the corporation code reviewer

7/28/2019 The Corporation Code Reviewer

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THE CORPORATION CODE

A. CORPORATIONDefinition

An artificial being created by operation of law, having the

right of succession and the powers, attributes and properties

expressly authorized by law or incident to its existence. (Sec.

2)

Attributes of a Corporation

i. An Artificial Being (Capacity to Contract andTransact Business)

A corporation exists by fiction of law. Hence, it canact only through its directors, officers, and

employees.

ii. Created by Operation of Law (Creature of theLaw)

Mere consent of the parties is not sufficient. The

State must give its consent either through a special

law (in case of government corporations) or a

general law (i.e., Corporation Code in case of

private corporations).

iii. Has the Right of Succession (Strong JuridicalPersonality)A corporation has the capacity for continuous

existence despite changes instockholders/members or by any transfer of shares

by a stockholder to a 3rd person.

iv. Has the Powers, Attributes, and PropertiesExpressly Authorized by Law or Incident to Its

Existence (A Creature of Limited Powers)

As a mere creature of law, it can exercise only such

powers as the law may choose to grant it, either

expressly or impliedly.

Corporate Fiction: A corporation has a personality separate

and distinct from the persons composing it. (Art. 44-47 of

the Civil Code; PNB vs. Andrada Electric Engineering Co.,

381 SCRA 244 (2002).B. CLASSES OF CORPORATION

IN RELATION TO STATE:a. Public Corporations

Formed or organized for the government of theportion of the state (e.g., barangay, municipality,

city, and province).

Created for political purposes connected with thepublic good in the administration of the civil

government.

Note: Ownership of the government of the majority of

the shares of a corporation does not qualify such entity

as a public corporation (National Coal Co., vs. CIR, 46

Phil 583, 1924).

b. Private by private persons alone or with the State. A corporation is created by operation of law under

the Corporation Code.

Mainly governed by the Corporation Code. A government-owned or controlled corporation

when organized under the Corporation Code is still

a private corporation. But being a government-

owned or controlled corporation makes it liable

for laws and provisions applicable to the

Government of its entities and subject to the

control of the Government(Cervantes vs. Auditor

General, 91 Phil 359, 1952).

c. On GOCCs

i. Created under a special law or charter

ii. Treated as private corporations not as pcorporations

Test to Determine Whether a Corporation is Govern

Owned or Controlled or Private in Nature:

Is it created by its own charter for the exercise of a p

function, or by incorporation under the general corpor

law?

d. Quasi-Public Corporations

A cross between private corporations and pcorporations.

Usually cover school districts, water districtsthe like (Villanueva, p. 75).AS TO PLACE OF INCORPORATION:a. Domestic

One formed, organized, or existing under the laws o

Philippines.

b. Foreign

One formed, organized or existing under any law other

those of the Philippines

- Whose laws allow Filipino citizens and corporatiodo business in its own country or State (princip

reciprocity).

- Licensed by SEC to do business in the Philippinessecuring a certificate of authority from the Boa

Investments and after complying with the conditionissuance of license on application forms, struc

organizations and capitalization.

AS TO GOVERNING LAW:a. PublicSpecial Laws and Local Government Codeb. Private Corporation Codec. Quasi-Public Corporations seems to be a

between private corporations and public corporatio

AS TO LEGAL STATUS:a. De Jure Corporation

A corporation organized in accordance with

requirements of law.

Every corporation is deemed de jure until potherwise.b. De Facto Corporation (Sec. 20)

- A corporation claiming in good faith to corporation under the Corporation Code.

- Corporation where there exists a flaw iincorporation, it falls short of the requiremen

law.

- It is the result of an attempt to incorporate uan existing law coupled with the exercis

corporate powers.

- Under the Sec. 66 of the Rules of Court, inmust be done by the Solicitor General in a

warranto proceeding - the main issue is the ri

exist as a corporation.

- A de facto corporation will incur the obligation, have the same powers and rights a

jure corporation.

Elements:1. A valid law under which incorporated;2. Attempt in good faith to incorporat

colorable compliance;3. Assumption of corporate powers; and4. Issuance of certificate of incorpor

(Arnold Hall vs. Piccio, 86 Phil 634, 195

A corporation which has failed to file its by-laws withi

prescribed period does not ipso facto lose its powers as

(Sawadjaan vs. CA, 459 SCRA 516, 2004).


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DE JURE DE FACTO

Created in strict or

substantial conformity with

the statutory requirements

for incorporation

Actually exists for all

practical purposes as a

corporation but which has

no legal right to corporate

existence as against the

State

Right to exist cannot be

successfully attacked even ina direct proceeding by the

State

Right to exercise powers

cannot be inquired intocollaterally in any private

suit. But such inquiry may

be made by the State in a

proper court proceeding.

c. Corporation by Estoppel

- All persons who assume to act as a corporationknowing it to be without authority to do so shall be

liable as general partners for all debts, liabilities

and damages incurred or arising as a result thereof.

- Where a group of persons misrepresent themselvesas a corporation (ostensible corporation), they are

subsequently estopped from claiming lack of

corporate life in order to avoid liability.- A third party who assumes an obligation to an

ostensible corporation cannot resist performance

by alleging the ostensible corporations lack ofpersonality.

-DE FACTO BY ESTOPPEL

Existence in Law Yes None

Dealings among

parties on a

corporate basis

Not required Required

Effect of lack of

requisites

Could be a

corporation by

estoppel

Not a corporation

in any shape or

form

d. Corporation by Prescription

- The Roman Catholic Church is a corporation byprescription, with acknowledged juridical personality

inasmuch as it is an institution which antedated by

almost a thousand years any other personality in

Europe (Barlin vs. Ramirez, 7 Phil. 41, 1906).

AS TO EXISTENCE OF STOCKS:a. Stock Corporation

- One which has a capital stock divided into shares andis authorized to distribute to the holders such

shares, dividends or allotments of the surplus profits

(i.e., retained earnings on the basis of the shares held

(Sec. 3)

- It is organized for profit.- The governing body is usually the Board of Directors

(except in certain instances, e.g. close corporations)

- Even if there is a statement of capital stock, thecorporation is still NOT a stock corporation if

dividends are not supposed to be declared, that is,

there is no distribution of retained earnings (CIR vs.

Club Filipino de Cebu, 1962).

b. Non-Stock Corporation (See Sec. 87-88)- A corporation where no part of its income is

distributable as dividends to members, trustees or

officers.

- Corporation that does not issue stocks and does notdistribute dividends to their members.

- Not organized for profit.- Profit obtained as incident to operation had

used for the furtherance of the purpose/s for w

the corporation was organized.

- The governing body is usually the Board of TrusAS TO RELATIONSHIP OF MANAGEMENT AND CONTR

a. Holding Company one that controls another subsidiary or affiliate by the power to elec

management; one which holds in other companie

the purpose of control rather than for mere investm

b. Affiliate Company one that is subject to comcontrol to a mother or holding company and operatpart of a system.

c. Parent and Subsidiary Companies whecorporation has a controlling financial interest in o

more corporations, the one having in control is k

as the parent company and the others are know

subsidiary companies.

- A subsidiary of a specified person affiliate controlled by such person, direc

indirectly, though one or more intermedia

AS TO FUNCTIONS:a. Public government of a portion of the State; andb. Private - usually for profit-making functions.

AS TO PURPOSE OF INCORPORATION:a. Municipal Corporationb. Religious Corporationc. Educational Corporationd. Charitable, Scientific or Vocational Corporatione. Business Corporation

AS TO NUMBER OF MEMBERS:a. Aggregate a corporation which consists of

persons united to form a body politic and corp

(Quimson, p. 156)

b. Corporation Sole may be formed by the archbishop, bishop, minister, rabbi, or other pres

elder of any religious denomination, sect or church.

-Purpose: formed for the purposadministering and managing, as trustee

affairs, properties, and temporalities o

religious denomination to which the hold

the office belongs and also to transmi

same to his successor in office (Sec. 110).

Director of Land vs. IAC, 146 SCRA 509 (1986) held

corporation sole has no nationality, overturned the pre

doctrine (Republic vs. Villanueva, 114 SCRA 875 [1

and Republic vs. Iglesia ni Cristo, 127 SCRA 687 [1that a corporation sole is disqualified to acquire or

alienable lands of the public domain, because of

constitutional prohibition qualifying only individua

acquire land of the public domain and the provision u

the Public Land Act which applied only to Filipino citize

natural persons. {Republic vs. Iglesia ni Cristo, 127

687 (1984); Republic vs. IAC, 168 SCRA 165 (1988)}.

OTHER CLASSIFICATION:

a. Close Corporation the issued stock of all classesbe held of record by not more than twenty persons;

not list in any stock exchange or make any p

offering any of its stocks.

