Corporation Code
natural person, although it may not
THE CORPORATION CODE perform certain actions that can be
OF THE PHILIPPINES done only by natural persons, such as
practice of law or medicine.
d. It may acquire and possess property of
Title 1 all kinds.

GENERAL PROVISIONS A General Principles

Powers, attributes and properties of a

A General Principles
This Code shall be known as the
1 Civil Code of the Philippines.
 
A corporation is
2 • an artificial being
  • created by operation of law,
• having the right of succession
and
• the powers, attributes and
properties
o expressly authorized by
law or
o incident to its existence.
Doctrine of Corporate Entity
§ A corporation is a legal or juridical
person with a personality separate and
apart from its individual stockholders or
members and from any other legal entity
to which it may be connected or related.
§ It is not in fact and in reality a person
but the law treats it as though it were a
person by process of fiction and thus
facilitating the conduct of corporate
business.
corporation
§ A corporation being a creation of law,
may exercise only such powers as are
granted by the law of its creation.
§ An express grant however is not
necessary.
§ A corporation may exercise, implied as
well as incidental powers.
Test to determine
§ The test to be applied is whether the act
of the corporation is in direct and
immediate furtherance of its business,
fairly incidental to the express powers
and reasonabl necessary to their
exercise.
Illustration:
1. Railroad corporation has incidental
power to build railroads.
2. Corporation engaged in agricultura chas
implied authority to buy agricultural
lands.
3. A cement factory may operate an
electric plant for the purpose of
exclusively suppliying electricity to its
cement factors and employees living
within its factory compound.
Corporation v. Partnership

Consequence of corporation being an artificial Basis Partnership Corporation

entity Manner of Mere agreement Created by
a. Generally, a corporation is only liable creation of the parties law or
for the obligations incurred by it. It is operation of
law
not liable for the acts of its stockholders
Number of At least 2 At least 5
or those of legal entities to which it may
incorporators
be connected.
Commencement From the From date of
b. Personal or solidary liability may be of juridical moment of issuance of
incurred by corporate agents acting in personality execution of certificate of
behalf of the corporation only when contract incorporation
exceptional circumstances warrant. Powers Any power Only powers
c. A corporation may incur obligations and authorized as expressly,
bring civil and criminal actions in its own long as not impliedly
contrary to law, granted and
name and in the same manner as a

Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017
 
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morals, etc. incidental the obligations of the
Management When Board of partnership.
management not trustees or § The charters must
agreed, every directors expressly allow the
partner is an corporation to enter
agent into partnership and
Effect of Partner can sue The suit must the nature of the
mismanagement a co-partner be in the partnership must be in
who mismanages name of the line with the business
corporation authorized by law or
Right of No right of Has right of the AoI.
succession succession succession § Where one of the
Liability to third Partners are Stockholders
partners is a foreign
corporation, it must
persons liable personally are liable only
obtain a license to
and subsidiarily to the extent
transact business in
for partnership of their
the country in
debts to third investment
accordance with the
persons
Corporation Code.
Transferability Delectus Stockholder
of interest personae can transfer
Four attributes of corporation
his shares 1. It is an artificial being
without prior § It has capacity to contract and
consent transact business.
Term of For any period Only 50 years, 2. It is created by operation of law
existence stipulated extendible to § It is a creature of law.
50 more in 3. It has a right of succession
one instance § It has a strong juridical personality.
Firm name “Ltd.” Is May adopt any 4. It only has the powers, attributes and
required for a firm name properties expressly authorized by law
limited provided it is or incident to its existence.
partnership not identical § It thus has limited powers.
or deceptively
similar Theories on corporate existence and powers
Dissolution May be dissolved Can only be 1. Theory of concession
at any time by dissolved with § Theory formally adopted by
will or any or all the consent of Philippine jurisprudence.
partners the State § This is the theory used when the
Laws governing Civil Code Corporation issue is between the State and the
Code corporation.
§ [Bance] Under this theory, the
corporation exists because the State
May a corporation be a partner?
allows it. It is thus a mere creation
§ Generally, a corporation cannot
of the State and requires state
ordinarily enter into partnership with
recognition and concession.
other corporations or with individuals.
2. Theory of business enterprise
§ Except:
§ The corporation is not merely an
o To enter into joint venture with
artificial being, but it is an
another where the nature of
aggregation of persons doing
that venture is in line with the
business through an underlying
business authorized by their
economic unit called the “business
charters.
enterprise.”
o Where the partnership
§ Under this theory, contracts and
agreement provides that the
transactions pursued requires the
two partners will manage the
protection of the commercial
partnership so that the
expectations of the public who
management of the corporate
dealt in good faith with the
interst is not surrendered.
apparent corporation.
o Under certain conditions:
§ All the corporation
Genossenchaft theory, not followed
partners must be
§ Considers the corporation as a social and
managing partners,
legal entity, independent of state
and thus, must be
recognition and concession.
solidarily liable for all

Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017

 
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§ The theory followed is the theory of
concession, wherein the corporation is
only a creature of law. Hence, it cannot
have rights and privileges higher than
that of its creator and cannot
legitimately refuse to yield obedience to
acts of its state organs.
Only government-owned or controlled
corporations may be created by law
Any other corporation must be incorporated
pursuant to a general enabling law, i.e. the
Corporation Code.
B Doctrine of Piercing the Corporate Veil
Doctrine of piercing the corporate veil
§ The separate personality of a §
corporation may be disregarded under
the doctrine of “piercing the veil of
corporate fiction,” as in fact at times
the courts will look at the corporation as
an aggregation of persons undertaking
business as a group, disregarding the
separate juridicalpersonality of the
corporation in unifying the group to
ascribe personal liability on its members.
Types of piercing application
The doctrine of piercing the corporate veil
applies only in three basic areas, namely:
a. Defeat of public convenience, as
when the corporate fiction is used as
a vehicle for the evasion of an
existing obligation (“equity
piercing”);
b. Fraud cases, as when the
corporation is used to justify a wrong,
protect a fraud, or defend a crime
(“fraud piercing”);
c. Alter ego cases, as when a
corporation is merely a farce since it
is a mere alter ego or business
conduit of a person, or where the
corporation is so organized and
controlled and its affairs are so
conducted as to make it merely an
instrumentality, agency, conduit or
adjunct of another corporation
(“Alter ego piercing or the
instrumentality test”)
Fraud cases v. Alter ego cases
§ When the corporation is a mere alter
ego or business conduit of a person, the
separate juridical personality may be
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
disregarded [even when the purpose is
not to hold an officer or stockholder
liable for corporate debts].
§ This is commonly referred to as the
“instrumentality rule” or the alter ego
doctrine, which the courts have applied
in disregarding the separate juridical
personality of corporation.
Effect as to liability
§ The corporation will be treated merely
as an association or collection of persons
or individuals undertaking business as a
group and the stockholders or members
will be considered as the corporation,
that is, liability will attach personally or
directly to the officers or stockholders.
If there are two corporation, they will
be merged into one, the one being
merely regarded as the instrumentality,
agency, conduit or adjunct of the other.
Piercing doctrine is only an equitable remedy
§ The doctrine of piercing the corporate
veil of corporate fiction is an equitable
doctrine developed to address situations
where the separate corporate
personality of a corporation is abused or
used for wrongful purposes.
§ This is a remedy of last resort and is not
available when the corporation
employed fraud in the foreclosure
proceedings, and other remedies are
still available, such as in this case the
remedy of annulment based on vice of
consent.
Guidelines as to piercing veil
1. Piercing the veil cannot be employed to
allow fraud.
§ Such as when the seller only raises
this to avoid the consequences of a
sale to a corporate entity by
claiming that the broker through
whom the seller transacted sale was
also the President of the corporate
buyer, when such fact was known to
her from the beginning.
2. Piercing applies only when the corporate
fiction was the very tool used to commit
fraud or evade obligations.
3. Piercing not available to establish a right
for the first time or theorize
Factors or circumstances rendering the
subsidiary an instrumentality
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1. The parent corporation owns all or most
of the capital stocks of the subsidiary.
2. The parent and subsidiary corporations
have common directors or officers.
3. The parent corporation finances the
subsidiary.
4. The parent corporation subscribes to all
the capital stock of the subsidiary or
otherwise causes its incorporation.
5. The subsidiary has grossly inadequate
capital.
6. The parent corporation pays the salaries
and other expenses or losses of the
subsidiary.
7. The subsidiary has substantially no
business except with the parent
corporation or no assets except those
conveyed to or by the parent
corporation.
8. In the papers of the parent corporation
or in the statements of its officers, the
subsidiary is described as a department
or division of the parent corporation, or
its business or financial responsibility is
referred to as the parent corporation’s
own.
9. The parent corporation uses the
property of the subsidiary as its own.
10. The directors or executives of the
subsidiary do not act independently in
the interest of the subsidiary but take
their orders from the parent-corporation.
11. The formal legal requirements of the
subsidiary are not observed.
Three-pronged test in determining the
applicability of the doctrine of piercing the
corporate veil based on the “instrumentality”
or “alter ego” doctrine
1. Instrumentality or control test – Not
mere or complete stock control, but
complete dominion, not only of finances
but of policy and business in respect to
the transaction attacked so that the
corporate entity as to this transaction
had at the time no separate mind, will
or existence of its own;
2. Fraud test - such control must have been
used by the defendant at the time the
acts complained of took place, to
commit fraud or wrong, violation of a
statutory or other positive duty, or
dishonest and unjust act in
contravention of plaintiff’s legal rights;
and
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
3. Harm/causal connection test – the
aforesaid control and breach of duty
must proximately cause the injury or
unjust loss.
§ The causal connection between the
fraud committed through the
instrumentality of the corporate
form and the injury or loss suffered
by the plaintiff must be established.
Alter ego doctrine does not allow court to
acquire jurisdiction over other corporation
§ The principle of piercing the veil of
corporate fiction and the resulting
treatment of 2 related corporations as
one and the same is applied only to
determine liability.
§ It is not available to confer on a court
jurisdiction it has not acquired in the
first place, over a party not impleaded
in a case.
§ This means that in order to assert
liability, 2 requisites must concur:
o The court must first acquire
jurisdiction over the corporation or
corporations involved before it can
apply the doctrine; and
o The doctrine must be raised during
a full-blown trial over a cause of
action duly commenced involving
parties duly brought under the
authority of the court.
Clear and convincing evidence
§ Clear and convincing evidence is needed
to pierce the veil of corporate fiction.
§ The mere interlocking of directors and
officers does not warrant piercing the
separate corporate personalities of two
corporations – not only must there be a
showing that there was a majority or
complete control, but complete
domination, not only of finances but of
policy and business practice in respect
to the transaction attacked, so that the
corporate entity as to this transaction
had at the time no separate mind, will
or existence of its own.
Extent of legal effects when piercing applied
§ The application of the piercing doctrine
to a particular case does not deny the
corporation of legal personality for any
and all purposes, but only for the
particular transaction or instance for
which the doctrine was applied.
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Four Basic Advantages of Corporate Doctrine of limited liability vis-à-vis doctrine of

C Organizations
1. Strong Juridical Personality
Personality separate and distinct from
individual stockholders
§ A corporation has a personality separate
and distinct from its individual
stockholders or members. Being an
officer or stockholder of a corporation
does not make one’s property also that
of the corporation and vice versa.
§ The transfer of corporate assets to the
stockholders is not a partition among co-
owners, for the stockholders do not co-
own corporate assets; such transfer
must be treated as a conveyance from
one party to another.
§ The interest of a party is purely
inchoate: and this purely inchoate
interest not entitle them to intervene in
a litigation involving corporate property.
separate juridical personality
§ Stockholders are not personally liable
for corporate debts and liabilities, and if
they stand to lose anything at all by
reason of the corporation’s insolvency,
it is only to the extent of what they
invested or promised to invest into the
venture.
3. Centralized Management
All corporate powers are vested with the BoD
§ Except when otherwise provided in the
Corporation Code, all corporate powers
and all corporate properties are vested
in the BoD/BoT; and
§ Other than electing directors or trustees,
and specific provisions giving them
ratificatory voting rights, the
stockholders or members do not have
management powers over operations
and assets of the corporation.

Case: Edward J. Nell v. Pacific Farms

§ A Corp buys the shares of B Corp which 4. Free transferability of Units of Ownership
later turns out to be insolvent. Will A
Corp be answerable for the debts of B Doctrine of delectus personam, not applicable
Corp? § The doctrine of delectus personam in
§ Generally, no. Where a corporation buys partnership is not applicable to
all the shares of another corporation, corporate setting, and that stockholders
this will not operate to dissolve the hold their shares as personal property
bought corporation and the two with rights to dispose, assign or
corporations still maintain their encumber them as they may desire.
separate corporate entites.
Consequently, a corporation which buys
all the shares of another corporation D Nationality of Corporation
which becomes insolvent will not be
liable for the latter’s debts. Place of incorporation test
§ The corporation is a national of the
Exceptions: country under whose law it is organized
1. If there is an express assumption of or incorporated.
liabilities by the buying corporation. § This is the primary test of nationality in
2. If the purchase was in fraud of creditors Philippine jurisdiction.
(accion pauliana).
3. When there is consolidation or mereger. Control test
4. If the purchaser merely continues the § In certain cases, the control test is
business enterprise of the seller, i.e. employed in addition to the nationality
when it amounts to a business enterprise test.
transfer. § This test is employed where in
special/extraorrdinary circumstances
2. Limited Liability to Investors involving:
o Exploitation of natural
Doctrine of Limited Liability reousrces
§ As a general rule, stockholders in a stock o Ownership of land
corporation are personally liable for o Operation of public utility
corporate debts and liabilities only to o War time
the extent of what they have invested
(paid-up capital) and what they have Grandfather rule
promised to invest in the corporation § Under this rule, the nationality of the
(unpaid subscription). stockholders is material in determining
the nationality of a corporation or its

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Xavier University – Ateneo de Cagayan, Class of 2017
 
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compliance with our laws on permissible a. Corporation aggregate
foreign investment. § Corporation consisting of
§ This is done by attributing the more than one member.
nationality of second or even subsequent b. Corporate sole
tier ownership to determine the § Special form of corporation
nationality of the corporate shareholder. usually associated with the
§ If the shares of stock of the immediate clergy.
investor corporation is in turn held and 2. As to whether they are for religious
controlled by another corporation, then purposes
the Court must look into the citizenship a. Ecclesiastical corporation
of individual stockholders of the latter § Organized for religious
corporation. purposes.
b. Lay corporation
§ Organized for purpose
B Classification of Corporations other than religious.
3. As to whether they are for charitable
purposes
a. Eleemosynary corporation
Corporations formed or organized § Established for charitable
3 under this Code may be purposes
  § Stock; or b. Civil corporation
§ Non-stock corporations. § Established for business or
profit
Corporations which have 4. As to State under or whose laws they
§ capital stock divided into have been created
shares and a. Domestic corporation
§ are authorized to § Incorporated under PH law
distribute to the holders b. Foreign Corporation
of such shares dividends § Incorporated under laws
or allotments of the other than the PH
surplus profits on the 5. As to their legal right to corporate
basis of the shares held existence
a. De jure corporation
are stock corporations.
§ Existing in fact and in law;
See later discussion
All other corporations are non- b. De facto corporation
stock corporations. § Existing in fact but not in
law
6. As to whether they are open to the
A Stock and Non-Stock Corporation
public or not
a. Close corporation
Stock corporation § Limited to selected persons
§ Created and operated to make a profit or members of a family
which may be distributed in the form of b. Open corporation
dividends. § Open to any person who
§ Organized for profit may wish to become a
§ Two elements that must be present: stockholder
o With capital stock divided into shares; 7. As to relation to another corporation
and a. Parent or holding corporation
o Authorized to distribute shares’ § Related to another
dividends. corporation that it has the
power, either directly or
Non-stock corporation indirectly, through one or
§ Do not issue stock or dividends to their more intermediaries, to
members control or to elect the
§ Not created for profit but for public majority of the directors of
good and welfare. such other corporation.
§ This usually include charitable, religious, b. Subsidiary corporation
social, literary, scientific, civic and § Related to another
political organizations and societies. corporation that the
§ No capital stock. majority of its directors
can be elected, either
Other classification of corporations directly or indirectly, by
1. As to number of persons composing: such other corporation

Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017

 
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which thereby become its
parent
c. Affiliated corporation
§ Related to another by
owning or being owned by
common management or by
a long-term lease of
properties.
8. As to whether government or private
purpose
a. Public corporations
§ Formed or organized for
the government of a
portion of the State for the
general good and welfare
b. Private corporations
§ Formed for some private
purpose, benefit or end
B De Facto Corporation
The due incorporation of any
20 corporation claiming in good faith to
  be a corporation under this Code,
and its right to exercise corporate
powers, shall not be inquired into
  authority to do so shall be liable as
collaterally in any private suit to
which such corporation may be a
party.
Such inquiry may be made by the
Solicitor General in a quo warranto
proceeding.
De facto corporation, meaning
§ A corporation where there exists a flaw
in its incorporation.
Rationale as to why no collateral attack may be
made
§ Grant of juridical personality is an
exercise of State power and not a
matter of private affair. Consequently,
under the de facto corporation doctrine,
the defect in the juridical personality of
a corporation cannot be inquired into by
private individuals, much less used as a
defense to avoid claims,
o Except in a quo warranto
proceeding brought on behalf of
the State where the main
action is to question the
validity or existence of such
juridical personality.
Requisites of a de facto corporation
1. Organized under a valid law
2. Bona fide compliance with formalities of
law
3. User of corporate powers;
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
4. SEC issuance of certificate of
incorporation.
When is there a bona fide attempt to
incorporate
§ There must be bona fide attempt in
good faith to create a corporation de
jure. Mere intent is not sufficient.
§ Furthermore, there must be bona fide
attempt to comply with all the
requirements of law, which goes far
enough to amount to “colorable
compliance” with the law.
Defects precluding creation of corporation
1. Absence of articles of incorporation
2. Failure to file articles of incorporation
with the SEC (Cagayan Fishing Co v.
Sandiko, 1934)
3. Lac of certificate of incorporation from
the SEC.
C Corporation by estoppel
All persons who assume to act as a
21 corporation knowing it to be without
general partners for all debts,
liabilities and damages incurred or
arising as a result thereof:
Provided, however, That when any
such ostensible corporation is sued
on any transaction entered by it as a
corporation or on any tort
committed by it as such, it shall not
be allowed to use as a defense its
lack of corporate personality.
One who assumes an obligation to an
ostensible corporation as such,
cannot resist performance thereof on
the ground that there was in fact no
corporation.
Basis of doctrine of corporation by estoppel
§ Corporation by estoppel is founded on
principles of equity and is designed to
prevent injustice and unfairness.
§ It applies when persons assume to form
a corporation and exercise corporate
functinos and enter into business
relations with third persons.
§ Where there is no third person involved
and the conflict arises only among those
asusming the form of a corporation who,
therefore, know that it has not been
registered, there is no corporation by
estoppel.
§ The doctrine of corporation by estoppel
will apply to a third party only when he
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tries to escape liability on a contract shareholders. Corporators in a non-
from which he has benefited on the stock corporation are called
irrelevant ground of defective members.
incoporation.
Incorporators
Corporation by estoppel v. corporation de facto § are those stockholders or members
§ The better doctrine is that estoppel menioned in   the articles of incorporation
prevails, notwithstanding that not all as originally forming and composing the  
the three requisites necessary to corporation and who are signatories
constitute as association of persons a de thereof
facto corporation are present.
§ In other words, corporation by estoppel Rationale
may arise even if no de facto § The incorporator (aside from the fact
corporation exist. that he gives part of   the capital)
guarantees to the world that the articles
When estoppel does not apply of incorporation   are hue and if it turns
§ The corporation by estoppel doctrine out that there is falsity, the incorporator
cannot be employed bya person acting may be   heM liable for the damages
as President of an unincorporated caused thereby.
corporation toescape personal liability § If a corporation is allowed   to become an
on the ground that the other party incorporator, it can only be limitedly
"cannotdeny the corporate existence of liable in such case.   The law seeks to
the Federation because it hadcontracted make only natural persons who are
and dealt with the Federation in such a unlimitedly liable   as the only ones
manner as torecognize and in effect qualmed to be incorporators.
admit its existence."
§ The application ofthe doctrine applies to Corporators
a third party only when he tries to § those who compose the corporation,
escapeliability on a contract from whether as  stockholders or members.
which`he has benefited on the
irrelevantground of defective Three other classes
incorporation. 1. Promoters
§ In the case at bar, the petitioneris not § Persons who bring about or cause to
trying to escape liability from the bring about the formation and
contract but rather is theone claiming organization of a corporation by
from the contract. (Int’l Express Travel bringing together the incorporators
v. CA, 2000) or the persons interested in the
enterprise.
Corporations created by special laws § Refer to persons who undertake the
4 or charters shall be governed formation of a corporation without
  primarily by the provisions of the their being incorporators.
special law or charter creating them § They lay the groundwork for
or applicable to them, supplemented corporate existence.
by the provisions of this Code, 2. Subscribers
insofar as they are applicable. § Persons who have agreed to take
and pay for original, unissued shares
or a corporation formed or to be
C Incorporators, stockholders formed.
§ A susbcriber is technically not a
stockholder. He becomes a
Corporators are those who compose stockholder only from the time his
5 a corporation, whether as subscription is accepted by the
  stockholders or as members. corporation or the corporation’s
offer is accepted by him.
Incorporators are those stockholders § Technically, a person is not a
or members mentioned in the stockholder unless he is recorded as
articles of incorporation as originally such in the books of the corporation.
forming and composing the 3. Underwriter
corporation and who are signatories § Person, usually an investment bank,
thereof. who has:
a. Agreed, alone or with others to
buy at stated terms an entire
Corporators in a stock corporation
issue of securities or a
are called stockholders or substantial part thereof;

Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017

 
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b. Has guaranteed the sale of an
issue by agreement to buy from
the issuing party any unsold
portion or at stated price; or
c. Has agreed to use his “best
efforts” to market all or part of
an issue; or
d. Has offered for sale stock he
has purchased from
controlling stockholder.
D Shares of Stock
The shares of stock of stock
6 corporations may be divided into
  classes or series of shares or both,
any of which classes or series of
shares may have such rights,
privileges or restrictions as may be
stated in the articles of
incorporation:
Provided: That no share may be
deprived of voting rights except
those classified and issued as
§ “preferred”; or
§ “redeemable” shares,
unless otherwise provided in
this Code:
Provided, further: That there shall
always be a class or series of shares
which have complete voting rights.
Any or all of the shares or series of
shares may have a par value or have
no par value as may be provided for
in the articles of incorporation:
Provided, however, That
§ banks,
§ trust companies,
§ insurance companies,
§ public utilitities and
§ building and loan associations
shall not be permitted to
issue no-par value shares of
stocks.
Preferred shares of stock issued by
any corporation may be given
preference in the distribution of the
assets to the corporation in case of
liquidation and in the distribution of
dividends, or such other preferences
as may be stated in the articles of
incorporation which are not violative
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
of the provisions of this Code;
Provided, That preferred shares
of stock may be issued only with a
stated par value.
The Board of Directors, where
authorized in the articles of
a
incorporation, may fix the terms
and conditions of preferred shares
of stocks or any series thereof;
Provided, That such terms
and conditions shall be
effective upon the filing of a
certificate thereof with the
Securities and Exchange
Commission.
Shares of capital stock issued
without par value shall be deemed
fully paid and non-assessable and the
holder of such shares shall not be
liable to the corporation or to its
credits in respect thereto:
Provided, That shares without
par value may not be issued for a
consideration less than the value
of P5 per share:
Provided, further, That the
entire consideration
received by the corporation
for its no-par value shares
shall be treated as capital
and shall not be available
for distribution as dividends.
A corporation may, furthermore,
classify its share for the purpoes of
insuring compliance with
constitutional or legal requirements.
Except as otherwise provided in the
articles of incorporation and stated
in the certificate of stock, each
share shall be equal in all respects to
every other share.
Where the articles of incorporation
provide for non-voting shares in the
cases allowed by this Code, the
holders of such shares shall
nevertheless be entitled to vote on
the following matters:
1. Amendment of the articles
of incorporation;
2. Adoption and amendment of
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by-laws;
3. Sale, lease, exchange,
mortgage, pledge or other
disposition of all
substantially all of the
corporate property;
4. Incurring, creating
increasing bonded
indebtedness;
5. Increase or decrease capital
stock;
6. Merger or consolidation of
the corporation with another
corporation or other
corporations;
7. Investment of corporate
funds in another corporation
or business in accordance
with this Code; and
8. Dissolution of the
corporation.
Except as provided in the
immediately preceding paragraph,
the vote necessary in this code shall
be deemed to refer only to stocks
with voting rights.
Power to classify shares
GR: The shares of stock corporations may be
divided into classes or series of shares, or both,
any of which classes or series of shares may have
rights, privileges, or restrictions as may be stated
in the articles of incorporation.
Except:
This power to classify shares is subject to
certain qualifications and limitations as may be
imposed by law or by the articles of incorporation.
(1) No share may be deprived of voting
rights except those classified and issued
as "preferred," or "redeemable" shares.
(2) there shall always be a class or series of
shares which have complete voting
rights.
(3) Any or all of the shares or series of
shares may have a par value or have no
par value as may be provided for in the
articles ofincorporation, except that
a. banks,
b. trust companies,
c. insurance companies,
d. public utilities, and
e. building and loan associations
shall not be permitted to issue
no par value shares of stock.
When classification of shares may be made
1. By the incorporators – those that first
determine what kind and number of
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
shares may be issued as stated in the
articles of incorporation.
2. By the BoD and stockholders – after the
or corporation comes into existence but
only by amending the articles of
incorporation.
or
If the amendment changes or restricts
the rights of any class of shares or
authorizes preferences in any respect
superior to those of outstanding shares
of any class, any stockholder shall have
the right to dissent and demand
payment of the fair value of his shares.
(Sec. 81)
Doctrine of equality of shares
1. It means that in the absence of any
provision in the articles of incorporation
and in the certificate of stock to the
contrary, all stocks, regardless of their
class, nomenclature, enjoy the same
rights and privileges and subject to the
same liabilities.
Who may classify shares
2. Unless the Articles of Incorporation
expressly allow the BoD to classify
shares, the Board has no authority to
classify shares.
3. Hence, the BoD must have the consent
of the stockholders in this case.
1 share, 1 vote
§ Stockholders have one vote for each
share held by them, which excludes
fractional voting.
§ The power to classify shares cannot be
construed to mean that one class is
entitled to four votes per share, and
another class only to one vote per share.
Capital Stock, Capital, Shares of Stock
A and Certificate of Stock
Capital stock
§ Capital stock is the amount fixed in the
articles of incorporation
o to be subscribed and paid in or
agreed to be paid in by the
stockholders of a corporation,
o in money, property, services or
other means
o at the organization of the
corporation or afterwards.
Capital stock v. authorized capital stock
§ Authorized refers to the amount of
capital stock as specified in the articles
of incorporation.
§ It is synonymous with capital stock
where the shares of corporation have
par value.
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§ If the shares have no par value, the
corporation has no authorized capital
stock, but it has capital stock the
amount of which is not specified in the
articles as it cannot be determined until
all the shares have been issued.
Corporation Code
In response to advertisements made by the
corporation to buy shares in the company,
applications have been received for 1.2M shares
but the company only issued 1M shares. Out of
the 1M issued shares, only 800,000 have been
paid.

Subscribed capital stock Later on, the corporation bought back

§ The amount of the capital stock 300,000 of these shares. Determine:
subscribed, whether fully paid or not.
§ It connotes an original subscription Authorized capital = P20M
contract for the acquisition by a Subscribed capital = 1,200,000 x P10 = P12M
subscriber of unissued shares in a
corporation and would.
§ [Bance] Hence, this pertains to the
original sale between the corporation
and the stockholders and does not
involve the subsequent transfer of share
or resale of treasury shares. 1. Common and Preferred Shares
§ The primary classification of shares is
Outstanding capital stock common and preferred, each of which
§ Portion of the capital stock which is may be divided into other classes.
issued and held by persons other than
the corporation itself.
§ The total shares of stock issued to
subscribers or stockholders, whether or
not fully or partially paid, except
treasury shares. (Sec. 137)
§ It is thus broader than subscribed capital
stock.

Outstanding v. subscribed capital stock Capital

§ These two terms are often used § Used broadly to indicate the entire
synonymously property or assets of the corporation.
§ But while every subscribed share is § It includes the amount invested by the
“outstanding,” an issued share may not stockholders plus the undistributed
have the status of outstanding share as earnings less losses and expenses.
in the case of treasury shares.
Capital stock v. capital
Paid up capital
§ Portion of the subscribed or outstanding Capital Capital Stock
capital stock that is actually paid. Actual corporate An amount.
§ “Actual capital stock” is also used to property.
refer to the amount of the capital stock
actually subscribed and paid for. Concrete thing Abstract
Fluctuates or varies Fixed in the articles
Unissued capital stock from day to day as of incorporation and
§ Portion of the capital stock that is not there is appreciation unaffected by profits
issued or subscribed. or depreciation of and losses
§ It does not vote and draws no dividends. profits
Belongs to the When issued, belongs
Legal Capital corporation to the stockholder
§ The amount equal to the aggregate par May involve real or Always personal
value and/or issued value of the personal property property
outstanding capital stock.
§ When par value shares are issued above Stock or share of stock
par, the premium or excess is not to be § One of the units into which the capital
considered as part of the legal capital. stock is divided.
§ It represents the interest or right which
Example: the owner has –
ABC Ltd was registered with an authorized capital a. In the management of the
of P20M where each share is of P10. corporation in which he takes
part through his right to vote

Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017
 
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Corporation Code
b. In a portion of the corporate § Possession of a certificate of stock is not
earnings essential to ownership of stock because
c. Upon its dissolution and winding the right to stock may exist
up, in the property and assets independently of the certificate.
of the corporation.

Capital stock v. share of stock Situs of shares of stock for certain purposes
1. For purposes of execution, attachment
Capital stock Share of stock and garnishment
The whole body of The stock in the o Domicile or residence of the
shares of stock in the hands of the corporation, which is the place
corporation stockholder. where the principal office of
the corporation is located.
Nature of share of stock 2. For purposes of registration of chattel
1. Ownership of share of stock confers no mortgages on shares of stock
immediate legal right or title to any o Province or city where the
property of the corporation. corporation has its principal
2. Shares of stock consitute property office or place of business.
distinct from the capital or tangible 3. For purposes of property taxation
property. o Domicile or residence of the
o Hence, shares of stock are owner.
personal property even if most
of the properties of the
corporation are real properties. B Classes of shares in general
3. They do not constitute an indebtedness
of the corporation to the shareholder 1. Par value or no par value
and are therefore, not credits as to 2. Voting or non-voting
make the stockholder a creditor of the 3. Common or preferred
corporation. 4. Promotion share
4. Only typifies a proportionate or aliquot 5. Share in escrow
part of the corporation’s property. 6. Convertible share
7. Founder’s share
Certificate of stock 8. Redeemable share
§ Written acknowledgment by the 9. Treasury share
corporation of the interest, right and
participation of a person in the
management, profits, and assets of a 1. Par value v. no-par value
corporation.
§ Formal written evidnce of the holder’s Par value share
ownership of one or more shares and is a § One with a specific money value fixed in
convenient instrument for the transfer the articles of incorporation and
of title. (Sec. 63) appearing in the certificate of stock.
Share of stock v. Certificate of stock Rules as to par value share
1. The primary purpose of par value is to
Share of stock Certificate of stock fix the minimum subscription or issue
Incorporeal or Tangible property price of the shares, thus assuring
intangible property creditors that the corporation would
Represents the right Written evidence of receive minimum amount.
or interest of a person that right or interest 2. A corporation may issue shares with
in a corporation different par values. Shares issued less
May be issued even if May not be issued than par value are referred to as
the subscription is not unless the watered stock.
fully paid subscription is fully 3. The par value of a stock remains t he
paid same regardless of market value or book
Situs of share of stock Situs is at the place value of the stock, except when there is
is the State where the where it is located or a stock split.
corporation has its at the domicile of the
domicile owner, even though
the corporation is
domiciled elsewhere Stock split
§ A company divides its existing shares
Possession of certificate of stock into multiple shares.

Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017

 
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§ Although the number of shares
outstanding increases by a specific
multiple, the total dollar value of the
shares remains the same compare to
pre-split amount.
§ The most common is 2 for 1 or 3 for 1,
wherein the shares held by the
stockholder is increased by such number.
§ Also known as:
o Forward stock split
o Scrip issue
o Bonus issue
o Capitalization issue
o Free issue
No par value share
§ One without any stated value appearing
on the face of the certificate of stock.
§ In other words, it is a stock which does
not state how much money it represents.
Rules as to no par value share
1. It has no par value, but it always has an
“issued value,” which is the
consideration fixed by the corporation
for its issuance.
2. Does not purport to represent any stated
proportionate interest in the capital
stock measured by value, but only an
aliquot part of the whole number of such
shares of the issuing corporation.
3. A corporation may issue no par value
only, or together with par value shares.
a. No par value stockholders have
the same rights as holders of
par value stock.
4. The capital stock of a corporation issuing
only no par shares is not set forth by a
stated amount of money, but instead is
expressed to be divided into a stated
number of shares, i.e. if there are 1000
shares and a shareholder has 100 shares,
then that means he has 100/1000 shares
or 1/10 of the shares.
a. By removing the par value of
shares, the attention of persons
interested in the financial
condition of the corporation is
focused upon the value of
assets and the amount of its
debt.
Restrictions regardings the issuance of no par
value shares
1. Banks, trust companies, insurance
companies, and building and loan
associations shall not be permitted to
issue no par value shares of stock.
2. Preferred shares of stock of any
corporation may be issued only with a
stated par value.
3. Shares issued without par value shall be
deemed fully paid and non-assessable
and the holder of such shares shall not
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
be liable to the corporation or to its
creditors in respect thereto.
§ However, this does not mean that
the holder is no longer liable for for
the shares if they are not yet fully
paid.
§ It only means that the holder shall
not be liable beyond the issued
price, notwithstanding a change in
their value.
4. Shares without par value may not be
issued for a consideration less than the
value of P5 per share; and
5. The entire consideration received by the
corporation for its no par value shares
shall be considered as capital, and
therefore, shall not be available for
distribution as dividends.
§ The theory is that the shareholders
intended that all the amounts paid
for no par value shares shall be
employed permanently to the
prosecution of the venture.
Rule as to why the 5 companies cannot issue no
par value shares
§ Ibove-types of corporations deal with
the public and most ofthem manage the
savings of the people; thus, the law
seeks to protect the investing public by
making sure that such corporation have
sufficient funds in the form of capital so
that the public could determine the
financial viability of such corporations.
Three ways of determining value of no par
value shares
(1) By majority vote of the outstanding
shares (issuedshares) in a meeting called
for that purpose;
(2) By Board of Directors pursuant to
authority conferredupon it by the
articles of incorporation; or
(3) By amendment of articles of
incorporation.
Advantages of par value shares
1. Par value shares are easily sold as the
public is more attracted to buy this kind
of shares;
2. There is greater protection to creditors.
3. There is unlikelihood of sale of
subsequently issued shares at a lower
price;
4. There is unlikelihood of sale of
subsequently issued shares at a lower
price; and
5. Thre is unlikelihood of the distribution
of dividends that are only ostensible
profits.
Disadvantages of par value shares
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1. The subscribers are liable to corporate
creditors for their unpaid subscription;
and
2. The stated face value of the share is not
an accurate criterion of its true value.
Advantages of no par value shares
1. No par value shares are issued as fully
paid and non-assessable;
2. Their price is flexible
3. Low-priced stocks (most no par shares
are low-priced) enjoy wider distribution;
4. They tell no untruth concerning the
value of the stockholder’s contribution;
and
5. Stock dividends are more easily isued,
thereby simplifying accounting
procedure.
Disadvantages of no par value shares
1. They legalize large issues of stock for
property;
2. They conceal the money or property
represented by the shares;
3. They promote issuance of watered
stock; and
4. There is lesser protection to creditors.
2. Voting and non-voting share
Voting share
§ Share with a right to vote.
Generally, common stocks have right to vote
while this right is withheld from preferred
stocks.
§ Each common share shall be equal in all
respects to every other common share.
§ Corporations are thereby prohibited
from issuing multiple voting and non-
voting common shares, nor can they
limit the maximum number of votes per
stockholder irrespective of the number
of shares he holds.
Shares that may be deprived of right to vote
1. Preferred shares
2. Redeemable shares
Article 6 expressly prohibits the depreciation
of voting rights except as to said shares.
Founder’s share, exception
§ Generally, only preferred and
redeemable shares may be deprived of
the right to vote.
§ However, founder’s share may be given
the exclusive right to vote and be voted
for in the election of directors for a
limited period (5 years max)
§ In this case, voting common stocks will
have no right to vote for directors.
When a vote is required, who may vote
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
§ As a rule, whenever a vote is necessary
under the Code to approve a particular
corporate act, such vote refers only to
stocks with voting rights, except in
certain cases when even non-voting
shares may also vote.
One share, one vote
§ This is the rule as representation in a
corporation is commensurate to extent
of ownership.
Non-voting share
§ Share without a right to vote.
Rules as to non-voting shares
1. If originally issued as voting stock, it
may not therafter be deprived of the
right to vote without the consent of the
holder.
2. Where non-voting shares are provided
for, the Code requires that there shall
always be a class or series of shares
which have complete voting rights.
3. Only preferred or redeemable shares
may be deprived of the right to vote.
a. If a common stock is issued with
a feature that voting rights are
automatically assigned, the
same violates the provision of
law that only preferred or
redeemable shares may be
deprived of the right to vote.
4. In case of any amendment of the articles
of incorporation which changes or
restricts the rights of any stockholder,
the latter has the right to dissent and
demand payment of the fair value of his
shaares.
3. Common share and Preferred Share
Common share
§ One which entitles the holder thereof to
a pro rata division of the profits, if
there are any, and in its assets upon
dissolution, without any preference or
advantage isn that respect over other
stockholders but equally with all other
stockholders except preferred
stockholders.
§ Called common shares as it is the basic
class of stock which private corporations
generally issue, or because its holders
stand on equal footing, without
extraordinary rights or privileges.
§ Common shares have complete voting
rights. They cannot be deprived of said
rights except as provided by law.
Common stockholders are residual owners of
the corporation
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§ They get only the assets left over in case
of liquidation after all other securities
holders are paid.
Rights of common shares stockholders
§ right to vote at meetings;
§ right to dividends;
§ right to examine corporate books.
Preferred share
§ One with a stated par value which
entitles the holder thereof to certain
preferences over the holders of common
stock.
The Rule: Preferred shares of stock may only
be issued with stated par value
§ More than one class of preferred shares
may be issued, usually designated “first
preferred,” “second preferred” etc.
Presumption, preferred shares are voting
shares
§ The rule is that each share shall be in all
respects equal to every other share
except as otherwise provided in the
Articles of Incorporated and stated in
the certificate of stock.
§ Thus, unless otherwise so provided,
preferred stocks are presumed to be
voting although they are rarely given
voting privileges.
Stockholders may enjoy preference in:
§ Dividends
§ Voting (particularly in election
directors)
§ Corporate property upon dissolution.
Kinds of preferred shares
1. Preferred share as to assets
§ Share which gives the holder
thereof preference in the
distribution of the assets of the
corporation in case of liquidation.
§ Preferred stocks, standing alone,
creates a preference only to
dividends and not to assets in case
of liquidation.
2. Preferred share as to dividends
§ Share the holder of which is entitled
to receive dividends on said share to
the extent agreed upon before any
dividends at all are paid to the
holders of common stock.
§ There is no guaranty however that it
will receive any dividends. The
corporation is not bound to pay
dividends unless the BoD declares
them.
§ The preference simply means that
holders of common stock may
receive dividends only after the
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
satisfaction of the prior claims on
dividends of preferred stockholders.
Kinds of preferred shares as to dividends
1. Cumulative preferred shares
§ Share which entitles the holder
thereof not only to the payment of
current dividends but also to
dividends in arrears.
§ If the stipulated divdend is not paid
in a given year, it shall be added to
the dividend which shall be due the
following year and the accumulated
dividends must be paid to the
holder of said preferred share
before any dividend may be paid to
the holders of common stock.
2. Non-cumulative preferred share
§ Entitles the holder to payment of
current dividends only in preference
to common stockholders.
§ In other words, if dividends are not
declared in a given year, the right
to the dividends for that particular
year is extinguished.
3. Participating preferred share
§ Share which gives the holder
thereof not only the right to eceive
the stipulated dividends at the
preferred rate but also to
participate with the holders of
common shares in the remaining
profits pro rata after the common
shares have been paid the amount
of the stipulated dividend at the
of same preferred rate.
4. Non-participating preferred share
§ Share which entitles the holder to
receive the stipulated preferred
dividends and no more.
§ The balance, if any, is given entirely
to the common stocks.
5. Cumulative-participating preferred share
§ Share is a combination of the
cumulative share and participating
share.
§ This means that the holder is
entitled not only to the dividends in
arrears but also, after receiving his
preferred share of dividends, to
participation with the holders of
common stock in the remaining
profits.
Guaranteed stock, defined
§ Used to refer to preferred stock on
which the payment of dividend is
guaranteed.
§ Guaranteed stock is entitled to arrears
in dividends, while ordinary preferred
stock is not.
Interest bearing stock
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Corporation Code
§ Where the corporation agrees absolutely o for services rendred in
to pay interest before dividends are paid launching or promoting the
to common stockholders is legal only welfare of the company, such
when construed as requiring payment of as
interest as dividends from net earnings § advancing the fees for
or suplus only. incorporating,
§ Such stock is in effect preferred stock, advertising, attorney’s
except perhaps that the discretion of fees, surveying, etc.
the Board to use profits for other
corporate purposes may be more limited. 5. Share in escrow
Preference among preferred shares Share in escrow
§ When a corporation issues more than § Share subject to an agreement by virtue
one class of preferred stock as to assets of which the share is deposited by the
or as to dividends, certain preferred grantor or his agent with a third person
shares may be given first preference or to be kept by the depository until the
second preference on earnings. performance of a certain condition
(usually the payment of the full
Preferred stockholders are not creditors of the subscription price) or the happening of a
corporation certain event contained in the
§ Preferences granted to preferred agreement.
stockholders do not give them a lien
upon the property of the corporation nor 6. Convertible share
make them creditors of the corporation,
the rights of the former being always
Convertible share
subordinate to the latter.
§ Share which is convertible or changeable
by the stockholder from one class to
Stocks cannot be issued with fixed interest
another class (such as from preferred to
§ Stock cannot be issued with a fixed
common) at a certain price and within a
interest instead of dividends inasmuch
certain period.
as this will make the contract of
subscription one of loan and make the
Conversion, not automatic
corporation a debtor of the subscriber.
§ While preferred shares possess the
§ However, stocks issued with dividends
quality of being convertible into
may be payable in the nature of interest.
common shares per articles of
§ Shareholders, both common and
incorporation, such conversion is not
preferred, are risk takers who invest
automatic.
capital in the business and who can look
§ An amendment of the articles of
only to what is left after corporate debts
incorporation is required to formalize
and liabilities are fully paid.
the conversion which must not result in
watering of stock or issuance of stock in
Limitations as to issuance of preferred shares
excess of the authorized capital stock.
1. Preferred shares can only be issued with
par value.
Conversion of no par value to par value share,
2. Preference must:
when allowed
a. Stated in the articles of
§ The conversion of no par value shares to
incorporation; or
par value is allowed by SECprovided:
b. May be fixed by Board of
o There would be no change in
directors when authorized by
the stockholders’ percentage
articles of incorporation,
interest in the total assets of
provided, such terms and
the corporation.
conditions shall be effective
upon filing of a SEC certificate.
7. Founders’ shares

