Securities Regulation Code RA8799

CORPORATION
LAW (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO
INCORPORATION AND ORGANIZATION OF B. In case the corporation is governed by a special

CORPORATIONS law (eg. educational institution) a favorable
CORPORATE NAME recommendation of the appropriate government agency
(eg. DepEd) that such articles is in accordance with law.
Clarification made by Atty: (Sec.17, last par.)

Late December 2017, SEC came out with a new regulation (3) Payment of the filing and publication fees.
concerning corporate names. Under the Intellectual
Property Code, the moment you create a trade name and (4) The issuance of the SEC of the certificate of
start using a trade name it is already protected even if it is incorporation if all papers filed after verification and
not yet registered under the IP Code.But under this new examination are found in order. Such certificate
regulation, if the corporation is doing business under a commences the corporate existence, it’s juridical
trade name different from its corporate name, the trade personality and legal existence. The certificate of
name should be included in its Articles of Incorporation. In incorporation is a final determination of the corporation’s
that regard, the protection granted by Section 18 of the right to do business or enter into contracts in its name.
Corporation Code is extended to that trade name. Once issued, the certificate becomes the charter or
corporate franchise from which the authority of the
Effect if the trade name is not included in the Articles corporation to operate as such flows. It is the primary
of Incorporation: franchise of the corporation akin to a birth certificate.

ORGANIZATION
SEC rules provide that such trade name can be used by
The issuance of the certificate of incorporation calls the
some other corporations subject to the consent of the
corporation into being but it is not ready to do business
owner of the trade name.
until it is organized. The corporation must formally organize

and commence the transaction of its business or the
Trade name and Corporate name need not be the same.
construction of its works within two (2) years from the date

of its incorporation, otherwise, its corporate powers shall
EXAMPLE
cease and it shall be deemed dissolved. (Sec. 22)
Trade name: Penshoppe

Corporate name: Golden ABC
Organization includes:
INCORPORATION 1. Adoption of by-laws
2. Election of the corporate officers
Steps in the creation of a corporation: 3. Putting up of corporate office as the principal place of
(1) Promotion their business (as indicated in the articles of the
(2) Incorporation incorporation)
(3) Formal organization and commencement of business 4. Application for permits (eg. Mayor’s or business permits)

operations

1. ADOPTION OF BY-LAWS
Steps in incorporation:
Sec. 46. Adoption of by-laws. - Every corporation
(1) Drafting and execution of the articles of incorporation
formed under this Code must, within one (1) month
by the incorporators (who must at least be 5 natural
after receipt of official notice of the issuance of its
persons but not more than 15 persons, all of legal age,
majority of whom are residents of the Philippines, and must certificate of incorporation by the Securities and
own or be a subcriber to at least one share of the capital Exchange Commission, adopt a code of by-laws for its
stock of the corporation). In this connection, the person government not inconsistent with this Code. For the
chosen as temporary treasurer pending incorporation must adoption of by-laws by the corporation the affirmative
also execute: vote of the stockholders representing at least a
A. An affidavit regarding the capital subscribed majority of the outstanding capital stock, or of at least
and paid-up. (Sec.14, last paragraph, Corporation Code) a majority of the members in case of non-stock
corporations, shall be necessary. The by-laws shall be
(2) Filing with the SEC of the articles of incorporation signed by the stockholders or members voting for
together with the following: them and shall be kept in the principal office of the
A. Treasurer’s affidavit showing at least 25% of the corporation, subject to the inspection of the
entire authorized shares has been subscribed an at least stockholders or members during office hours. A copy
25% of the subscription has been paid in cash and /or thereof, duly certified to by a majority of the directors
property to the corporation; and or trustees countersigned by the secretary of the
CENIZA | FONTANOSA | GABUNADA | GEGANTO | GEONZON | GLORIA | JUMAO-AS | KE-E | MALAZARTE | MARTINQUILLA | MATA | SEÑAGAN | WEE
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CORPORATION LAW (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO
corporation, shall be filed with the Securities and least a majority of the outstanding capital stock, or
Exchange Commission which shall be attached to the at least majority of the members in case of non-
original articles of incorporation. stock corporations
Notwithstanding the provisions of the preceding
paragraph, by-laws may be adopted and filed prior to By-laws may be also adopted and filed prior to
incorporation; in such case, such by-laws shall be incorporation. (Pre Incorporation)
approved and signed by all the incorporators and
submitted to the Securities and Exchange - in such case, such by-laws shall be approved and
Commission, together with the articles of
signed by all the incorporators and submitted to the
incorporation.
SEC, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the

issuance by the Securities and Exchange Commission
Pre incorporation meaning the by laws are submitted
of a certification that the by-laws are not inconsistent
with this Code. simultaneously with the articles of the incorporation
The Securities and Exchange Commission shall not in which case how are by-laws are adopted by the
accept for filing the by-laws or any amendment approval of ALL INCORPORATORS even though the
thereto of any bank, banking institution, building and incorporators do not present the majority of the
loan association, trust company, insurance company, outstanding capital stock of the corporation.
public utility, educational institution or other special
corporations governed by special laws, unless Consequences if by-laws were not adopted
accompanied by a certificate of the appropriate
government agency to the effect that such by-laws or • Ground for suspension
amendments are in accordance with law. • does not result to an automatic dissolution of
the corporation
Time and Procedure for the Adoption of By-laws:
1) Pre-incorporation LOYOLA GRAND VILLAS HOMEOWNER ASSOCIATION,
- -Submitted or filed before the SEC together with INC.,PETITIONER,VS. HON. COURT OF APPEALS, HOME
the articles of incorporation INSURANCE AND GUARANTY CORPORATION, EMDEN
- this is the one required now in practice, you ENCARNACION AND HORATIO AYCARDO,
cannot incorporate without it. RESPONDENTS.
2) Post-incorporation
Facts:
Basically everything that you need to do post
incorporation in order to commence transaction of LGVHAI was organized on February 8, 1983 as the
business. association of homeowners and residents of the
Loyola Grand Villas. It was registered with the
One of the items mentioned as part of the Home Financing Corporation, the predecessor of
organization of a corporation is the adoption of its by herein respondent HIGC, as the sole homeowners
laws although in practice as I mentioned before the organization in the said subdivision under
by laws are currently now required to be adopted pre Certificate of Registration No. 04-197. It was
incorporation but under the law by-laws can be organized by the developer of the subdivision and
adopted when? its first president was Victorio V. Soliven, himself
the owner of the developer. For unknown reasons,
Under the law section 46 .. however, LGVHAI did not file its corporate by-laws.