- Any corporation may be incorporated close corporation, except mining o

companies, stock exchanges, banks, insu

companies, public utilities, educa

institutions and corporations declared

vested with public interest (Sec. 96).


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b. Eleemosynary Corporation one organized forcharitable purposes.

C. NATIONALITY OF CORPORATIONSServes as a legal basis for subjecting the enterprise or its

activities to the laws, the economic and fiscal powers, and

various social and financial policies of the state to which it is

supposed to belong.

Tests:

1. Place of Incorporation- Principal doctrine on the test of the nationality

of a corporate identity in the Philippines- A corporation is a national of the country

under whose laws has been organized and

registered

2. Control TestA corporation shall be considered a Filipino corporation

if the Filipino ownership of its capital stock is at least

60%, and where the 60-40 Filipino-Alien equity

ownership is NOT in doubt (SEC opinion dated 6

November 1989; DOJ Opinion No. 18, s. 1989).

Therefore, its shareholdings in another corporation

shall be considered to be Filipino nationality when

computing the percentage of Filipino equity of the

second corporation (SEC Opinion dated 23 November

1993).

Control test is applied in the following:

Exploitation of natural resourcesOnly Filipinocitizens or corporations whose capital stock are at

least 60% owned by Filipinos can qualify to exploit

natural resources. (Sec. 2, Art. XII, Conti.)

Public Utilities xxx no franchise, certificate orany other form of authorization for the operation of

a public utility shall be granted except to citizens of

the Philippines or corporations organized under

the laws of the Philippines at least 60% of whose

capital is owned by such citizens. (Sec. 11, Art. XII,Consti.)

Mass Media Ownership of mass media shall belimited to the citizens of the Philippines, or tocorporations, cooperatives, or associations, wholly-

owned and managed by such citizens (100%Filipino management of the entity)[Sec 11, Art. XVI,

Consti.]

Cable Industry CATV as a form of mass mediawhich must, therefore, be owned and managed by

Filipino citizens, or corporations, cooperatives, or

associations, wholly-owned and managed by such

citizens pursuant to the mandate of the

Constitution. (DOJ Opinion No. 95, s. 1999)

Advertising Industry xxx only Filipino citizensor corporations or associations at least 70% of

whose capital is owned by such citizens is allowed

to engage in the advertising agency. (Sec 11, Art.

XVI, Constitution)

3. Grandfather RuleIt is a method of determining the nationality of a

corporation which in turn is owned in part by another

corporation by breaking down the equity structure of

the shareholder corporation.

It involves the computation of Filipino ownership of a

corporation in which another corporation of partly

Filipino and partly foreign equity owns capital stock.

The percentage of shares held by the second

corporation in the first is multiplied by the latters own

Filipino equity, and the product of these percentages is

determined to be the ultimate Filipino ownership o

subsidiary corporation (SEC Opinion re: Silahis)

Ex. MV Corporation and AC Corporation have

interest in XYZ Corporation. MV Corporation is

owned by Filipinos while AC Corporation is 50% o

by Filipinos. By the grandfather rule, MV Corpor

would have a 30% Filipino interest in XYZ Com

(60% 0f 50%), while AC Corporation would have a

Filipino interest in XYZ Company (50% of 50%). H

the total Filipino interest is only 55%.

Note: the application of the test is limited to the iof investment. Only when the corporation is less

60% owned shall the grandfather rule be applied.

D. CORPORATE JURIDICAL PERSONALITY1. Doctrine of Separate Juridical Personality

A corporation has personality separate and disfrom that of its stockholders and members and i

affected by the personal rights, obligations,

transactions of the latter.

The property of the corporation is not the property

stockholders or members and may not be sold by

without express authorization from the Boar

Directors (Woodchild Holdings, Inc. vs. R

Electric and Construction Co. 436 SCRA 235, 200

Stockholders have no claim on corporate proper

owners, but mere expectancy or inchoate right t

same upon dissolution of the corporation afte

corporate creditors have been paid. Such right is lim

only to their equity interest (doctrine of limited liab

Although a stockholders interest in the corporationbe attached by his personal creditor, corporate pro

cannot be used to satisfy his claim (Wise & Co. vs

Sun Lung, 1940)

a. Liability for TortsAs a separate juridical personality, a corpor

can be held liable for torts committed by its of

for corporate purpose (PNB vs. CA, 1978).

Corporate tort consists in the violation of agiven or the omission of a duty imposed by l

breach of legal duty.

The failure of the corporate employer to co

with the law-imposed duty under the Labor Co

grant separation pay to employees in ca

cessation of operations constitutes tort an

stockholder who was actively engaged in

management or operation of the business shou

personally liable. (Sergio F. Naguiat vs. NLRC

SCRA 564, 1997)

b. Liability for CrimesSince a corporation is a mere legal fiction, it c

be proceeded against criminally because it c

commit a crime in which personal violencmalicious intent is required. Criminal acti

limited to the corporate agents guilty of a

amounting to a crime and never against

corporation itself (West Coast Life Insuranc

vs. Hurd [1914], Time Inc. vs. Reyes [1971])

General Rule: Corporations cannot co

felonies punishable under the RPC for

incapable of the requisite intent to commit

crimes. Also, crimes are personal in n

requiring personal performance of overt

Finally, a corporation cannot be arrested

imprisoned; hence, cannot be penalized for a

punishable by imprisonment.


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Exceptions:

If the crime is committed by a corporation, the

directors, officers, employees or other officers

thereof responsible for the offense shall be charged

and penalized for the crime, precisely because of

the nature of the crime and the penalty therefore. A

corporation cannot be arrested and imprisoned;

hence, cannot be penalized for a crime punishable

by imprisonment. However a corporation may be

charged and prosecuted for a crime if the

imposable penalty is fine (Ching vs. Secretary ofJustice, GR NO. 164317, February 6, 2006)

When express provisions of law are enacted

specifically providing that a corporation may be

proceeded against criminally, it is the responsible

officer who will be held personally liable for the

crimes committed by the corporation. (Sia vs. CA ,

GR No 111809, May 5, 1997)

Under the Anti-Money Laundering Act, juridical

persons are also defined as offenders of criminal

acts.

c. Recovery of Moral DamagesGeneral Rule:

Moral damages cannot be awarded in favor of

corporations because they do not have feelings and

mental state. They may not even claim moraldamages for besmirched reputation (NAPOCOR vs.

Philipp Brothers Oceanic, G.R. No. 126204.

November 20, 2001).

Exceptions:

A corporation can recover moral damages under

Art. 2219 (7) if it was the victim of defamation

(Filipinas Broadcasting Network vs. Ago

Medical and Educational Center 448 SCRA 413,

2005)A corporation with a good reputation, if

besmirched, is allowed to recover moral damages

upon proof of existence of factual basis of damage

(actual injury) and its causal relation (Crystal vs.

BPI, 2008).

2. Doctrine of Piercing the Corporate VeilThis doctrine means that the court may disregard the

separate and distinct personality of the corporation

from its members or stockholders and treat the

corporation as a mere collection of individuals or an

aggregation of persons undertaking business as a group

especially when the corporate legal entity is used as a

cloak for fraud or illegality. (Kukan Internatl. Vs.

Reyes, September 29, 2010).

It is merely an equitable remedy, and may be granted

only in cases when the corporate fiction is used to defeat

public convenience, justify a wrong, protect fraud

defend crime or where the corporation is a mere alter

ego of business conduit of a person.

a. Grounds for Application of Doctrinei. If done to defraud the government of

taxes due it.

ii. If done to evade payment of civil liability.iii. If done by a corporation which is merely a

conduit or alter ego of another

corporation.

iv. If done to evade compliance withcontractual obligations.

v. If done to evade compliance with financialobligation to its employees.

b. Test in Determining ApplicabilityGeneral Rule: The mere fact that a corporation

owns all or substantially all of the stocks of another

corporation is NOT sufficient to justify their

treated as one entity.

Exception: The subsidiary is a instrumentalityof the parent corporation.

Circumstances rendering subsidiary

instrumentality (PNB vs. Ritratto Group, 200

i. The parent corporation owns all or mthe capitalof the subsidiary.

ii. The parent and subsidiary corporahave common directors and officers.

iii. The parent company finances subsidiary.

iv. The parent company subscribed to acapital stock of the subsidiaryor othe

causes its incorporation.

v. The subsidiary has grossly inadecapital.

vi. The parent corporation pays the saand other expenses or losses of

subsidiary.

vii. The subsidiary has substantiallybusiness except with the p

corporation or no assets except

conveyed to or by the parent corpora

viii. The papers of the parent corporationthe statements of its officers, is subsdescribed as a department or subdivis

the parent corporation, or its busine

financial responsibility is referred

the parent corporations own.

ix. The parent corporation uses the proof the subsidiary as its own.

x. The directors or executives ofsubsidiary do not act independently i

interest of the subsidiary but take

orders from the parent corporation.

xi. The formal and legal requirements osubsidiary are not observed.

