Made by: Wesly Paul Cortez

BA 162 – Law on Partnerships and Private Corporations

CORPORATIONS

SEC. 18 CORPORATE NAME

General rule: No corporate name may be allowed by the SEC if the proposed name is identical/deceptively
similar to that of any existing corporation

Change of name: When a change of name is approved, the SEC shall issue an amended certificate of incorporation
(mere approval of stakeholders does not automatically change the name of corporation)

SEC. 19 COMMENCEMENT OF CORPORATE EXISTENCE

General rule: A private corporation commences to have corporate existence and juridical personality at the date
the SEC issues a certificate of incorporation under the official seal

Note: Corporation must formally organize and commence the transaction of business within
TWO YEARS from the date of issuance of certificate of incorporation

Religious corporations and cooperatives need not be registered at the SEC

SEC. 20 DE FACTO CORPORATIONS

Defined (de jure) Created in strict/substantial conformity with mandatory statutory requirements for incorporation

Defined (de facto) Exists for all practical purposes as a corporation but has no legal right to corporate existence

Requisites for de facto (1) valid law to assume it might be incorporated

(2) bona fide attempt to organize a corporation under such law
(3) actual user/exercise in good faith of corporate powers conferred upon it by law

Stockholders of de facto corporations enjoy exemption from personal liability for corporate
obligations

General rule: Assuming that a de facto corporation actually exists, its existence as a corporation can not be
collaterally attacked or questioned by the state or private individuals

Duty of the state: State must bring a direct proceeding against the corporation to oust it from the exercise of
corporate powers and have if dissolved

Defined (attacks)
DIRECT ATTACK OF CORPORATE COLLATERAL ATTACK OF CORPORATE
EXISTENCE EXISTENCE
State attacks the existence of an association Corporate existence is questioned in some
claiming to be a corporation, only be instituted incidental proceeding not provided by law for
by government thru the SOLICITOR the express purpose of attacking the corporate
GENERAL by “quo warranto” proceedings existence

SEC. 21 CORPORATION BY ESTOPPEL

General rule All persons who assume to act as a corporation knowing it to be without authority to do so shall
be liable as general partners for all debts, liabilities and damages incurred / arising as a result
thereof

Exception When such ostensible corporation is sued on any transaction entered, it shall not be allowed to
use as a defense the lack of corporate personality

To third persons One who assumes an obligation to an ostensible corporation cannot resist performance on the
ground that there was in fact no corporation

Note: A corporation has NO REAL EXISTENCE in law, just a “mere fiction existing in cases”
 Made by: Wesly Paul Cortez

EFFECTS OF NON-USE OR CORPORATE CHARTER AND CONTINUOUS INOPERATION OF

SEC. 22
THE ORGANIZATION

General rule: If a corporation doesn’t formally ORGANIZE and COMMENCE the transaction of its business
within TWO YEARS from the date of its incorporation, corporate powers cease and the
corporation is dissolved

If the corporation commenced the transaction of its business but SUBSEQUENTLY

INOPERATIVE (continuously) for at least FIVE YEARS, the same shall be ground for suspension
of certificate of incorporation

Exception: Provision shall not apply if failure to do business or continuously become operative is due to
causes beyond the control of the corporation as determined by the SEC

Defined (mandatory vs directory)

MANDATORY PROVISIONS DIRECTORY PROVISIONS

Formalities for incorporation
designed to protect the public
Relatively inconsequential formalities so that
which are
failure to comply with a directory provision will
not be fatal to the corporation

Defined (conditions)
CONDITIONS PRECEDENT CONDITIONS SUBSEQUENT
Conditions to be complied with after acquiring
Those conditions non-compliance of which will
corporate existence in order that a corporation
prevent the legal existence of a corporation
may legally continue as such

Formal organization (1) adoption of by-laws

(2) election of the board of directors (trustees)
(3) taking steps to necessary to enable the corporation to transact business

