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50 FAQs on the Corporation Code (Batas Pambansa Blg. 68)

Q1:
A1:

What is a corporation?
A corporation is an artificial being created by operation of law, having the right of succession
and the powers, attributes and properties expressly authorized by law or incident to its
existence.

Q2:
A2:

What are the advantages of forming a corporation?

There are several:
1. Capacity to act as a single unit;
2. Limited shareholders liability;
3. Continuity in existence;
4. Feasibility of greater undertaking;
5. Transferability of shares;
6. Centralized management; and
7. Standardized method of organization, management and finance

Q3:
A3:

What are the disadvantages of corporate form of business?

These include:
1. To have valid and binding corporate act, formal proceedings, such as board meetings are
required.
2. The business transactions of a corporation is limited to the state of its incorporation and may
not act as such corporation in other jurisdiction unless it has obtained a license or authority
from the foreign state.
3. The shareholders' limited liability tends to limit the credit available to the corporation as a
separate legal entity.
4. By the very nature of shares of stock which are personal properties, transferable at will by
the owners thereof, transfers of share may result to uniting incompatible and conflicting
interests.
5. The minority shareholders have practically no say in the conduct of corporate affairs.
6. In large scale enterprises, stockholders' voting rights may become merely fictitious and
theoretical because of disinterest in management, wide-scale ownership and inaccessible
place of meeting.
7. Double taxation may be imposed on corporate income.
8. Corporations are subject to governmental regulations supervision and control including
submission of reportorial requirements not otherwise imposed in other business form.

Q4:
A4:

How is it different from a partnership?

A corporation is created by law or through laws, but a partnership can be created by mere
agreement of the parties. Generally, a corporation must have at least 5 incorporatiors, while in a
partnership, two is enough. Usually, busines is conducted through the board of directors in a
corporation, but in a partnership, any one of the partners may bind it. Partnerships are based on
mutual trust and confidence such that death, incapacity, insolvency, civil interdiction or mere
withdrawal would result in its dissolution; in a corporation, one can transfer, sell or assign his
shares even without the consent of other stockholders, allowing the corporation to continue

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existing despite the aforementioned diqualifications. However, a corporation's lifetime is only
up to 50 years, unless extended.
Q5:
A5:

What are stock and non-stock corporations?

A stock corporation has a capital stock, divided into shares, and profits of the corporation are
distributed as dividends or allotments to its stockholders based on the shares held by them. A
non-stock corporation may or may not incur income but such income is not distributable as
dividends

Q6:
A6:

How is a corporation formed?

Through three stagesPromotional stage, Process of incorporation, and Organization and
commencement of business
PROMOTIONAL STAGE
A promoter acting for a proposed corporation has 3 options:
1. He may make a continuing offer on behalf of the corporation, which, if accepted after
incorporation, will become a contract. In this case, the promoter does not assume any
personal liability, whether or not the corporation will accept the offer.
2. The promoter may make a contract at the time binding himself, with the understanding
that if the corporation, once formed, accepts or adopts the contract, he will be relieved of
responsibility.
3. The promoter may bind himself personally and assume the responsibility of looking to
the proposed corporation, when formed, for reimbursement.
PROCESS OF INCORPORATION
Process of incorporation:
1. Drafting the articles of incorporation
2. Preparation and submission of additional and supporting documents
3. Filing with the SEC
4. Subsequent issuance of certificate of incorporation
Contents of the articles of incorporation
1. Name
2. Purpose
3. Principal office
4. Term
5. Incorporators
6. Number of directors/trustees
7. Names, nationalities and residences of directors/trustees
8. If a stock corporation, amount of authorized capital stock, number f oshares, par value,
original subscribers
9. If a non-stock corporation, amount of capital, contributors
10. Such other matters not inconsistent with law and which the incorporator may deem
necessary and convenient
11. Treasure's certificate

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ORGANIZATION AND COMMENCEMENT OF BUSINESS
A corporation must formally organize and commence transaction of its business within two
years from the date of incorporation, other wise it shall be deemd dissolved. But if it had
commenced business but subsequently stopped for a period of five years, it may also be a
ground for suspension or revocation of its certificate.
Q7:
A7:

Are there limits in choosing a name for the corporation?

Yes, there are. It must not be identical, or deceptively or confusingly similar to that of any
existing corporation or to any other name protected by law.

Q8:
A8:

Does a corporation need to state its purpose?

Yes. A corporation must have a purposes or purposes whoch are lawful, specific or stated
concisely although in broad or general terms, and must be capable of being lawfully combined.
These purposes are stated in order that stockholders shall know within what lines of business his
money is to be put at risk. These will also help the board of directors and the management know
their scope of authority, or for anyone who wishes to transact with the corporation to know
whether a contract or transaction which he contemplates entering is one within the general
authority of the management.

Q9:
A9:

What is the Principal Office?

The residence of the corporation is the place of its principal office as may be indicated in its
articles of incorporation and may, therefore, be sued only at that place.

Q10: Who are incorporators?