E. INCORPORATION AND ORGANIZATION

1. PromoterPromoters are persons who, acting alone or with o

take the initiative in founding and organizing

business or enterprise of the issuer and rec

consideration therefore (RA 8799, Securities Regu

Code).

a. Liability of PromoterGeneral Rule: The promoter binds hi

personally and assumes the responsibilit

looking to the proposed corporation

reimbursement.

Exception:

Any express or implied agreement to the conor novation of the contract.

The court ruled in Caram Jr. vs. CA thainvestors who were not the moving spirit bthe organization of the corporation, but who

merely convinced to invest in the prop

corporate venture on the basis of the feas

study undertaken, are NOT liable personally

the corporation for the cost of such feasibility

(Caram Jr. vs. CA 151 SCRA 372, 1987) .

Exception to Exception: Where was a showing that the corporation

fictitious and did not have a sep

juridical personality, to justify the m

the principal stockholders th

responsible for its stockholders.

b. Liability of Corporation for PromoContracts


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General Rule: A corporation is not bound by the

contract. Since the corporation did not yet exist at

the time of the contract, it could not have an agent

who could legally bind it.

Exceptions: A corporation may be bound by the

contract if it makes the contract its own by:

Adoption of ratification of the entire contract afterincorporation.

Acceptance of benefits under the contract withknowledge of the terms thereof.

Performance of its obligation under the contract.2. Number and Qualifications of Incorporators

Incorporators are stockholders or members mentionedin the articles originally forming and composing the

corporation and who are signatories thereof.

Natural persons Of legal age Must own or subscribe at least one share of stock of

the corporation (Genuine interest)

5 to 15 incorporators who must sign the articles ofincorporation (AOI)

Majority of the incorporators must be residents ofthe Philippines

3. Corporate Name Limitations on Use of CorporateName

Must not be identical or deceptively or confusinglysimilar to that of any existing corporation including

internationally known foreign corporation though

not used in the Philippines;

Any other name already protected by law; Name that is patently defective, confusing or

contrary to existing laws, morals or public policy

(Sec. 18).

Must include the word Corporation/Corp.orIncorporated/Inc.

Change of Corporate Name

Requires amendment of the AOI: majority vote of the

board and the vote or written assent of stockholders

holding 2/3 of the outstanding capital stock (Sec 16).

Doctrines Pertaining to Corporate Name

A corporation may change its name by the amendment

of AOI, but the same is not effective until approved by

the SEC (Philippine First Insurance Co. vs. Hartigan34 SCRA 252, 1970).

A change in the corporate name does not make a new

corporation, and whether affected by a special act or

under a general law, has no effect on the identity of the

corporation, or on its property, rights, or liabilities.

Consequently, the new corporation is still liable for the

debts and obligations of the old corporation(Republic

Planters Bank vs. CA 216 SCRA 738, 1992).

Similarity on corporate names between two

corporations would cause confusion to the public

especially when the purposes stated in their charter are

also the same type of business (Universal Mills Corp.vs. Universal Textile Mills Inc. 78 SCRA 62, 1977).

A corporation has no right to intervene in a suit using a

name other than its registered name; if a corporation

legally and truly wants to intervene, it should have used

its corporate name as the law requires and not another

name which it had not registered (LaureanoInvestment and Development Corp. vs. CA 272 SCRA

253, 1997).

There would be no denial of due process wh

corporation is sued and judgment is rendered agai

in its unregistered trade name, holding th

corporation may be sued under the name by wh

makes itself known to its workers (Pison-A

Agricultural Development Corp. vs. NLRC 279

312, 1997).

4. Corporate TermNot more than 50 years from date of incorpor

subject to extension for periods not exceeding 50

per extension unless:

Sooner dissolved, or Extended

Extensions:

Not earlier than 5 years prior to expiry Unless earlier extension is for justi

reasons as determined by SEC.

How to extend amend the AOI during the lthe corporation before the expiry of its term. Any dissenting stockholder may exercise

appraisal right (Sec. 37).

5. Minimum Capital Stock and SubscriRequirementsAt the time of incorporation:

At least25% of authorized capital stockas sin the AOI must be subscribed

At least 25% of the total subscription mupaid upon subscription, the balance to be pa

on a date or dates fixed in the contra

subscription without need of call, or in the ab

of a fixed date or dates, upon call for payme

the BOD.

Call term used when the Board forasks for payment of the balance o

subscription or a part thereof.

No minimum authorized capital stock is required eif required by special laws (Sec. 12 and 13)

Minimum paid-up capital is not less than P5,000.6. Articles of Incorporation

a. Nature and Function of Articles

The AOI is a basic contract documenCorporation Law that defines the charter of

corporation. Section 14 of the Corporation

provides that the AOI do not become binding a

charter of the corporation unless they have ben

with the SEC.

b. Contentsi. Name of corporation;

ii. Purpose/s, indicating the primary secondary purposes;

iii. Place of principal office;iv. Term which shall not be more than 50 yeav. Names, citizenship and residences

incorporators;vi. Number, names, citizenships and residendirectors;

vii. If stock corporation, amount of authocapital stock, number of shares;

viii. In par value stock corporations, the par of each share;

ix. Number of shares and amounts of subscriof subscribers which shall not be less

25% of authorized capital stock;

x. Amount paid by each subscriber on subscription, which shall not be less than

of subscribed capital and shall not be less

P5,000.00;

xi. Name of treasurer elected by subscribers;xii. If the corporation engages in a nationa


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industry, a statement that no transfer of stock

will be allowed if it will reduce the stock

ownership of Filipinos to a percentage below

the required legal minimum.

c. Amendment

Requirements:i. A legitimate purpose for the amendment;

ii. by a majority vote of the board of directors ortrustees;

iii. by a vote or written assent of the stockholdersrepresenting at least two thirds (2/3) of the

outstanding capital stock, without prejudice tothe appraisal right of dissenting stockholders

in accordance with the provisions of the

Corporation Code;

iv. by a vote or written assent of at least twothirds (2/3) of the members if it be a non-stock

corporation.

v. The original and amended articles, together,shall contain all provisions required by law to

be set out in the articles of incorporation. Such

articles, as amended, shall be indicated by

underscoring the change or changes made, and

a copy thereof duly certified under oath by the

corporate secretary and a majority of the

directors or trustees stating the fact that the

said amendment or amendments have beenduly approved by the required vote of

stockholders or members, shall be submitted

to the Securities and Exchange Commission

(SEC).When the SEC is satisfied that theamendment should be allowed, the SEC will

issue a certificate indicating its approval. The

amendments shall take effect upon approval

by the SEC, or from the date of filing with the

SEC if not acted upon within six (6) months

from the date of filing for a cause not

attributable to the corporation.

d. Non-amendable Items

i. Names of incorporatorsii. Names of incorporating directors/trusteesiii. Names of original subscribers to capital stock

and subscribed and paid- up capital

iv. Treasurer-in-trust elected by originalsubscribers

v. Members who contributed to the initial capitalof non-stock corporation

vi. Place and date of executionvii. Witnesses and acknowledgments (De Leon,

2010)

7. Registration and Issuance of Certificate ofIncorporation

Documents to be filed with the SEC:i. Articles of Incorporation

ii. Treasurers affidavit certifying that 25% of thetotal authorized capital stock has been

subscribed and at least 25% of such has been

fully paid in cash or property

iii. Bank certificate showing the paid-up capitaliv. Letter authority authorizing the SEC to

examine the bank deposit and other corporate

books and records to determine the existence

of paid-up capital.

v. Undertaking to change the corporate name incase there is another person or entity with

same or similar name that was previously

registered.

vi. Certificate of authority from pgovernment agency whenever appropriat

BSP for banks and Insurance Commissio

insurance corporation (Sundiang and Aqu

Issuance of Certificate of Incorporation by SECThe SEC shall give the incorporators reasonable ti

correct or modify the objectionable portions o

articles or amendments (Sec. 17).

Grounds for Disapproving AOI:i. AOI does not substantially comply wit

form prescribedii. Purpose is patently unconstitutional, ilimmoral, contrary to government rules

regulations

iii. Treasurers Affidavit concerning the amof capital subscribed and or paid is false

iv. Required percentage of ownership of Filcitizens has not been complied with.

Remedy in case of rejection of AOI pe

for review in accordance with the Rul

Court (Sec. 6, last par., PD 902-A).