Every corporation, must, within one (1) month after Sometime in 1988, the officers of the LGVHAI tried
receipt of the official notice of the issuances of its to register its by-laws. They failed to do so. To the
certificate of incorporation by the SEC, adopt a code officers consternation, they discovered that there
of by-laws for its government not inconsistent with were two other organizations within the
the Corporation Code. (Post Incorporation) subdivision the North Association and the South
Association. According to private respondents, a
- For the adoption of by-laws by the corporation, the non-resident and Soliven himself, respectively
affirmative vote the stockholder representing at headed these associations. They also discovered
that these associations had five (5) registered Grand Villas. More importantly, the South
homeowners each who were also the Association did not dispute the fact that LGVHAI
incorporators, directors and officers thereof. None had been organized and that, thereafter, it
of the members of the LGVHAI was listed as transacted business within the period prescribed
member of the North Association while three (3) by law.
members of LGVHAI were listed as members of the
South Association. The North Association was On the second issue, the Court of Appeals
registered with the HIGC on February 13, 1989 reiterated its previous ruling that the HIGC has the
under Certificate of Registration No. 04-1160 authority to order the holding of a referendum to
covering Phases West II, East III, West III and East determine which of two contending associations
IV. It submitted its by-laws on December 20, 1988. should represent the entire community, village or
subdivision.
In July, 1989, when Soliven inquired about the
status of LGVHAI, Atty. Joaquin A. Bautista, the Petitioner contends that, since Section 46 uses the
head of the legal department of the HIGC, informed word must with respect to the filing of by-laws,
him that LGVHAI had been automatically dissolved noncompliance therewith would result in self-
for two reasons. First, it did not submit its by-laws extinction either due to non-occurrence of a
within the period required by the Corporation Code suspensive condition or the occurrence of a
and, second, there was non-user of corporate resolutory condition under the hypothesis that (by)
charter because HIGC had not received any report the issuance of the certificate of registration alone
on the associations activities. Apparently, this the corporate personality is deemed already
information resulted in the registration of the formed. It asserts that the Corporation Code
South Association with the HIGC on July 27, 1989 provides for a gradation of violations of
covering Phases West I, East I and East 11. It filed requirements. Hence, Section 22 mandates that the
its by-laws on July 26, 1989. corporation must be formally organized and should
commence transactions within two years from date
These developments prompted the officers of the of incorporation. Otherwise, the corporation
LGVHAI to lodge a complaint with the HIGC. would be deemed dissolved. On the other hand, if
the corporation commences operations but
HIGC ruled in favor of LGVHA and HIGC appellate becomes continuously inoperative for five years,
board affirmed it. then it may be suspended or its corporate franchise
revoked.
In resolving the first issue, the Court of Appeals
held that under the Corporation Code, Petitioner concedes that Section 46 and the other
provisions of the Corporation Code do not provide
We also find nothing in the provisions cited by the for sanctions for non-filing of the by-laws.
petitioner, i.e., Sections 46 and 22, Corporation However, it insists that no sanction need be
Code, or in any other provision of the Code and provided because the mandatory nature of the
other laws which provide or at least imply that provision is so clear that there can be no doubt
failure to file the by-laws results in an automatic about its being an essential attribute of corporate
dissolution of the corporation. While Section 46, in birth. To petitioner, its submission is buttressed by
prescribing that by-laws must be adopted within the facts that the period for compliance is spelled
the period prescribed therein, may be interpreted out distinctly; that the certification of the SEC/HIGC
as a mandatory provision, particularly because of must show that the by-laws are not inconsistent
the use of the word must, its meaning cannot be with the Code, and that a copy of the by-laws has
stretched to support the argument that automatic to be attached to the articles of incorporation.
dissolution results from non-compliance. Moreover, no sanction is provided for because in
the first place, no corporate identity has been
The Court of Appeals added that, as there was no completed. Petitioner asserts that non-provision
showing that the registration of LGVHAI had been for remedy or sanction is itself the tacit
validly revoked, it continued to be the duly proclamation that non-compliance is fatal and no
registered homeowners association in the Loyola corporate existence had yet evolved, and
therefore, there was no need to proclaim its approved and signed by all the incorporators and
demise. In a bid to convince the Court of its submitted to the Securities and Exchange
arguments, petitioner stresses that: Commission, together with the articles of
incorporation.
the word MUST is used in Sec. 46 in its universal
literal meaning and corollary human implication its In all cases, by-laws shall be effective only upon the
compulsion is integrated in its very issuance by the Securities and Exchange
essence MUST is always enforceable by the Commission of a certification that the by-laws are
inevitable consequence that is, OR ELSE. The use of not inconsistent with this Code.
the word MUST in Sec. 46 is no exception it means
file the by-laws within one month after notice of The Securities and Exchange Commission shall not
issuance of certificate of registration ORELSE. accept for filing the by-laws or any amendment
The OR ELSE, though not specified, is inextricably a thereto of any bank, banking institution, building
part of MUST. Do this or if you do not you are and loan association, trust company, insurance
Kaput. The importance of the by-laws to corporate company, public utility, educational institution or
existence compels such meaning for as decreed the other special corporations governed by special
by-laws is `the government of the corporation. laws, unless accompanied by a certificate of the
Indeed, how can the corporation do any lawful act appropriate government agency to the effect that
as such without by-laws. Surely, no law is intended such by-laws or amendments are in accordance
to create chaos.[7] with law.