4. Promotion Shares Founders’ shares classified as such

7 in the articles of incorporation may
  be given certain rights and privileges
Promotion shares
§ Such shares as are issued to promoters, not enjoyed by the owners of other
or those in some way interested in the stocks,
company
o for incorporating the company provided that where the
or exclusive right to vote and be
voted for in the election of
Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017

 
Commercial Law 264
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directors is granted,
it must be for a limited period
not to exceed 5 years, subject to
the approval of the SEC.
The 5-year period shall
commence from the date of the
aforesaid approval by the SEC.
Founders’ share
§ Shares issued to the organizers and
promoters of a corporation in
consideration of some supposed right or
property.
8. Redeemable shares
Redeemable shares may be issued by
8 the corporation when expressly so
  provided in the articles of
incorporation.
They may be purchased or taken up
by the corporation upon the
expiration of the fixed period,
regardless of the existence of
unrestricted retained earnings in
the books of the corporation,
and
upon such other terms and
conditions stated in the articles
of incorporation, which terms
and conditions must also be
stated in the certificate of stock
representing said shares.
Redeemable or callable shares
§ Shares, usually preferred, which by their
terms are redeemable at a fixed date or
at the option of either the issuing
corporation or the stockholder or both
at a certain redemption price.
Redemption, defined
§ It is the repurchase, the reacquisition of
stock by a corporation which issued the
stock in exchange for cash or property,
whether or not the acquired stock is
cancelled, retired or held in the treasury.
§ The redemption of stock dividends
previously issued is used as a veil for the
constructive distribution of cash
dividends.
Common shares are never redeemed
Redeemable shares v. shares that may be
acquired under Sec. 41
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
§ Under Sec. 41, the corporation has
power to acquire own shares provided
that the corporation has unrestricted
retained earnings.
§ In the case of redeemable shares, the
corporation may acquire the same
regardless of the presence of
unrestricted retained earnings. By virtue
of redeemable shares, the shareholder is
conferred the right of a creditor to
attact corporate financing.
Redemption/retirement of shares v. repurchase
§ The retirement or redemption of stock
by a corporation is different from a
purchase by a corporation of its own
stock.
§ The manner in which a duly authorized
plan for retiring stock is to be carried
out is part of the corporate business,
and in the absence of fraud or bad faith,
is not subject to judicial control.
Redemption, when subject to tax
§ When the corporation redeems shares
coming from thoseissued upon
establishment of the corporaion or from
initial capita`investment, the
redemption to their concurrent value of
acquisitionwould not be subject to tax,
because that would constitute merely a
return of investment.
§ If the redemption is from previously
declared stock dividends, the proceeds
of theredemption constitute additional
wealth, for it is no longer merely return
of capital but a gain thereon, and
subject to tax.
Insolvency, when redemption may not be made
§ Redemption may not be made where the
corporation is insolvent or if such
redemption would cause insolvency or
inability of the corporation to meet its
debts as they mature.
§ This limitation is based on the principle
that corporate assets are a trust fund for
creditors.
Terms and conditions must be stated in both
certificate and article
§ Sec. 8 requires that all the terms and
conditions affecting such shares must
be stated not only in the articles of
incorporation but also in the certificate
of stock representing said shares.
Contract between the parties
§ Provisions relating to the redemption of
preferred stock are, in effect, a
contract between the issuing
corporation and the preferred
stockholders and strict compliance
thereof is essential.
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§ Thus, the corporation cannot redeem its incorporation, they can be
preferred shares before the redemption reissued.
period or at a discount price in 3. Where the reissuance of redeemed
contravention of the articles of shares is prohibited either expressly or
incorporation to improve its financial impliedly by silence, the number of
position. authorized shares of the capital stock of
o The remedy is to amend the the corporation is reduced accordingly,
articles by changing the and the articles of incorporation must be
redemption features of the amended to reflect such reduction.
preferred shares.

Voting rights
Redemption, at corporation’s option § Redeemable shares may be deprived of
§ Except as otherwise provided therein, voting rights in the articles of
the redemption rests entirely with the incorporation, unless otherwise provided
corporation, and the stockholder is in the Code.
without right to either compel or refuse
the redemption of his stock. 9. Treasury shares
§ The redeemable shares provided in this
section is optional, and not the Treasury shares are shares of stock
obligatory type. 9 which have been issued and fully
  paid for,
Maintenance of a sinking fund
§ For the protection of stockholders, all
but subsequently reacquired by
corporations which have issued
the issuing corporation by
redeemable shares with mandatory
redemption features are required by the
SEC to set up and maintain a sinking § purchase;
fund where cash is gradually set aside in § donation;
order to accumulate the amount § or through some other
necessary to meet the redemption price lawful means.
of redeemable shares at specified dates
in the future. Such sharse may again be
§ The fund shall be deposited with a disposed of for a reasonable
trustee bank and shall not be invested in price fixed by the board of
risky or speculative ventures. directors.

Presumption as to redeemable shares Treasury shares

§ Unless expressly provided in the articles
of incorporation and stated in the
certificate of stock, preferred shares
shall be deemed irredeemable.
Redemption is repurchase for cancellation
§ A redemption by the corporation of its
stock is, in a sense, a repurchase of its
for cancellation.
§ The retirement of a class of stock
destroys all rights adhering to the shares
of that class.
Effect of redemption
1. In case of redeemable shares reacquired
by the corporation, the same shall be
considered retired and no longer
issuable, unless otherwise provided in its
articles of incorporation.
2. Upon redemption, redeemable shares
lose their status as part of the
outstanding or unissued authorized
capital stock.
o They are considered treasury
shares after redemption if by
provision of the articles of
§ Shares which have been lawfully issued
by the corporation and fully paid for and
later reacquired by it either by purchase,
redemption, donation, forfeiture, or
other lawful means.
Power to reacquire shares
§ Section 41 expressly empowers a stock
corporation to purchase or acquire its
own shares for legitimate corporate
purposes.
§ Only surplus earnings may be used for
the purchase of treasury shares.
Corporation may bid in delinquent shares
§ In the absence of a qualified bidder,
may bid at the public sale of delinquent
shares and title to the shares purchased
shall be vested in the corporation as
treasury shares.
Purchase by the corporation operates as a
forfeiture of the shares.
Rules as to treasury shares
1. Treasury shares are not retired shares.

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Xavier University – Ateneo de Cagayan, Class of 2017
 
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2. Retirement of treasury shares can be
effected by decreasing the capital stock C Par Value, Book Value, Market Value
of the corporation in accordance with
Sec. 38. Par Value
3. Treasury shares are issued shares but § The par value indicated in the
they are not outstanding shares. certificate of stock represents the
amount of money or property
Use of treasury shares contributed by the shareholder to the
§ Treasury share or stock, which may be capital stock of the corporation.
common orferred, may be used for a § Patently, the assets of a company
variety of corporate purposes, such as cannot always be equal to the par value
for: of the outstanding stock, the assets
o stock bonus plan for being in a state of fluctuation as the
management and employees; or business prospers or declines.
o for acquiring another company.
Par value, meaning
When held in corporation § Par means equal and “par value” means
§ It does not earn dividends face value or value equal to the face of
§ And has no vote in company’s affairs. the stocks or bonds.
Value of stock, presumption
Resale of treasury shares § Corporate stock is “at par” when it is
§ They may sold by the corporation at any worth its face value, and is “above par”
price the BoD sees fit to accept, even at or at a “premium” when it is worth more.
less than par or issued value.
§ This is because the corporation has Book value
already received the full value upon § Par value does not always reflect its
their initial issuance, provided such book value or its actual or true value
price is reasonable under the which may be determined by divididing
circumstances. the total stockholders’ equity or the net
value of the total corporate assets
Consequences of sale of treasury shares (capital and surplus, if any) by the
1. Stockholders may rightfully complain if number of shares issued or oustanding.
the price is lower than reasonable.
2. Treasury shares again become Market value
oustanding stock and regain whatever § Par value and book value may be more
dividends and voting rights they or less than market value which may be
originally held. defined as the price at which a willing
3. Differ from retired or cancelled shares in seller would sell and a willing buyer
that while the latter has disappeared would buy, assuming that both have a
altogheter, treasury shares may be sold. reasonable knowledge of the facts, and
4. Sale of treasury shares may be treated neither being under abnormal pressure.
as a sale of ordinary property of the § Market value is affected by the law of
corporation; hence, the gain therefrom supply and demand.
is subject to tax.
It is difficult to determine the book or market
value or price of a corporation’s stock when it
[Bance]Redeemable shares v. treasury shares is not traded publicly.
Redeemable shares Treasury shares
In the hands of In the hands of the D Reclassification v. Exchange of Shares
stockholders or persons corporation
other than the
Reclassification Exchange of Shares
corporation
Does not bring any There would be a
Forms part of the Does not form part of
substantial alteration shifting of the balance
outstanding shares the oustanding shares
in the subscriber’s of stock features, i.e.
May be paid regardless May only be paid if
proportional interest. priority in dividend
of unrestricted there is unrestricted
declarations, absence
retained earnings restrained earnings
of voting rights
Purpose is to retire the May be used for various
Both does not yield income for tax purposes
share purposes and share
may be resold.
May be paid regardless Only modifies the
of unrestricted subscriber’s rights and
retained earnings privileges, which is not

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Xavier University – Ateneo de Cagayan, Class of 2017

 
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a flow of wealth for
tax purposes.
When may a subscriber be taxed for income
§ The issue of taxable dividend may arise
only once a subscriber disposes of his
entire interests and not when there is
stillmaintenance of proprietary interest.
E Issue and Transfer of Shares
Issue, defined
§ An issue is the initial disposition (for
consideration not less than the par or
stated value) of unissued shares, such as
by:
o Subscriptions
o Stock dividendss, and
o Sale of or payment of
obligations with shares from the
unsubscribed capital stock.
Subscription
§ Any contract for the acquisition of
unissued stock in an existing corporation
or in one still to be formed, irrespective
of how the parties refer to the
agreement.
§ Until the stocks are fully paid, it
continues to be a subsisting liability that
is legally enforceable.
§ Interest is due on unpaid subscription if
the by-laws so provide for such payment.
Title 2
INCORPORATION AND
ORGANIZATION OF PRIVATE CORPS
A Articles of incorporation
Articles of incorporation
§ Defined as the charter of the
corporation and the contractual
relationship:
o between the State and the
corporation;
o between the stockholders and
the State; and
  Commission if the proposed name is:
o between the corporation and its
stockholders.
Mandatory provisions in the
Incorporation
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
1. The name of the corporation.
2. The specific purpose or purposes for
which the corporation is being
incorporated. Where a corporation has
more than one stated purpose, the AoI
shall state which is primary and is/are
secondary purpose/purposes; Provided,
that a non-stock corporation may not
include a purpose which would change
or contradict its nature as such.
3. Place where the principal office of the
corporation is to be located, which must
be within the Philippines;
4. The term for which the corporation is to
exist;
5. The names, nationalities and residences
of incorporators;
6. The number of directors or trustees,
which shall not be less than 5 nor more
than 15;
7. The names nationalities and residences
of the persons who shall act as directors
or trustees until the first regular
directors or trustees are duly elected
and qualified in accordance with the
Code.
8. If it be a stock corporation, the amount
of its authorized capital stock in lawful
money of the PH:
a. Number of shares into which it
is divided; and
b. In case the shares are par value
shares, the par value of each;
c. The names, naitonalities and
residences of the original
subscribers,
d. The amount subscribed and
paid by each on his subscription,
and
e. If some or all of the shares are
without par value, such fact
must be stated;
9. If it be a non-stock corporation, the
amount of its capital, the names,
nationalities and residences of
contributors and the amount contributed
by each; and
10. Such other matters as are not
inconsistent with law and which the
incorporators may deem necessary and
convenient.
1 Corporate name
No corporate name may be allowed
18 by the Securities and Exchange
§ identical or
§ deceptively or
§ confusingly similar
Articles of
a. to that of any existing
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corporation or
b. to any other name already
protected by law or
c. is patently deceptive,
  secondary meaning or have bcome
confusing or contrary to
existing laws.
When a change in the corporate
name is approved, the Commission
shall issue an amended certificate of
incorporation under the issue an
amended certificate.
Guidelines in use of corporate names
(a) The complainant corporation acquired a
prior right over the use of such
corporate name; (priority of adoption)
and
(b) The proposed name is either:
§ Identical
§ deceptively or confusingly similar to
thatof any existing corporation or to
any other name already protected
by law
§ patently deceptive, confusing or
contrary to existing laws.
Test in determining whether the name is
confusingly similar
§ Whether the similarity is such as to
mislead a person using ordinary care and
discrimination and the Court must look
to the record as well as the names
themselves.
§ And it can even cover words that are
deemed generic.
Prohibited use of certain words
1. Unlawful for any person, etc. to use
whether directly or indirectly, the
emblem, official seal, and name of the
United Nations, both in its full or
abbreviated form. (RA No. 226);
2. Unlawful to use the word “bonded” in
part or in whole as a trade name or
business name of those operating or
maintaining any warehouse not licensed
under Act. No. 3893 (General bonded
Warehouse Act) or established under
Secs 1302 and 1304 of the RAC.
3. Only those engaged in banking, baner,
quasi-banking, savings and loan
associations, trust corporation and trust
company may use such terms.
4. Only the Philippine National Bank may
use the term “national” as a portion of
the bank’s name or title.
Use of generic, geographic and descriptive
terms and names
§ The general rule is that a corporation
cannot acquire such a right in such
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
names, words or terms as to have their
use by other enjoined
§ Unless such words have acquired a
distinctive so as to distinguish not only
the product of a particular service and
its quality but also the name of the
producer of the service.
Doctrine of secondary meaning
§ A word or phrase originally incapable of
exclusive appropriation with reference
to an article on the market because
geographically or otherwise descriptive,
might nevertheless have been used so
long and so exclusively by one producer
with reference to his article that, in that
trade and to that branch of the
purchasing public, the word or phrase
has come to mean that the article was
his product.
Change of corporate name
§ A change of corporate name does not
make a new corporation, whether
effected by a special act or under a
general law.
§ It has no effect on identity of
corporation, or on its property, rights,
or liabilities.
§ The corporation, upon such change in its
name, is in no sense a new corporation,
nor the successor of the original
corporation.
§ It is the same corporation with a
different name, and its character is in
no respect change.
Jurisdiction over issuing involving corporate
name
§ The Securities and Exchange Commission
has quasi-judicial power to hear and
decide controversy between two
corporations as to who has a better right
to the use of a particular corporate
name.
2 Purpose
Purpose clause
§ Articles of incorporation must state
expressly what is its primary purpose, as
distinguished from its secondary and
other purposes.
Limitation as to non-stock corporation
§ A non-stock corporation may not include
a purpose which would change or
contradict its nature as such.
Diversion of funds
§ Under Sec. 42, if funds are to be
diverted from the primary purpose to a
secondary purpose, this can be done
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only by a 2/3 votes of the outstanding amendment of the articles of
shares and cannot be done by mere incorporation.
resolution of the BoD. § Under Sec. 16, such amendment requires
§ Dissenting minority stockholders may the 2/3 votes of outstanding capital
exercise their appraisal right. stocks.
§ Those stockholders who oppose such
extension of corporate life have a right
3 Principal place of business to exercise their appraisal right under
Sec. 37.
Residence of the corporation
§ The residence of a corporation is the End of term does not mean end of existence
place where its principal office is § When the term of the corporation ends,
located, as stated in its Articles of that corporation does not automatically
Incorporation. cease to exist; it will continue to exist
for a 3-year period to wind up its affairs.
Place of business § But it cannot seek to extend its
§ The place of the principal office does corporate term during that period
not necessarily mean the place where because that will mean new business.
the business of the corporation is
transacted but the place where its books
and records are ordinarily kept and its 5 Incorporators
officers usually meet for the purpose of
managing the affairs and transacting the § Any number of natural
business of the corporation. 10 persons
  § not less than 5 but not more
than 15
§ all of legal age; and
4 Corporate Term
§ a majority of whom are
residents of the Philippines,
A corporation shall exist for a period
11 not exceeding 50 years from the date may form a private corporation
  of incorporation for any lawful purpose or purposes.
Each of the incorporators of a stock
unless sooner dissolved or unless corporation must own or be a
said period is extended. subscriber to at least 1 share of the
capital stock of the corporation.
That corporate term as originally
stated in the articles of Sec. 14(5). The names, nationalities
incorporation may be extended and residences of the incorporators
for period not exceeding 50 must be provided for in the articles
years in any single instance by an of incorporation.
amendment of the articles of the
incorporation, in accordance Steps in the creation of a corporation
with this Code; 1. Promotion
2. Incorporation
Provided, That no extension can 3. Formal organization and commencement
be made earlier than 5 years of business operations.
prior to the original or
subsequent expiry date(s) unless Underwriting agreements
there are justifiable reasons for 1. Firm commitment
an earlier extension as may be § The syndicate members severally
determined by the SEC. but not jointly agree to purchase
the whole issue outright at a
Exception particular price for resale at a price
different to the public or to dealers
§ Condominium corporations can be
organized for 200 years. who sell at another different to the
public.
2. All or nothing commitment
When extension of term allowed, amendment
§ Syndicate agree to accept liability
of articles
for the purchase of an issue at a
§ If the life of the corporation is to be
given price only if the entire issue is
extended, then there must be an