Commencement of corporate existence

juridical personality upon issuanc

certificate of incorporation (Sec. 19)

Revocation of certificate of incorporatio

the incorporators are guilty of frauprocuring the same after due notice

hearing (Sec. 6(i), PD 902-A).

8. Adoption of By-Laws (Sec. 46)After Incorporation within one month after rece

official notice of the issuance of its certificat

incorporation by the SEC.

Before Incorporation approved and signed by a

incorporators and submitted to SEC together with A

a) Nature and FunctionsBy-laws are mere internal rules a

stockholders and cannot affect or prejudice

persons who deal with the corporation unlesshave knowledge of the same (China Ban

Corporation vs. CA, 1997).

Regulations, ordinances, rules or laws adopt

an association or corporation or the like fo

internal governance, including rules for ro

matters such as calling meetings and the like

Vs. Mandaue Packing Products Plants U

FFW, 467 SCRA 107, 2005).

b) Requisites of Valid By-Laws (Sec. 46)i. Must be approved by the affirmative

of the stockholders representing

majority of the outstanding capital

or majority of members (if filed pri

incorporation, approved and signed

incorporators).

ii. Must be kept in the principal office ocorporation; subject to inspectio

stockholders or members during

hours (Sec. 64).

iii. It must be consistent with the CorporCode, other pertinent laws

regulations.

iv. It must be consistent with the AOI.v. It must be reasonable and not arbitra

oppressive.

vi. It must not disturb vested rights, imcontracts or property rights


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stockholders or members or create

obligations unknown to law.

c) Binding EffectsOnlyfrom the issuance of SEC certification that by-

laws are not inconsistent with the Code.

Cannot bind stockholders or corporation pending

approval.

As to the Corporation and its Components- Binding not only upon the corporation but also on

its stockholders, members and those having

direction, management and control of its affairs.

They have the force of contract betweenstockholders/members.

As to Third Persons

- Not binding unless there is actual knowledge.Third persons are not even bound to investigate the

content because they are not bound to know the by-

laws which are merely provisions for the

government of a corporation and notice to them

will not be presumed (China Banking

Corporation vs. CA, 1997).

d) Amendment or Revision (Sec. 48)Majority vote of the members of the Board and

majority vote of the owners of OCS or members, in

a meeting duly called for the purpose; or

Delegation to the BOD of power to amend or repeal

by-laws by vote of stockholders representing 2/3 of

OCS or 2/3 of the members.

Such delegated power is considered revoked by

majority vote only of stockholders representing 2/3

of OCS or 2/3 of the members.

. CORPORATE POWERS

. GENERAL POWERSEvery corporation has the power and capacity:

i. To sue and be sued in its corporate name;In the absence of a special authority from the Board of Directors

to institute a derivative suit, the President or Managing Director

is disqualified by law to sue in her own name or on behalf of the

corporation. The power to sue and be sued in any court by a

corporation even as a stockholder is lodged in the Board of

Directors that exercises corporate powers and not in the

President. (Bitong v. CA, 292 SCRA 304)

ii. Of succession by its corporate ;A corporation has a capacity of continuous existence irrespective

of the death, withdrawal, insolvency, or incapacity of the

individual stockholders or members and regardless of the

transfer of their interest or shares of stock.

iii. To adopt and use a corporate seal;However, a corporation may exist without a seal.

iv. To amend its articles of incorporation;v. To adopt by-laws, not contrary to law, morals, or public

policy, and to amend or repeal the same;

vi. In case of stock corporations, to issue or sell stocks tosubscribers and to sell treasury stocks, or admit members to

the corporation if it be non-stock corporation;

vii. Purchase, receive, take or grant, hold, convey, sell, lease,pledge, mortgage and otherwise deal with such real and

personal property, including securities and bonds of

corporations;

While a corporation may appoint agents to negotiate fo

purchase of real property needed by the corporation, the fina

will have to be with the Board of Directors whose approva

finalize the transaction. (Firme v. Bukal Enterprises, 414

190)

viii. To enter into merger or consolidation with corporations;

ix. To make reasonable donations, provided, that no corporshall give donations in aid of any political party or candor for purposes of partisan political activity;

x. To establish pension, retirement, and other plans fobenefit of its directors, trustees, officers and employees;

xi. To exercise other powers as may be essential or necessacarry out its purpose or purposes stated in the articl

incorporation.

2. SPECIFIC POWERSi. Power to Extend or Shorten Corporate Terms

Requirements:

- Majority vote of the Board of Directors or Trustees

- Ratification at a meeting by 2/3 of the outstancapital stock or members

An extension of corporate term allows a dissenting stockhold

exercise his appraisal right.

ii. Power to Increase or Decrease Capital Stock or ICreate, Increase Bonded Indebtedness

Requirements:

- Majority vote of the board of directors- Favored by 2/3 of the outstanding capital stock

Ways to increase or decrease capital stock:

i. By increasing/decreasing the number of sauthorized to be issued without increasing/decrethe par value thereof;

ii. By increasing/decreasing the par value of each without increasing/decreasing the number thereof

iii. By increasing/decreasing both the number of sauthorized to be issued and the par value thereof.

A corporate bond is an obligation to pay a definite sum of m

at a future time at fixed rate of interest.

A business corporation may borrow money whenever

necessity of its business so requires and issue securit

customary evidence of debt such as notes, bonds or mortg

This includes non-stock corporations as well.

iii. Power to deny pre-emptive rightWhenever the capital stock of a corporation is increasedand

shares of stock are issued, the new issue must be offered fi

the stockholders who are such at the time the increase was

in proportion to their existing shareholdings and on equal t

with other holders of the original stocks before subscription

received from the general public. This is called a Pre-em

right .

The pre-emptive right of stockholders of a stock corporati

subscribe to all issues or disposition of shares of any cla

proportion to their respective shareholdings may be denie

the articles of incorporation.


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EXCEPTIONS:

i. Stocks issued in compliance with laws requiringstock offerings or minimum stock ownership by the

public

ii. Stocks issued in good faith with approval ofstockholders representing 2/3 of the OSC:

-In exchange for property needed for corporate purposes

-in payment of a previously contracted debt.

iv. Power to Sell or Dispose All or Substantially All of theCorporate Assets

Requirements:- Majority vote of its board of directors- Authorization by 2/3 of stockholders of the OSC or

members. Provided, that in non-stock corporations,

where there are no members with voting rights, the vote

of at least a majority of the trustees will be sufficient for

authorization.

- Authorization must be done at a stockholders ormembers meeting duly called for that purpose after

written notice.

Any dissenting stockholder may exercise his appraisal rights.

A sale or disposition shall be deemed to cover substantially

all the corporate property and assets if thereby the

corporation would be rendered incapable of continuing thebusiness or accomplishing the purpose for which it was

incorporated.

If the corporation can sell, it can also abandon the

transaction through the board without further action or

approval by the stockholders or members but subject to

rights of third parties under any contract relating thereto.

v. Power to Acquire Its Own SharesA stock corporation shall have the power to purchase or

acquire its own shares for a legitimate corporate purpose,

provided that the corporation has unrestricted retained

earnings. It includes the following cases:

i. To eliminate fractional shares arising out of stockdividends;

ii. To collect or compromise an indebtedness to thecorporation, arising out of unpaid subscription, in a

delinquency sale, and to purchase delinquent

shares sold during said sale;

iii. To pay dissenting or withdrawing stockholdersentitled to payment for their shares. (Sec. 41,

Corporation Code)

Conditions for the exercise of the power:

i. The capital is not impaired;ii. For a legitimate and proper corporate purpose;iii. There is unrestricted retained earnings to purchase

the same;

iv. The corporation acts in good faith withoutprejudicing the rights of creditors and

stockholders;

v. The conditions of corporate affairs warrant it;(De Leon, Corporation Code of the Philippines, 2010)

vi. Power to Invest Corporate Funds in Another Corporationor Business

A private corporation may invest its funds in any other

corporation or business or for any purpose other than the

primary purpose for which it was organized.

Requirements:

- Majority vote of board of directors or trustees- Ratification by the 2/3 stockholders representin

OSC or members. However, if the investme

reasonably necessary to accomplish the corpora

primary purpose, the approval of the stockholde

members shall not be necessary.