A10: They are natural persons who originally formed the corporations. They must not be less than
five but not more than fifteen, all of legal age and a majority of whom are residents of the
Philippines. They must also own or subscribe to at least one share of the capital stock of the
corporation.
Q11: What are the qualifications and disqualifications to create a board of directors or
trustees?
A11: There must be at least five but not more than fifteen directors or trustees, except in educational
non-stock corporations, where the number must be divisible by 5; in close corporations, where
all stockholders are considered as members of the board, it allows up to 20 members; also, for
corporation sole. All of them must own at least one share, and majority of them must be
residents of the Philippines. One cannot be a member of the board if he has been convicted by a
final judgment for an offense punishable by imprisonment for a period exceeding six years, or a
violation of the Corporation Code committed within five years prior to the election or
appointment. Those who has substantial interest in a competitor corporation may also be
disqualified.
Q12: What are capitals and stocks?
A12: Authorized capital the maximum amount fixed in the articles to be subscribed and paid-in or
secured to be paid by the subscribers.

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Subscribed capital stock the total number of shares and its total value for which there are
contracts for their acquisition or subscription.
Paid-up capital stock the actual amount or value which has been actually contributed or paid
to the corporation in consideration of the subscriptions made thereon.
Stocks shall not be issued for a consideration less than the par or issued price thereof or in
exchange of promissory notes or future services.
Q13: How does one acquire stocks?
A13: There are three ways to become a stockholder: By a contract of subscription with the
corporation, by the purchase of treasury shares from the corporation, and by purchase or
acquisition of shares from existing stockholders (includes purchase from the stock exchange).
Stocks are acquired through:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by 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;
3. Labor performed or services actually rendered to the corporation;
4. Previously incurred indebtedness by the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares in exchange for stocks in the event of reclassification or conversion.
After acquiring stocks, one is issued a stock certificate, which is a document or instrument
evidencing the interest of a stockholder in the corporation. It is proof that one has a designated
interest or right in the management of the corporation, and in the surplus profits and, in case of
distribution, in all assets remaining after the payment of its debts. Properties exchanged for
stocks are subject to valuation through appraisal and zonal valuation and market value as
indicated in the tax declarations for real properties. Labor performed or services actually
rendered to the corporation must be capable of valuation and in fact fairly valued. The set-off or
satisfaction of a debt due from the corporation is a lawful and valid consideration for the
issuance of stock.
Q14: Are all stocks the same?
A14: No, stocks may be classified as common or preffered. A common stock entitles its owner to an
equal pro-rata division of profits, if there be any, but without any preference or advantage in that
respect over any other stockholder or class of stockholders. A preferred stock gives the holder
a preference over the holder of common stocks with respect to the payment of dividends and/or
with respect to distribution of capital upon liquidation. However, preferred shares are presumed
to be non-participating, unless they are made so. They are also presumed to be non-cumulative ,
which means back dividends paid before the payment of dividends cannot be claimed.

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Q15: What are par value and no par value shares?
A15: Par value shares are those whose values are fixed in the articles of incorporation and they
cannot be issued nor sold by the corporation at less than par. On the other hand, no par value
shares are those shares whose issued prices are not stated in the certificate of stock, but they
may be fixed in the articles of incorporation or by the board when authorized, or the
stockholders themselves.
Q16: What are voting and non-voting shares?
A16: Voting shares allow the holder the right to vote and participate in the management of the
corporation through the exercise of such right, either at the election of the board of directors, or
in any manner requiring the stockholder's approval. Non-voting shares do not grant the holder
thereof the right to vote, except on the amendment of the articlers of incorporation, adoption
and amendment of by-laws, sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property, in incurring, creating or increasing bonded
indebtedness, in increase or decrease of capital stock, during merger or consolidation of the
corporation with another corporation or other corporations, investment of corporate funds in
another corporation or business in accordance with this Code, and in the dissolution of the
corporation.
Q17: What are other kinds of shares?
A17: Founders' shares are given certain rights and privileges not enjoyed by the owners of other
stocks, provided that where the exclusive right to vote and be voted for in the election of
directors is granted, it must be for a limited period not to exceed five (5) years subject to the
approval of the Securities and Exchange Commission.
Redeemable shares may be issued by the corporation when expressly so provided in the
articles of incorporation and they may be purchased or taken up by the corporation upon the
expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the
books of the corporation, and upon such other terms and conditions as may be stated in the
articles of incorporation, which terms and conditions must also be stated in the certificate of
stock representing said shares.
Treasury shares are shares of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation by purchase, redemption, donation or
through some other lawful means. Such shares may again be disposed of for a reasonable price
fixed by the board of directors. Treasury shares may again be issued for a price less than par and
they have no voting and dividend rights. Such rights are only granted to outstanding shares of
stock.
Q18: In there a minimum capital stock required for stock corporations?
A18: None. But the amount of subscribed at the time of incorporation must be at least 25% of the
authorized capital stock. It is also required that at least 25% of the total subscribed stocks must
have been paid upon subscription, the balnce payable on date or dates fixed. In no case,
however, that the paid-up capital should be less than five thousand pesos.

