or repair activity is specifically authorized,
g) To authorize the establishment and operation of stock with a substantial export component, to a non-Philippine
exchanges, commodity exchanges and such other similar national by the Secretary of National Defense; or
organization and to supervise and regulate the same; including
the authority to determine their number, size and location, in the 2) Which have implications on public health and morals, such
light of national or regional requirements for as the manufacture and distribution of dangerous drugs; all
forms of gambling; nightclubs, bars,

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 beerhouses, dance halls; sauna and steam forms of gambling, nightclubs, bars, beer houses, dance halls, sauna
bathhouses and massage clinics. and steam bathhouses and massage clinics.
“Small and medium-sized domestic market enterprises, with paid-in "Small and medium-sized domestic market enterprises with paid-in
equity capital less than the equivalent two hundred thousand US equity capital less than the equivalent of Two hundred thousand US
dollars (US$200,000) are reserved to Philippine nationals, Provided dollars (US$200,000.00), are reserved to Philippine nationals:
that if: (1) they involve advanced technology as determined by the provided, that if (1) they involve advanced technology, or (2) they
Department of Science and Technology or employ at least fifty (50) direct employees, then a minimum paid-in
(2) they employ at least fifty (50) direct employees, then a minimum capital of One hundred thousand US dollars (US$100,000.00) shall
paid-in capital of one hundred thousand US dollars (US$100,000.00) be allowed to non- Philippine nationals.
shall be allowed to non-Philippine nationals.
"Amendments to List B may be made upon recommendation of the
Amendments to List B may be made upon recommendation of the Secretary of National Defense, or the Secretary of Health, or the
Secretary of National Defense, or the Secretary of Health, or the Secretary of Education, Culture and Sports, indorsed by the NEDA,
Secretary of Education, Culture and Sports, endorsed by the NEDA, or upon recommendation motu propio, of NEDA, approved by the
approved by the President, and promulgated by a Presidential President, and promulgated by a Presidential Proclamation.
Proclamation.
"The Transitory Foreign Investment Negative List established in
“Transitory Foreign Investment Negative List” established in Sec. 15 Section 15 hereof shall be replaced at the end of the transitory period
hereof shall be replaced at the end of the transitory period by the first by the first Regular Negative List to be formulated and recommended
Regular Negative List to be formulated and recommended by NEDA, by NEDA, following the process and criteria, provided in Sections 8
following the process and criteria provided in Sections 8 of this Act. and 9 of this Act. The first Regular Negative Lists shall be published
The first Regular Negative List shall be published not later than sixty not later than sixty (60) days before the end of the transitory period
(60) days before the end of the transitory period provided in said provided in said section and shall become immediately effective at
section, and shall become immediately effective at the end of the the end of the transitory period. Subsequent Foreign Investment
transitory period. Subsequent Foreign Investment Negative Lists shall Negative Lists shall become effective fifteen (15) days after
become effective fifteen (15) days after publication in a newspaper of publication in a newspaper of general circulation in the Philippines:
general circulation in the Philippines: Provided, however, That each provided, however, that each Foreign Investment Negative List shall
Foreign Investment Negative List shall be prospective in operation be prospective in operation and shall in no way affect foreign
and shall in no way affect foreign investment existing on the date of investment existing on the date of its publication.
its publication.
"Amendments to List B after promulgation and publication of the
“Amendments to List B after promulgation and publication of the first Regular Foreign Investment Negative List at the end of the
first Regular Foreign Investment Negative List at the end of the transitory period shall not be made more often than once every two
transitory period shall not be made more often than once every two (2) years."
(2) years”. (As amended by R.A. 8179)

SEC. 3, R.A. 8179 (AMENDING SEC. 8, RA. 7042)

END OF MIDTERM NOTES
Sec. 3. Sec. 8 of the Foreign Investments Act of 1991 is
hereby amended to read as follows:

"Sec. 8. List of Investment Areas Reserved to Philippine Nationals

(Foreign Investment Negative List). – The Foreign Investment
Negative List shall have two (2) component lists: A and B:

"a) List A shall enumerate the areas of activities reserved to

Philippine nationals by mandate of the Constitution and specific laws.

"b) List B shall contain the areas of activities and enterprises

regulated pursuant to law:

"1) which are defense-related activities, requiring prior clearance and

authorization from Department of National Defense (DND) to engage
in such activity, such as the manufacture, repair, storage and/or
distribution of firearms, ammunition, lethal weapons, military
ordinances, explosives, pyrotechnics and similar materials, unless
such manufacturing on repair activity is specifically authorized, with
a substantial export component, to a non-Philippine national by the
Secretary of National Defense; or

"2) which have implications on public health and morals, such as the
manufacture and distribution of dangerous drugs, all

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