Any dissenting stockholder may exercise his appraisal r

The other purposes for which the funds may be invested wi

amending the articles of incorporation must be those enume

in the articles of incorporation. In order to engage in any secondary purposes, the corporation must comply with the a

requirement. A corporation is not allowed to engage

business distinct from those enumerated in the articl

incorporation without amending the purpose clause of

articles to include the desired business activity amon

secondary purpose. (De Leon, Corporation Code of

Philippines, 2010)

vii. Power to Declare DividendsThe board of directors of a stock corporation may de

dividends out of the unrestricted retained earnings which sh

payable in cash, in property, or in stock to all stockholders o

basis of outstanding stock held by them;

Provided, that any cash dividends due on delinquent stock

first be applied to the unpaid balance on the subscription

costs and expenses, while stock dividends shall be withheld

the delinquent stock holder until his unpaid subscription is

paid; (Sec. 43)

Requirement:

- Approval of stockholders representing not less thaof the OSC

- In a regular or special meeting duly called fopurpose

- Existence of unrestricted retained earningsA stock corporation is prohibited from retaining suprofit in excess of 100% of their paid-in capital stock, ex

- When justified by definite corporate expansion pror programs approved by the board of directors;

- When prohibited under any loan agreement withfinancial institution or creditor without their hi

consent;

- That such retention is necessary under spcircumstances obtaining in the corporation, suc

when there is a need for special reserve for pro

contingencies. (Sec. 43, par 2)

Dividend, is that part or portion of the profits

corporation set aside, declared and ordered by the dire

to be paid ratably to the stockholders on demand or

fixed time.

Stock Dividends, these dividends are payable in uni

additional shares of the corporation instead of cas

property out of the unrestricted retained earnings. T

are issued by a resolution of the board and approv

stockholders. It must also require to have unissueds

for distribution to stockholders, otherwise, it must inc

its capital stock to the extent of corporate earnings

declared.

Cash Dividends,these are dividend payable in cash. Tcan be declared by mere board resolution from unrest

retained earnings.


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Property Dividends,these are dividends distributed to the

stockholders in the form of property, real or personal, such

as warehouse receipts, or shares of stock of another

corporation. This is actually cash dividend since the

stockholder may sell the property received and realize cash.

These must be properties no longer intended to be used by

the corporation for its business. However, no actual

distribution of property dividend shall be made without

approval by the Commission.

The participation of each stockholder in the earnings of the

corporation is based on his total subscription and not on the

amount paid by him in account thereof. Ex. A subscribes to1,000 shares of the par value P10.00 per share and has paid

P5,000 on his subscription, he will participate in dividends

on the basis of 1,000 shares, not 500 shares. (De Leon,

Corporation Code of the Philippines, 2010)

Dividends are usually declared generally quarterly. But the

directors may declare dividends in advance for succeeding

quarters when the business is in good shape and abundant

with revenues.

viii. Power to enter into Management ContractA management contract is one whereby the corporation

undertakes to manage or operate all or substantially all of

the business of another corporation. A managementcontracts must not be longer than 5 years for any one term.

However, service contracts which relate to the exploitation,

development, exploration or utilization of natural resources

may be entered into for such periods provided by law or

regulation. (De Leon, 2010)

Requirements:

- Resolution of a quorum of the Board ofDirectors/Trustees; and

- Ratified by a majority vote by the stockholdersrepresenting the outstanding capital stock or members,

as the case may be, in a meeting called for the purpose;

- In both cases, such votes must be made by both themanaging and managed corporation.

EXCEPT: That 2/3 votes shall be necessary if:

- Stockholder who represents the interest of bothcorporations owns 1/3 of the outstanding capital stock

of the managing corporation.

- Majority of the members of the Board of the managingcorporation compose also majority of the members of

the board of the managed corporation.

(Villanueva, Commercial Law Reviewer, 2009)

ix. Ultra Vires ActsThese are acts not within the express, implied, and incidental

powers of the corporation conferred by the Corporation Code orits articles of incorporation.

There are three types ofultra vires acts:

1. Those outside the express, implied or incidental powersof the corporation;

2. Those which are effected by corporate representativeswho act without authority;

3. Those which are contrary to laws or public policy. Applicability of Ultra Vires ActsThe term ultra vires is distinguished from an illegal act since

the former is merely voidable which may be enforced by

performance, ratification, or estoppels, while the latt

void and cannot be validated.

When a contract or act is illegal per se , it is wholly vo

inexistent. But when a contract is not illegal per s

merely beyond thepower of a corporation, the sam

merely voidable and may be enforced by perform

ratification, or estoppels or on equitable ground.

Consequences of Ultra Vires Acts- If executor on both sides, it cannot be enforced by e

party thereto.

-

If fully performed on both sides, neither partymaintain an action to set aside the transaction

recover what he has parted with.

- If performed on one side and the other has recbenefits by reason of such performance, recove

permitted on the ground that it would be unju

sanction retention of benefits coupled with refu

perform (De Leon, 2010)

3. HOW THESE POWERS ARE EXERCISEDa. StockholdersStockholders have residual power of fundamental corp

changes in the exercise of their right to vote.

b. Board of DirectorsGenerally, the Board of Directors alone exercises the powe

the corporation. The board exercises their power through b

meetings.

c. OfficersCorporate officers may exercise corporate powers via auth

from:

1. Law2. Corporate By-laws3. Authorization from the board, either expressly or imp

by habit, custom or acquiescence in the general courbusiness.

4. TRUST FUND DOCTRINEThe assets of a corporation of the corporation as represent

its capital stock are trust funds to be maintained unimpand to be used to pay corporate creditors in the sense that

can be no distribution of such assets among the stockho

without provision being first made for the payment o

corporate debts and that any such disposition of it is a frau

the creditors of a corporation who extend credit on good fa

its outstanding capital stock and, therefore, void. (Philip

Trust Co. v. Rivera, 144 Phil 469)

Under the trust fund doctrine, the capital stock, property

other assets of a corporation are regarded as equity in tru

the payment of the corporate creditors. (CIR v. CA, 301 152)

G. BOARD OF DIRECTORS AND TRUSTEES

1. DOCTRINE OF CENTRALIZED MANAGEMENTUnless otherwise provided in the Corporation Code

corporate powers of all corporations shall be exercise

business conducted and all property of such corpora

controlled and held by the board of directors or trustees


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elected from among the holders of stocks, or where there is

no stock, from among the members of the corporations, who

shall hold office for one (1) year and until their successors

are elected and qualified. (Sec. 23, Corporation Code)

A corporations Board of Directors is understood to be thatbody which:

a. Exercises all powers provided for under the CorporationCode;

b. Conducts all business of the corporation; andc. Controls and holds all property of the corporation.(Hornilla v. Salunat, 405 SCRA 220)

2. BUSINESS JUDGMENT RULEThe courts cannot undertake to control the discretion of the

board of directors about administrative matters as to which

they have legitimate power of action, and contracts intra

vires entered into by the board of directors are binding upon

the corporation and courts will not interfere unless such

contracts are so unconscionable and oppressive as to amount

to a wanton destruction of the rights of the minority.

Exceptions:

a. When otherwise provided by the Corporation Codeb. When the Directors or officers acted with fraud, gross

negligence or in bad faith; and

c. When directors or officers act against the corporation inconflict of interest situation.

3. Tenure, Qualifications and Disqualifications ofDirectors or Trustees

Tenure: Under section 23, the board of directors and

trustees shall hold office for one (1) year and until their

successors are elected and qualified. As a general rule, the

directors or trustees of a corporation shall serve for a term

as fixed in the by-laws.

Hold-over:Upon failure of a quorum at any meeting of the

stockholders or members called for an election, the

directorate naturally holds over and continues to functionuntil another directorate is chosen and qualified.

Qualifications:Stock Corporations:

a. Own at least one (1) share;b. Share of stock must be registered in his name;c. Must continually own such share during his term;

otherwise he automatically ceases to be a director;

d. Majority must be residents of the Philippines;Non-stock Corporation:

a. He must be a member in good standing thereof;b. a majority of them must be residents of the Philippines;Only a natural person may be elected as directors or trustees.However, a corporation which owns shares of stocks or is a

member in another corporation can designate by board

resolution its officer or representative to sit in the lattersboard and thus qualifying him to be elected as director or

trustee. (De Leon, 2010)

A trustee in a voting trust may be elected as director/trustee.

(Villanueva, 2009)

Disqualifications:No stockholder or member can be elected as director or

trustee if he has been convicted by final judgment of an

offense carrying an imprisonment exceeding 6 years, or an

offense constituting a violation of the Code, 5 years pr

his election or appointment.

Every Director requires at least one share of stock

elected. If he transfers all his shares during his tenu

automatically ceases to be a director. This applies

Director who transfers all his shares to a trustee un

Voting Trust Agreement. (Lee v. CA, 205 SCRA 752)

4. ELECTIONSIn order for the election of the Directors or Trustees to

place, the presence of a majority of the capital stomembers, either personally or by written proxy is requi

Elections must be held by secret ballot if requested b

voting stockholder or member, otherwise, it may be he

any form.

a. CUMULATIVE VOTING AND STRAIGHT VOTINGExample: A owns 100 shares of stock in a corporation a

directors are to be elected. A is entitled to 500 votes

shares x 5 directors)

Straight Voting - every stockholder may vote such nu

of shares for as many persons as there are directors

elected. In this case, A may distribute equally 100 shaeach of the 5 directors without preference. The same

applies to elections of the board of trustees, whereby A

vote for each trustee to be elected.