Commencement (1) performed preparatory acts geared toward the fulfillment of the purposes of the business
- enter into contracts for lease/sale of properties to be used as a factory
- making plans for the construction of the factory

SEC. 23 BOARD OF DIRECTORS OR TRUSTEES

General rule: All corporate powers shall be exercised by the board of directors or trustees to be elected among
the holders of stock (stock corporations) and members of the corporation (non-stock
corporations)

Tenure Board of directors shall hold office for ONE YEAR and until their successors are elected

Qualifications (1) Own at least ONE SHARE of the capital stock

(2) Share shall stand in his own name on the books of the corporation
(3) As soon as one director ceases to be the owner of at least one stock, he shall cease to be a
director
(4) Trustees of non-stock corporations must be a member of such
(5) A majority of the directors must be residents of the Philippines

Powers (1) Governing body of the corporation; may be delegated expressly/impliedly, to other officers
(2) Binding effect of stockholders’ action
- Directors have sole authority to determine policy and conduct the ordinary business
- It is impractical to entrust administration to a host of widely scattered stockholders

Limitations of powers (1) observe the limitations / restrictions imposed by the constitution
(2) cannot perform acts that involves fundamental changes in the corporation
(3) cannot exercise powers not possessed by the corporation
 Made by: Wesly Paul Cortez
NOTE: Directors hold a FIDUCIARY RELATION to the corporation and members they represent.
They are required to discharge their duties in good faith and shall be liable if they breach such.

SEC. 24 ELECTION OF DIRECTORS OR TRUSTEES

Entitled to vote there must be present, either in person or by representative authorized by a WRITTEN PROXY,
the owners of the majority of the outstanding capital stock or if there be no capital stock, a
MAJORITY of the members entitled to vote.

Method Must be by ballot IF REQUESTED; viva voces (roll call / raising of hands) are also valid
(1) STRAIGHT may vote such number of shares as many persons as there are
directors
(2) CUMULATIVE a stockholder concentrates his votes to one candidate
(3) CUM. DISTRIBUTION cumulate his shares and distribute the same among as many
candidates

Requirements (1) A stock holder cannot be deprived in the articles of incorporation his right to use any methods
of voting in the election of directors
(2) No delinquent stock shall be voted
(3) If a quorum is present, candidates receiving the highest votes shall be declared elected; law
mandates PLURALITY not MAJORITY of the votes cast
(4) Requisite notice must be given

Failure to hold election Meeting may be adjourned day to day but cannot be adjourned sine die (indefinitely)

SEC. 25 CORPORATION OFFICERS QUORUM

General rule Directors must formally organize by the election of a president who shall be a director, a
treasuer (who may or may not be a director), a secretary – all of who shall be a
RESIDENT and CITIZEN of the Philippines

Additional requirements Any two or more positions shall be held concurrently by the same person; except no one
shall act as president and secretary or treasurer at the same time

Extent of authority

Gives general supervisoin and control of the business as CEOs; preside meetings of the directors as
President
well as stockholders or members
Vice
Acts In the absence/vacancy of the office of the president
President
Need not be director; must not act as president and secretary at the same time; resident and citizen
of the Philippines
Secreatary
Make and keep the records to make proper entries of votes, resolutions
Entrusted with the authority to receive and keep the money of the corporation and disburse them as
Treasurer
he may be authorized
Comptroller Appointed to control accounts and to check expenditures
General Entrusted with the management of the corporation; has knowledge of its business and property and
Manager be considered as the principal officer

Requisites for meetings (1) Meeting of the directors duly assembled as a board
(2) Presence of a quorum
(3) Decision of the majority of the quorum / entire board
(4) Meeting at the place, time, and manner provided in the by-laws

Quorum defined Such number of the membership of a collective body as is competent to transact its
business or do any other corporate act