The pertinent provision of the Corporation Code Issue: WON, the failure to file LGVHAI’s by-laws
that is the focal point of controversy in this case within the period prescribed by Sec. 46 of the
states: Corporation Code had the effect of automatically
dissolving the said corporation.
Sec. 46. Adoption of by-laws. Every corporation
formed under this Code, must within one (1) month Ruling: NO. the word must connotes an imperative
after receipt of official notice of the issuance of its act or operates to impose a duty which may be
certificate of incorporation by the Securities and enforced. It is synonymous with ought which
Exchange Commission, adopt a code of by-laws for connotes compulsion or mandatoriness. However,
its government not inconsistent with this Code. For the word must in a statute, like shall, is not always
the adoption of by-laws by the corporation, the imperative. It may be consistent with an exercise of
affirmative vote of the stockholders representing discretion. In this jurisdiction, the tendency has
at least a majority of the outstanding capital stock, been to interpret shall as the context or a
or of at least a majority of the members, in the case reasonable construction of the statute in which it is
of non-stock corporations, shall be necessary. The used demands or requires. This is equally true as
by-laws shall be signed by the stockholders or regards the word must. Thus, if the language of a
members voting for them and shall be kept in the statute considered as a whole and with due regard
principal office of the corporation, subject to the to its nature and object reveals that the legislature
stockholders or members voting for them and shall intended to use the words shall and must to be
be kept in the principal office of the corporation, directory, they should be given that meaning.
subject to inspection of the stockholders or
members during office hours; and a copy thereof, Section 46 aforequoted reveals the legislative intent
shall be filed with to attach a directory, and not mandatory, meaning
the Securities and Exchange Commission which for the word must in the first sentence thereof. Note
shall be attached to the original articles of should be taken of the second paragraph of the law
incorporation. which allows the filing of the by-laws even prior to
incorporation. This provision in the same section of
Notwithstanding the provisions of the preceding the Code rules out mandatory compliance with the
paragraph, by-laws may be adopted and filed prior requirement of filing the by-laws within one (1)
to incorporation; in such case, such by-laws shall be month after receipt of official notice of the issuance

of its certificate of incorporation by the Securities EXISTENCE. PROPER NOTICE AND HEARING ARE
and Exchange Commission. It necessarily follows CARDINAL COMPONENTS OF DUE PROCESS IN ANY
that failure to file the by-laws within that period DEMOCRATIC INSTITUTION, AGENCY OR SOCIETY. In
does not imply the demise of the corporation. By- other words, the incorporators must be given the
laws may be necessary for the government of the chance to explain their neglect or omission and
corporation but these are subordinate to the remedy the same.
articles of incorporation as well as to the
Corporation Code and related statutes. There are in
fact cases where by-laws are unnecessary to BY-LAWS
corporate existence or to the valid exercise of
corporate powers, thus: By- laws may be defined as the rules of action adopted
by a corporation (or association) for its internal
In the absence of charter or statutory provisions to government and for the government of its
the contrary, by-laws are not necessary either to stockholder or members and those having the
the existence of a corporation or to the valid direction, management and control of its affairs in
exercise of the powers conferred upon it, certainly their relation to the corporation and as among
in all cases where the charter sufficiently provides themselves, including rules for routine matters such
for the government of the body; and even where as calling meetings and the like.
the governing statute in express terms confers
upon the corporation the power to adopt by- It is not an essential requisite for the existence of the
laws, the failure to exercise the power will be corporation
ascribed to mere non-action which will not render
void any acts of the corporation which would Because what gives life to a corporation is the
otherwise be valid. issuance of certificate of incorporation
Failure to adopt by laws does not invalidate its
Although the Corporation Code requires the filing existence because its existence is derive from
of by-laws, it does not expressly provide for the authority given pursuant to the issuance of articles of
consequences of the non-filing of the same within incorporation.
the period provided for in Section 46. However,
such omission has been rectified by Presidential
Decree No. 902-A, the pertinent provisions on the Consequences of failure to adopt by laws
jurisdiction of the SEC of which state:
SEC. 6. In order to effectively exercise such Non-filing of the by- laws on time will not result in the
jurisdiction, the Commission shall possess the automatic dissolution of the corporation. Such
following powers: consequence is not provided in the Corporation Code.

(l) To suspend, or revoke, after proper notice and 1. Pursuant to Section 6(i, 5) of Pres. Decree No. 902-
hearing, the franchise or certificate of registration A( see Sec.19), the failure to file a code of by-laws
of corporations, partnerships or associations, upon within one (1) month from the date of incorporation
any of the grounds provided by law, including the with the SEC shall render the corporation liable to the
following: revocation of its registration.

5. Failure to file by-laws within the required period; 2. There must, first of all, be a hearing to determine
the existence of the ground, and assuming such
Even under the foregoing express grant of power finding , the penalty is not necessarily revocation but
and authority, THERE CAN BE NO AUTOMATIC may only be revocation.
CORPORATE DISSOLUTION SIMPLY BECAUSE THE
INCORPORATORS FAILED TO ABIDE BY THE 3.Under the rules and regulations of the Commission,
REQUIRED FILING OF BY-LAWS EMBODIED IN the failure may be merely with the imposition of an
SECTION 46 OF THE CORPORATION CODE. THERE IS administrative fine.
NO OUTRIGHT DEMISE OF CORPORATE