Cumulative Voting for one Candidate a stockhold

allowed to concentrate his votes and give one candidamany votes as the number of directors to be el

multiplied by the number of his shares shall equal. Incase, A may vote all his 500 shares to a single director

elected.

Cumulative Voting by Distribution By this meth

stockholder may cumulate his shares by multiplying als

number of his shares by the number of directors telected and distribute the same among as many candi

as he shall see fit. Here, A may distribute his votes as he

desire among the directors to be elected, i.e., 200 shar

Director 1, 100 shares to director 2, and 200 shar

director 3, giving no favorable vote to Directors 4 and 5.

However, the Corporation Code states that the total nu

of votes cast by a stockholder shall not exceed the numb

shares owned by him. Lastly, no delinquent stock shal

or be voted.

b. QUORUMA majority of the number of directors or trustees as fix

the articles of incorporation shall constitute a quorum fotransaction of corporate business. Except, when

otherwise provided in the articles of incorporation or th

laws that a greater majority is required. (Sec. 25, Corpor

Code)

Note: There is a difference between requiring A mavote of the directors or trustees and A vote of majorthe directors or trustees constituting a quorum. Iformer, you require a vote of majority plus one of a

directors. In contrast, the latter requires a majority plu

vote of directors enough to constitute a quorum (majori


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5. REMOVALAny director or trustee of a corporation may be removed

from office:

a. By a vote of the stockholders representing 2/3 of theoutstanding capital stock, or 2/3 vote of the members.

b. At a regular meeting of the corporation or at a specialmeeting called for such purpose,

c. Previous notice to stockholders or membersd. May be without just cause, except when it operates to

deprive minority stockholders or members the right of

representation (requires just cause).

The board of directors has no power to remove one of its

members as director or trustee.

6. FILLING OF VACANCIESGenerally, if still constituting a quorum, at least a majority of

the members are empowered to fill any vacancy occurring in

the board other than by removal by the stockholders or

members or by expiration of term.

Stockholders or members may fill the vacancy in the

following cases:

a. Vacancy results from removal by the stockholders ormembers, or the expiration of term;

b. Vacancy occurs other than by removal or expiration ofterm, such as death, resignation, abandonment, or

disqualification; provided that the remaining directors

do not constitute a quorum;

c. When the board refers the matter to the stockholders;d. Increase in the number of the board;A director or trustee so elected to fill a vacancy shall only be

for the unexpired term of his predecessor in office.

7. COMPENSATIONGenerally, the by-laws of a corporation fixes the

compensation of the directors. However, if no compensation

is provided for therein, then directors shall receive onlyreasonable per diems. Per diems are paid per attendance in

board meetings.

The amount of compensation may also be fixed in a

resolution of the stockholders by a majority vote

representing the outstanding capital stock. Notwithstanding,

the stockholders cannot delegate to the board of directors

the authority to fix the amount of their own compensation.

Where the compensation is granted either in the by-laws or

by the vote of stockholders, the total yearly compensation of

directors or trustees shall in no case exceed 10% of the net

income before income tax of the compensation during the

preceding year.

8. FIDUCIARIES DUTIES AND LIABILITY RULESA director is a fiduciary. Their powers are powers in trust.He who is in such fiduciary position cannot serve himself

first and his cestuis second. He cannot manipulate the affairs

of his corporation to their detriment and in disregard of the

standards of common decency. He cannot by the

intervention of a corporate entity violate the ancient precept

against serving two masters. (De Leon, The CorporationCode of the Philippines, 2010)

Duty of Obedience The directors or trustees and officers to

be elected shall perform the duties enjoined on them by law

and by the by-laws of the corporation. Any director, tr

or officer violating this duty is liable for ultra vires acts.

Duty of Diligence Directors or trustees who (1) willfull

knowingly vote for, or assent to patently unlawful acts

corporation, (2) or who are guilty of gross negligence o

faith in directing the affairs of the corporation, shall be

jointly and severally for all the damages resulting there

suffered by the corporation, its stockholders or member

other persons. (Sec. 31, Corporation Code)

Personal Liability of corporate director, trustee or o

shall attach only when:a. He affirms an unlawful act, or acts with bad faigross negligence in directing its affairs, or for conf

interest resulting in damage to the corpor

stockholders or other persons;

b. He consents to the issuance of watered stocks ornot file with the secretary his written objection the

c. He agrees to hold himself personally and soliliable with the corporation;

d. Law makes him personally liable for his corpaction. (Tramat Mercantile v. Court of AppealsSCRA 14)

Duty of LoyaltyWhen a director, trustee or officer atte

to acquire or acquires, in violation of his duty, any int

adverse to the corporation with respect to any matter whas been reposed in him in confidence, as to which e

imposes a disability upon him to deal in his own beha

shall be liable as a trustee for the corporation and

account for the profits which otherwise would have ac

to the corporation. (Sec. 31, Corporation Code)

This liability shall attach despite the fact that the dir

risked his own funds in the venture. However, violati

this duty may be ratified by a vote of the stockho

owning or representing at least 2/3 of the outsta

capital stock. (Sec. 34, Corporation Code)

These two provisions are contained in the doctrin

corporate opportunity, which states that a corpdirector cannot take advantage for his personal ben

business opportunity which has an inherent aptitud

being integrated into the existing business of

corporation.

9. RESPONSIBILITY FOR CRIMESSince a corporation is a mere legal fiction, it cannot be

liable for a crime committed by its officers, since it doe

have the essential element of malice; in such case

responsible officers would be criminally liable.

The performance of the act is an obligation directly imp

by the law on the corporation. Since it is a responsible o

or officers of the corporation who actually perform thfor the corporation, they must of necessity be the on

assume the criminal liability (People v. Tan Boon Kon

Phil 607)

10. INSIDE INFORMATIONThe fiduciary position of insiders, directors, and of

prohibits them from using confidential information re

to the business of the corporation to benefit themselv

any competitor corporation in which they may have a

substantial interest.


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Since loss and prejudice to the corporation is not a

requirement for liability, the corporation has a cause

of action as long as there is unfair use of inside information.

It is inside information if it is not generally available to

others and is acquired because of the close relationship of

the director or officer of the corporation. (Sec. 3.8, 27

Securities Regulation Code)

11. CONTRACTSa. By Self-Dealing Directors with the CorporationA contract of the corporation with one ore more of its

directors or trustees or officers is voidable, at the option of

such corporation, unless the following conditions are

present:

i. The presence of such director or trustee in the board

meeting in which the contract was approved is not necessary

to constitute a quorum for such meeting;

ii. The vote of such director or trustee was not

necessary for the approval of the contract;

iii. That the contract is fair and reasonable under thecircumstances;

iv. (In the case of an officer) The contract with theofficer has been previously authorized by the board

of directors.

In the absence of the first two conditions, a ratification may

be made by a vote of the stockholders representing at least

2/3 of the outstanding capital stock or at least 2/3 vote of

the members in a meeting called for the purpose. Full

disclosure of the adverse interest of the directors or trustees

must be made at such meeting. (Sec. 32, Corporation Code)

b. Between Corporations with Inter-locking DirectorsGeneral Rule: A contract between two or more corporations

having interlocking directors shall not be invalidated on that

ground alone.

Exceptions: (1) There is Fraud and (2) The contract is notfair and reasonable under the circumstances.

Rule when the directors interest is nominal in onecorporation and substantial in the other: The

requirements under Section 32, as stated above, must be

complied with to make the contract between the corporation

and interlocking directors valid.

Stockholdings exceeding 20% of the outstanding capital

stock shall be considered substantial for the purposes of

interlocking directors.

The By-Laws may prohibit a director of a corporation from

serving at the same time a director of a competing

corporation. (Gokongwei, Jr. v. SEC, 89 SCRA 336)

c. Management ContractsPreviously tackled under Corporate Powers.

A management contract cannot delegate entire supervision

and control over the officers and business of a corporation to

another as this will contravene the fundamental rule that the

corporate powers of all corporations shall be exercised by

the board. The board cannot surrender its power and duty of

supervision and control for otherwise, it becomes a mere

instrumentality of the managing company.

Where majority of the members of the members of the b

of the managing corporation also constitute a majority

members of the board of directors of the man

corporation, the management contract must be approv

the stockholders of the MANAGED Corporation owning

of the total outstanding stock or members.