General rule on quorum A majority vote of the directors or trustees present at a meeting at which there is a
quorum, is sufficient to authorize action
 Made by: Wesly Paul Cortez
Ruling on proxies Directors / trustees CANNOT validly act by proxy; they must attend meetings and act in
person and as a body; cannot delegate his duties or assign his powers to another

SEC. 26 REPORT OF ELECTION OF DIRECTORS, TRUSTEES, AND OFFICERS

General rule (1) Secretary/any other officer shall report to the SEC the names, nationalities and residencies of
the directors/trustees and the officers elected WITHIN 30 DAYS AFTER THE MEETING IN
WHICH THEY ARE ELECTED

(2) In case of a director’s death, resignation, etc., the heirs of the director/trustee, secretary, or
any other officer shall immediately report to the SEC such event

SEC. 27 DISQUALIFICATION OF DIRECTORS, TRUSTEES, OR OFFICERS

Disqualifications (1) No person convicted by final judgment of an offense punishable by imprisonment for a period
exceeding 6 YEARS

(2) Violation of the Corporation Code committed within 5 YEARS prior to the date of election

SEC. 28 REMOVAL OF DIRECTORS AND TRUSTEES

General rule Any director or trustee of a corporation may be removed from office by a vote of the stockholders
holding or representing two-thirds of the outstanding capital stock or by a vote of two-thirds (2/3)
of the members entitled to vote (for non-stock corporations)

Additional requisites Removal shall take place at a regular meeting or a special meeting

Special meeting (1) Must be called by the secretary on order of the president or on the written demand of
stockholders representing or holding at least a majority of the outstanding capital stock or
demand of majority entitled to vote

(2) Should the secretary refuse/fail to call the special meeting, the call may be addressed directly
to the stockholders or members by any stockholder / member of corporation signing the demand

(3) Notice of time and place of such meeting must be given by publication or written notice

Election Filling in the vacancy shall be made at the same time without further notice or at any regular or
special meeting

Cause of removal Removal may be with or without cause; may not be used to deprive minority stockholders the
right of representation

Resignation The law doesn’t prevent a director or trustee from resigning at any time; IF FIDUCIARY, a director
cannot resign at an unreasonable time if the immediate consequence would be to leave the
interest of the corporation without proper care

Abandonment of office (1) director accepts a position in which his duties are incompatible with those such director
(2) director absented himself from all meetings for nearly a year; announced refusal to act as
officer

SEC. 29 VACANCIES IN THE OFFICE OF DIRECTOR OR TRUSTEE

General rule A person elected to fill a vacancy holds office only for the UNEXPIRED TERM of his predecessor

Vacany filled by… STOCKHOLDERS/MEMBERS

(1) results from removal by the stockholders/members or the expiration of term
(2) results from vacancy other than removal or expiration PROVIDED THAT remaining
directors/trustees do not constitute a quorum for filling in the vacancy
(3) vacancy may be filled by the remaining directors but he board refers the matter to the
stockholders
 Made by: Wesly Paul Cortez
(4) vacancy is created by reason of an increase in the number of directors or trustees

BY MEMBERS OF THE BOARD (if still constituting a quorum)

- at least a majority of them are empowered to fill any vacancy occurring in the board
other than by removal or expiration of term
SEC. 30 COMPENSATION OF DIRECTORS

General rule Directors shall not receive any compensation, as such directors, except for reasonable per diems,

Exception Such compensation may be granted to directors by the vote of the stockholders representing at
least a majority of the outstanding capital stock at a regular/special stockholders’ meeting

Limitation In no case shall the total yearly compensation of directors exceed 10% of the NET INCOME
BEFORE INCOME TAX of the corporation during the preceding year

Per diems defined Daily allowance given for each day an officer/employee was away from his home base

Doesn’t specify who is to set the amount of the per diems and what amounts shall be considered
reasonable