issuance of the Certification of Incorporation by

ADOPTION OF BY-LAWS the Securities and Exchange Commission.
Sec. 46. Adoption of by-laws. -
Every corporation formed under this Code must, within EFFECT OF FAILURE TO ADOPT BY-LAWS:
one (1) month after receipt of official notice of the
issuance of its certificate of incorporation by the • Only gives a ground to penalize the Corporation
Securities and Exchange Commission, adopt a code of and not an automatic dissolution or termination of
by-laws for its government not inconsistent with this its franchise.
Code. For the adoption of by-laws by the corporation the • The penalty is not found in the Corporation Code.
affirmative vote of the stockholders representing at • Basis of the penalty: Section 6 of P.D. 902-A with
least a majority of the outstanding capital stock, or of at respect to the power of the Securities and
least a majority of the members in case of non-stock Exchange Commission to suspend or revoke a
corporations, shall be necessary. The by-laws shall be corporation’s registration.
signed by the stockholders or members voting for them • Under this law it is still a requirement that the
and shall be kept in the principal office of the corporation is accorded with due process which is
corporation, subject to the inspection of the satisfied by due notice and hearing. Therefore, still
stockholders or members during office hours. A copy not automatic suspension or revocation.
thereof, duly certified to by a majority of the directors
or trustees countersigned by the secretary of the CONTENTS OF BY-LAWS
corporation, shall be filed with the Securities and Sec. 47. Contents of by-laws. - Subject to the provisions
Exchange Commission which shall be attached to the of the Constitution, this Code, other special laws, and
original articles of incorporation. the articles of incorporation, a private corporation may
provide in its by-laws for:
Notwithstanding the provisions of the preceding
paragraph, by-laws may be adopted and filed prior to
The time, place and manner of calling and conducting
incorporation; in such case, such by-laws shall be
regular or special meetings of the directors or
approved and signed by all the incorporators and
trustees;
submitted to the Securities and Exchange Commission,
The time and manner of calling and conducting
together with the articles of incorporation.
regular or special meetings of the stockholders or
In all cases, by-laws shall be effective only upon the members;
issuance by the Securities and Exchange Commission of The required quorum in meetings of stockholders or
a certification that the by-laws are not inconsistent with members and the manner of voting therein;
this Code. The form for proxies of stockholders and members
and the manner of voting them;
The Securities and Exchange Commission shall not The qualifications, duties and compensation of
accept for filing the by-laws or any amendment thereto directors or trustees, officers and employees;
of any bank, banking institution, building and loan The time for holding the annual election of directors
association, trust company, insurance company, public of trustees and the mode or manner of giving notice
utility, educational institution or other special thereof;
corporations governed by special laws, unless The manner of election or appointment and the term
accompanied by a certificate of the appropriate of office of all officers other than directors or trustees;
government agency to the effect that such by-laws or The penalties for violation of the by-laws;
amendments are in accordance with law. (20a) In the case of stock corporations, the manner of
issuing stock certificates; and
By-laws Such other matters as may be necessary for the
• The rules and regulations or private laws proper or convenient transaction of its corporate
enacted by the corporation to regulate, govern, business and affairs. (21a)
and control its own actions, affairs, and
concerns, and or its stockholders or member The time and manner of calling and conducting regular or
and directors and officers in relation thereto special meetings of the stockholders or members
and among themselves in their relation to the

corporation.
• The by-laws does not provide for the place of the
• The rules are not necessary to the conduct of its meeting for Stockholders or Members because
business with outside the Corporation. It will
the Articles of Incorporation has provided for it
not affect the corporate existence of the which is the principal place of business.
corporation which commences upon the
• It is different with the Board of Directors that 10. SUCH OTHER MATTERS AS MAY BE NECESSARY FOR THE PROPER
they can hold there meeting anywhere. OR CONVENIENT TRANSACTION OF ITS CORPORATE BUSINESS AND
AFFAIRS.
The required quorum in meetings of stockholders or
members and the manner of voting therein
Therefore, by-laws should not be contrary to the provisions
• The by-laws may provide for quorum but must of the Constitution, the Corporation Code, other special
not be less than what is required in the laws, and the articles of incorporation.
corporation code. Therefore, it cannot be less
than 50% + 1. If there is a conflict between the by-laws and Constitution,
• If it is more than the majority it is called as Super The Corporation Code, other special laws, and the articles
Majority quorum of incorporation, substantive laws will prevail.
• If the by-laws does not provide for the
quorum default is what is Stated in Section 25 of GRACE CHRISTIAN HIGH SCHOOL VS. CA
the Corporation Code which refers to the Facts:
“majority holding the outstanding capital stock”.

It is counted by shares and not by the number of
In 1968, when the by-laws of the Grace Village
persons.
Association Inc. was adopted, it states that the
• Majority is counted as 50% + 1
director shall be elected every year and shall serve for
Why by-laws need not provide the manner of voting one year. An amendment was made in 1975 in the by-
of the election of board of directors? laws making the representative of Grace Christian
Voting for election of directors is not the same as the voting High School as permanent Director of the Association.
for other matters by the stockholders. Voting for other This draft was never presented to the general
matter or approval by the stockholder requirement is based membership for approval. In 1990, Mr. James Tan, the
from the number of shares. If the law or the by-laws allow principal of the said school was informed by the
for the majority then base it from the outstanding capital association that “it was the sentiment that all
stock. If it requires 2/3 votes, then you just need to get the directors should be elected by members of the
approval of the holders of the 2/3 of outstanding capital association”.
stock. Take population as a whole. That’s ordinary
ratification or approval by stockholders. A suit for mandamus in the HIGC was brought by the
school to compel the board of directors of the
However, voting for election of directors is not the same. association to recognize its right to a permanent seat
This requires cumulative voting of stockholders. Meaning, in the board.
your vote is counted by the number of vacancies in the
board multiplied by the number of shares in the SEC: practice of allowing unelected members in the
corporation. board was contrary to the existing by-laws of the
association and to the Corporation Code.
EXAMPLE