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Q19: Are there restrictions in the transfer of shares and on its preferences?
A19: Generally, none, except in close corporations, wherein preferences must be stated in the bylaws. In all cases, the transfer must not reduce ownership of Filipino citizens to the less than the
required percentage of the capital stock as provided by existing laws shall be allowed or
permitted to be recorded in the books of the corporation and this restriction shall be indicated in
all of the stock certificates to be issued by the corporation.
Q20: When does a corporation begin to exist?
A20: Only from the time of the issuance of the certificate of incorporation that a corporation acquires
juridical personality and legal existence. Prior to incorporation, a corporation has no juridical
personality to enter into contracts. But de facto corporations, which exist because they were
defectively created as a corporate body, by virtue of its bona fide attempt to incorporate under
existing statutory authority, coupled with the exercise of corporate powers, and corporations by
estoppel or thosepersons who assume to act as corporation knowing it be without authority to do
so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a
result thereof. This is because a person who has contracted or dealt with an association in such a
way as to recognize its existence as a corporate body is estopped from denying the same in an
action arising out of such transaction or dealing, yet this doctrine may not be held to be
applicable where fraud takes part in the said transaction.
Q21: What are the powers and privileges of a corporation?
A21: The corporation enjoys a separate legal entity separate from its individual stockholders or
members and is not affected by the personal rights, obligations and transactions of its
stockholders or members. Conversely, a corporation has no interest in the individual property of
its stockholders unless transferred to the corporation, even in case of a oneman corporation.
However,when this power is used or being used to defeat public convenience, justify wrong,
protect fraud, defend crime, confuse legitimate issues, or to circumvent the law or perpetuate
deception, or an alter-ego, adjunct or business conduit for the sole benefit of a stockholder or a
group of stockholders or another corporation, such corporate personality may be dispensed
with.
Corporations have the power to sue and be sued, succeed, adopt and use its won seal, amend
its articles and adopt, amend or repeal its by-laws, sell or issue stocks or admit its members,
aquire or dispose real or personal rpoperty, merge or consolidate with other corporations, make
reasonable donations, establish pension, retirement, and other plans, extend or shorten its term,
increase or decrease its capitalstock, create bonded indebtedness, deny pre-emptive right, sell or
dispose corporate assets, aqcuire its own shares, invest its funds in other ventures, declare
dividends, and enter into management contracts.
Q22: Can the corportae charter be amended?
A22: Yes, through a resolution made by at least a majority of the board of directors or trustees, the
vote or written assent of the stockholders representing at least 2/3 of the outstanding capital
stock or 2/3 of the members in case of non-stock corporation, and the submission and filing of
the amendments with the SEC of the original and amended articles, a duly certified copy of
such signed by the coporate secretary and the majority of the board, and a favorable
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recommendation from the appropriate government agency concerned. The amendments shall
take effect upon approval of the SEC or 6 months from the non-action of the SEC, except for
special amendments such as extension or shortening of corporate term, increse or decrease of
capital stock, or creating bonded indebtedness.
Q23: How does a corporation amend its corporate term?
A23: Extension may be made only before the term provided in the corporate charter expires. Hence,
the steps are:
1. Approval by a majority vote of the board or directors or trustees.
2. Written notice of the proposed action and the time and place of meeting shall be served
to each stockholder or member either by mail or by personal service.
3. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock
or 2/3 of the members in case of non-stock corporations.
4. In case of extension of corporate term, the extension should be for periods not exceeding
50 years in any single instance, and provided that no extension can be made earlier than
5 years prior to the original or subsequent expiry date(s) unless there are justifiable
reasons for an earlier extension as may be determined by the SEC.
5. In cases of extension of corporate term, a dissenting stockholder may exercise his
appraisal rights
Q24: How does a corporation exercise its rights and powers?
A24: Through the board of directors and trustees. A corporation is bound by the acts of its corporate
officers if they act within the scope of the 5 classifications of powers of corporate agents:
1. Those expressly conferred or those granted by the articles of incorporation, the
corporate by-laws or by the official act of the board of directors.
2. Those that are incidental or those acts as are naturally and ordinarily done which are
reasonable and necessary to carry out the corporate purpose or purposes.
3. Those that are inherent or acts that go with the office.
4. Those that are apparent or those acts which although not actually granted, the principal
knowingly allows or permits it to be done.
5. Powers arising out of customs, usage or emergency.
These members of the board are voted in an election every year, including the president
treasurer, secretary, and other officers as may be provided for in the by-laws. In no case, that
one shall act as a president and secretary, or president and treasurer at the same time. During
board meetings, quorum is achieved when a majority of the number of members of the board
are present. Any action of the board without a meeting and without the required voting and
quorum requirement will not bind the corporation unless subsequently ratified, expressly or
impliedly.
Q25: How does a corporation remove or fill in a vacant position in the board?
A25: Through a general or special meeting call by the secretary, on order of the president or
writtendemand by the majority of the stockholders, stating the time and place of the meeting,
and by a vote of the stockholders representing at least 2/3 of the outstanding capital stock or 2/3
of the members in case of non-stock corporations. Removal of board members may be with or
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without a just cause, but not when it is used to deprive minority stockholders of representation.
Courts have the power to remove a director. SEC is also authorized to cancel, alter or enjoin
resolutions.
Q26: What are the other rights, privileges, and responsibilities of directors?
A26: Directors have a duty of obedience, diligence, and loyalty to the corporation. They may or may
not receive compensation for their positions, except when provided for by the by-laws, through
a majority vote of the stockholders, or when they render extraordinary service. Generally, they
are not civilly or criminally liable for acts done by him as such officer or agent, or for the
misconduct of his co-directors or other officers, except when he assents to a patently unlawful
act, fraud, bad faith, gross negligence, or conflict of interest, or when he holds himself
personallly and solidarily liable with the corporation, or when the law makes him liable.
Q27: Can a stockholder file a against an erring director or officer?
A27: Yes, the stockholder may file an individual suit, a representative suit, or a derivative suit.
Individual suit is one brought by the shareholders for direct injury to his rights, such as denial of
his right to inspect corporate books and records or pre-emptive right; while the latter cases are
actions based on injury to the corporation to enforce a corporate right wherein the
corporation is joined as a necessary party, and recovery is in favor of the corporation. Service of
summons must be made upon the president, managing partner, general manager, corporate
secretary, treasurer, or in house counsel.
Q28: May the board of directors act through an executive committee?
A28: Yes, on a majority vote of the board or when specific matters within the competence of the
board are delegated to the executive committee by the by-laws. However, the execom cannot
decide alone regarding approval of any action for which the shareholder's approval is also
required, in filling of vacancies in the board, amendment, repeal, or adoption of new of by-laws
or resolutions which are not expressedly amendable or repealable, and on the distribution of
cash dividends to shareholders.
Q29: Are there limitations as to donations made by the corporations?
A29: Yes, the amount must be reasonable, and must be for public welfare, or for hospital, charitable,
scientific, cultural or similar purpose; and it shall not be in aid of any political party or
candidate, or for purpose of partisan political activity.
Q30: What are the limitations as regards investing corporate funds?
A30: The investment must be in the form of money, stock, bonds and other liquid assets and does not
include real properties or other fixed assets. It requires a majority vote from the board and
ratification by the 2/3 of the stockholders or members.
Q31: When are dividends payable?
A31: When the board declares such earnings and orders it to be paid to the stockholders. The right of
the stockholders to be paid dividends vest as soon as they have been lawfully and finally
declared by the Board of Directors. No revocation of dividend may be had unless it has not been
officially communicated to the stockholders or is in the form of stock dividends which is