SEC. 31 LIABILITY OF DIRECTORS, TRUSTEES OR OFFICERS

General rule Occasions when a director may be held liable for damages:
(1) willfully and knowingly votes or assents to patently unlawful acts of the corporation
(2) guilty of gross negligence or bad faith in directing the affairs of the corporation
(3) acquires any personal interest in conflict with his duty as such director/trustee

Erring board members shall be held jointly and severally (or solidarily) liable for all the damages
resulting therefrom suffered by the corporation or persons

Secret profits Director/trustee held accountable and guilty is required to account to the corporation for the
profits obtained by him from a business opportunity which should belong to a corporation

SEC. 32 DEALINGS OF DIRECTORS, TRUSTEES, OR OFFICERS WITH THE CORPORATION

General rule A contract of the corporation with one or more of its directors or trustees or officers is voidable at
the option of the corporation

Exception (1) Presence of such director / trustee in the board meeting in which the contract was approved
was not necessary to constitute a quorum

(2) Vote of such director/trustee was not necessary for the approval of the contract

(3) Contract is fair and reasonable under the circumstances

(4) (in case of an officer) the contract with the officer has been previously authorized by the board
of directors

Ratification Contract may be ratified by the vote of the stockholders representing at least 2/3 of the
outsatanding capital stock or members in a meeting called for the purpose

PROVIDED: (1) full disclosure of the adverse interest of the directors involved is made
(2) contract is fair and reasonable under circumstances

Failure of the section The section fails to specify whether the votes of the self-dealing director/trustee shall be counted
in the meeting of the ratification of the contract

SEC. 33 CONTRACTS BETWEEN CORPORATIONS WITH INTERLOCKING DIRECTORS

General rule A contract between two or more corporations having interlocking directors shall not be invalidated
on that ground alone
 Made by: Wesly Paul Cortez

Provisions to the rule (1) provided that the contract is fair and reasonable under the circumstances
(2) interest of the interlocking director is merely nominal

Exception (1) in cases of fraud

(2) interest exceeds 20% of the outstanding capital stock shall be substantial
SEC. 34 DISLOYALTY OF A DIRECTOR

Theory CORPORATE OPPORTUNITY THEORY

A director, who by virtue of his office acquires for himself a business opportunity which should
belong to he corporation, should account to the corporation all such profits by refunding the
same, notwithstanding the he risked his funds in the venture

Exception If the disloyal act is ratified by the vote of stockholders representing 2/3 of outstanding capital
stock

Failure of the section Whether the disloyal director shall be allowed to vote his shares for the ratification or not

SEC. 35 EXECUTIVE COMMITTEE

Practice Existing corporate practice in the Philippines which delegates the executive committee to
expedite action on important matters without the need for a board meeting

Function Directly manages the operations s of the corporation between meetings of the board

Requirements (1) must be composed of not less than 3 members of the board
(2) act on specific matters within the competence of the board on a majority vote of board

Exception (1) approval of any action for which shareholders’ approval is also required
(2) filling of vacancies in the board
(3) amendment / repeal of by-laws / adoption of new by-laws
(4) amendment or repeal of any resolution of the board which is not repealable expressly
(5) distribution of cash dividends to the shareholders

TITLE IV: POWERS OF CORPORATIONS

SEC. 36 CORPORATE POWERS AND CAPACITY

Powers and capacity (1) To sue and to be sued in the corporate name
(2) Succession by its corporate name for the period of time stated in the articles and certificate
(3) Adopt and use a corporate seal
(4) Amend articles of incorporation
(5) Adopt by-laws and amend and repeal the same (not contrary to laws, morals, public policy)
(6) Issue or sell stocks to subscribers; sell treasury stocks; admit members of the corporation
(7) Purchase, receive, take, hold, convey, sell, lease and deal with real and personal property
(8) Enter into merger or consolidation with other corporations
(9) Make reasonable donations (except for political party/candidate/purposes of partisan activity)
(10) Establish pension, retirement and other benefits for its directors, trustees, officers
(11) Exercise such other powers, as may be essential or necessary to carry out its purpose