Illustration: If A, B, C, D, and E constitute the majority

members of the board of directors of X corporation and

of Y corporation, the bigger 2/3 vote by the stockholder

corporation is necessary. This is a case of a contract bet

two corporations with interlocking directorates. (De

2010)

16. EXECUTIVE COMMITTEE

The by-laws of a corporation may create an exec

committee composed of not less than three members o

board to be appointed by the Board. Said committee ma

by majority vote of all its members, on such specific m

within the competence of the board, as may be delegat

in the by-laws, or on a majority vote of the board.

The purpose of the Executive Committee is to take off p

the work from the Board during the periods when the B

does not meet.

Matters they cannot act on:a. Approval of any action for which shareholders app

is also required;

b. Filling of vacancies in the board;c. Amendment or repeal of any resolution of the B

which by its express terms is not so amendab

repeatable;

d. Distribution of cash dividends.17. MEETINGS

a. Regular or Special MeetingsRegular meetings of directors or trustees are those held b

board monthly, unless the by-laws provide otherwise.

Special meetings of directors or trustees are those held b

board at any time upon the call of the president

provided in the by-laws.

These meetings maybe held anywhere in or outsid

Philippines, unless provided otherwise in the by

Notice must be sent to every director or trustee at least

prior to the scheduled meeting.

b. Who PresidesSection 54 provides, the president shall preside a

meetings of the directors or trustees as well as o

stockholders or members, unless the by-laws protherwise.

The by-laws may provide that the chairman, instead o

president, shall preside at board meetings. Where ther

vice-chairman provided in the by-laws, he presides i

absence of the chairman.

Where the officer entitled to preside is not present a

time of the meeting, a stockholder or member who take

floor may temporarily preside at the meeting pendin

selection of the presiding officer.

c. Quorum


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Under Sec. 52, Unless otherwise provided for in this Code or

in the by-laws, a quorum shall consist of the stockholders

representing a majority of the outstanding capital stock or a

majority of the members in the case of nonstick corporations.

d. Rule on AbstentionWhen time comes for directors to vote on an issue, a director

may vote "yes" or "no." If a director abstains from voting,

that means the director has not voted. An abstention is a

non-vote, a decision not to make a decision. When the chair

calls for a vote, abstentions are not called for, only the yeasand nays.

Whenever a director believes he/she has a conflict of

interest, the director should abstain from voting on the issue

and make sure his/her abstention is noted in the minutes.

The other reason a director might abstain is that he/she

believes there was insufficient information for making a

decision. Otherwise, directors should cast votes on all issues

put before them. Failure to do so could be deemed a breach

of their fiduciary duties.

. STOCKHOLDERS AND MEMBERS

1. RIGHTS OF A STOCKHOLDER OR MEMBERS

Direct or indirect participation in management Voting Rights Right to remove directors Proprietary Rights Right to Inspect books and records Right to be furnished with the most recent financial

statements/reports

Right to recover stocks unlawfully sold for delinquentpayment of subscription

Right to file individual suit, representative suit and derivativesuits.

a. Doctrine of Equality of SharesEach share shall be EQUAL in ALL respects to every other

share, except as otherwise provided in the Articles ofIncorporation and stated in the certificate of stock.

2. PARTICIPATION IN MANAGEMENT

a. PROXY - Stockholders and members may vote in person or byproxy in all meetings of stockholders or members.

- A written authorization given by one person to another sothat the second person can act for the first.

- A proxy is a special form of agency. The proxy holder is inthe eye of the law an agent and as such a fiduciary.

(Ballantine, p. 412)

Requirements for Validity: (Sec. 58)

i. Unless otherwise provided in the proxy, it shall be validonly for the meeting which it was intended.

ii. It shall be signed by the stockholder or memberconcerned;

iii. Proxies shall be in writing;iv. It shall be filed before the scheduled meeting with the

corporate secretary;

v. No proxy shall be valid and effective for a period longerthan 5 years at any one time.

b. VOTING TRUST - An arrangement created by one or morestockholders 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 five (5) years at any time.

The trustee can also be voted as director.

If the voting trust was a requirement for a loan agree

period may exceed 5 years but shall automatically expire

full payment of the loan. (Sec. 59, Corporation Code).

c. CASES WHEN STOCKHOLDERS ACTION IS REQUIREDi. By a Majority Vote (of the outstanding capital stoc

entitled to vote)

Fixing of the issue value of no par value shares barticles may fix the issue price or may authorize the B

of Directors to fix said issue value (Sec. 62);

Adoption or amendments to the By-Laws (Sec. 48 Execution of Management Contracts, unless in cinterlocking shareholders of more than one-third (1

the managing corporation or interlocking majori

directors in both managed and managing corpor

(Sec. 44);

Revocation of delegation to the Board of Directothe amendment of By-Laws (Sec. 48);

Calling a meeting to remove directors (Sec. 26); a Payment of compensation for directors unless alfixed in the By-Laws.

ii. By a Two-Thirds Vote Declaration of bond or stock dividends (Sec. 43); Investment in other corporations or for pur

other than those provided in the Article

Incorporation (Sec. 42);

Certain amendments to the Articles of Incorpo(Sec. 16; Sec. 37);

Delegation to the Board of Directors to amend thLaws (Sec. 48);

Sale, lease, exchange, mortgage, pledge or disposition of all or substantially of the corp

assets, but stockholders action is not requir

corporations business is not substantially limite

the proceeds are used to continue the rema

business (Sec. 40);

Removal of a director (Sec. 28); Ratification of voidable contracts in certain

between a corporation and its director or trustee32);

Voluntary dissolution of the corporation (Sec.118 Execution of management contracts in case

interlocking stockholders or directors (Sec.44);

Increase or decrease of capital stock and creatiincrease of bonded indebtedness (Sec. 38);

Extending or shortening corporate term (Sec. 37) Issuance of shares not subject to pre-emptive

(Sec. 39);

iii. By Cumulative VotingCumulative voting is allowed election of directors or trustees (Sec. 24).

- A stockholder may vote such number of shares f

many persons as there are directors to be elected may cumulate said shares and give one candidate as

votes as the number of directors to be elected mult

by the number of his shares shall equal, or he

distribute them on the same principle among as

candidates as he shall see fit (Sec. 24).

Provided that the total number of votes cast by him

not exceed the number of shares owned by him as s

in the books of the corporation multiplied by the w

number of directors to be elected.


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3. PROPRIETARY RIGHTS

The proprietary rights of shareholders consist principally in their

right to dividends and to liquidation of assets.

While a share of stock represents a proportionate or aliquotinterest

in the property of the corporation, it however, does not vest the

owner thereof with any legal right or title to any of the assets, his

interest in the corporate property being equitable or beneficial in

nature. Shareholders are in no legal sense the owners of corporate

property, which is owned by the corporation as a distinct legal

person.

a. RIGHT TO DIVIDENDSRight to dividends vests upon lawful declaration by the Board of

Directors. From that time, dividends become a debt owing to the

stockholder. No revocation can be made except if NOT yet

announced or communicated to the stockholders.

Stock corporations are prohibited from retaining surplus profits in

the excess of 100% of their paid-in capital stock,

EXCEPT:

i. When justified by definite corporate expansion projects orprograms approved by the board of directors;

ii. When the corporation is prohibited under any loanagreement with any financial institution or creditor, whether

local or foreign, from declaring dividends without its/his

consent, and such consent has not yet been secured; or

iii. When it can be clearly shown that such retention is necessaryunder special circumstances obtaining in the corporation,

such as when there is a need for special reserve for probable

contingencies.

Forms of Dividends: Cash, Property or Stock.

NOTE: Right to dividends vests upon declaration so whoever owns

the stock at such time also owns the dividends. Subsequent transfer

of stock would not carry with it right to dividends UNLESS agreed

upon by the parties.

b. RIGHT OF APPRAISAL

Right to demand payment of the fair value of his shares, after

dissenting from a proposed corporate action involving a fundamental

change in the corporation in the cases provided by law.

When Right of Appraisal May be Exercised:

i. Extend or shorten corporate term;ii. Restriction of rights or privileges of shares through the

amendment of the articles of incorporation;

iii. Sale of all or substantially all corporate assets;iv. Equity investment in non-primary purpose business enterprise;v. Merger or consolidation

OTE: (a) All the above instances require the 2/3 votes of the

outstanding capital stock;

(b) The appraisal right pertains only to stockholders who have

actually dissented from the above-enumerated transactions.

c. RIGHT TO INSPECT

Under Section 74 of the Corporation Code, the stockholder has a

right to examine the books of the corporation. That it be done during

business hours on a business day in the place where the corporation

keeps all its records; the stockholders has not improperly used any

information he secured through any previous examination; demand

is made in good faith or for a legitimate purpose.