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revocable at any time prior to distribution. Stock dividends cannot be issued to a person who is
not a stockholder.
Q32: How can a corporation commit ultra-vires acts and what are its consequences?
A32: When the corporation performs acts which are not within its express, inherent or implied
powers as defined by its charter or articles of incorporation. The corporation may be suspended
or its franchise revokes. Stockholders may file corresponding suits. However, ultra-vires acts
which are clearly beneficial to the company or necessary to promote the interest or welfare of
the corporation, its employees and their families, or in the legitimate furtherance of its business
are within corporate powers, such as retirement plans, if not provided by the by-laws. Mere
ultra-vires acts which are not illegal per se may become binding and enforceable either by
ratification, estoppel or on equitable grounds unless the public or third parties are thereby
prejudiced.
Q33: What are by-laws and how do they work?
A33: By-laws are rules and ordinances made by a corporation for its own government; to regulate the
conduct and define the duties of the stockholders or members towards the corporation and
among themselves. They are rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its stockholders or
member and directors and officers with relation thereto and among themselves in their relation
to it. These by-laws must not be inconsistent with the Corporation Code, and prior to
incorporation, it must be approved, signed and submitted by the incorporators together with the
articles of incorporation to the SEC. It may also be adopted subsequent to incorporation but
such must be made within the first month after incorporation and submitted when it has been
approved and signed by the majority of the stockholders or members. The by-laws contain how
meetings are conducted, election and appointment, and qualification rules, violations and
penalties, how stocks are issued, and so on. These by-laws may be amended or repealed through
a majority vote of the members of the board and ratified by the majority of the stockholders or
members, or though the board only, if delegated by the 2/3 of the members.
Q34: How are meetings conducted?
A34: Meetings may be general or special. For a stockholder's meeting to be valid, it must be held on
the date fixed in the by-laws or in accordance with law (usally every April), at the proper place
(city or municipality where the prinicipal office is located), called by the proper party, with
prior notice was given (2 weeks for regular, 1 week for special), and quorum and voting
requirements must be met. For a board meeting, regular meeting are held monthly (or at any
time for special meetings), and may be held anywhere in or outside the Philippines, with at least
a day's notice, except if notice is waived. In close corporations, the act of any one director may
bind the corporation without a meeting. The president shall preside unless otherwise provided,
and physical presence at the meeting is not required; teleconferencing and videoconferencing is
allowed. A director or trustee cannot attend or vote by proxy at any board meeting.
Q35: May a proxy act in behalf of a stockholder or member?
A35: It depends. Proxy is the authority given by the stockholder or member to another to vote for him
at a stockholders or members meeting. It also refers to the instrument or paper which is
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evidence of the authority of the agent or the holder thereof to vote for and in behalf of the
stockholder or member. Proxy is either general or limited., but it is required that proxy must be
in writing, signed by the stockholder/member, and filed before the scheduled meeting with the
corporate secretary.. It is only valid for such meeting, unless otherwise provided but it shall not
exceed five years at any one time.
Q36: How does a voting trust works?
A36: A voting trust is one created by an agreement between a group of stockholders of a corporation
and a trustee, or a group of identical agreements between individual stockholders and a common
trustee, whereby it is provided that for a term of years, or for a period contingent upon a certain
event, or until the agreement is terminated, control over the stock owned by such stockholders,
shall be lodged in the trustee, either with or without reservation to the owners or persons
designated by them the power to direct how such control shall be used. It is a device of binding
stockholders to vote as a unit and thus assuring a desirable stability and continuity in
management in situations where it is needed.
Q37: How are stocks stransferred?
A37: Through the use of stock certificates. A certificate of stock is a document which evidences the
ownership of shares and a convenient instrument for the transfer of the title. It must be signed
by the president or vice-president and countersigned by the secretary or assistant secretary,
sealed with the corporate seal, with the full amount of subscription together with interest and
expenses paid. Holders of subscribed share though not yet fully paid are entitled to all rights of
a stockholder, except when the shares have been declared delinquent or when he exercises his
appraisal right. Once a subscriber has paid his subscription in full, he becomes entitled to be
issued a stock certificate.
To transfer shares of stock, deliver the certificate, as indorsed by the owner or his attorney-infact or other person legally authorized to make the trasnfer, or through a duly notarized deed,
when the corporation has yet to issue the certificate. The transfer must be recorded in the books
of the corporation to render such transfer valid. SEC allows the grant of preferential rights to
existing stockholders and/or the corporation, giving them the first option to purchase the shares
of a selling stockholder within a reasonable period not exceeding 30 days provided that the
same is contained in the articles of incorporation and in all of the stock certificates to be issued
by the corporation. This is considered reasonable since it merely suspends the right to transfer
within the period specified.
Q38: What will happen if one buys a forged certificate or acquires a certificate of stock without
an authorized transfer?
A38: Such document acquires no title as against the lawful owner and will have no right or remedy
against the corporation (non-negotiability of stock certificates). Except, if after such forged or
unauthorized transfer, the corporation issues a new certificate and such certificate passes into
the hands of subsequent bona fide purchaser, the latter may rightfully acquire title thereto since
the corporation will be estopped to deny the validity thereof. The subsequent purchaser in good
faith took the shares by virtue of the genuiness of the certificates issued by the corporation or of
the representation made by the corporation that the same is valid and subsisting and that the
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person named therein is a stockholder of the corporation. He may therefore,
compel
the
corporation to recognize him as a stockholder or claim reimbursement and damages against the
latter.
Q39: What if a person was issued a watered stock?
A39: A watered stock is one which is issued by the corporation as fully paid-up shares when in fact
the whole amount of the value thereof has not been paid. It may have been issued for the
following reasons:
1. For a monetary consideration less than its par or issued value;
2. For a consideration in property, tangible or intangible, valued in excess of its fair market
value;
3. Gratuitously or under an agreement that nothing shall be paid at all;
4. In the guise of stock dividends when there are no surplus profits of the corporation.
All creditors, whether prior or subsequent to the issuance of watered stock may enforce
payment of such water. Subscribers for stock shall pay to the corporation interest on all unpaid
subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in
the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the
legal rate.
The effects of issuance of watered stock are:
1. As to the corporation when a corporation is guilty of ultra-vires acts which constitute
an injury to or fraud upon the public, or which will tend to injure or defraud the public,
the State may institute a quo-warranto proceeding to forfeit its charter for the misuse or
abuse of its franchise.
2. As between the corporation and the subscriber the subscription is void; the subscriber
is liable to pay the full par or issued value thereof, to render it valid and effective.
3. As to the consenting stockholders they are estopped from raising any objection
thereto.
4. As to dissenting stockholder in view of the dilution of their proportionate interest in
the corporation, they may compel the payment of the water in the stock solidarily
against the responsible and consenting directors and officers inclusive of the holder of
the watered stock.
5. As to creditors they may enforce payment of the difference in the price, or the water in
the stock, solidary against the responsible directors/officers and the stockholders
concerned.
6. As against transferees of the watered stock his right is the same as that of his
transferor. If however, a certificate of stock has been issued and duly indorsed to a bona
fide purchaser, without knowledge, actual or constructive, the latter cannot be held
liable, at least as against the corporation, since he took the shares on reliance of the
misrepresentation made by the corporation that the stock certificate is valid and
subsisting. This is because a corporation is prohibited from issuing certificates of stock
until the full value of the subscriptions have been paid and could not, therefore, deny the
validity of the stock certificate it issued as against a purchaser in good faith.