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Xavier University – Ateneo de Cagayan, Class of 2017

 
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not sold – usually within a 30-day
period.
3. Standby commitment
§ Syndicate will purchase and
distribute at predetermined prices
to the public any amount of the
issue not taken by stockholders in
exercising their pre-emptive rights.
4. Best efforts commitment
§ Means that the syndicate will use its
best efforts to distribute the issue
to the public.
§ The syndicate does not agree to
purchase the issue at predetermined
prices. The security is sold for
whatever price it will bring, the
underwriters take a predetermined
spread, and the issuers take the
residual.
Underwriting syndicate
§ Term used to refer to a group of
investment bankers who have pooled
their resources to share in the profits of
an underwriting on a pro rata basis
according to the amount of underwriting
risk assumed.
Incorporation v. corporation
Corporation Incorporation
Legal or juridical Only the act by which
institution that institution is
created
Steps in incorporation
1. Drafting and execution of the articles of
incorporation by the incorporators and
other documents required for
registration of the corporation.
2. The person chosen as temporary
treasurer pending incorporation must
also execute:
a. An affidavit certifying
compliance with subscription
and paid-up requirements as to
capital stock;
3. Filing with SEC of the articles of
incorporation with:
a. Treasurer’s affidavit showing at
least 25% of the entire
authorized shares has been
subscribed and at least 25% of
the subscription has been paid
in cash and/or property to the
corporation.
b. In case the corporation is
governed by a special law, e.g
educational institution, a affected when he gives nominal
favorable recommendation of
the appropriate government
agency that such articles of
incorporation is in accordance
with law.
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
4. Payment of the filing and public fees
5. The issuance of SEC of the certificate of
incorporation if all the papers filed after
verification and examination are found
in order.
Incorporators, must be natural persons
§ The five persons required by law must
be natural persons.
§ A corporation cannot be an incorporator
of another corporation.
§ Reason for the prohibition:
o Artificial persons, without brain
or body, existing only on paper
through legislative command and
incapable of thought or action
except through natural persons,
cannot create other artificial
persons, and those others still,
until the line is so extended and
the capital stock so duplicated
and reduplicated as to result in
confusion and fraud.
When may a corporation be an incorporator
§ In cases of cooperatives and
corporations primarily organized to hold
equities in rural banks may organize
rural banks and/or subscribe to shares of
stock of any rural bank.
Majority of incorporators must be residents of
the Philippines
§ A corporation composed entirely of
aliens may be incorporated as long as
the majority of the incorporators are
residents of the Philippines except in
the case of nationalized corporations.
§ The term means “domiciled residents”.
Case: Nautica Canning v. Yumul
§ Yumul, who was elected director, was
not allowed to inspect corporate records
on the ground that he is merely a
nominal stockholder, and that the
evidence was clear that the shares
registered in his name were actually
paid for by Dee at the time of the
incorporation of the company.
§ Held: Yumul is a qualified stockholder of
record, his election into the Board was
lawful, and the right to inspect
corporate records.
§ It is possible for a business to be wholly
owned by one individual, and the
validity of its incorporation is not
ownership of only one share of stock to
each of the other four incorporators.
§ This arrangement is not necessarily
illegal, but it is valid only between and
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among the incorporators privy to the
agreement.
§ It does not bind the corporation which
will consider all stockholders of record
as the lawful owners of their registered
shares.
§ As between the corporation on the
onehand, and its stockholders and third
persons on the other, the Corporation
looks only to its books for the purpose of
determining who its shareholders are.
6 Minimum capital stock required
Capitalization requirements
§ At least 25% of the total authorized
capital stock must be subscribed;
o then 25% of the total subscribed
stock must be paid-up.
§ No minimum capital is required, except
if specifically provided by special law, as
long as the paid-up capital, should not
be less than P5,000.
Capital stock v. paid-up capital stock
§ Capital refers to the value of the
property or assets of a corporation.
§ Capital subscribed is the total amount of
capital that persons (subscribers) have
agreed to take and pay for, which need
not necessarily be, and can be more
than, the par value of the shares.
o In fine, it is the amount
  that the Philippines and to domestic
the corporation receives,
inclusive of the premiums, if
any, in
  consideration of the
original issuance of the shares.
§ Paid-up
  capital is that portion of
authorized capital stock which has been
both subscribed and paid.
o Not all funds or assets received
by the corporation can be
considered paid-up capital, for
this term has a technical
signification in Corporation law.
  residences
Filipino percentage ownership requirement
regarding corporate capital
  regular Board
Filipino ownership of a certain percentage
of the capital stock or capital is reqied in certain
  incorporation,
caes, such as:
1. Corporations for exploration,
development and utilization of natural
resources.
§ At least 60% of the oustanding
capital stock must be owned by
Filipinos.
2. Public service corporations
§ 60% of the capital
3. Educational corporations
§ 60%
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
4. Corporations engaged in mass media and
advertising industry
§ Mass media must be wholly owned
and managed by Filipino citizens;
§ Advertising industry – 70%
5. Banking corporations
§ 60%
6. Corporations engaged in retail
§
7. Rural banks
§ No less than 40% of voting stocks
must be owned by Filipinos.
8. Corporations engaged in coastwise
shipping
§ 60%
9. Financing companies
§ 60%
10. Corporations engaged in the pawnshop
business
§ 70%
11. Corporations engaged in the recruitment
and placement of workers, locally or
overseas
§ 75% of the authorized voting capital
stock
12. Corporations engaged in the operation of
a private detective, watchman or
security guard agencies
§ 100% Filipino owned
13. Under the Flag law
§ In the purchase of articles for the
government, preference shall be
given to materials and supplied
produced, made or manufactured in
entities.
§ Domestic entities mean any citizen
of the PH or corporation at least
75% of the capital of which is owned
by Filipinos.
7 Incorporating Board of Directors
Requirements of incorporating board of
directors
§ The names, nationalities and
of the persons who shall act as directors
or trustees until the
members are duly elected shall be
stated in the articles of
which cannot be less than 5 nor more
than 15.
B Amendment of Articles
Procedure for amendment of articles of
incorporation
1. Majority vote of the Board; and
2. Vote (in a meeting) or mere written
assent (no meeting) of 2/3 of the
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outstanding capital stock, or in case of the provisions of which apply
non-stock corporation, by the members. suppletorily.

Right of dissenting stockholders in relation to When other agency certification is required

amendment A certificate of authorityis required for the
§ Once the amendment is approved, following:
dissenting stockholders may exercise
their rights of appraisal, but only if it Corporation Authority
involves diminishing of substantial rights Insurance companies Insurance Commission
previously granted or creating a new set Banks, building and Monetary Board
of shares with priority rights. loan association,
finance companies
When right of appraisal not available Educational Education Secretary or
§ When the amendments do not affect institution CHED
their substantial rights, i.e. change of Public utilities Land Transportation
name, increase in the number of Office, Civil
directors or trustees. Aeronautics Board, NTC

Amendment, when takes effect Grounds when articles of Incorporation or

§ Amendment of articles of incorporation Amendment may be rejected
will be effective only upon SEC approval; (1) Non-compliance with the form
but should no action be taken by SEC prescribed;
within 6 months from the date of filing, (2) Purpose is illegal or immoral
then automatically amendment is (3) Treasurer’s Affidavit is false; or
deemed effective, provided that delay (4) Non-compliance with percentage
be not attributable to the corporation. requirement of ownership required by
the Constitution.
Charter, defined
§ an instmment or authority from the The incorporators must be given notice of
sovereignpower bestowing the right or the grounds for rejection or disapproval and they
privilege to be and act as a corporation. must be given opportunity to makethe
appropriate modifications.
Charter v. Franchise

Charter Franchise C Effects of Non-Use of Corporate

Instrument bestowing Right and privilege
the right and privilege itself of being a Charter
corporation.
Two Situations
Components of corporate charter (a) Non-User, 2 Years
(1) As to corporations formed under the § When corporation does not formally
general incorporation law,   the charter organize and commence the transaction
consists of: of its business or the construction of its
a. The law under which it is works within 2 years from the date of its
organized (B.P. Big. 68.); incorporation, its corporate powers
b. Articles of incorporation; cease and the corporation shall be
c. By-laws; and deemed dissolved (automatic).
d. All applicable provisions of the § Formal organization
Constitution and the general o May consist in the election of
laws of the State in force at the new board directors or trustees
time the corporation is and corporate officer
incorporated which are as much § Commencement of business
a part of its charter as though o May take the form of
expressly written therein. contracting for lease or sale of
(2) As to corporations created by special properties to be used as
laws, the charter consists of: business site of thecorporation
a. The special law which creates and other preparatory acts
the corporation geared towards fulfillment
b. Executive orders of the ofthe purpose for which the
President corporation was established.
c. Rules and regulations (b) Non-user, 5 Years
applicable to such corporations; § When the corporation has commenced
d. All laws applicable thereto, the transaction of its business but
including the Corporation Code,

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Xavier University – Ateneo de Cagayan, Class of 2017
 
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subsequently becomes continuously • Certified by majority of
inoperative for a period of at least 5 directors or trustees.
years. • Countersigned by the
§ This is a ground for the suspension or Secretary of the
revocation of its corporate franchise or a Corporations.
certificate of incorporation (not
automatic). Effectivity of By-Laws
§ Notice and hearing are required. § Only upon issuance by SEC of a
§ This does not include non-use or certification that the by-laws are not
inactivity for reasons beyond the control inconsistent with the Code.
of the corporation as when the mineral § SEC shall not accept for filing by-laws or
lands to be developed by the any amendment thereto of any bank,
corporation as per its purpose, are the banking institution, building and loan
objects of court litigation and a court association, trust company, insurance
injunction against the corporate company, public utilitity, educational
activities has been issued. institution or other special corporations
governed by special laws, unless
accompanied by a certificate of the
Title 3 appropriate government agency to the
effect that such by-laws or amendments
are in accordance with law.

BY-LAWS Contents of by-laws

1. The time, place, and manner of calling
and conducting regular or special
meetings of the directors or trustees;
A Nature of By-Laws 2. The time and manner of calling and
conducting regular or special meetings
of the stockholders or members.
Period of adoption
3. The required quorum in meetings or
§ Within 1 month after receipt of official
stockholders or members and the
notice of the issuance of its certificate
manner of voting therein.
of incorporation by SEC, the corporation
4. The form for proxies of stockholders and
must adopt a code of by-laws for its
members and the manner of voting them.
government.
5. The qualifications, duties and
§ By-laws may be adopted and filed prior
compensation of directors or trustees,
to incorporation; in such case,   such by-
officers and employees.
laws shall be approved and signed by all
6. The time for holding the annual election
the incorporators andsubmitted to SEC,
of directors or trustees and the mode or
together with the articles of
manner of giving notice thereof.
incorporation.
7. The manner of election or appointment
and the term of office of all officers
How by-laws adopted
other than directors or trustees.
a. By-laws filed together with articles of
8. The penalties for violation of the by-
incorporation
laws.
i. Must be approved and signed by
9. In the case of stock corporations, the
all incorporators; and
manner of issuing stock certificates; and
ii. Must be submitted to SEC with
10. Such other matters as may be necessary
articles
for the proper or convenient transaction
b. Filed within 1 month from notice of
of its corporate business and affairs.
issuance of certificate of incorporation
i. Affirmative vote of the
Other Matters included in the by-laws
stockholders representing at least
§ Other matters may be included in the
a majority of the outstanding
by-laws, provided they abide by the
capital stock, or at least a
following rules:
majority of the members, in case
o Not contrary to law, morals or
of a non-stock corporation; and
public policies;
ii. By-laws shall be signed by
o Cannot contravene provisions of
stockholders or members voting
the Articles of Incorporation;
for them.
and
o One copy kept in office of
o Must not be discriminatory, or
corporation;
unreasonable because by-laws
o Another copy sent to SEC;
are meant to regulate and not
restrict rights.

Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017
 
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Pena v. CA A Doctrine of Centralized Management
§ When the by-laws require the
attendance of 4 members of the five-
man board for a special meeting, the Unless otherwise provided in this
attendance of only three members, 23 Code,
although constituting the majoriy,   § the corporate powers of all
makes any resolution adopted therein corporations formed under
void as to affect the contract entered this Code shall be exercised,
into by the corporation within a third § all business conducted and
party. § all property of such
corporations controlled and
Effect of by-laws to third parties held
§ The purpose of a by-law is to regulate
the conduct and define the duties of the by the Board of Directors or
members towards the corporation and trustees to be elected from
among themselves. among the holders of stocks, or
§ They are self-imposed and, although where there is no stock, from
adopted pursuant to statutory authority,
among the members of the
have no status as public law.
corporation
§ Therefore, it does not bind third persons,
except when they have knowledge of the
provisions either actually or who shall hold office for one
constructively. year until their successors are
elected and qualified.
By laws, how repealed or adopted
By laws may be repealed, amended or Every director must own at least
modified either by an action of the: share of the capital stock of the
(a) Board and stockholders by: corporation of which he is a director,
i. Majority vote of the members
of the Board; and which share shall stand in his
ii. Majority vote of the oustanding name on the books of the
capital stock or majority of the corporation.
members in a meeting called
for that purpose. Any director who ceases to be
the owner of at least 1 share of
(b) Board alone, provided that the power to the capital stock of the
amend, repeal or adopt was delegated
corporation of which he is a
to them by 2/3 of the outstanding
director shall thereby cease to
capital stock or members.
be a director.
Power to amend, may be revoked
§ Such power of the Board may be revoked Trustees of non-stock
by majority vote of the oustanding corporation smust be members
capital stock or majority of the members. thereof.

Only power to adopt new/subsequent by-laws A majority of the directors or

may be delegated
§ The power to adopt the first original by-
laws cannot be delegated to the board
of directors or trustees, only the power
to adopt new by-laws that will supplant
the old by-laws can be validly delegated.
Title 4
BOARD OF DIRECTORS OR TRUSTEES
AND CORPORATE OFFICERS
trustees of all corporations
organized under this Code must
be residents of the Philippines.
The Board is seat of corporate powers
§ Consequently, there can be no valid
contract that can be enforced on behalf
of the corporation when there is no
showing that there was approval of the
purchase by the BoD which exercises all
corporate powers in a corporation.
Illustration of exercise of corporate powers
§ In the absence of authority from the BoD,
no person, not even its officers, can
validly bind a corporation.

Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017

 
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§ The power to borrow money requires
even a special power of attorney. There
is invariably a need of an enabling act of
the corporation to be approved by its
BoD to authorize an officer to obtain a
loan on behalf of the corporation.
Two theories as to power of BoD
a. Theory of directly vested power
b. Theory of delegated power
a. Theory of directly vested power
§ It cannot be said that the Board acts as
agents of the stockholders, since their
source of power originally vested by law
and not delegated by the stockholders.
§ The BoD, in drawing to themselves the
power of the corporation, occupies a
position of trusteeship in relation to the
stockholders, in the sense that the Board
should exercise not only care and
diligence, but utmost good faith in the
management of corporate affairs.
Principle on Delegation of Board Power
§ Just as a natural person may authorize
another to do certain acts for and on his
behalf, the BoD may validly delegate
some of its functions and powers to
officers, committees or agents.
§ The authority of such individuals to bind
the corporaiton is generally derived
from law, corporate by-laws or
authorization from the board, either
expressly or impliedly by habit, custom
or acquiescence in the general course of
business.
B Business Judgment Rule
Business judgment rule
§ All corporate powers and prerogatives
are vested directly in the Board of
Directors.
Consequences of the Business judgment rule
1. The resolution, contracts and the
transactions of the BoD, cannot be
overturned or set aside by the
stockholders or members and not even
by the courts under the principle that
the busienss of the corporation has been
left to the hands of the Board; and
2. Directors and duly authorized officers
cannot be held personally liable for acts
or contracts done with the exercise of
their business judgment.
Exceptions to the Business Judgment Rule
1. When the Corporation Code expressly
provides otherwise.
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
2. When the directors or officers acted
with fraud, gross negligence or in bad
faith.
3. When Directors or officers act against
the corporation in conflict of interest
situation.
May SEC overturn the decision of the Philippine
Stock Exchange Board denying the listing of
shares of the applicant issuer on the ground
that there were questionf of proper ownership
over the bulk of the real estate assets of said
corporation?
§ No. While it is true that Sec has the
primary say as to whether or not
securities, including shares of stock may
be traded or not in a stock exchange,
questions of policy and of management
are still left with the honest decision of
the officers and directors of a
corporation and the courts are without
authority to substitute their judgment
for the judgment of the board of
directors. (PSE v. CA)
Remedies in case of mismanagement
a. Receivership
b. Injunction if the act has not yet been
done
c. Dissolution if abuse amounts to a ground
for quo warranto but Solicitor General
refuses to act.
d. Derivative suit or complaint filed with
the RTC.
C Qualifications and Disqualifications of
Board Members
1 Qualifications
a. Own at least 1 share in his name, and if
he ceases to own at least one share in
his own name, he automatically ceases
as a director.
o Except: Trustee in a voting
trust may be elected
director/trustee.
b. Majority of corporate directors must be
PH residents.
c. He must not have been convicted (not
mere commission) by final judgment of
an offense carrying an imprisonment
exceeding 6 years or an offense
constituting a violation of the Code, 5
years prior to his election or
appointment.
2 Election
Required attendance
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a. Stock corporation – majority of
oustanding capital stock; or
b. Non stock corporation – majroity of
members entitled to vote.
Time to determine voting right
1. Share standing in one’s name at the
time fixed in by-laws.
2. Where by laws silent, at time of election.
Cumulative voting
§ The stockholder shall have as many
votes as he has number of shares
multiplied with the nmber of directors
up for election.
§ This is a device to enable the minority,
by concentrating their cumulative votes
on at least one candidate, to have a
representative in the Board.
Mandatory in stock corporations
§ Cumulative voting is mandatory in stock
corporations.
§ Members of the Board in a non-stock
corporation shall not be voted
cumulatively unless specifically provided
for in the by-laws.
Formula in determining how many shares are
needed to vote for the desired number of
directors
[outstanding shares]x[desired # of Directors] +1
Total No. of Directors + 1
Report of election of directors, trustees and
officers
§ Within 30 days after the election of the
directors, trustees and officers of the
corporation, secretary or any other
officer of the corporation, shall submit
to SEC, the names, nationalities and
residence of the DTO elected.
§ Should a director, trustee or officer or
officers die, resign or in any manner
cease to hold office, his heirs in case of
his death, secretary, or any other officer
shall immediately report such fact to the
SEC.
Reporting is mandatory and jurisdictional
§ The determination of who are the legal
directors and officers of the corporation
is conditioned upon the reports
submitted to SEC pursuant to Sec. 26.
Holdover principle
§ Generally, the DTO of a corporation
serve only for the term of 1 year.
§ However, under the holdover principle,
the current DTO holds over and
continues to function until another
director is chose and qualified.
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
§ The usual reason is because there was a
failure to elect a new DTO.
Purpose of holdover doctrine
§ It accords validity to what would
otherwise be deemed as dubious
corporate acts and gives continuity to a
corporate enterprise in relation to
outsiders.
§ The old holdover officer is a de facto
officer and by fiction of law, his acts as
such are considered valid and effective.
Can the BoD elect another director to fill in a
vacancy caused by the resignation of a
holdover director?
§ No. The holdover period is not part of
the term of office of a member of the
BoD. Consequently, when during the
holdover period, a director resigns from
the board, the vacancy can only be filled
up by the stockholders, since there is no
term left to fill up pursuant to the
provisions of Sec. 29 which mandates
that a vacancy occuring in the BoD
caused by the expiration of a member’s
term shall be filled by the corporation’s
stockholders.
§ That a director continues to serve after
1 year from his election (i.e. in a
holdover capacity), cannot be
considered as extending his term.
§ This holdover period however is not to
be considered as part of his term, which
as declared, has already prescribed.
(Valle Verde Country Club v. Africa)
Tenure v. Term
§ Tenure is the period during which the
incumbent actually holds office – which
may be shorter (or in case of holdover,
longer) than the term
3 Removal
Removal, how effected
§ Any DT of a corporation may be removed
from office, with or without cause, by a
vote of:
o 2/3 of the oustanding capital
stock; or
o 2/3 of the members entitled to
vote.
§ Except: if a director was elected by
virtue of the minority’s exercise of
cumulative voting rights, then such
director may be removed only for cause.
Removal, meeting
§ The removal may be made at a regular
or special meeting called for the
purpose of removing a director or
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Corporation Code
trustee, with previous notice of the time b. When the stockholders representing a
and place of such meeting. majority of the oustanding capitl stock
§ If the officers refuse to call a meeting to at a regular or special meeting agree to
consider the removal of the director, it give them compensation.
may be called at the instance of any c. When the DTO renders service in a
stockholder or member. capacity other than as DTO.

4 Vacancies in Board 6 Meeting of the Boards

How filled Types of meetings

§ If vacancy is due to:
a. Removal by the stockholders,
b. Increase in the number of
directors/trustees, or
c. Expiration of the term:
§ Must be filled by
majority vote of the
stockholders in
regular or special
meeting called for that
purpose.
§ If vacancy is due to other causes:
o Majority of the remaining BoD
members
§ Provided they still
constitute a quorum.
Period
§ A director or trustee so elected to fill a
vacancy shall serve only for the
unexpired term of his predecessor in
office.
§ Regular meetings – monthly, unless the
by-laws provide otherwise.
§ Special – at any time upon the call of the
President or as provided in the by laws.
Notice
§ Notice of regular/special meetings
a stating the date, time and place must be
sent to every director or trustee at least
1 day priro to scheduled meeting, unless
by-laws provide otherwise.
§ A director or trustee may waive
requirement, either expressly or
impliedly.
Place of meeting
§ Anywhere in or outside of the Philippines,
unless the by-laws provide otherwise.
Quorum of board
§ In the absence of stipulations in the by-
laws, a majority of the number of
directors as fixed in the articles of
incorporation shall constitute a quorum.

5 Compensation of Directors Requisites of board meetings

1. Meeting of the Board duly assembled.
General rule: no compensation 2. Existence of quorum; and
§ In the absence of any provision in the 3. Decision of the majority of the quorum
by-laws fixing their compensation, the duly assembled.
directors shall not receive any
compensation. No proxy
§ Except: reasonable per diems. § Directors in board meetings cannot be
represented or vote by proxy.
Compensation, how granted
§ Such compensation, other than per
diems, may be granted to directors by
the vote of the stockholders 6 Executive Committee
representing at least a majority of the
outstanding capital stock. Composition
§ Not less than 3 members of the Board to
Limit be appointed by the Board.
§ In no case shall the total yearly
compensation of directors exceed 10% of Function
the net income before income tax of the § May act, by majority vote of all its
corporation during the preceding year. membrs,
o on such specific matters within
When officers may receive compensation other the competence of the board,
than per diems as may be delegated to it in the
a. When there is a provision in the by-laws by laws; or
fixing their compensation; or

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Xavier University – Ateneo de Cagayan, Class of 2017

 
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o on such specific matters as may
be delegated to it by majority
vote of the board.
Functions which may not be delegated or acted
upon by Execom
1. Approval of any action for which
shareholder’s approval is also required.
2. Filling of vacancies in the Board.
3. Amendment or repeal of any resolution
of the Board which by its express terms
is not so amendable or repealable.
4. Distribution of cash dividends.
Purpose
§ Take off part of the work from the Board
during the periods when the Board does
not meet.
7 Corporate Officers
Who are corporate officers?
a. President, who shall be a director.
b. Treasurer, who may or may not be a
director.
c. Secretary who shall be a resident and
Filipino citizen.
d. Such other officers as may be provided
for in the By-laws.
Concurrent positions
§ Any two or more positions may be held
currently by the same person
§ Except:
o Not as President and Secretary;
or
o Not as President and Treasurer.
Power to elect officers
§ The power to determine who the
officers should be and the power to
elect them are lodged with the Board.
§ In this matter, the stockholders have no
say.
§ Corporate officers are elected by
majority of all the members of the
Board.
§ Non-stock corporation: officers are
elected by a majority of the members,
unless otherwise provided for in the
articles.
Corporate officers, whom to hire and fire
1. The officers provided by the Corporation
Law, namely, the President, Treasurer
and Secretary.
2. Those provided for in the by-laws of the
corporation.
Case: Gurrea v. Lazama
§ Hence, a general manager is not a
corporate officer in spite of the
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
importance of his duties and function
when his position is not provided for in
the by-laws.
Corporate officers, within business judgment
rule
§ When the position is that of a corporate
officer, it is subject to the business
judgment discretion of the BoD to
terminate.
§ Only those who are non-corporate
officer enjoy the constitutional right to
security of tenure, and cannot be
dismissed nor terminated from service
except for cause.
Authority of Corporate Officers
a. Actual authority
b. Doctrine of apparent authority
Doctrine of apparent authority
§ A corporation will be estopped from
denying the agent’s authority if it
knowingly permits one of its officers or
any other agent to act within the scope
of an apparent authority, and it holds
him out to the public as possessing the
power to do those acts.
§ The doctrine of apparent authority does
not apply if the principal did not commit
any acts or conduct which a third party
knew and relied upon in good faith as a
result of the exercise of reasonable
prudence.
Apparent authority, how ascertained
a. Through the general manner in which
the corporation holds out an officer or
agent as having the power to act, with
which it clothes him; or
b. By the acquiescence in his acts of a
particular nature, with actual or
constructive knowledge thereof, within
or beyond the scope of his ordinary
powers.
Hence, such authority may be assumed when
the officer acted and the same was
recognized by the board or allowed to be
exercised without any objection from the
corporation.
Rationale for the Doctrine of Apparent
authority
§ A third person has little to no
information as to what occurs in
corporate meetings; and he must
necessarily rely upon the external
manifestations of corporate consent.
§ The integrity of commercial transactions
can only be maintained by holding the
corporation strictly to the liability fixed
upon by its agents in accordance with
law.
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What must be proved for doctrine of apparent
authority to apply
a. Acts of the purported corporate officer
or agent
  justifying belief in the agency
by the principal
 corporation;
b. Knowledge thereof by the principal
corporation (i.e.,
  Board of Directors)
which is sought to be held; and
c. Reliance thereon by the principal
corporation (i.e.,
  Board of Directors)
consistent with ordinary care
  and
prudence.
1. President
Qualifications
1. Should be a director
2. May not hold the position of Secretary or
Treasurer concurrently.
3. Need not be a Philippine resident
2. Secretary
Confidential position
§ The position of Corporate Secretary is a
primarily confidential position. Board
members must have the highest
  § acquires for himself a
confidence in the Secretary to ensure
that their honest sentiments are always
and fully expressed, in the interest of
the corporation – the nature of the
corporate secretary’s work is akin to
that of a personal secretary of a public
official, a position long recognized to be
primarily confidential in nature.
Duty of secretary
§ To record transfers of stock is
ministerial.
§ However, the secretary cannot be
compelled to do so when the
transferee’s title to said shares has no
prima facie validity or uncertain.
Corporation Code
severally for all damages
resulting therefrom suffered by
the corporation, its stockholders
or members and other persons.
When a director, trustee, or officer
attempts to acquire or acquires, in
violation of his duty,
any interest adverse to the
corporation in respect of any
matter which has been reposed
in him in confidence,
as to which equity imposes a
disability upon him to deal in his
own behalf,
he shall be liable as a trustee for
the corporation and must
account for the profits which
otherwise would have accrued to
the corporation.
Where a director by virtue of his
34 office,
business opportunity which
should belong to the
corporation,
§ thereby obtaining profits to
the prejudice of such
corporation,
he must account to the latter for
all such profits by refunding the
same,
unless his act has been
ratified by a vote of the
stockholders owning or
representing at least 2/3 of
the oustanding capital stock.

8 Duties of Directors, Trustees or Officers This provision shall be applicable,

Directors or trustees who:
31 d. willfully and knowingly votes
  for or assent to patently
unlawful acts of the
corporation; or
e. are guilty of gross negligence
or bad faith in directing
affairs of the corporation; or
f. acquire any personal or
pecuniary interest in conflict
with their duty as such
directors or trustees
shall be liable jointly
notwithstanding the fact that the
director risked his own funds in the
venture.
Three-fold duty
1. Duty of obedience
2. Duty of diligence
3. Duty of Loyalty
Duty of obedience
§ DTO shall direct the affairs of the
corporation only in accordance with the
purpose for which it was organized.
and

Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017
 
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§ The DTO shall perform the duties must be ratification of the stockholders
enjoined on them by law and by the by- representing 2/3 of the oustanding
laws of the corporation. capital stock.
§ On the other hand, if the duty of loyalty
Duty of diligence is violated by a trustee or officer, it is
Director or trustee who: within the business judgment of the
a. Willfully and knowingly vote for or Board to ratify the act.
assent to patently unlawful acts of
the corporation; or Doctrine of corporate opportunity
b. Who are guilty of gross negligence; § Under this doctrine, a director, who by
or virtue of his office acquires for himself a
c. Bad faith in directing the affairs of business opportunity which should
the corporation. belong to the corporation, thereby
obtaining profits to the prejudice of
Shall be liable jointly and severally for all such corporation, is guilty of disloyalty
damages resulting therefrom suffered by the and should, therefore, account to the
corporation, its stockholders or members and latter for all such profits by refunding
other persons. the same, notwithstanding, that he
risked his funds in the venture.
Gross negligence
§ Want of even slight care, acting or
omitting to act in a situation where 9 Liability of DTOs to Third Persons
there is duty to act, not inadvertently
but willfully and intentionally, with a When DTOs are solidarily liable
conscious indifference to the The personal liability of a corporate
consequences insofar as other persons director, trustee or officer along (although not
may be effected. necessarily) with the corporation may validly
attach as a rule only when:
Duty of Loyalty a. He:
The duty of loyalty may be breached when: § assents to a patently unlawful act of
a. When DTO attempts to acquires or the corporation,
acquires in violation of his duty, any § acts in bad faith or is guilty of gross
interest adverse to the corporation in negligence in direting its affairs or
respect of any matter which has been § has obtained pecuniary interest in
reposed in him in confidence, as to conflict of interest, resulting in
which equity imposes a disability upon damages to the corporation, its
him to deal in his own behalf stockholders or other persons.
§ The DTO shall be jointly and b. He:
severally liable as a trustee for § consents to the issuance of watered
the corporation and must down stocks; or
account for the profits which § who having knowledge thereof, does
otherwise would have accrued to not forthwith file with the
the corporation. corporate secretary his written
b. Where a D, by virtue of his office objection thereto.
acquires for himself a business c. He agrees to hold himself personally and
opportunity which should belong to the solidarily liable with the corporation; or
corporation, thereby obtaining profits d. He is made, by a specific provision of
which should belong to the corporation. law, to personally answer for his
§ He must account to the latter for corporate action.
all such profits by refunding the
same, Use of inside information
o Unless his act has been § While directors owe a fiduciary duty only
ratified by a vote of to the corporation, they are still bound,
the stockholders however, to deal always at arm’s length
owning or representing with individual shareholders and other
at least 2/3 of the persons.
outstanding capital § However, they are only liable if the
stock. acted with bad faith or malice.
o Hence, it would be wrong for
Sec. 31 v. Sec. 34 any director to take undue
§ Sec. 31 applies to DTOs, while Sec. 34 advantage in the use of “inside
applies only to a Director. information.”
§ This implies that in order for a director o In illegal dismissal cases, where
to keep the profits of the venture, there the officers acted jointly in
Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017

 
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causing the illegal
unjustifiable dismissal of
plaintiff-appellee, they
personally liable to
employee.
Liability for labor claims
GR: Directors cannot be held personally liable
for labor claims simply by such positions.
§ A corporation is a juridical entity with
legal personality separateand distinct
from those acting for and in its behalf
and, in general,
  from the people
comprising it. The rule is that the
obligationsincurred by the corporation,
acting through its directors, officersand
employees, are its sole liabilities."
§ To hold a director or officer personally
liable for corporate obligations, two
requisites must concur:
(1) complainant must allege in the
complaint thatthe director or officer
assented to patently unlawful acts of
thecorporation, or that the officer
was guilty of gross negligence or bad
faith; and
(2) complainant must clearly and
  trustees or officers is VOIDABLE, at
convincingly provesuch unlawful acts,
negligence or bad faith.
Exceptional case: AC Ransom’s case
§ The officers can be held liable not only
criminally liable but even for payment of
backwages. If the policy were otherwise,
the corporate employer would have
devious ways to evade paying backwages.
§ If no definite proof exists as to who the
responsible officer is, then the firm’s
president who can be deemed its chief
operation officer shall be presumed as
the responsible officer.
§ If the non-payment of the back wages
has been a continuing situation, the
personal liability of the president of the
employer-firm, at the time the back
wages are ordered to be paid should also
be continuing, joint and several persona
liabilities of all who may have thereafter
succeeded to the office of the
president; otherwise, the employees
would be deprived of their rights by the
election of a president who has no
leviable assets.
Reahs Corp v. NLRC
§ The general rule of separate corporate
personality should remain as the guiding
rule in determining corporate liability to
itsemployees, and that at the very least,
to justify solidary liability,
  "there must
be an allegation or showing that the
officers of thecorporation deliberately
or maliciously designed to evade
thefinancial obligation of the
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
and corporation to its employees," or
the ashowing that the officers
are indiscriminately stopped its business
the toperpetuate an illegal act, as a vehicle
for the evasion of existingobligations, in
circumvention of statutes, and to
confuse legitimate issues.
§ In this case, while there was no
sufficient evidence of bad faith, the
Court found that the corporate officers
were aware that they were violating
labo standard provisions but they did not
act to correct these violations; instead,
they abruptly closed business. Neither
did they oner separationpay to the
employees as they conveniently resorted
to a `ameexcuse that they suffered
serious business tosses, knowing
fullywell that they had no substantial
proof in their hands to prove suchlosses.
10 Dealings of DTOs with corporation
A contract of the corporation with
32 one or more of its directors or
the option of such corporation,
unless all the following conditions
are present:
1. That the presence of such
director or trustee in the
Board meeting in which the
contract was approved was
not necessary to constitute a
quorum for such meeting;
2. The vote of such director or
trustee was not necessary
for the approval of the
contract;
3. The contract is fair and
reasonable under the
circumstances; and
4. In case of an officer, the
contract with the officer has
been previously authorized
by the BoD.
Where any of the first two conditions
set forth in the preceding paragraph
is absent, in the case of a contract
with a director or trustee, such
contract may be ratified by the vote
of the stockholders representing at
least 2/3 of the oustanding capital
stock or 2/3 of the members in a
meeting called for the purpose:
Provided, That full disclosure of
the adverse interest of the
directors or trustees involved is
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Corporation Code
made at such meeting: § It is no defense against such liability
that he merely is acting in a
Provided, however, that the representative capacity or that the
contract is fair and forbidden act applies only to the
reasonable under the corporation.
circumstances.
Title 5
Except in cases of fraud, and
33 provided the contract is fair and POWERS OF CORPORATIONS
  reasonable under the circumstances,
a contract between two or more
corporations having interlocking
directors shall not be invalidated on
A Principles as to Power of Corporations
that ground alone:
Powers of the corporation
Provided, That if the interest of § A corporation has no power except those
the interlocking director in one o expressly conferred on it by
corporation or corporations is [the] Corporation Code
merely nominal, he shall be o and those that are implied or
incidental to its existence.
subject to the provsiions of the
preceding section insofar as the
latter corporation or
corporations are concerned.
1 Express powers of the corporation

Express powers of the corporation

Stockholders exceeding 20% of
1. To sue and be sued;
the outstanding capital stock
2. Power of succession by its corporate
shall be considered substantial name for the term of its existence;
for purposes of interlocking 3. To adopt and use a corporate seal;
directors. 4. To amend its articles of incorporation;
5. To adopt by-laws not contrary to law,
morals or public policy and to amend or
Sec. 32 pertains to self-dealing directors repeal the same;
6. In case of stock corporations, to issue or
Burden of prooft sell stocks; for non-stock corporations,
§ The burden of proof lies with the to admit members.
corporation to show that the officer is 7. To purchase, receive, take or grant,
not authorized to enter into the contract hold, convey, sell, lease, pledge,
before the same may be annulled. mortgage and otherwise deal with all
§ It is only when the corporation has types of property.
discharged this burden that the burden 8. To enter into merger or consolidation.
of evidence shifts to the other party to 9. To make reasonable donations, provided
prove that the officer was clothed with that no corporation shall give donations
apparent authority to act. in aid of any political party or candidate
or for purpose of partisan political
Sec. 33 deals with corporations with activity.
interlocking directors 10. To establish pension, retirement, and
§ The rule under Sec. 33 allowing other plans for the benefit of its
annulment of contractsbetween directors, trustees, officers and
corporations with interlocking directors employees; and
resulting in theprejudice to one of the 11. To exercise such other powers as may be
corporation, has no application to essential or necessary to carry out its
caseswhere fraud is alleged to have purpose or purposes as stated in the
been committed to third parties. articles of incorporation.