Limited capacity DOCTRINE OF LIMITED CAPACITY

A corporation has only such powers as are expressly granted and those that are necessarily
implied from those expressly granted or those, which are incident to its existence

Classification of powers (1) Authorized by law

(2) Necessary to the exercise of express/incidental powers
(3) Incidental to its existence

Ultra vires defined Acts or contracts of a corporation outside the cope of its express, implied and incidental powers

Express powers expressly conferred upon the corporation by law

 Made by: Wesly Paul Cortez

Implied powers reasonably necessary to exercise the express powers and to accomplish/carry out the purpose of
the corporation

Incidental powers powers which a corporation can exercise by the mere fact of its being a corporation which are
impliedly granted

SEC. 37 POWERS TO EXTEND OR SHORTEN CORPORATE TERM

General rule Term of a corporation may be extended or shortened by an amendment of the articles of
incorporation approved by the majority vote of the board of directors / trustees

Amendment must be ratified at a meeting of the stockholders representing at least 2/3 of the
outstanding / members

Voluntary dissolution Effected by an amendment of the articles of incorporation to shorten the corporate term

Appraisal right Granted to a dissenting stockholder if the corporate is either shortened or lengthened

POWER TO INCREASE OR DECREASE CAPITAL STOCK; INCUR, CREATE OR INCREASE

SEC. 38
BONDED INDEBTEDNESS

General rule No corporation shall increase/decrease its capital stock or incur any bonded indebtedness unless
approved by a majority of the board of directors and ata a stockholders’ meeting, 2/3 of the
outstanding capital stock shall favor the increase/diminution of capital stock or
incurring/increasing any bonded indebtedness

Requisites Written notice of such a meeting and the proposal of increase/decrease in capital stock must be
addressed to all stockholders (postage/served personally)

Methods for increase (1) Increase / decrease the number of shares authorized to be issued without
increasing/decreasing par value

(2) Increase / decrease the par value of each share without increasing/decreasing the number
thereof

(3) Increase / decrease both number of shares authorized and the par value thereof

Necessity for increase (1) Increase of corporate assets

(2) Issuance of stock dividends

Unpaid subscription No decrease of the capital stock shall be approved by the Commission, if its effect shall prejudice
the rights of corporate creditors

Distribution of surplus There can be a distribution of only those assets over and above the amount equal to the par
value of the outstanding reduced capital and the amount necessary to discharge the existing
corporate indebtedness

Corporate bond Obligation to pay a definite sum of money at a future date at fixed rate of interest

SEC. 39 POWER TO DENY PRE-EMPTIVE RIGHT

General rule All stockholders of a stock corporation shall enjoy a pre-emptive right to subscribe to all issues or
disposition of shares of any class in proportion to their respective share holdings

Exception Such right is denied by the articles of incorporation or an amendment

Provisions (1) right shall not extend to shares to be issued in compliance with laws requiring stock offerings
(2) right shall not extend to shares to be issued in good faith with approval of stockholders
representing 2/3 of the outstanding capital stock in exchange for property or payment of
previously contracted debt
 Made by: Wesly Paul Cortez

SEC. 40 SALE OR OTHER DISPOSITION OF ASSETS

Requisites for validity (1) sale, etc. must be approved by the board of trustees / directors
(2) action of the board must be authorized by a vote of stockholders of 2/3 of outstanding capital
stock
(3) authorization must be done at a stockholders’ / members’ meeting after written notice

Authority of the board Board is given the right to decide upon the terms and conditions of the sale including
consideration of the sale

Dissenting right Any disposition which does not involve all or substantially all of the corporate assets made in
ordinary course of business doesn’t require the approval of the stockholders and would not entitle
any dissenting stockholder to exercise his appraisal right