There are 5 vacancies and you have 100 shares, the
corporation gives the stockholder 500 votes allowed. For
Moreover, the said by-laws which made the School
ordinary matter, you can only vote 100 or the number of representative as permanent director of the board
votes that you have. For election of directors, its cumulative was merely a proposal and never been ratified by its
or the number of vacancies multiplied the number of shares members.
you have.
SC: There was no valid amendment of the
The by-laws cannot provide for any other manner of voting association’s by-laws because there was a failure to
in the election of directors, other than what is provided in comply with the requirement of its existing by-laws
the law which is cumulative voting. It has to comply with and the Corporation Code pertaining to the manner
the Corporation Code. of voting of board of directors. It is worthy to note
that the proposed amendment to the by-laws was
CONTINUATION OF CONTENTS OF BY-LAWS SEC. 47 never approved by the holders of the association
8. THE PENALTIES FOR VIOLATION OF THE BY-LAWS representing majority of the outstanding capital
9. IN THE CASE OF STOCK CORPORATIONS, THE MANNER OF stock as required by the provisions of the law and its
ISSUING STOCK CERTIFICATES own by-laws. Further, the law provides that the
position must be elected. Petitioner has not acquired
a vested right despite its long and continued VGCCI refused to transfer the stock in the name of CBC
“practice” since practice, no matter how long due to Calapatia’s unsettled accounts (unpaid monthly
continued, cannot give rise to any vested right if its dues). Instead, VGCCI sent a demand letter to Calapatia
contrary to law. and later on informed the latter of the termination of his
membership to the sale of his stocks which was also
DISCUSSION OF THE CASE: conducted by VGCCI. CBC protested such sale.

In order to be elected as a director, you need to be a Discussion:
Sec. 63 of the Corporation Code does not cover OTHER
stockholder or in order for you to be a trustee, you
INDEBTEDNESS
need to be a member. You cannot be elected as a
1.It matters on what type of obligation he incurred,
director or a trustee when you are not a stockholder
WON its an unpaid subscription or other indebtedness
or a member of a corporation. The representative of The only time stocks are NOT allowed to be sold is when
Grace Christian High School in this case is not a the indebtedness refers to the stockholders unpaid
member of the village association. He just sits in the subscription
board as a representative of Grace Christian School.
This is not allowed under the law. Even if it was When shares are unpaid, they are NOT TRANSFERABLE
provided in the by-laws and the latter is approved by If the obligation was on the Unpaid Subscription, SC’s
the SEC, that by-laws cannot be contrary to the decision will not be the same. But since we are only
Corporation Code. Clearly, the latter should prevail. talking about the monthly dues, that does not fall under
the prohibition under Sec. 63.
This case was worse because the by-laws giving the
principal a permanent seat in the board was never Case Application:
approved by the SEC. Even if it was approved, the Country Club’s BY LAWS PROVISIONS
Corporation Code requirement will still prevail. By What is says : the member cannot sell his shares if there
laws, cannot put a requirement that is contrary to the are unpaid obligations to the country club.
provisions of the Corporation Code.

Since China bank is not among those enumerated by law
Moreover, even the fact that it has been practiced
as being bound by the by-laws of a corporation, CBC is
from 1975 to 1990s , that’s not mean that you have a
not bound by that specific requirement of the by-laws.
vested right to the position because the law gives a

specific qualification on who can be considered as
If Chinabank was notified by the bank when he applied
directors or trustees. If you do not fall within the for the registration of the pledge
requirement of the law then you cannot be elected as Effect: it would make a difference , since he would have
director or trustee even if it is provided in the by-laws. prior knowledge.

In this case, the notice given by the country club came in
Persons bound by the By-Laws too late, since they only notified CB only after the pledge
1. Corporation has aldready been foreclose, they did not notify upon
2. Directors the registration of the pledge.
3. Board of Trustees
4. Stockholders Therefore, Chinabank is not bound by the by-law for
being a third person without prior knowledge.
Persons not bound by the By-Laws
1. Any person who has no actual knowledge of the
corporation CEBU MACTAN MEMBERS INC V TSUKAHARA
2. Employees of the corporation Facts:
It appears that on February 1994, the CMMCI
CHINABANK V CA President, purportedly on behalf of CMMCI, obtained
Facts: a loan amounting to P6,500,000 from Tsukahara. As
Calapatia pledges his stocks to Chinabank (CBC). CBC
payment for the loan, CMMCI issued seven postdated
informed VGCCI and asked the latter to record it in its
checks of CMMCI payable to Tsukahara. On 13 April
books to which the latter acceded. Calapatia obtained a
1994, Sugimoto, again purportedly on behalf of CMCI,
loan from CBC secured by the pledge agreement. He
failed to pay thus CBC extrajudcially foreclosed the
obtained another loan amounting to P10,000,000 from
mortgage which resulted in CBC as the highest bidder. Tsukahara. Sugimoto executed and signed a
promissory note in his capacity as CMMCI President

and Chairman, as well as in his personal capacity. Upon A corporate officer may represent and bind the
maturity, the checks were presented for payment but corporation in transactions with third persons to the
the same were dishonored by PNB, the drawee bank. extent that the authority to do so has been
After several failed attempts to collect the loan intentionally, incidentally or impliedly conferred upon
Tsukahara filed a case for collection of sum of money him, or by apparent powers as corporation has caused
against CMMCI and Sugimoto with the Regional Trial persons dealing with its officer or agent to believe that
Court. it has conferred.

Tsukahara alleged that the amount of P16,500,000 was Discussion:
used by CMMCI for the improvement of its beach
resort, which included the construction of a wave The corporation, its stockholders and officers are
fence, the purchase of airconditioners and curtains, bound by its by-laws. The third person therefore have
and the provision of salaries of resort employees. He the right to rely on the provision or authority in the by-
also asserted that Sugimoto, as the President of laws. The corporation, when it provides for certain
CMMCI, “has the power to borrow money for said authority in its by-laws (which is it is allowed to do) is
corporation by any legal means whatsoever and to bound by such authority. When the corporation
sign, endorse and deliver all checks and promissory provide for certain authorities for its officers in its by-
notes on behalf of the corporation.” laws, it cannot thereafter retract and say later on that
it is not what they intend to so long as such authority
The Regional Trial Court ruled in favor of Tsukahara. is expressly provided in the by-laws and so long as it is
The Court of Appeals affirmed. The Supreme Court not contrary to laws and public policy. Ordinarily, any
agreed. transaction entered into by the corporation should be
done by the board of directors, so supposedly without
The Supreme Court ruled that the CMMCI President is the approval of the board of directors the corporation
given the power under CMMCI’s by-laws to borrow cannot transact business. In this case there was no
money, execute contracts, and sign and indorse checks approval by the board of directors it was just the
and promissory notes, in the name and on behalf of president himself who signed the documents, however
CMMCI. such is still binding to the corporation because it is
ARTICLE III expressly provided in their by-laws.
Officers
2. President. The President shall be elected by the Board of GOKONGWEI JR. V SEC
Directors from their own number. He shall have the following Facts:
powers and duties . . .