Responsibility for crimes Two sources of express powers

§ Any director, trustee or officer (as well 1. Those provided for in the Corporation
as any employee or agent) of a Code; and
corporation who does an act constituting 2. Those provided for in the purpose clause
a crime is personally responsible of the articles of incorporation
therefore specifically.

Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017

 
Commercial Law 283
283
 

2 Ultra vires doctrine
  be enforced nor can
 breach.
No corporation Under this Code shall
45 possess or exercise any corporate
  not be interfered with as
  powers except
  persons whose
  the
§ those conferred by this Code
or
§ by its articles
incorporation and
§ except such as are necessary
or incidental to the exercise
of the powers so conferred.
Ultra vires acts, defined
§ Refers only to an act outside or beyond
  property through an ultra
corporate powers, including those that
may ostensibly be within such powers
but are, by general or special laws,
either prohibited or decalred illega.
§ Under comercial law, it means an act
committed outside the object for which
a corporation is created and therefore,
beyond the power conferred upon it by
  confirms and gives
law.
Ultra vires v. illegal act
§ Unlike an illegal act which is void and
cannot be convalidated, such an ultra
vires act is merely voidable and may be
enforced by virtue of its performance,
ratification or estoppel.
Types of ultra vires acts
a. Done by the corporation outside the
express, implied or incidental powers of
the corporation
§ VOID, and not suscetiple of
ratification.
b. Done by corporate representatives
without authority (although it may be
within the powers of the corporation).
§ VOID, or if not unenforceable or as
ineffective or legally binding.
§ However, this may be ratified
expressly or impliedly.
o Thus, an acceptance of
benefits derived by the
shareholders from an
investment made by the
Board outside corporate
and without the required
concurrence of the
stockholders may be
considered as effective
investment.
c. Those which are contrary to laws or
public policy.
Effect of ultra vires acts
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
a. A wholly executory ultra vires contract
or act cannot
damages be recovered for its
b. A wholly executed ultra vires contract or
act shall
between the parties or
rights are derived therefrom; but
State can always question said contract
or act.
of c. When an ultra vires act is executed on
one side but executory contract or on
the other wise who receive benefits
therefom, recovery can be had by the
former.
d. The title of a corporation to property
cannot be questioned on the ground that
it acquired the
vires contract of transfer.
3 Doctrine of Ratification
Ratification, defined
§ Ratification means that the principal
voluntarily adopts,
sanction to some unauthorized act of its
agenton its behalf.
§ It is this voluntary choice, knowingly
made, which amounts to a ratification of
what was theretofore unauthoarized and
becomes the authorized act of the party
so making the ratification.
Requisites of valid ratification
a. Act or contract must be consummated,
not merely executory.
b. The creditors are not prejudiced, or all
of them have given their consent.
c. The rights of the public or the State are
not involved; and
d. All the stockholders must give their
consent.
4 Trust fund doctrine
Trust fund doctrine
§ Subscriptions to the capital stock of a
corporation constitute a fund towhich
the creditors have a right to look for the
satisfaction of their claims.
When distribution of capital is allowed vis-à-vis
trust fund doctrine
1. Amendment of the Articles of
Incorporation to reduce the authorized
capital stock.
2. Purchase of redeemableshares by the
corporation, regardless of the existence
of unre-stacted retained earnings, and
3. Dissolution and eventual liquidation of
the corporation.
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B Express powers of Corporation
1 To sue and be sued
§ There must be a certified copy of the
board resolution authorizing the filing of
a petition for certiorari.
2 Power of succession by its corporate
name
3 To adopt and use a corporate seal
4 To amend its articles of incorporation
5 To adopt by-laws not contrary L,M, P
6 To issue or sell stocks/admit members
§ Related with No. 12
7 To deal with all types of property
§ Since sale of corporate land can only be
effected through an agent, the law on
agency requires that there must be
written authority of agent. Otherwie,
the sale is void and even the ratification
of the corporation cannot give effect to
the sale. (Relate with No. 13)
8 To enter into merger or consolidation
9 To make reasonable donations
10 Establish pension, retirement and other
benefits to its DTO and employees
11 Power to extend or shorten term
Requirements
a. Majority vote of the Board of
Directors/Trustees; and
b. Ratification in a meeting by 2/3 of
outstanding capital stock or 2/3 of the
members, as the case may be.
  sufficiency of
Shortening or extending term, requires
amendment of the articles
§ But, whereas in general amendments of
the articles can be made by written
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
assent of the stockholders or members,
without need of meeting, in shortening
or extending term, there must be a
meeting called for that purpose.
Dissenting stockholder may exercise right of
appraisal
§ However, this only applies where there
is extension of term.
§ Not when the term is shortened.
Power to temporary cease corporate operations
§ The temporary stoppage of the
operations of the corporation cannot be
classified as an ordinary business
transaction such as to limit its approval
to the BoD.
§ The cessation of business operations,
though temporary, is a fundamental
concern which should be decided not
only by the Board but also by the
stockholders themselves who stand to be
primarily affected by such event.
§ This is not a mere exercise of
management prerogative, hence, the
2/3 vote of oustanding capital stock is
required either prior to the voting of the
Board or by subsequent ratification.
12 Power to decrease or increase capital
stock, increase or decrease bonded
indebtedness
Requirements to increase or decrease of the
capital stock of a corporation are as follows:
1. Majority vote of the members of the
Board of Directors;
2. Ratification by 2/3 vote of the
outstanding capital stock, in a meeting
duly called for that purpose with notice
previously given.
3. Certificate of said corporate act shall be
signed by:
a. majority of the members of the
Board and
b. Chairman and Secretary of the
stockholder’s meeting.
4. Certificate must be accompanied by the
Treasurer’s Affidavit certifying
compliance with the 25%-25%
requirements as to stock subscription.
a. No decrease shall be approved
by SEC if it will prejudice
corporate creditors.
b. Bonds issued by the corporation
shall be registered with SEC
which is given the power to
determine the
the terms of such bonds.
Rights that may be exercised by shareholders
during this period
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1. Preemptive right to subscribe to a
sufficient number of shares in order to
maintain their previous relative voting
power.
2. Dissenting stockholders cannot exercise
the right of appraisal in this case.
13 Disposition or encumbrance of all or
substantially all corporate assets
Requirements
1. Majority vote of the members of the
board
2. 2/3 votes of the outstanding capital
stock or members in a meeting called for
the purpose.
§ With written notice of the proposed
action and time and place of
meeting.
  shares for a legitimate corporate
Right of appraisal available
Where disposition is without 2/3 ratification
§ the sale would be null and void.
When is there disposition of all or substantially
all corporate assets
§ if thereby the corporation would be
rendered incapable of continuing the
business or accomplishing the purposes
for which it was incorporated.
Corporation Code
another corporation, the latter is not liable for
the debts and liabilities of the transferor.
Except:
1. Where the purchaser expressly or
impliedly agrees to assume such debts;
2. Where the transaction amounts to a
conlidation or merger of corporations;
3. Where the purchasing corporation is
merely a continuation of the selling
corporation (business transfer rule); and
4. Where the transaction is entered into
fraudulently in order to escape liability
for such debts.
14 Power to acquire own shares
A stock corporation shall have the
41 power to purchase or acquire its own
purpose or purposes,
including but not limited to the
following cases:
Provided, That the corporation
has unrestricted retained
earnings in its books to cover the
shares to be purchased or
acquired:

Board may still abandon sale 1. To eliminate fractional

§ After such authorization or approval by shares arising out of stock
the stockholders or members, the Board dividends.
of Directors or Trustees may, 2. To collect or compromise an
nevertheless in its discretion, abandon indebtedness to the
such sale, lease, exchange, mortgage, corporation, arising out of
pledge or other disposiion. unpaid subscription, in a
delinquency sale, and to
Sell-out statute, subject to limitations purchase delinquent shares
§ This sell-out statute is subject to sold during said sale; and
equitable limitations to guard against
3. To pay dissenting or
possible abuse of power by the majority
withdrawing stockholders
and possible prejudice to the interest of
entitled to payment for their
the minority and to corporate creditors
as well. shares under the provisions
of this Code.
When is the 2/3 ratification not required
§ When the sale, lease, exchange,
mortgage, pledge or other disposition of When may corporation acquire own shares
property and assets is necessary in the § When there is unrestricted retained
usual and regular course of business; or earnings to cover the shares purchased
§ If the proceeds of the sale or other or acquired.
disposition of such property are o Except: redeemable shares.
appropriated for the conduct of its
remaining business. Instances when corporation may buy its own
stocks
Rule as liability of corporation which buys a. To complete fractional shares.
property of another corporation b. To collect indebtedness or in case of
GR: Where one corporation sells or otherwise delinquency sales; and
transfers all or substantially all of the assets to c. The exercise of right of appraisal.

Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017

 
Commercial Law 286
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Effect of reacquired shares
§ Cease to be outstanding and until
disposed of again by the corporation,
the acquired shares are neither voting
nor participating.
Examples when corporation may reacquire own
shares
a. Forced purchased – when a stockholder
withdraws at an agreed or arbitrated
price in the exercise of his “appraisal
right.”
b. Purchase of delinquent shares – Where
the corporation bids in the sale of
delinquent shares at public aution, in
the absence of other bidders.
c. Voluntary purchase or similar acquisition
– A conventional purchase or acquisition
by the corporation at a price to be paid
out of surprlus profits.
d. Donation
[Bance] Hence, reacquisition of own shares is not
limited to the three instances. It may be a
voluntary purchase provided or donation provided
that there is unrestricted retained earnings.
15 Power to invest funds in another
corporation
Corporation, how it may invest funds in
another corporation:
1. If investment (even in another
corporation) is reasonably necessary to
accomplish the primary purpose
§ Only a BOARD RESOLUTION is
required.
2. If for purposes other than primary or
corporation is engaged in a different
business
§ Majority vote of the BoD/T; AND
§ Duly ratified by 2/3 vote of
outstanding capital stock or
members
Written notice is required in this case
Right of appraisal may be exercised
16 Power to declare dividends
Dividends, defined
§ That part or portion of the profits of a
corporation set aside, declared and
ordered by the directors to be paid
ratably to the stockholders on demand
or at a fixed time.
§ It is payment to the stockholders of a
corporation as a return upon their
investment.
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
Dividends v. Profits/earnings
§ Dividend is the portion set aside for
distribution from the net earnings of the
corporation. Hence, dividends come
from profits and profits are the source
of dividends.
§ Profits are not dividends until so
declared or set aside by the corporation.
o In the meantime, all profits are
part of the assets of the
corporation and do not belong
to the stockholders individually.
o They may be in cash as well as
in kind.
Requirements as to declaration of dividends
1. Stock dividends
§ Not issued without 2/3 approval of
outstanding stockholders.
2. Other dividends (cash or property
dividends)
§ Mere majority of the quorum of the
BoD is sufficient to declare other
dividends.
§ The board may declare, other
dividends other than stock without
need of stockholder’s approval.
Stock dividend
§ A stock dividend is one that is declared
and paid out from the unissued shares of
the corporation, thereby
correspondingly increasing its capital
account and reducing the surplus profit
account.
[Bance] Issuing cash dividends v. stock
dividends
§ With a cash dividend, value actually
leaves the company as cash gets paid
out to shareholders who can do
whatever they want with it.
§ With a stock dividend, the company has
simply shifted the value from one form
of stockholder’s equity to another. Value
that had been held in retained earnings –
profits kept by the company on behalf of
its shareholders – is now being held by
the shareholders themselves in the form
of more company stock. The total
amount of equity hasn’t changed.
Unrestricted retained earnings, defined
§ De leon: The difference between the
total present value of its assets after
deducting losses and liabilities and the
amount of its capital stock.
§ Refer to profits a business has
accumulated since its creation that it
has not distributed to stockholders as
dividends.
§ The SEC defines it as the:
o amount of accumulated profits
and gains
Commercial Law 287
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o realized out of the normal and
continuous operations of the
company
o after deducting distributions to
stockholders and transfers to
capital stock or other accounts
and
o which is:
§ not appropriated by
the BOD for corporate
expansion programs or
projects;
§ not covered by a
restriction for dividend
declaration under a
loan contract; and
§ not required to be
retained under special
circumstances, such as
when a special reserve
for likely contingencies
is needed. (SEC
Guidelines MC No. 11,
2008
Corporation Code
the corporation is prohibited from
entitling thereto any one else.
Payment by the corporation to someone else
§ Entitles the real owner to recover the
dividends from the corporation.
§ However, the shareholder himself may
give that entitlement to another such as
to a usufructuary.
§ In pledges of shares of stock, cash
dividends could be subject to legal
compensation whenever pertinent.
Where corporation decides to give cash or
stock bonus
§ It does not partake of a dividend
declaration.
§ It is thus perfectly valid as long as the
shares therefor are sourced from its
treasury shares (not from the unissued
or unsubscribed shares which can only
be issued, other than by way of stock
dividend, for valuable consideration or
for demandable obligations.

Considerations for the declaration of dividends
1. Dividends may only be declared out of
the unrestricted retained earnings.
2. Unless justifiable reasons exist, such as
business expansions, loan agreement
limitations or other special
circumstances, stock corporations are
prohibited from retaining surplus profits
in excess of 100% of paid-in capital
stock; and
3. In the case of stock dividends, the
declaration thereof must have the
approval of the shareholders
representing not less than 2/3 of the
oustanding capital stock.
Declaration of dividends, when may be revoked
§ A declaration of dividends may be
revoked if the same was irregularly
declared, such as when the same is
violative of the trust fund doctrine.
§ Otherwise, it can no longer be revoked
once the right thereto has already
vested in the stockholders upon
compliance with the last act or
condition required by law, the by-laws
of the corporation, and/or the board or
stockholders’s resolution as the case
may be for rendering effective the
declaration.
Entitlement to dividends
§ The right to receive dividends which
pertains to the shares registered in the
stockholder’s name is a right that flows
from ownership.
§ The right to dividends is based on duly
recorded stock holdings; accordingly,
SEC may compel corporation to declare
dividends
§ Corporations are prohibited from
retaining surplus profits in excess of
100% of their paid-in capital stock
except when justified by any of the
reasons .
§ The corporation may be compelled by
the SEC to declare dividends to its
stockholders.
§ The prohibition on retention of profits is
applicable to all stock corporations,
including wholly owned subsidiaries.
Actions to enforce declaration of dividends
GR: Since stockholder has no individual interest
in the profits of a corporation, prior to the
declaration of a dividend, a stockholder cannot
maintain an action at law to recover his share of
the accumulated profits.
§ Mandamus is not a proper remedy in
such a case.
Ex: Where there exist sufficient net profits.
§ An action at law may be maintained
where it is alleged that sufficient net
profits have been earned to obligate the
corporation to pay the amount agreed.
o Before an action to compel the
declaration and payment, it
must appear that the
complaining stockholder has
made application to the
directors of the corporation for
the relief sought.

Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017
 
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Corporation Code
Instances when majority of the board, and not
17 Power to enter into management just majority of the quorum present, when
contracts required
1. In the election or removal of officers.
Requirements of management contract for both 2. Amendment to the articles
managed and managing corporation 3. Specific delegation to the Executive
a. Resolution of the BoD/Trustees. committee
b. Majority vote of the outstanding capital 4. Increase or decrease of the capital stock,
stock or members, as the case may be, or incurrence, creation or increase of
in a meeting called for that purpose. bonded indebtedness
§ Except: the 2/3 vote shall be 5. Sale, encumbrance, or disposition of all
necessary if: or substantially all of the corporate
o Stockholders represent the assets
interests of both corporations 6. Investment in another corporation or
owns 1/3 of outstanding business
stocks of the managing 7. Voluntary dissolution.
corporation.
o Majority of the members of
the Board of managing 3 By the officers
corporation compose also of
majority of the members the Corporate officers may act on such matters as
board of the managed may be authorized either:
corporation. a. Expressly by the by0laws or Board
Resolution; or
Period of management contract b. Implied, as by general practice or policy.
§ No management contract shall be
entered into for a period longer than 5
years for any one term.
Title 6

C As to who exercises
RIGHT OF STOCKHOLDERS AND
Powers of the corporation are generally MEMBERS
exercised by the Board.
§ There are however instances when the Rights of stockholders may be grouped
law requires the action of shareholders 1. Managerial Rights
alone or with the concurrence of the a. Right to attend stockholders
board. meetings
b. Right to vote
2. Proprietary rights
1 By the shareholders a. Right to dividends
b. Right to net assets in case of
1. Election or removal of directors or liquidation
trustees. 3. Remedial
2. Change in the corporate charter or a. Individual suit
articles of incorporation. b. Representative suit
3. Changes in the by-laws although the c. Derivative suit
shareholders may delegate this power 4. Appraisal rights
4. Certain other actions of substance or 5. Inspection Rights
essence such as the declaration of bond
or stock dividends.
A Right to attend stockholders’ meetings

Right to attend meetings

2 By the Board of Directors
8. Until challenged successfully in a proper
proceeding, a registered stockholder has
Quorum a right to participate in any meeting and
§ Unless the Articles of Incorporation or in the absence of fraud the action of the
by-laws require a greater number, a stockholders’ meeting cannot be
majority of the nuber of directors or collaterally attacked on account of such
trustees fixed in the articles constitute a participation, even if it be shown later
quorum.

Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017
 
Commercial Law 289
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Corporation Code
on that the shares had been previously b. There shall always be a class or series of
sold (but not recorded). shares which must have complete voting
rights;
Types of meetings c. Even shares classified as “non-voting”
c. Regular meetings – held annually on a would have power to vote in the
date fixed in the by-laws, or if not so following corporate acts:
fixed, on any date in April of every year § Amendment of the articles of
as determined by the board. incorporation.
§ Provided: written notice of § Adoption and/or amendment of the
regular meeting must be sent at by-laws
least 2 weeks, unless a § Sale, lease, or encumbrance of all
different period is required by or substantially all of the corporate
the by-laws. property.
d. Special meetings – held at any time § Incurring, creating or increasing
deemed necessary or as provided in the bonded indebtedness.
by-laws. § Merger or consolidation.
§ Provided: That at least one § Investment of corporate funds in
week written notice shall be another corporation or business
sent to all stockholders or enterprise; and
members, unless otherwise § Dissolution of the corporation.
provided in the by-laws.
§ Notice of any meeting may be Executors, administrators and legal
waived, expressly or impliedly, representatives, has right to vote
by any stockholder or member. § Executors, administrators, receivers and
other legal representatives duly
Place and time of meetings appointed by the court may attend and
§ Must be held in the city or municipality vote in behalf of the stockholder or
where the principal office of the members without need of any written
corporation is located, preferably in the proxy.
principal office itself.
§ Any provision in the by-laws changing Rule where stockholder has pledged or
such place shall be ILLEGAL. mortgaged his shares
§ The right to vote remains with the
Who may call meetings stockholder.
§ Where there is no person authorized to o Except when the right to vote has
call a meeting, SEC upon petition of a been granted to the pledgee or
stockholder/member and on the showing mortgagee, but the right to vote
of good cause, may issue an order to must be recorded in the corporate
petitioner to call a meeting by giving books.
proper notice, with the petitioner
presiding thereat until at least a Voting in case of joint ownership
majority of stockholders/members § In case of shares owned jointly by two or
present have chosen a presiding officer. more persons, in order to vote the same,
the consent of all the co-owners shall be
Quorum in meetings necessary.
§ Majority of the outstanding capital stock, o Unless there is a written proxy,
or of the members, shall constitute a signed by all the co-owner,
quorum. authorizing one or some of them or
§ Except: in cases where greater vote for any other person to vote such shares.
an act or business is required by law as
when the required vote is 2/3 of the
oustanding capital stock or membership 1 Proxy
as the case may be.
Stockholders and members may vote
58 in person or by proxy in all meetings
B Right to vote   of stockholders or members.

Limitations that may be placed on right to vote Proxies shall be:

a. No share may be deprived of voting § in writing;
rights except those classified and issued § signed by the stockholder or
as “preferred” or “redeemable” shares; member and
and § filed before the scheduled
meeting with the corporate

Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017

 
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secretary.
Unless otherwise provided in the
proxy, it shall be valid only for the
meeting for which it is intended.
No proxy shall be valid and effective
for a period longer than 5 years at
any one time.
Proxy
§ In writing
§ Signed by the stockholder or member
§ Filed with corporate secretary before
the scheduled meeting.
[Note] unless it is in the proper form, the
proxy cannot be enforced nor exercised.
Period of validity
§ Unless otherwise provided in the proxy,
it shall be valid only for the meeting for
which it is intended.
§ No proxy shall be valid and effective for
a period longer than 5 years at any one
time.
§ Proxies are good only for one meeting
duly designated.
§ It is possible to make the proxy good for
several meetings; but there must be an
express stipulation to this effect, but
the period cannot be longer than 5 years.
2 Voting trusts
Voting trust
§ One or more stockholders of a stock
corporation may create a voting trust for
the purpose of conferring upon a trustee
or trustees the right to vote and other
rights pertaining to the shares for a
period not exceeding 5 years at any one
time.
§ Except: in the case of a voting trust
specifically required as a condition in a
loan agreement, said voting trust may
be for a period exceeding 5 years but
shall automatically expire upon full
payment of the loan.
Form
a. In writing and notarized and specify the
terms and conditions thereof.
b. Certified copy shall be filed with
corporation and SEC – otherwise said
agreement shall be ineffective and
unenforceable.
c. Covered stock certificates shall be
cancelled and new ones issued in
trustee’s name, indicating that they are
issued pursuant to said agreement.
d. Notation in corporate books of the
transfer in trustee’s name.
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
e. Trustee shall execute and deliver to
transferors voting trust certificates,
which shall be transferable in the same
manner and with the same effect as
certificates of stock.
Examination right
§ The voting trust agreement filed with
the corporation shall be subject to
examination by any stockholder in the
same manner as any other corporate
book or record.
§ Both the transferor and the trustee may
exercise the right of inspection of all
corporate books and records.
§ But reservation of only the right of
inspection in the person of transferor, it
means that the original owners-
transferor-beneficiary is deprived of
other rights, such as the right to vote,
appraisal right, etc. which now pertain
to the trustee as the registered owner of
the shares.
Prohibited VTA
§ It should not circumvent the law against
monopolies and illegal combinations in
restraint of trade or used for purposes of
fraud.
Termination of VTA
§ Unless expressly renewed, all rights
granted in a VTA shall automatically
expire at the end of the agreed period,
and the voting trust certificates as well
as the certificates of stock in the name
of the trustee shall thereby be deemed
cancelled and new certificates of stock
shall be reissued in the name of the
transferors.
3 Summary of cases when stockholders’
action is required
1. By majority
a. Fixing the issue value of no par value
shares
§ But the articles may fix the issue
price or authorize the Board to fix
said issue value.
b. Adoption or amendment to the by-laws
c. Execution of management contract
§ Except where 1/3 of the managing
corporation or interlocking majority
of directors
d. Revocation of delegation to the Bod on
the amendment of by-laws.
e. Payment of compensation for directors
unless already fixed in the by laws.
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Corporation Code
2. By a 2/3 vote
Right of first refusal
1. Declaration of bond or stock dividends § Except in the case of close corporations
2. Investment in other corporations or for where the right of first refusal is
purposes other than those provided in required to be a feature to be found in
the Articles the articles of incorporation, the right of
3. Certain amendments to the Articles of first refusal can only arise in Corporate
Incorporation Law by means of a contractual
4. Delegation to the board of directors to stipulation, or when it is provided for in
amend the by-laws. the articlesof incorporation.
5. SLEMP or other disposition of all or § The nature and purpose of by-laws
substantially all of the corporate assets. would not allow rights of first refusal to
6. Removal of a director be found in its provisions.
7. Ratification of a voidable contract in
cases between the corporation and its
director or trustee E Right to receive dividends
8. Voluntary dissolution of the corporaiton
9. Execution of management contracts in Prohibition to retain dividends
cases of interlocking stockholders or § Stock corporations are prohibited from
directors retaining surplus profits in excess of
10. Increase or decrease of capital stock and 100% of their paid-in capital stock.
creation, uncrring of bonded
indebtedness. Except:
1. When justified by definite corporate
expansion projects orprograms approved
by the board of directors;
C Pre-emptive right 2. When the corporation is prohibited
under any loan agreement with any
Pre-emptive right financial institution or creditor, whether
§ The shareholder’s right to subscribe to local or foreign,   from declaring
ALL issues or disposition of shares of any dividends without its/his consent, and
class in proportion to his present such consent has not yet been secured;
stockholdings, the purpose being to or
enable the shareholder to retain his 3. When it can be clearly shown that such
proportionate control in the corporation retention is necessary under special
and to retain his equity in the retained circumstances obtaining in the
earnings, and also in the net assets in corporation,   such as when there is a
the event of dissolution. need for special reserve for
probablecontingencies.
Pre-emptive right, when may be exercised
a. Increase in the authorized capital stock Forms of dividends
b. Opening for subscription the unissued 1. Cash dividends
portion of existing capital stock; and § Can be declared by mere Board
c. Disposition of treasury shares. unrestricted retained earnings
§ Can be payable to holders of
delinquent stock but to be applied
Pre-emptive right, when inapplicable to the unpaid balance on the
a. Shares to be issued to comply with laws subscription pluscost and expenses
requiring stock offering or minimum while such holders of delinquent
stock ownership by the public. stockmay likewise be entitled to
b. Shares issued in good faith with the stock dividends issuance ofwhich
approval of the shareholders shall be withheld from the
representing 2/3 of the oustanding delinquent stockholderuntil the
capital stock in exchange for property latter fully pays his unpaid
needed for corporate purposes. subscription.
c. Shares issued in payment of previously § Revocable before announcement to
contracted debt the shareholders.
d. In case the right is denied in the articles 2. Property dividends -
of incorporation. 3. Stock dividends
§ Can be declared by the Board but
requires the approvalof 2/3 of the
D Right of first refusal Outstanding Capital Stock at a

Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017
 
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regular orspecial meeting duly § Sec. 74 has been interpreted by the
called for such purpose. Supreme Court as no longer allowing the
§ Declaration may be revoked prior to unqualified right of inspection of
actual issuance. stockholder of Corporate records and
that the person making the demand has
Dividends cannot be declared out of capital to show that he is acting in good faith
§ Except liquidating dividends distributed and for a legitimate purpose.
at dissolution.
Right to financial statements
Dividends can be declared only out of the § Within 10 days from receipt of a written
unrestricted retained earnings request of any stockholder or member,
§ Although stock dividends may be issued corporation shall furnish him most
out of premium surplus (since in the recent financial statement, which shall
latter case; it is nothing but a book- include the balance sheet and profit or
entry procedure) loss statement.

F Right to inspect and copy corporate G Remedial rights

records

Books required to be kept 1 Individual suit

1. Books that record all business § Suit instituted by the shareholder for his
transactions of the corporationwhich own behalf against the corporation
shall include contract, memoranda,
journals, ledgers,  etc.;
2. Minute book for meetings of the 2 Representative suit
stockholders/members; § A suit filed by a shareholder in his behalf
3. Minute book for meetings of the board; and in behalf likewise of other
4. Stock and transfer book. shareholders similarly situated and with
a common cause against the corporation.
Conditions upon right to inspect
(1) That it be done during business hours on
a business day; 3 Derivative suits
(2) For good purpose, which may be:
§ To investigate acts of management
Derivative suits, preliminary
§ To investigate financial conditions § It is a common law right of stockholders
§ To fix value of shares
and members and exists byvirtue of
§ Mailing list for proxies Philippine jurisprudence adopting
§ Information for litigation
American jurisprudence on thematter,
(3) The following are not good and honest originally regulated under the Rules of
purposes:
Court, and now covered under the
§ Obtain corporate secrets (formula) Interim Rules of Procedure of lntra-
§ Nuisance suit
Corporate Controversies promulgated by
§ To embarrass the company. the Supreme Court.
§ The legal standing of stockholders
Liability for refusal to allow inspection
tobring derivative suits for and in behalf
§ The director or officer who unjustly of their corporation is not a civil law
refuses to allow stockholders to inspect
right, nor does the Corporation Code
the corporate books may be held liable contain any provision recognizing or
for damages and a criminal offense
regulating the filing of derivative suits.
punished under Sec. 144 of the
Corporation Code.
Derivative suits, defined
§ A derivative action is a suit by a
Defenses that the director or trustee may put
shareholder to enforce acorporate cause
up of action. The corporation is a necessary
1. Improper use of the information
party tothe suit, and the relief which is
obtained in the past.
granted is a judgment against a
2. There was bad faith; or thirdperson in favor of the corporation.
3. Use of the information for an
Similarly, if a corporation has adefense
illegitimate purpose. to an action against it and is not
asserting it, a stockholdermay intervene
No unqualified right to inspection and defend on behalf of the corporation.

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Xavier University – Ateneo de Cagayan, Class of 2017
 
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§ A derivative suit is an action brought by 2. Restriction of rights or privileges of
minority shareholders in the name of the shares thorugh the amendment of the
corporation to redress wrongs articles of incorporation.
committed against the corporation, for 3. Sale of all or substantially all corporate
which the directors refuse to sue. assets
o It is a remedy designed by 4. Equity investment in non-primary
equity and has been the purpose business enterprise
principal defenseof the 5. Merger or consolidation
minority shareholders against
abuses by the majority. Requires 2/3 vote of stockholders
§ All the above instances require the 2/3
votes of the outstanding capital stock.
Basis of derivative suit § The appraisal right pertains only to
§ The basis is the theory of delegated stockholders who have actually
authority wherein the BoD is a creation dissented from the above-enumerated
of the stockholders and only controls transactions.
and directs the affairs of the corporation
by delegation of the stockholders. Appraisal right, how exercised
1. The dissenting stockholder must submit
Right to file derivative suit v. Business written demand on the corporation for
judgment rule payment of the fair value of the shares
§ Derivative suit is founded on equity and within 30 days from the date on which
does not apply to overcome “business the vote was taken.
judgment” rule; and therefore, is § Failure to do so means waiver of the
available only in instance when the BoD right.
is incapable of exercising business § Effect: He loses all rights as
judgment on behalf of the corporation stockholder including dividend
[such as when the majority of the rights; only one right remains and
members of the Board are the culprit, that is the right to receive payment
etc] of the fair value of his shares.
2. 10 days from demand, the dissenting
Requisites for filing of derivative suit stockholder must submit his certificate
Under the Interim Rules of Procedure of stocks for notation that such
Governing Intra-Corporate Controversies, the certificates representing dissenting
requirements of a derivative suit are: shares.
a. That he was a stockholder or member at § Failure to do means waiver of
the time theacts or transactions subject appraisal right.
of the action occurred and at the time § If such shares are subsequently
the action was filed: disposed of and new certificates are
b. That he exerted all reasonable efforts to issued to the transferee, the right
exhaustall remedies available under the of appraisal is automatically
articles ofincorporation, by-laws, laws or extinguished, the transferee
rules governing thecorporation or becomes a regular stockholder of
partnership to obtain the relief heesires, the corporation.
and alleges the same with particularity 3. Within 60 days from the date the
inthe complaint; stockholders approved the corporation
c. No appraisal rights are available for the action, the corporation and the
act or acts complained of; and dissenting stockholders shall agree as to
d. The suit is not a nuisance or harassment the fair value of the dissenting shares.
suit. § If after the 60-day period no
agreement is reached, then it shall
[Another requirement] be determined and appraised by 3
e. The cause of action actually devolves on disintered persons:
the corporation, the wrongdoing or harm o One appointed by the
having been caused to the corporation stockholder;
and not to the particular stockholder o Second appointed by the
bringing the suit. corporation; and
o Third to be chosen by the
two thus appointed.
H Appraisal Right 4. Findings of the majority of the
appraisers shall be final and the award
shall be payable within 30 days after it
When right of appraisal may be exercised is made.
1. Extend or shorten the corporate term

Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017

 
Commercial Law 294
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5. Dissenting stockholder can only be paid
the fair value of his shares only if there
are unrestricted retained earnings.
§ If the dissenting stockholder is not
paid within 30 days from after the
award, he shall automatically be
restored to all his rights as
stockholder.
Instances when right of appraisal is lost
1. Failure to make written demand within
30 days after the vote was taken on the
corporate act
2. Failure to surrender the certificate of
stock within 10 days from demand for
notation
3. Non-existence of unrestricted profit to
cover the payment of the fair value of
dissenting shares within 30 days from
date of award.
4. Subsequent transfer of the shares which
have been annotated when new
certificates of stock are issued
5. When the corporation consents a
demanding stockholder to withdraw the
exercise of appraisal right
6. Abandonment of corporate action
7. Disapproval of action by SEC
I Right to receive proportionately the
net assets of the corporation after
dissolution
When may corporation distribute assets
§ Except by decrease of capital stock and
as otherwise allowed by the Corporation
Code, no corporation shall distribute any
of its assets or property to its
stockholders
o Except upon lawful dissolution and
after payment of all its liabilities.
Liquidating dividend
§ In the liquidating of a corporation after
the payment of all corporate debts and
liabilities, the remaining assets, if any,
must be distributed to the stockholders
in proportion to their interests in the
corporation.
§ The share of each stockholder in the
assets upon liquidation is what is known
as liquidating dividend.
Distribution in relation to non-stock
corporations
A plan of distribution may be adopted in
the process of dissolution by:
§ Majority vote of the Board of Trustees;
§ Adopted by at least 2/3 of the members
having voting rights.
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
Title 7
SHARE OF STOCKS, STOCK
CERTIFICATES AND SUBSCRIPTION
AGREEMENTS
Shares of stock
§ Are personal property and may be
transferred by delivery of the certificate
or certificates indorsed by the owner or
his attorney-in fact or other persons
legally authorized to make the transfer.
§ This is the principle of free-
transferability of the units of
ownership.
Certificate of stock
§ Document evidencing the ownership of
shares of stock by a stockholder and the
full payment of the issue or subscription
price therefor.
§ The Certificate itself is a continuing
affirmation of representation that the
stock described therein is a valid and
genuine and is at least prima facie
evidence that it has been legally issued
in the absence of evidence to the
contrary.
§ It is merely evidence of a share of stock
and not the share itself.
Form of certificate of stock
§ Issued by the corporation
§ Signed by the president or vp
§ Countersigned by the secretary or
assistant secretary and
§ Sealed with the seal of the corporation.
Relief of stockholder if corporation refuses to
issue certificate
§ If the corporation unjustifiably refuses
to issues the certificate, the stockholder
may avail himself of mandamus, specific
performance or rescission plus damages.
Transfer of shares must be registered
§ Sec. 63 of the Corporation Code strictly
requires the recording of the transfer in
the books of the corporation, and not
elsewhere, to be valid as against third
parties.
Rules when certificate of stock reflects a
greater volume of shares than the actual
number of shares issued or to be issued:
a. To the extent that there is an overissue,
the excess issuance shall be VOID as
being ultra vires.
b. If there is no overissue, but no payment
has been made to cover the par or
stated value of the excess shares, the
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latter would constitute WATERED
SHARES.
c. If there is no overissue and there is no
issuance of WATERED SHARES, the
corporation is bound to honor the
certificate (if duly signed and released
by authorized officers) in the hands of a
holder in good faith, but with a right of
recourse against the culpable or unjustly
enriched party.
Certificate of stock, not a negotiable
instrument
A Issuance
May be issued only until full payment
§ No certificate of stock shall be issued
until the full amount of the subscription
is paid.
§ A certificate of stock may not be issued
on unpaid subscription even to the
extent of paid-up, but that payments
(subsequent to the subscription) may
specifically be so applied by the
stockholder to certain shares thereof as
to make them fully paid for which, and
to the extent of full payment,
certificates may be issued as long as
such application of payment is permitted
by a board resolution indiscriminately
applicable to all shareholders.
B Lost or Stolen Certificate
Procedure for issuance of new certificates in
lieu of those lost, stolen or destroyed
1. Registered owner shall file with the
corporation an affidavit in triplicate
setting forth:
a. Circumstances of loss
b. Number of shares represented
by each certificate
c. Serial number of certificates
d. Name of the corporation
2. After verifying the affidavit and other
information and evidence, the
corporation shall publish a notice in a
newspaper of general circulation once a
week for 3 consecutive weeks at the
expense of the registered owner that
these stocks were lost.
a. The notice shall provide that if
no contest is made within 1
year from the last publication,
the right to contest is barred
and the certificates shall be
cancelled in the book.
i. Except that new
certificates may be
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
issued even before the
1-year period if the
registered owner
would post a bond or
surety.
b. If contest is made, then the
issuance of new certificates
shall be suspended until final
decision of the court.
3. Except in case of fraud, bad faith or
negligence on the part of the
corporation and its officers, no action
may be brought against them in relation
to lost, destroyed or stolen certificates.
Instead, it should be directed to the
recipient of the new certificates.
Procedure does not apply where certificates
were mislaid by corporation or were in their
possession
§ In which case, it is the corporation
which should bear the consequences of
loss.
C Transfer of Shares
Certificate of stocks, when deemed transferred
§ Certificates of stock of a corporation are
for purpose of methods of transfer at
times referred to or considered quasi-
negotiable documents.
§ Bance: delivery + indorsement
Corporation may restrict right of transfer
§ Ordinarily a stockholder has an absolute
right to dispose of his shares
o Except as may be reasonably
restricted by provisions of the
articles of incorporation.
§ Hence, a share classified as non-
transferrable to aliens for purposes of
complying with the constitutional
requirements is valid.
§ But a provision in the by-laws stating
that no stockholder shall transfer his
shares without first informing the
secretary for purposes of giving the
corporation a right of first refusal is
considered a restrain of trade.
o [Bance] The right of first
refusal may only be granted
under contractual stipulations
between parties or when
provided in the Articles of
Incorporation, not merely when
it is in the by-laws.
Manner of transfer
§ Shares of stock may be transferred by
delivery of the certificate or certificates
and the indorsement thereof by the
owner or his legal representative.
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§ But the transfer shall be valid only as
between the parties and void as to
others until its recording in the books of
the corporation.
Registration or recording in the books of
corporation, essential
§ No transfer of shres of stock shall be
valid, except as between the parties,
until the transfer is recorded in the
books of the corporation so as to show
the names of the parties to the
transaction, the date of the transfer,
the number of the certificate or
certificates and the number of shares
transferred.
Requirements for transfer of stock to be valid
a. There must be delivery of the stock
certificates
b. The certificate must be indorsed by the
owner or his attorney-in-fact or other
persons legally authorized to make the
transfer; and
c. the transfer to be valid against third
persons msut be recorded in the
books of corporation.
Assignment of subscriptions
§ The code prohibits the recording of
transfers of shares against which
corporation holds any unpaid claim.
§ Accordingly an assigment of subscription
rights would bind the parties only and
the consenting creditors.
§ The corporation itself cannot release the
original subscriber from paying his
subscription without:
o Valuable consideration or
o Without the unanimous consent
of the stockholders, even when
such release shall be without
prejudice to the rights of non-
consenting creditors for whom
the trust fund is created.
Pledge or mortgage of shares
§ Shares of stock may be pledged or
mortgaged.
§ The pledgor or mortgagor has the right
to vote the shares unless such right is
given to the pledgee or mortgagee and
recorded in corporate books.
§ The pledge or mortgage itself need not
be record but a chattel mortgage must
comply with the chattel mortgage law,
and a pledge would require the shares to
be placed in the possession of the
creditor and the agreement to appear in
a public instrument to take effect
against third persons.
Corporation Code
D Collection of unpaid subscription
Remedies of corporation to enforce stock
subscription:
a. Call of the Board of Directors
b. Judicial action
c. Application of dividends
1 Call of the Board of Directors
Payment of balance of subscription
§ The Board may at any time declare due
and payable to the corporation unpaid
subscription to the capital stock and
may collect the same or such percentage
thereof in either case with accrued
interest if any, as it may deem necessary.
§ Payment shall be made on the date
specified in the call.
Power to call, not absolute
§ This power of the board is subject to the
stipulations in the subscription
agreement.
Effect of failure to pay
§ Failure to pay any due unpaid
subscription agreement shall render the
entire balance due and payable with
legal interest thereon or at the rate of
interest provided by the by-laws.
§ 30 days therefrom, it still unpaid, the
shares become delinquent and subject
to sale, unless the board declares
otherwise.
Rights of Delinquent shares
§ A stock declared delinquent shall be
denied the right to vote or be
represented in meetings,
§ the right to examine books,
§ pre-emptive rights or any other right
o except the right to dividends
which shall be applied to the
payment of his subscription.
Effect of shares becoming delinquent
1. To accelerate the entire amount of the
unpaid subscription.
2. To subject the share to interest,
expenses and cost.
3. To disenfranchise the shares from any
right that inhere to a shareholder,
except the right to dividends (but which
shall be applied to the amount due on
said shares)
4. To subject the shares to delinquency
sale.