SEC. 41 POWER TO ACQUIRE OWN SHARES

General rule A stock corporation shall have the power to purchase or acquire its own shares for a legitimate
corporate purpose

Provision Corporation has unrestricted retained earnings in its books to cover the shares to be
purchased/acquired

Reasons to reacquire (1) Elimination of fractional shares

(2) Satisfaction of indebtedness to corporation
(3) Payment of shares of dissenting or withdrawing stockholders

Conditions (1) Should be for a legitimate and proper corporate purpose

(2) There shall be unrestricted retained earnings to purchase the same and capital not impaired
(3) Corporation acts in good faith and without prejudice to the rights of creditors
(4) Conditions of corporate affairs warrant it

Trust fund doctrine Assets of the corporation as represented by its capital stock are “trust funds” to be maintained
unimpaired and to be used to pay corporate creditors

POWER TO INVEST CORPORATE FUNDS IN ANOTHER CORPORATION OR BUSINESS OF

SEC. 42
FOR ANY OTHER PURPOSE

General rule A private corporation may invest its funds in any other corporation of business of for any purpose
other than the primary purpose when approved by a majority of the board and ratified by the
stockholders representing at least 2/3 of outstanding capital stock / members

Provisions (1) Investment by the corporation is reasonably necessary to accomplish the primary purpose
(2) Any dissenting stockholder shall have appraisal right

SEC. 43 POWER TO DECLARE DIVIDENDS

General rule The board of directors may declare dividends out of the unrestricted retained earnings which shall
be payable in the following, on the basis of outstanding stock held by the shareholders (quorum)
(1) Cash
(2) Property
(3) Stock

Provisions (1) Cash dividends due to delinquent stocks shall be applied to unpaid balance + costs/expenses
(2) Stock dividends shall be withheld from delinquent stockholder until unpaid subscription is paid
(3) No stock dividend shall be issued without the approval of 2/3 of the outstanding capital stock

Retaining surplus Stock corporations are prohibited from retaining profits in excess of 100% of paid in capital stock
EXCEPTION: (1) Corporate expansion projects/programs approved by board of directors
(2) When prohibited under any loan agreement
(3) Retention is necessary under special circumstance
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Dividend defined part or portion of profits of a corporation set aside, declared and ordered to be paid ratably to
stockholders on demand or fixed time

DISTINGUISHED FROM PROFITS AND DIVIDENDS

PROFITS DIVIDENDS
Source of dividends Portion of the profit/net earnings with
Not dividends until so declared or set aside corporation set aside

No par value stock Entire consideration received from the same shall be treated as capital and shall not be available
for distribution as dividends

Unrestricted ret. earn. Difference between the total present value of its assets after deducting losses and liabilities and
the amount of its capital stock

Illegal receipt Stockholders who received them can be held liable to refund them to the corporation or its
creditors

Basis of dividends Participation of each stockholder in the earnings of a corporation is based on his total
subscription and not the amount paid by him

Classes of dividends (1) Cash - dividend payable in cash made at a stated percentage of par value
(2) Property - dividend distributed in the form of property or share of another company
(3) Stock - dividend payable on issued/unissued additional shares of corporation
(4) Option - dividend either to receive cash or stock dividend
(5) Composite - partly in cash and partly in stocks
(6) Scrip - writing issued to stockholder for payment of money or like at future time
(7) Bond - dividend distributed in bonds
(8) Liquidating - distributions of assets of the corporation upon dissolution/winding up

SEC. 44 POWER TO ENTER INTO MANAGEMENT CONTRACT

General rule No corporation shall conclude a management contract with another corporation unless such
contract shall have been approved by the board and by stockholders owning at least a majority of
the outstanding capital stock / membership

Provisions (1) stockholder/s representing both managing and managed corporations own or control more
than 1/3 of the total outstanding capital stock entitled to vote of managing corporation

(2) a majority of members of the board of the managing corporation also a majority of the
members