c. Borrow money for the company by any legal means
whatsoever, including the arrangement of letters of credit and
In this case petitioner Gokongwei is a stockholder of
overdrafts with any and all banking institutions; San Miguel Corporation. He filed a case for the
d. Execute on behalf of the company all contracts and declaration of nullity of the amended by-laws of
agreements which the said company may enter into; respondent corporation because he allege that the said
e.Sign, indorse, and deliver all checks, drafts, bill of exchange, amendment made by the stockholders is done to
promissory notes and orders of payment of sum of money in the
prejudice him because at that time, he was qualified to
name and on behalf of the corporation
be elected as a board of director. The respondent on

the other hand contended that Gokongwei cannot
With such powers expressly conferred under the
successfully impugn the amendment of the by-laws
corporate by-laws, the Supreme Court ruled that the
because they discovered that Gokongwei, although he
CMMCI president, in exercising such powers, need not
was a stockholder of San Miguel, he was also at the
secure a resolution from the company’s board of
same time a controlling stockholder of UFC AND CFC
directors:
who are also stockholders of San Miguel Corporation

and in that instance they discovered that these two
“Thus, given the president’s express powers under the
corporations which are controlled by Gokongwei, are
CMMCI’s by-laws, Sugimoto, as the president of
also engaged in businesses in competition with San
CMMCI, was more than equipped to enter into loan
Miguel. Taking from this, in most of the meetings that
transactions on CMMCI’s behalf. Accordingly, the
they had, the stockholders voted against the election
loans obtained by Sugimoto from Tsukahara on behalf
of Gokongwei in fact in one meeting the stockholders
of CMMCI are valid and binding against the latter, and
voted 80% against Gokongwei and in another meeting
CMMCI may be held liable to pay such loans.”
90% against him. BINDING EFFECT

The by-laws are binding because these are precisely
Discussion: internal rules to the corporation and stockholders. It is not
necessarily binding to third persons who are not privy to the
What was Gokongwei fighting against? provisions of the by-laws

He was fighting against the amendment of the by-laws
By-laws cannot be contrary to the Constitution, to the
because the amendment will disqualify him from being
Corporation Code, other laws and statutes and it cannot
elected as a Board of Director. The amendment also be contrary to the provisions of the Articles of
provides for a ground to disqualify a nominee from Incorporation but outside of those limitations, the
election to the board. Under the proposed amendment corporation and the stockholders may provide for whatever
of San Miguel, it provides that a nominee who holds a rules and regulations they need and deem necessary for the
competing interest or conflicting interest against the efficient and effective conduct of the corporation
corporation may not be elected as a director.
AMENDMENT OF BY LAWS
In this case, the voting of the Justices were tied. They
dismissed the question on the validity of the by-laws May be done by a majority vote of the BOD and vote of the
for failure to acquire the necessary votes. However it owners of at least the majority of the Outstanding Capital
mentioned in the decision that the stockholders can Stock (OCS)
amend the by-laws because as a rule when a
TESTS FOR APPROVAL
stockholders enters into corporation it submits to the
a. First Test: Majority of the board of directirs
idea that the decisions are controlled by the majority
directors – 50% plus 1 (out of 5 directors, 3 is the
and in this case he cannot acquire any vested right to majority, you count by person or by director)
the position and that by virtue of the fact that he has b. Second Test: By a vote of the owners of at least the
antagonistic claims or being the controlling majority of the Outstanding Capital Stock (OCS)
stockholder of two corporations which are in a. To determine the majority of the OCS, we
competition with SMC. SMC therefore has a right to look at the shares, 50% plus 1 of the
protect its interest that is why the stockholders can shares held by the stockholders including
validly amend the by-laws. (The corporation has the the directors so you count by shares
authority to provide for qualifications.)

EXAMPLE
What is the ground in order to render the qualifications
There are 5 directors and 4 directors have 4 shares each
and disqualifications valid?
while the other director has 996 shares out of 1000 shares.
IT MUST BE REASONABLE.
Such director is the owner of the majority of the
In this case, the Supreme Court mentioned that
outstanding capital stock
reasonableness is a question of whether or not the
provisions in the by-laws are applied without TAKE NOTE
qualification. SC held that the provision is reasonable These shares are subscribed shares since these are actually
because it applies to all, it does not apply to a specific owned by the stockholders
person. So any provision in the by- laws which provides
for qualification and disqualifications of directors in the SUBSCRIBED CAPITAL STOCK
election of directors is a valid provision provided that it Subscribed Capital Stock (SCS) is the same Outstanding
applies to all and not just to a specific person. Capital Stock (OCS) if there are no Treasury Shares. If you
have treasury shares then you have a different OCS in which

case you only take into consideration the OCS.

Recap: EXAMPLE
10,000 treasury shares the required voting would be 13,000
BY LAWS
+ 1.
internal rules governing the relationship between the

corporation and stockholders
Base it on the OCS and regardless of whether it is voting or

FAILURE TO ADOPT
non-voting. REASON is section 6 which provides that even
Failure to adopt the by-laws does not automatically dissolve the non-voting shares can vote provided that it is for the
a corporation but the failure to adopt may be a ground to adoption and the amendment of the corporate by-laws.
revoke or suspend the corporate franchise Total OCS voting and non-voting.