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Q40: How can a corporation compel its stockholders to pay their subscriptions?
A40: Either through a board action (delinquency sale) or a collection case in court. As a rule,
subscriptions shall be paid, together with interest if required, on the date or dates fixed in the
contract of subscription, or on the date or dates that may be specified by the board of directors
pursuant to a call declaring any or all unpaid portion thereof to be so payable . Failure or
refusal of the corporation, through its board of directors to enforce or collect payment of unpaid
subscription will not prevent the creditors or the receiver of the corporation to institute a court
action to collect the unpaid portion thereof (trust fund doctrine). A valid and binding
subscription for stock of a corporation cannot be cancelled so as to release the subscriber from
liability thereon. Exception is when there is a consent from all of the stockholders.
Unpaid subscriptions are not due and payable until a call is made by the corporation for
payment. A call is a condition precedent before the right of action to institute a recovery suit
accrues. A demand is required before a debtor may incur a delay in the performance of his
obligation. But a call is no longer necessary when the contract of subscription provides for a
date or dates when payment is due, or when the corporation has become insolvent. Delinquent
stocks are entitled to the right to dividends (any cash dividends due on delinquent stockholders
shall first be applied to the unpaid balance on his subscription plus cost and expenses, while
stock dividends shall be withheld until his unpaid subscription is paid in full).
Q41: What shall a stockholder do in case of a lost, stolen, or destroyed stock certificate?
A41: Ask the coporation for a replacement. The registered owner or his representative shall file an
affidavit with the corporation, stating the circumstances, the number of shares, serial number,
and the name of the corporation which issued the same. When deemed necessary, evidence may
be provided. Publication in a newspaper of general circulation once a week for three
consecutive weeks is also necessary. If uncontested for a year, a new certificate may be issued,
or he must file a bond if he wishes the issuance of the new certificate immediately. If contested,
the issuance is halted until final decision of the court. The corporation and its officers may only
be liable in case of fraud, bad faith, or negligence.
Q42: What are the records included in the corporate books and records?
A42: Records are to be kept and maintained by the corporation. These incliudes records of all
business transactions such as journals, ledgers, contracts, vouchers and receipts, financial
statements and other books of accounts, income tax returns, and voting trust agreement which
must be kept and carefully preserved at its principal office. Also, minutes of all meetings of
stockholders or members and of the directors or trustees, setting forth in detail the time and
place of holding the meeting, how authorized, the notice given, whether the meeting was regular
or special, if special its object, those present and absent, and every act done or ordered done
thereat which must likewise be kept at the principal office of the corporation. Included is the
stock and transfer book, showing the names of the stockholders, the amount padi or unpaid on
all stock for which subscription has been made, a statement of every alienation, sale or transfer
of stock made, the date thereof, and by and to whom made which must be kept either in the
principal office of the corporation or in the office of its stock transfer agent.
Any officer or agent of the corporation who refuses to allow the inspection of corporate books
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and records, or any director or trustee who through a resolution by the board votes for such
refusal shall be liable for damages and shall be guilty of an offense which shall be punishable
under Sec. 144, except when the person demanding the inspection has improperly used any
information secured through any prior examination of the records or minutes of such
corporation or of any other corporation; or was not acting in good faith or for a legitimate
purpose in making his demand. The stockholder may file a case of mandamus, damages either
against the corporate or responsible officer, or criminal complaintunder the Corporation Code.
Q43: What happens during a merger? How is it different from consolidation?
A43: A merger is a union effected by absorbing one or more existing corporations by another which
survives and continues the combined business; the uniting of two or more corporations by the
transfer of property to one of them which continues in existence, the other or others being
dissolved and merged therein. While in a consolidation, two or more existing corporations are
united to form a new corporation and this terminates the existence of the old ones.
Requirements and procedure for merger or consolidation:
1. The board of directors or trustees of each constituent corporation shall approve a plan of
merger or consolidation setting forth the following:

The names of the constituent corporations

The terms of the merger or consolidation and the mode of carrying the same into
effect;

A statement of changes, if any, in the articles of incorporation; and

Other provisions deemed necessary and desirable

2. Approval of the plan by the stockholders representing 2/3 of the outstanding capital
stock or 2/3 of the members in a non-stock corporations of each constituent corporation
at separate corporate meetings called for the purpose;
3. Prior notice of such meeting, with a copy or summary of the plan of merger or
consolidation shall be given to all stockholders or members at least 2 weeks prior to the
scheduled meeting, either personally or by registered mail stating the purpose thereof;
4. Execution of the articles of merger or consolidation by each constituent corporation to
be signed by the president or vice-president and certified by the corporate secretary or
assistant secretary setting forth the following:

The plan of the merger or consolidation;

As to stock corporations, the number of shares outstanding, or in the case of nonstock corporations, the number of members; and

As to each corporation, the number of shares or members voting for and against such
plan, respectively.

5. Submission of the articles of merger or consolidation in quadruplicate to the SEC

subject to the requirement of that if it involves corporations under the direct supervision
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of any other government agency or governed by special laws the favorable
recommendation of the government agency concerned shall first be secured; and
6.

Issuance of the certificate of merger or consolidation by the SEC at which time the
merger or consolidation shall be effective. If the plan, however, is believed to be
contrary to law, the SEC shall set a hearing to give the corporations concerned an
opportunity to be heard upon proper notice and thereafter, the SEC shall proceed as
provided in the Code.

It must be noted that any amendment to the plan of merger or consolidation must be approved
by majority vote of the respective boards of directors or trustees of all the constituent
corporations and ratified by the affirmative vote of stockholders representing at least 2/3 of the
outstanding capital stock or of 2/3 of the members of each of the constituent corporations. Also,
mergers and consolidations may not be entered into for the purpose of circumventing the law
against monopolies and illegal combinations in restraint of trade or for purposes of fraud.
Q44: As a stockholder, how does one protect one's investment when the corporation coverts its
property into another not of one's own choosing?
A44: By exercising his appraisal right. The purpose of the right is to protect the property rights of
dissenting stockholders from actions by the majority shareholders which alters the nature and
character of their investment. It is a right granted to dissenting stockholders on certain corporate
or business decisions to demand payment of the fair market value of their shares.
Instances when a stockholder may have the right to dissent and demand payment of the fair
value of his shares:
1. In case any amendment to the articles of incorporation has the effect of:

Changing or restricting the rights of any stockholder or class of shares;

Authorizing preferences in any respect superior to those of outstanding shares of any

class; or

Extending or shortening the term of corporate existence.

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation.
4. Investment of corporate funds in another corporation or business or for any other
purpose;
5. In a close corporation, a stockholder has the right to compel the corporation for any
reason to purchase his shares at their fair value which shall not be less than the par or
issued value when the corporation has sufficient assets to cover it debts and liabilities,
exclusive of capital stock.
The stockholder must have voted against the proposed corporate action, and must send a wriiten
demand for payment within 30 days from the vote. He must then surrender his stock certificate
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and payment will be made by the corporation, given it has unrestricted retained earnings in its
books, based on the fair market value of the stocks the day before the vote. If the corporation
fails to pay after demand within 30 days after the award, his voting and dividend rights shall be
immediately restored.
Q45: How can a corporation extinguish its existence?
A45: Through dissolution. Dissolution is the extinguishment of the corporate franchise and the
termination of corporate existence. When a corporation is dissolved, it ceases to be a juridical
entity and can no longer pursue the business for which it is incorporated. However, the
corporation will continue as a body corporate for another period of 3 years from the time it is
dissolved for the purpose of winding up its affairs and the liquidation of its assets. There are
three ways to dissolve a corporation: by expiration of the corporate term; by voluntary surrender
of its primary franchise (voluntary dissolution); or by the revocation of its corporate franchise
(involuntary dissolution).
EFFECTS OF DISSOLUTION
No right or remedy in favor of or against any corporation, its stockholders, members,
directors, trustees, or officers, nor any liability incurred by any such corporation,
stockholders, members, directors, trustees, or officers, shall be removed or impaired by the
subsequent dissolution of said corporation.