If the director or officer unjustly refuses to allow stockholder to

inspect the corporate books, he can be held liable for damages and

for criminal offense punished under Sec. 144 of the Corporation

Code.

A stockholders right of inspection is based on his ownership of

the assets and property of the corporation. Therefore, it is an

incident of ownership of the corporate property, whethe

ownership or interest is termed an equitable ownersh

beneficial ownership, or quasi-ownership. Such rig

predicated upon the necessity of self-protection. (Goko

Jr. Vs. SEC, 1979).

d. PRE-EMPTIVE RIGHT

Right to subscribe to all issues or disposition of shares o

class in proportion to his present stockholdings, the pu

being to enable the shareholder to retain his proportio

control in the corporation and to retain his equity in

retained earnings, and also in the net assets in the eve

dissolution.Sec. 39 has widened the coverage of pre-emptive right w

now includes re-issuance of treasury shares because of th

of the words disposition of shares, which would cove

following instances:

i. Increase in the Authorized Capital Stock;ii. Opening for subscription the unissued portion of ex

capital stock; and

iii. Disposition of treasury shares.Pre-emptive right not available in the following instances:

i. Shares to be issued to comply with laws requiring offering or minimum stock ownership by the public;

ii. Shares issued in good faith in exchange for proneeded for corporate purposes;

iii. Shares issued in payment of previously contracted deiv. In case the right is denied in the articles of incorpor

(Sec. 39)

e. RIGHT TO VOTE

A stockholder is given the right to participate in the corp

affairs by giving him the right to attend meetings afte

notice and the right to vote thereat in person or throu

proxy or trustee.

- Non-voting shares are not entitled to vote exceprovided for in the last paragraph of Sec. 6 o

Corporation Code.

- Preferred or redeemable shares may be deprived oright to vote.

- Fractional shares of stock cannot be voted.- Treasury shares have no voting rights as long as

remain in the treasury.

- No delinquent stock shall be voted. (Sec. 71)- A transferee of stock cannot vote if his transfer

registered in the stock and transfer book o

corporation.

f. RIGHT OF FIRST REFUSAL

Except in the case of close corporations where the right o

refusal is required to be a feature to be found in the artic

incorporation, the right of first refusal can only ari

Corporate Law by means of a contractual stipulation, or w

is provided in the articles of incorporation. The nature

purpose of by-laws would not allow rights of first refusal

found in its provisions.

4. REMEDIAL RIGHTS

a. Individual Suit A suit instituted by a shareholder for his

behalf against the corporation.

b. Representative Suit A suit filed by a shareholder in his b

and in behalf likewise of other stockholders similarly situate

with a common cause against the corporation (Pascual vs. D

Orozco, 19 Phil. 82).


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Derivative Suit A suit filed in behalf of the corporation by its

hareholders (not creditors whose remedies are merely subsidiary such as

accion subrogatoria or in accion pauliana) upon a cause of action

elonging to the corporation, but not duly pursued by it, against any

erson or against the directors, officers and/or controlling shareholders

f the corporation. If the suit is filed against a third person, the case is not

fra-corporated in nature. A derivative suit is a remedy designed by

quity and has been the principal defense of the minority stockholders

gainst abuses by the majority. The real party-in-interest in a derivative

ction is the corporation itself, not the shareholders who have actually

stituted it. (Gilda Lim vs. Patricia Lim-Yu, 352 Scra 216)

Requisites of a derivative suit

i. Cause of action is in favor of the corporation, such asthose arising from fraudulent conveyances, breach of

trust (but not error of judgment) on the part of the

board of directors, ultra vires acts and similar others;

ii. There is refusal on the part of the corporation to sueafter the corporation is advised to take appropriate

remedies but the exhaustion of intra-corporate

remedies may be dispensed with if that recourse would

be a futile exercise, such as when it is under the

complete control of the defendants (Everest vs. Asia

Banking Corporation, 49 Phil. 512).

iii. There would be injury to the corporation if the action isnot taken; and

iv. The action is brought by a shareholder or group ofshareholders in the name of the corporation.

5. OBLIGATION OF A STOCKHOLDER

i. Liability to the corporation for unpaid subscription (Sec. 67-

70, CCP);

ii. Liability to the corporation for interest on unpaid subscription

if so required by the by-laws (Sec. 66);

iii. Liability to the creditors of the corporation for unpaid

subscription (Sec. 60);

iv. Liability for watered stock (Sec. 65);

v. Liability for dividends unlawfully paid (Sec. 43);

vi. Liability for failure to create corporation (Sec. 10).

6. MEETINGS

a. REGULAR OR SPECIAL

i. WHEN AND WHERE

WHEN:

Regular meetings of stockholders or members shall be held

annually on a date fixed in the by-laws, or if not so fixed, on any

date in April of every year as determined by the board of

directors or trustees. (Sec. 50).

WHERE:

Stock Corporations: City or municipality where the principal

office of the corporation is located, or, if practicable, in the

principal office of the corporation; Provided, Metro Manila shall

be considered a city or municipality. (Sec. 51).

Exception: Such meeting shall be valid even if not held in the

proper place when all the stockholders or members of the

corporation are present or duly represented at the meeting.

Failure to comply with the mandatory provisions of Section 51

would render the meeting illegal.

ii. NOTICE

Regular Meeting written notice sent to tall stockholders or

members at least (2) weeks prior to the meeting, unless a

different period is required by the by-laws.

Special Meeting written notice sent at least 1 week prior to

the meeting, unless otherwise provided in the by-laws.

Subject to waiver, expressly or impliedly.

Failure to give notice would render a meeting VOIDABLE

instance of an absent stockholder, who was not notified o

meeting. (Board vs. Tan, 1959).

b. WHO CALLS THE MEETINGS

i. The President, unless the by-laws provide otherwise

54).

ii. The person or persons designated in the by-laws hav

authority to call stockholders or members meeting.

iii. In the absence of such provision in the by-laws

meeting may be called by a director or trustee or b

officer entrusted with the management of the corpo

unless otherwise provided by law.iv. Whenever for any cause there is no person authoriz

call a meeting, SEC upon petition of a stockholder/mem

and on the showing of good cause therefore, may iss

order to petitioner to call a meeting by giving proper n

with the petitioner presiding thereat until at least a ma

of stockholders/members present have chosen a pre

officer. (Sec. 50)

Pursuant to the powers granted to the SEC under Secti

of the Corporation Code, and Section 6(f) of Pres. D

902-A, the SEC has opined that when there is no p

authorized in the by-laws to call a meeting or in the

the person authorized in the by-laws to call a meetin

or refuses to call for a meeting, any interested stockh

may petition the SEC to authorize him to call a meeti

compel the officers of the corporation to call a meeting

c. QUORUM

Under Section 52 of the Corporation Code, unless othe

provided for in the Code itself or in the by-laws, a quorum

consist of the stockholders representing a majority o

outstanding capital stock or a majority of the members in

of non-stock corporations.

In those cases in which the law determines the numb

shareholders or members whose concurring votes are nece

to make their action binding on the corporation, no less

such number is necessary to constitute a quorum at a me

called to transact such business. In such cases, the by-laws

provide for a greater quorum.

In other cases, the by-laws may provide for the holdi

meetings with the presence of any number of stockholde

members, even less than a majority, provided there are at

two. It is customary however, to provide in the by-laws tha

presence of the registered holders of a majority o

outstanding shares is necessary to constitute a quorum

that a smaller number may meet and adjourn to a later

and that at such adjourned meeting, the shareholders atte

shall constitute a quorum.

The SEC has opined that where a corporation encou

several unsuccessful attempts or if it would be impossib

the corporation to get the required quorum of

stockholders/members necessary to transact business, it

pursuant to the provisions of Pres. Decree 902-A, petitio

SEC for the appointment of a management committe

undertake the management thereof.

Where quorum is present at the start of a lawful me

stockholders present cannot without justifiable cause brea

quorum by walking out from said meeting so as to defea

validity of any act proposed and approved by

majority.(Johnston vs. Johnston, 1965 CA decision)


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d. MINUTES OF THE MEETINGS

Under Section 74 of the Corporation Code, the corporation

shall, at its principal office, keep and carefully preserve a record

of all minutes of all meetings of stockholders and members, in

which it shall be set forth in detail the time and place of holding

the meeting; the notice given; whether regular or special; if

special, its object, those present and absent; and every act done

or ordered done at the meeting.

Upon the demand of any director, trustee, shareholder or

member, the time when any director, trustee, shareholder or

member entered or left the meeting must be noted in theminutes; and on a similar demand, the yeas and nays must be

taken on any motion