SEC. 6. REFER TO CODAL 🙃 the stockholder’s approval comes first (approval to

delegate to the BOD the power to amend the by-laws).
HOW IS THE POWER TO AMEND DELeGATED
Revocation of delegation: by majority vote of the
1. Owners of 2/3 of the OCS approves stockholders. (Take note of the voting requirements for the
2. If the power to amend may be delegated to the BOD is delegation and revocation, it is easier to revoke than to
stated in the by-laws delegate.)
Basis:

AMENDMENT TO BY-LAWS
BOARD OF DIRECTORS
SEC. 48. Amendments to by-laws. - The board of REQUIREMENTS TO BE ELECTED AS BOD
directors or trustees, by a majority vote thereof, and
the owners of at least a majority of the outstanding 1. OWN ATLEAST 1 SHARE
capital stock, or at least a majority of the members of What is required is merely legal tile NOT the
beneficial ownership of the share. Must own atleast
a non-stock corporation, at a regular or special
one (1) share as written In the stock and transfer
meeting duly called for the purpose, may amend or book.
repeal any by-laws or adopt new by-laws. The owners 2. RESIDENT OF THE PHILIPPINES
of two-thirds (2/3) of the outstanding capital stock or 3. LEGAL AGE
two-thirds (2/3) of the members in a non-stock
corporation may delegate to the board of directors or Section 23. xxx Every director must own at least one (1)
share of the capital stock of the corporation of which he is
trustees the power to amend or repeal any by-laws or
a director, which share shall stand in his name on the
adopt new by-laws: Provided, That any power
books of the corporation xxx
delegated to the board of directors or trustees to

amend or repeal any by-laws or adopt new by-laws EXAMPLE
shall be considered as revoked whenever I want to form a corporation by myself, can I do it? No.
stockholders owning or representing a majority of the because I need to have at least 5 incorporators. But what I
outstanding capital stock or a majority of the can do is, out of the 1,000 shares, I’ll have 996 shares to
members in non-stock corporations, shall so vote at a myself and 1 share each to the remaining incorporators.
regular or special meeting. That 1 share each, if I want, will not even be their beneficial
X X X X X X X X X X X X X X share. What I can do is to have them sign a declaration of
trust saying that they are merely holding the shares as my
AMENDING THE BY-LAWS nominee, and in trust for me.

1. Majority votes of the BOD and vote of the owners SO, under the stock and transfer book, their names will
of atleast the majority of the OST (DIRECT appear as stockholders, but, beneficially, the shares
METHOD) actually belong to me. They cannot receive dividends, and I
can direct them on how to vote the shares. The only have
TN: 2 APPROVALS legal ownership. Generally, that is a valid arrangement. The
1 FOR THE BOD then Ratification of the holders of only limitations is when you use those arrangements to
the OCS circumvent the law, such as when there is a nationalization
requirement, because it now has to be legal and beneficial
2. Delegation (INDIRECT OR DELEGATED APPROVAL) ownership to the filipinos.

ATTY: only by the approval of the BOD, no need for A majority of the directors or trustees of all corporations
approval of the stockholders. But this power of organized under this Code must be residents of the
sole approval by the directors can only be done if Philippines
such authority is delegated by the 2/3 of the OCS.
GENERAL RULE

There is no citizenship requirement
DIFFERENCE BETWEEN THE TWO MODES:
EXCEPTION
ST
1 mode is approved by both the BOD and Stockholders; Unless the corporation engages in nationalized activities,
nd
2 mode is only to be approved by BOD. in which case, we follow the rule in the FRIA.

st
Atty: In the 1 mode the stockholders actually approve
what’s in the amended by law. First the BOD then the
nd
Stockholders approve. In the 2 mode, the stockholders do

not actually see what’s in the amended by-laws because
DISQUALIFICATIONS EXCEPTION IS: DELINQUENT SHARE

Section 27. Disqualification of directors, trustees or A share is considered delinquent when a share subscribed
officers. - No person convicted by final judgment of an has not been paid on the specific date required, or if not
offense punishable by imprisonment for a period specified, upon the call for payment.
exceeding six (6) years, or a violation of this Code If a share has not yet been paid, but there is no call yet, you
aren’t considered delinquent, therefore, you can vote.
committed within five (5) years prior to the date of his

election or appointment, shall qualify as a director,
But delinquency has to be declared by the board. as long
trustee or officer of any corporation.
as there’s no declaration, they are entitled to vote,

provided they have voting shares.
2 DISQUALIFICATIONS:
1. convicted by final judgment of an offense punishable GENERAL INFORMATION SHEET
by imprisonment for a period exceeding six (6) years
2. violation of the corporation code committed within Within 30 days After election, you’ll have to submit the
five (5) years prior to the date of his election or General Information Sheet (GIS) to the SEC to report the
appointment election of directors. You will find here all the details of the
corporation.
ELECTION OF DIRECTORS
Section 24. Election of directors or trustees. - At all If you elect directors within your annual stockholders meeting,
elections of directors or trustees, there must be just file a GIS.
If you elect directors outside of the annual stockholders
present, either in person or by representative
meeting, file an amended GIS. Because you’re only supposed to
authorized to act by written proxy, the owners of a file a GIS once a year.
majority of the outstanding capital stock, or if there be
no capital stock, a majority of the members entitled to But, If there are any changes in the information required to be
vote. xxx stated in the GIS, like changing of directors, in that case, you file
an amendment to the SEC.

For the election of the directors, there must be a quorum
COMPENSATION OF DIRECTORS
To determining the quorum – majority of the outstanding
capital stock. Sec. 30. Compensation of directors. — In the absence of
To validly elect the director – voting shares any provision in the by-laws fixing their compensation,
the directors shall not receive any compensation, as
EXAMPLE such directors, except for reasonable per diems:
5 seats to be filled | 100 shares Provided, however, That any such compensation (other
Candidates: A B C D E F G than per diems) may be granted to directors by the vote
In this case, you are only allowed to have 500 votes. The by- of the stockholder representing at least a majority of
laws cannot provide for more nor less. 1 share = 1 vote the outstanding capital stock at a regular or special
stockholders' meeting. In no case shall the total yearly
METHODS OF VOTING: compensation of directors, as such directors, exceed
1. Straight Voting – the votes are distributed equally ten percent (10%) of the net income before income tax
among the candidates without preference. of the corporation during the preceding
2. Cumulative voting for one candidate: - 500 votes all in year.
favor of any candidate. For example, 500 votes for A
3. Cumulative voting by distribution – With 100 shares of GENERAL RULE
stock, you is entitled to 500 votes if there are five directors Directors are not entitled to compensation
to be elected. A may distribute his votes to candidates A, B,
and C, giving A, 100 votes, B, 150 and C, 250. A may cast his EXCEPTION
votes in any combination desired by him provided that 1. provided for in the by-laws
the total number of votes cast by him does not exceed 500, 2. approved by the voters of the majority of the
which is the number of shares owned by him multiplied by outstanding capital stock
the total number of directors to be elected. The compensation shall not exceed ten percent (10%) of
the net income before income tax of the corporation during
Basically, with the 500 votes, you can distribute it however you the preceding year.
want.