Dissolution terminates a corporations primary franchise and generally prevents it from

further exercising other or secondary franchises which have been conferred to it.

Dissolution terminates the corporations power to enter into contracts or to continue the
business as a going concern.

In a lease to a corporation, the rights and obligations thereunder are not extinguished by the
corporations dissolution since leases affect property rights and survives the death of
parties. The stockholders succeed to the rights and liabilities of the dissolved corporation in
an unexpired leasehold state which may be enforced by or against the receiver or liquidating
trustee. However, the lease, by its terms, terminates when the corporation ceases to exist.

Contracts for personal services are deemed terminated by the dissolution of the corporation.
There is an implied condition that the contract shall terminate in such event.

A dissolved corporation has no juridical personality; it ceases to exist as a corporation and

cannot apply for a new certificate or a secondary franchise.

The 3-year period allowed by the law is only for the purpose of liquidation or winding up of
corporate affairs. No act can be done for the purpose of continuing the business for which it
was established. Neither can it enforce a contract executed prior to its dissolution.

The termination of the life of a juridical entity does not, by itself, imply the diminution or
extinction of rights demandable against such juridical entity. Debts due to or against the
corporation will not be extinguished. Otherwise, it will amount to an impairment of
contracts or a denial of due process.

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EXPIRATION OF CORPORATE TERM
A corporation registered under the Corporation Code is required to indicate its term of
existence in the articles of incorporation. But this is not the case for corporations sole, and
religious societies. There is no need to for the institution of a proceeding for quo warranto to
determine the time and date of the dissolution of a corporation because the period of corporate
existence is provided in the articles of incorporation.
SURRENDER OF FRANCHISE (VOLUNTARY DISSOLUTION)
There are three modes of voluntary dissolution: where no creditors are affected, where creditors
are affected, and shortening of corporate term. When no creditors are affected, the stockholders
or members are informed of the meeting for the purpose of dissolution after the majority has
decided through a majority vote to dissolve the corporation. If 2/3 of the outstanding capital
stock or members adopts the resolution, then such is certified and sent to the SEC, who in turn,
issues a certificate of dissolution. However, when creditors are affected, publication of the SEC
order on the dissolution is mandatory once a week for three consecutive weeks in a newspaper
of general circulation amd posting of notices in 3 public places in such city or municipality.
This is to inform all those interested parties to come forth and file their demands against the
corporation. A hearing ensues thereafter and the judgment shall dissolve the corporation and its
assets to be collected and distributed to pay the debts. Shortening of the corporate term is
through a majority vote of the board which is ratified by the 2/3 of the stockholders or
members, and then approved by the SEC.
INVOLUNTARY DISSOLUTION
Filing of a verified complaint is needed, with the proper notice and hearing on the grounds
provided by law. The grounds are:
1. Fraud in procuring the certificate of registration;
2. Serious misrepresentation as to what the corporation can do or is doing to the great
prejudice of or damage to the general public;
3. Refusal to comply or defiance of any lawful order of the Commission restraining
commission of acts which would amount to a grave violation of its franchise;
4. Continuous inoperation for a period of at least 5 years;
5. Failure to file by-laws within the required period; and
6. Failure to file required reports in appropriate forms as determined by the Commission
within the prescribed period.
7. Violation of any provision of the Corporation Code (Sec. 144);
8. In case of deadlock in a close corporation (Sec. 105);
9. In a close corporation, any acts of directors, officers or those in control of the
corporation which is illegal or fraudulent or dishonest or oppressive or unfairly
prejudicial to the corporation or any stockholder or whenever corporate assets are being
misapplied or wasted (Sec. 105).
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10. Other grounds can be found in special laws, e.g. the Securities Regulation Code and the
General Banking Act.
Q46: How is liquidation and winding up done after dissolution?
A46: Liquidation and winding up is done after dissolution of the corporation. This entails the
collection of all corporate assets, the payments of all its debts and settlement of its obligations
and the ultimate distribution of the corporate assets, if any of it remains, to all stockholders in
accordance with their proportionate stockholdings in the corporation or in accordance with their
respective contracts of subscription (e.g. preferred stocks).
There are three methods of liquidation: by the corporation itself though the Board of Directors,
by a Trustee appointed by the corporation, or by appointment of a receiver. A dissolved
corporation continues as a body corporate for a period of 3 years from the time of dissolution
for the purpose of prosecuting and defending suits by or against it and enabling it to settle and
close its affairs, to dispose of and convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was established. At any time during said three
(3) years, the corporation is authorized and empowered to convey all of its property to trustees
for the benefit of stockholders, members, creditors, and other persons in interest.
Q47: How does a non-stock corporation operate?
A47: A non-stock corporation is one where no part of its income is distributable as dividends to its
members, trustees, or officers, subject to the provisions of the Code on dissolution. Even if a
corporation has capital stock divided into shares it is considered as non-stock so long as it does
not distribute dividends to its members and officers. The determination of whether or not a nonstock corporation can engage in profit-making business or activity depends largely on the
purpose or purposes indicated in the articles of incorporation. If the business activity is
authorized in the said articles, necessary, incidental or essential thereto, the same may be
undertaken by the corporation, otherwise, not, as it would be an ultra-vires act.
These corporations may be for charitable, religious, educational, professional, cultural,
fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry,