Sale of delinquent shares

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Xavier University – Ateneo de Cagayan, Class of 2017

 
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a. Extrajudicial remedy; delinquency sale
b. Judicial
Extrajudicial remedy, steps
a. Board of Directors must make a call by
resolution demanding the payment of
the balance of the subscription. This is
called the "notice of call.
b. The notice of call shall be served on
each stockholdereither personally or by
registered mail (now there is no need for
publication).
c. If the stockholder does not pay the
amount due on the date designated in
the notice, the Board shall issue, by
  action in a court of proper
resolution, a "notice of delinquency.”
d. Notice of delinquency shall be served on
the non-paying subscriber either
personally or by registered mail:
§ PLUS publication in a newspaper of
general circulation in the province
or city where the principaloffice of
the corporation is located, once a
week for two (2) consecutive weeks.
§ The notice shall state the amount
due on each subscription plus
accrued interest,
  and the date, time shall be applied to any amount owing
and place of the sale which shall not
be less than 30 days nor more than
60 days from the date the stocks
become delinquent.
§ The delinquent stockholder may pay
the corporation on or before the
date specified in the sale the full
balance of subscription, plus
accrued interest, cost of
advertisement and expenses of sale.
Otherwise, the auction shall push
through.
e. In the public auction, the highest bidder
is the one who is willing to pay the
amount of the balance of the
subscription for the least number of
shares.
Corporation may bid, only when there are no
bidders
§ If there are no bidders, then the
corporation must bid for the whole
number of shares (regardless of how
much the stockholder has paid),
  which formed in case of consolidation.
shall then pertain to the corporation as
fully paid treasury stocks.
Requirements to contest auction sale
GR: No action to recover delinquentstock sold
can be sustained upon:
§ the ground of irregularity or defect in
the notice of sale, or
§ in the sale itself of the delinquent stock,
UNLESS the party seeking to maintain such
action:
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
1. first pays or tenders to the party holding
the stock the sum for which the same
was sold, with interest from the date of
sale at the legal rate; and
2. no such action shall be maintained
unless it is commenced by thehiing of a
complaint within 6 months from the
date of sale.
2 Judicial action
Nothing in this Code shall prevent
70 the corporation from collecting by
jurisdiction the amount due on any
unpaid subscription, with accrued
interest, costs and expenses.
3 Application of cash dividends
Dividends, application
§ Cash dividends due delinquent shares
said shares; stock dividend shall be
withheld until the delinquent
stockholders pay in full their unpaid
subscription.
Title 8
MERGERS AND CONSOLIDATION
Procedure for merger or consolidation
(1) The Boards of each corporation shall
draw-up a plan of merger or
consolidation setting forth:
a. Names of corporations involved
b. Terms and mode of carrying it
out
c. Statement of changes, if any in
the present articlesof surviving
corporation; or the articles of
the newcorporation to be
(2) Plan for merger or consolidation shall be
approved by majority vote of each of
the Boards of the concerned
corporations at separate meetings;
(3) The same shall be submitted for
approval by the stockholders or
members of each such corporations at
separate corporatemeetings duly called
for the purpose.
(4) Affirmative vote of 2/3 of the
outstanding capital stock in case of
stock corporation, or 2/3 of the
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members of a non-stock corporation
shall be required.
(5) Dissenting stockholders may exercise the
right of appraisal.
(6) Any amendment to the plan must be
approved by the same votesof the board
members or trustees and stockholders or
membersrequired for the original plan.
(7) After such approval, Articles of Merger
or Articles of Consolidationshall be
executed by each of the constituent
corporations, signedby president or vice-
president and certified by secretary or
assistantsecretary, setting forth:
a. Plan of merger or consolidation;
b. In stock corporation, number of
shares outstanding;
  in non-stock,
number of members;
c. As to each corporation, number
of shares or membervoting for
and against such plan,
respectively.
(8) Four copies of articles or merger or
consolidation shall be submittedto SEC
for approval. Special corporations, like
banks, insurancecompanies, building and
loan associations, etc., need the
priorapproval of the respective
government agency concerned.
(9) If SEC satisfied that merger or
consolidation is legal, it shall issue
Certificate of Merger or the Certificate
of Consolidation.
(10) If SEC is not satisfied, it shall set a
hearing, given due notice to allthe
corporations concerned.
Merger
§ one of the constituent corporations
remains as anexisting juridical person,
whereas, the other corporation shall
cease to exist.
§ Merger is the disapperance of one of
the corporations with the other
corporation acquiring all the assets,
  Non-transferability of membership
rights of action, and assuming all the
liabilities of the disappearing
corporation.
Consolidation
§ all constituent corporations disappear
withthe emergence of a new corporate
entity which shall obtain allthe assets of
the disappearing corporations, and
likewise shall assume all their liabilities.
Spin-off
§ The purpose of a spin-off process is for
the corporation to segregate a line of
business or a separate business
enterprise into a new corporate entity,
which then may become its subsidiary.
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
Title 9
OTHER TYPES OF CORPORATIONS
A Non-stock corporation
Definition of non-stock corporation
§ A non-stock corporation is one organized
for an eleemosynary purpose and where
no part of tis income is distributable to
its members, trustees or officers,
subject to the provisions on dissolution.
Rule where non-stock corporation earns a
profits
§ Any profit which a non-stock corporation
may obtain as an incident to its
operations, shall, whenever necessary or
proper, be used for the furtherance of
the purpose or purposes for which the
corporation was organized.
Non-availability of nationalization laws
§ The prohibition of foreign citizens
becoming officers in a corporation
engaged in business does not apply to
the activities of a non-stock corporation
which do not fall within the coverage of
nationalized industry or area of business,
which is reserved by law exclusively to
Filipino citizens.
Right to vote
§ Members of a non-stock corporation are
entitled only to one vote; there is no
cumulative voting in non-stock
corporations, unless the same is
expressly provided in the articles of
incorporation.
§ Membership in a non-stock corporation
and all rights arising therefrom are
personal and non-transferrable, unless
the articles or the by-laws otherwise
provide.
Conversion of non-stock corporation to stock
corporation
§ A non-stock corporation cannot be
converted into a stock corporation by a
mere amendment of the Articles of
Incorporation.
§ For purposes of transformation, it is
fundamental that the non-stock
corporation be dissolved first under any
of the methods provided by the
Corporation Code. Thereafter, the
members may organize as a stock
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corporation directed to bring profits or
pecuniary gains to themselves.
§ In case of dissolution, the members are
generally not entitled to any beneficial
interest over the assets of the non-stock
corporation, unless so provided in the
Articles of Incorporation. In other words,
non-stock, non-profit corporations hold
their funds in trust for the carrying out
of the objectives and purposes express
in its charter.
B Close corporations
Requirements for close corporation
The Articles of incorporation must expressly
provide for the following:
1. Number of stockholders not to exceed
20;
2. Restriction: right of first refusal in favor
of the stockholder or the corporation;
and
3. The stocks cannot be listed in the stock
exchange nor should they be publicly
offered.
When may a close corporation not be
considered as one
§ A close corporation is not deemed a
close corporation whenever 2/3 of the
voting stocks or voting rights is owned or
controlled by another corporation which
is not a close corporation.
Corporation which cannot be close corporations
1. Mining
2. Oil
3. Stock exchanges
4. Banks
5. Insurance companies
6. Public utilities
7. Educational institutions
8. Other corporations declared to be
vested with public interest.
C Foreign Corporations
What is a foreign corporation
§ A corporation that is organized other
than under the laws of the Philippines,
provided said foreign country allows
Filipinos and Philippine corporations to
do business there.
Necessity of license to do business
§ A foreign corporation shall have the
right to transact business in the
Philippines after it has obtained a
license to do business.
Bance, Shayne Amor
Xavier University – Ateneo de Cagayan, Class of 2017
Corporation Code
Effect if not licensed
§ A foreign corporation which does
business in the PH wihtout proper
license cannot maintain any action or
proceeding before PH court.
Rationale for requiring registration
§ The purpose is to subject the foreign
corporation to the jurisdiction of our
courts
§ Otherwise, the foreign corporation
illegally doing business here because of
its refusal or neglect to obtain the
required license and authority to do
business may successfully, through
unfairly, plead such neglect or illegal
act so as to avoid service and thereby
impugn the jurisdiction of the local
courts.
Transacting business, defined
§ Transacting business denotes habituality
in the commercial dealings.
§ An isolated transaction is not
“transacting business,” but a single act
of a foreign corporation may so
constitute transacting business as to
render it amenable to PH laws if such
act appertains to the ordinary business
of the corporation and indicates a
purpose to engage in business in the PH.
“Doing business,” under the Foreign
Investments Act of 1991
1. Soliciting orders, purchases and service
contracts;
2. Opening offices whether called liaison
branch or office;
3. Appointing representatives or
distributors who are domiciled in the PH
or who in any calendar year stay in the
Philippines for a period or periods
totalling 180 days or more;
4. Participating in the management,
supervision or control of any domestic
business firm, entity or corporation in
the PH; or
5. Any other act or acts that imply a
continuity of dealings or arrangements
for, and contemplate to that extent the
performance of acts or prosecution of,
commercial gain or the purpose and
object of the business organization.
The foreign corporation is prohibited form
doing either of these activites unless it is
duly licensed.
Acts that do not constitute “doing business”
under FIA of 1991
1. Mere investment as a shareholder by a
foreign entity in domestic corporations
duly registered to do business; and or
the exercise of rights of such investor;
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Corporation Code
2. Having a nominee director or officer to Dissolution
represent its interest in such § Dissolution, or the official termination of
corporation; the life of a juridicalentity for purpose
3. Appointing representative or distributor of commercial endeavors, does not by
domicile in Philippines which transacts itselfcause the extinction or diminution
business in its own name and account; of the rights and liability of such entity.
4. Publication of general advertisement
through any print or broadcast media.
5. Maintaining stock of goods in the PH Classification of Methods of Dissolution
solely for the purpose of having same 1. Involuntary Dissolution
processed by another entity in the Ph 2. Voluntary dissolution
6. Consignment by foreign entity of
equipment with a local company to be
used in processing of products for export 1 Involuntary Dissolution
7. Collecting information in the Philippines;
and Involuntary dissolution may be by:
8. Performing services auxiiliary to an a. Expiration of the term;
existing isolated contract of sale which b. Failure to organize and commence
ar enot on a continuing basis, business within 2 years from the date of
manufacture or exported to the issuance of the certificate of
Philippines’ machinery it has incorporation;
manufactured or exported to the PH, c. Legislative dissolution; or
servicing the same, training domestic d. Dissolution by the SEC upon verified
workers to operate it, and similar complaint.
incidental services.
9. Grounds for dissolution by SEC
Outline of suability of foreign corporations 1. The corporation was illegaly organized;
2. Continuous inactivity for at least 5
Doing business May sue and can be sued years;
in PH, with a in the Philippines 3. Serious dissenssion in the corporation; or
license 4. Commission by the corporation of illegal
Doing business, Cannot sue, but may be or ultra vires acts, or violation by the
without a sued in the PH. Corporation of any provision of the Code.
license
Not doing May sue and may be
business in sued. 2 Voluntary Dissolution
Philippines on
isolate If without debts
transactions If without debts, dissolution may simply be
by administrative proceedings.
Estoppel in relation to foreign corporations 1. Majority vote of the Board, by
§ If a foreign corporation does business in resolutin; and
the PH, without a license, a PH citizen 2. Affirmative vote of 2/3 of the
or entity which has contracted with said outstanding capital stock or 2/3 of
corporation may be estopped from the members, as the case may be.
challenging the foreign corporation’s 3. Copy of resolution certified by
corporate personality in a suit brought majority of director or trustees and
before the PH courts. countersigned by secretary and filed
with SEC;
4. SEC must issue certificate of
dissolution.

Title 10 The notice of meeting for dissolution,

requirements
§ The meeting was published in principal
DISSOLUTION AND WINDING UP office; if non, then in a newspaper of
general circulation in the Philippines
(LIQUIDATION) with notice sent to each stockholder or
the member at least 30 days prior to
meeting.
A Dissolution
If without debts
1. Formal petition filed with SEC

Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017
 
Commercial Law 301
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Corporation Code
a. Signed by majority of the § It is the winding up of a corporation so
directors/trustees or officers that assets are distirbuted to those
having management of its entitled to receive them.
affiars, verified by president or
secretary or one Rehabilitation
director/trustee § On the opposite end is rehabilitation
b. Set forth all claims and which connotes a reopening or
demands against it; reorganization. Rehabilitation
c. Set forth that dissolution was contemplates a continuance of
resolved upon affirmative vote corporate life and activities in an effort
of 2/3 of the oustanding capital to restore and reinstate the corporation
stock or 2/3 of the members as to its former position of successful
the case may be. operation and solvency.
2. SEC shall issue order reciting purpose of
petition and shall fix date before which Liquidation vis-à-vis rehabilitation
objections may be filed, which shall not § The concept of liquidation is
be less than 30 days nor more than 60 diametrically opposed or contrary to the
days after the entry or order. concept of rehabilitation, such that both
3. Order shall be published once a week for cannot be undertaken at the same time.
3 consecutive weeks in a newspaper § To allow the liquidation proceedings to
published in the municipality or city continue would seriously hinder the
where the principal office of the rehabilitation of the subject bank.
corporation is situated; if non, in a
newspaper of general circulation in the Liquidation proceeding is a proceeding in rem
PH and a copy is to be posted for 3 § All other interested persons whether or
consecutive weeks in 3 public places in not known to the parties may be bound
such municipality. by such proceedings.
4. After 5 days’ notice from expiry date,
SEC shall hear the petition and the
objections thereto. 1 Methods of Corporate
5. If lawful, it shall order the corporation Liquidation
dissolved, provide for the disposition of
properties, and may appoint receiver. Corporate liquidation, how done
1. By the corporation itself
Shorterning of corporate term, how done o The board of directors shall
§ By a vote of 2/3 of the outstanding supervise the liquidation
shares or 2/ of the members, the process, but their authority is
articles may be amended to shorten the good only within a period of 3
corporate life. years from corporate
dissolution.
2. By a trustee
B Liquidation o All the assets of the corporation
are transferred to a trustee or
receiver who handles the
Effect of dissolution
liquidation process.
§ After the dissolution of the corporation,
it shall be continued as a body corporate
If liquidation is by trustee
for 3 years after the time when it would
§ As long as the receiver or trustee is
have been so dissolved;
appointed within the 3-year period, he
§ For the purpose of prosecuting and
may act beyond that period.
defending suits by or against it and
enabling it to:
Winding up may be beyond 3-year period
o settle and close its affairs,
§ While the general rule is that the
o dispose of and convey its
corporate body only continues after 3
property; and
years from the time of dissolution, the
o to distribute it assets, but not
Court has held that a dissolved
for the purpose of continuing
corporation may continue with its suit
the business for which it was
after the 3-year period.
established.
§ Hence, the court considered the counsel
procecuting the claims of the
Nature of corporate liquidation
corporation as a “trustee” within the
§ Liquidation, in corporation law,
meaning of the law at least with respect
connotes a winding up or setting with
to matters in litigation.
creditors and debtors.

Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017
 
Commercial Law 302
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Corporation Code
Termination of corporate personality does not
mean extinction or diminution of the rights and
liabilities of such entity.

Where no trustee was appointed by the

corporation
§ Where no trustee was appointed by the
corporation, its directors or trustees
should be permitted to continue as
“trustees,” to complete the corporate
liquidation.

Liability of trustee
§ The trustee in such case cannot be made
jointly and severally liable for the
dissolved corporation’s obligations, since
being a mere trustee, its liability under
the arrangement should merely be co-
extensive with the amount of the assets
it took over from the dissolved
corporation: “to the extent of the fair
value of assets actually taken over by
the SRA from Philsucom, if any.”

Reincorporation
§ The BoD may file a new set of articles of
incorporation to reincorporate what
otherwise would be a dissolved
corporation, provided that they obtain
the ratificatory vote of at least 2/3 of
the outstanding capital stock from
stockholders approving such process.
§ While normally, the BoD is not permitted
to undertake any activity outside of the
usual liquidation of the business of the
dissolved corporation, there is nothing
to prevent the stockholders from
conveying their respective shareholdings
toward the creation of a new
corporation to continue the busienss of
the old.

Bance, Shayne Amor

 
Xavier University – Ateneo de Cagayan, Class of 2017
 
Commercial Law 303
303