After election, the board of directors control the
In here, we only look at the voting shares. As long as the management of the corporation
voting shares are outstanding, they are allowed to vote.

They now have the authority to do all acts of management. BUSINESS OPPORTUNITY
They conduct day-to-day business operations. They control Transactional in nature, it does not contemplate a general
and hold all corporate properties. undertaking (i.e. investing in a competitor corporation)

The board holds the administrative powers; But the ILLUSTRATION
stockholders still hold the ownership powers. The corporation was approached by A who intends to buy
There are acts of the corporation, especially acts pertaining a lot owned by the corporation. B, a director of the
to ownership, which require the approval of the corporation, with knowledge of the intent of A to purchase
stockholders. the lot, goes to A and offers a land (owned by B) beside the
lot owned by the corporation, with a cheaper price.
BUSINESS JUDGMENT RULE
B’s position as a director abled him to know about the
Under the business judgment rule, any decision made by business opportunity (purchase of the lot by A), and the use
directors in the regular course of the performance of their of such information undermines the interest of the
duties, are considered as valid and the directors cannot be corporation—the taking of the opportunity or transaction
held liable for them. Courts have no authority to supplant that should have benefitted the corporation.
the judgment of the directors because, precisely, the
directors are supposed to be elected on the basis of their Section 31, par. 2 illustrates another instance of doctrine of
expertise with regards to the operations of the corporation. corporate opportunity:
This is binding on the Corporation and the stockholders.
LIABILITY OF DIRECTORS, TRUSTEES, OFFICERS
As long as the directors are acting in good faith, even if it Section 31. Liability of directors, trustees or officers. -
resulted in a loss, they cannot be held liable for any
Directors or trustees who willfully and knowingly vote
damages suffered by the corporation.
for or assent to patently unlawful acts of the

corporation or who are guilty of gross negligence or bad
[LACKING PORTION] faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict
with their duty as such directors or trustees shall be
DOCTRINE OF CORPORATE OPPORTUNITY liable jointly and severally for all damages resulting
Section 34. Disloyalty of a director. - Where a therefrom suffered by the corporation, its stockholders
director, by virtue of his office, acquires for himself a or members and other persons.
business opportunity which should belong to the When a director, trustee or officer attempts to acquire
corporation, thereby obtaining profits to the prejudice or acquires, in violation of his duty, any interest adverse
of such corporation, he must account to the latter for to the corporation in respect of any matter which has
all such profits by refunding the same, unless his act has been reposed in him in confidence, as to which equity
been ratified by a vote of the stockholders owning or imposes a disability upon him to deal in his own behalf,
representing at least two-thirds (2/3) of the he shall be liable as a trustee for the corporation and
outstanding capital stock. This provision shall be must account for the profits which otherwise would
applicable, notwithstanding the fact that the director have accrued to the corporation. (n)
risked his own funds in the venture. (n)
ILLUSTRATION OF SECTION 31, PAR. 2

A director who, by virtue of his office, acquires for himself Director, trustee, or officer (D/T/O) knows that the
a business opportunity which should belong to the corporation wants to buy a land. The D/T/O approaches the
Corporation, thereby obtaining profits to the prejudice of owner of the land and offers to buy the land at a price lower
such corporation, is guilty of disloyalty and should, than what the corporation intended (i.e. your price is 100K
therefore, account to the latter for all such profits by and the corporation’s price is 200K).
refunding the same, notwithstanding that he risked his
funds in the venture. You bought the land at 100K/sqm., and sold it to the
corporation at 200K/sqm.
When a director, trustee, or officer acquires pecuniary
interest against the corporation or acquires a business This is an example of acquiring interest adverse to the
opportunity reserved for the corporation. corporation.

DIRECTOR, TRUSTEE, OR OFFICER AS TRUSTEE

The director, trustee, or officer is considered a trustee for
the profits he has earned and is acquired to account and
refund it to the corporation.

DISTINGUISHED FROM THE BUSINESS JUDGMENT RULE

BUSINESS JUDGMENT RULE

GENERAL RULE
All the decisions of the directors, acting as such, cannot be
held liable therefor; no one can substitute a different
judgment for the judgment of the director, even by the
courts. They are not liable for any damages caused by their
decision.

EXCEPTIONS
1. Directors agree to a patently unlawful act
2. They are guilty of gross negligence
3. They acquire conflict of interest against the
corporation

EFFECT
Solidary liablility for damages to the corporation,
stockholders, and injured third persons.

DOCTRINE OF CORPORATE OPPORTUNITY

EFFECTS
1. Profits acquired are considered as that of the
corporation
2. Director is considered as trustee for the profit
3. Account and refund the corporation

REQUISITES FOR A VALID MEETING
1. Quorum – majority of the number of directors
stated in the articles.
2. Vote of the majority of those present


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CORPORATION

LAW (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO

INCORPORATION AND ORGANIZATION OF B. In case the corporation is governed by a special

issuance of the Certification of Incorporation by

promissory note in his capacity as CMMCI President

90% against him. BINDING EFFECT

SEC. 6. REFER TO CODAL 🙃 the stockholder’s approval comes first (approval to

DISQUALIFICATIONS EXCEPTION IS: DELINQUENT SHARE

DIRECTOR, TRUSTEE, OR OFFICER AS TRUSTEE

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