agricultural and like chambers, or any combination thereof. The provisions governing stock
corporation, when pertinent, shall be applicable to non-stock corporations.
Q48: How does a close corporation work?
A48: A close corporation is one whose articles of incorporation provide that:
1. All the corporation's issued stock of all classes, exclusive of treasury shares, shall be
held of record by not more than a specified number of persons, not exceeding 20;
2. All the issued stock of all classes shall be subject to one or more specified restrictions on
transfer permitted by Title XV of the Code; and
3. The corporation shall not list in any stock exchange or make any public offering of any
of its stock of any class.
A corporation shall not be deemed a close corporation when at least 2/3 of its voting stock or
voting rights is owned or controlled by another corporation which is not a close corporation.
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Any corporation may be incorporated as a close corporation, except for mining or oil
companies, stock exchanges, banks, insurance companies, public utilities, educational
institutions, and corporations declared to be vested with public interest.
As a rule, any action by the directors of a close corporation without a meeting is invalid.
Exceptions:
1. Written consent is signed by all the directors;
2. All the stockholders have actual or implied knowledge of the action and make no
prompt objection thereto in writing;
3. The directors are accustomed to take informal action with the express or implied
acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the action in question and none
of them makes prompt objection thereto in writing. (If a director's meeting is held
without proper call or notice, an action taken therein within the corporate powers is
deemed ratified by a director who failed to attend, unless he promptly files his written
objection with the secretary of the corporation after having knowledge thereof.)
Exception to the exceptions: The by-laws provide otherwise.
The pre-emptive right of stockholders in close corporations shall extend to all stock to be
issued, including reissuance of treasury shares, whether for money, property or personal
services, or in payment of corporate debts. Exception: The articles of incorporation provide
otherwise.
Any amendment to the articles of incorporation which seeks to delete or remove any provision
required by Title XV of the Code to be contained in the articles of incorporation, or reduce a
quorum or voting requirement stated in said articles of incorporation, must be approved by the
affirmative vote of at least 2/3 of the outstanding capital stock, whether with or without voting
rights, or of such greater proportion of shares as may be specifically provided in the articles of
incorporation for amending, deleting or removing any of the aforesaid provisions, at a meeting
duly called for the purpose.
In case of a deadlock and upon written petition by any stockholder, the SEC has the power to
arbitrate the dispute and decide. In a close corporation, a corporate action taken at a board
meeting without proper call or notice is deemed ratified by the absent director unless the latter
promptly files his written objection with the secretary of the corporation after having knowledge
of the meeting. Stockholders who actively engage in the management or operation of the
business and affairs of a close corporation shall be personally liable for corporate torts unless
the corporation has obtained reasonably adequate liability insurance
Q49: How can a foreign corporation operate in the Philippines?
A49: Foreign corporations are those formed, organized or existing under any laws other than those of
the Philippines (and whose laws allow Filipino citizens and corporations to do business in its
own country or state). A foreign corporation must secure a license or permit, and a cetificate of
authority from the appropriate government agency, before it can transact business in the
Philippines. They may establish their own branch office, liaison office, local subsidiary, regional
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or area headquarters, regional operating headquarters, regional warehouse, or a joint venture in
the Philippines. They must also appoint a resident agent before it can be issued a license, and
his job is to receive summons and other legal processes in any legal action against the
corporation. As a rule, foreign corporations without a license cannot maintain or intervene in
any action in any court here in the country, but it may be sued for any valid cause of action
recognized under our laws.
Q50: What are the different kinds of special corporations?
A50: These include educational corporations and religious corporations.
EDUCATIONAL CORPORATIONS
Educational corporations are those which provide facilities for teaching or instruction; they are
governed primarily by special laws and secondarily by the Corporation Code. A favorable
recommendation of the Secretary of Education, Culture and Sports is required before the SEC
accepts or approves the articles of incorporation or by-laws of any educational institution.
Trustees of non-stock educational corporations shall not be less than 5 nor more than fifteen 15,
in multiples of 5.
Educational institutions shall be owned solely by citizens of the Philippines or corporations or
associations at least 60% of the capital of which is owned by such citizens. The control and
administration of educational institutions shall be vested in citizens of the Philippines, except
when they have been established by religious groups and mission boards.
No educational institution shall be established exclusively for aliens and no group of aliens shall
comprise more than 1/3 of the enrollment in any school. But this rule does not apply to schools
established for foreign diplomatic personnel and their dependents and, unless otherwise
provided by law, for other foreign temporary residents
RELIGIOUS CORPORATIONS
A religious corporation is one composed entirely of spiritual persons which is created for the
furtherance of religion or perpetuating the rights of the church or for the administration of
church or religious work or property. These may either be a corporation sole or religious
societies.
A corporation sole consists of one person only and his successor in some particular station
(usually a chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such
religious denomination, sect or church), who are incorporated by law in order to give them
some legal capacities and advantages, particularly that of perpetuity, which in their natural
persons they could not have had. A religious society is a body of person associated together for
the purpose of maintaining religious worship.

50 FAQs on the Corporation Code