Corporation CODE- Villanueva Notes

8/3/2019 Corporation CODE- Villanueva Notes

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y CORPORATION CODE (BP BLG 68)*Corporation Code is the general law on Private Corporation regarding to its creation, formation and

powers.

INTRODUCTION:

1. Historical Background

Effectivity: May 1, 1980

Article XII Section 16 of the 1987 Constitution: The Congress shall not, except by general

law, provide for the formation, organization, or regulation of private corporations. Government-

owned or controlled corporations may be created or established by special charters in the interest of

the common good and subject to the test of economic viability.

*Congress has limited powers in the formation, creation and regulation of a private corporation.

Purposes:

2. Uniformity3. To avoid corruption

General Rule: Congress is prohibited to enact a law directly forming a private corporation.

Exception: GOCC may be created by special charter.

*GOCC is a private corporation with regard to function and in the meantime a public corporation

with regard to ownership.

Twin Conditions must be present in forming a GOCC:

4. Interest in the common good5. Subject to the test of economic viability

- Means can survive alone in the market; can generate income which they can use for their

operating expenses

CONCEPT AND ATTRIBUTES OF A CORPORATION:

6. Statutory definition of a Corporation

Section 2 of the Corporation Code: A corporation is an artificial being created by operation of

law, having the right of succession and the powers, attributes and properties expressly authorized

by law or incident to its existence.


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7. Attributes of a Corporation Artificial Being

- It exist by fiction of law only, hence it is subject to limitations that are inherent because of its

nature- A corporation is a juridical person which exists by process of legal fiction

Doctrine of Corporate Entity/Doctrine of Separate Personality - 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 entities to which it may be connected

Consequences/Implications of Separate Personality:

9. It is entitled to own properties in its own name and its properties are not the properties of itsstockholders, directors and officers.

Cases: Magsaysay-Labrador v CA; Sulo ng Bayan v Araneta

*The interest of the stockholders over the properties of the corporation is merely inchoate.

*Merely inchoate because there are still condition precedents before the shareholders get their

share, viz, in Asset, there are dissolution and satisfaction of claims; in profit-sharing, there are

unrestricted retained earnings and declaration by the Board of Directors.

10.It can incur obligations and its obligations are not the obligations of its stockholders, directors andofficers.

Case: Francisco v CA

11.The rights belonging to the corporation cannot be invoked by the stockholders, directors and officersand vice versa.

12.Corporations are entitled to certain constitutional rights, i.e., right against unreasonable searchesand seizure, due process clause.

*It is not entitled to certain constitutional right, i.e., right against self-incrimination particularly

production of corporate documents.

*Right against self-incrimination is applicable only to natural persons.

General Rule: Constitutional guarantees are applicable to corporations.

Exceptions:

13.Right against self-incrimination14.Freedom to travel


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Case: Bataan Shipyard v PCGG

15.It is liable for tort. It is liable when the act was committed by the officer or agent under expressdirection or authority from the stockholders or members acting as a body or generally from the

directors as the governing body.16.Generally, the corporation is considered a national of the country where it was incorporated (Place

of incorporation test)

*Exceptions: 1. In times of war, the nationality of a corporation is determined by the nationality of

the controlling stockholders; 2. Under the Foreign Investment Act of 1991

17.Corporations are incapable of intent, hence, they cannot commit felonies that are punishable underthe RPC. They cannot commit crimes that are punishable under special laws because crimes are

personal in nature requiring personal performance of overt acts. In addition, the penalty ofimprisonment cannot be imposed.

*Criminal liability falls upon to responsible officers.

*Responsible officers cannot invoke the doctrine of separate personality.

*Corporations cannot be incarcerated.

18.Moral damages cannot be awarded in favor of corporations because they do not have feelings andmental state.

*Corporations can claim damages such as actual, compensatory, exemplary, loss of earning

capacity.

General Rule: Corporation cannot claim moral damages.

Exception: If the corporation has a good reputation and such reputation was destroyed.

Case: Coastal Pacific Trading v Southern Rolling Mills, Co.

*In Filipinas Broadcasting Network Inc. v. Ago Medical and Educational Center, the SC ruled that a

corporation can recover moral damages under Article 2219(7) if it was the victim of defamation.

Doctrine of Piercing the Veil of Corporate Entity The doctrine that a corporation is a legal

entity distinct from the persons composing it. It is a theory introduced for the purposes of

convenience and to serve the ends of justice. But when the veil of corporate fiction is used as ashield to perpetuate fraud, to defeat public convenience, justify wrong, or defend crime, this fiction

shall be disregarded and the individuals composing it will be treated identically.

Cases: Times Transportation Co. v Santos Sotelo; Concept Builders v NLRC

*The doctrine of piercing the veil of corporate entity is the exception to the doctrine of corporate

entity.

*The users of this doctrine are: 1. Stockholder; 2. Group of stockholders; 3. Another corporation.


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Effects: 1. Stockholders, officers and corporation are in effect jointly liable; 2. In case of two

corporations, they will be treated as one wherein they will be both solidarily liable. (Instrumentality

rule)

*There is no effect on the existence of each corporation as long as their separate entity is used for

legitimate purposes.

Instrumentality Rule When one corporation is so organized and controlled and its affairs are

conducted so that it is in fact a mere instrumentality or adjunct of the other, the fiction of the

corporate entity to the instrumentality may be disregarded.

*The user is another corporation.

Keyword: CONTROL

Requisites: 1. Control, not mere majority 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. Such control must have been used by the defendant to commit fraud or wrong in contravention of

plaintiffs legal rights; 3. The aforesaid control and breach of duty must proximately cause the injury

or unjust loss complained of.Three cases of piercing the veil:

1. Fraud Cases when a corporation is used as a cloak to cover fraud, or to do wrong;

2.Alter Ego Cases when the corporate entity is merely a farce since the corporation is an alter

ego, business conduit or instrumentality of a person or another corporation;

3. Equity cases when piercing the corporate fiction is necessary to achieve justice or equity.

Probative Factors of Identity:

1. Identical shareholders;

2. Same set of officers, directors, or trustees;

3. Use of same premises, properties, tools and equipments;

4. Engage practically in the same business; 5. The same manner of keeping books and records.*The probative factors of identity are not conclusive but may be considered as strong evidence.

Creature of Law

Article XII Section 16 of the 1987 Constitution: The Congress shall not, except by general

law, provide for the formation, organization, or regulation of private corporations. Government-

owned or controlled corporations may be created or established by special charters in the interest of

the common good and subject to the test of economic viability.

Concession Theory It is a principle in the creation of corporations, under which a corporation isan artificial creature without any existence until it has received the imprimatur of the State acting

according to law, through the SEC. The life of the corporation is a concession made by the State.

Right of Succession


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- Capacity to have continuity of existence despite the changes on the persons who compose it.

Thus, the personality continues despite the change of stockholders, members, board members or

officers; death or disability.

- Also known as Principle of Perpetual Succession

Reason: To make the corporation more stable

Creature of enumerated powers, attributes and properties

Doctrine of Limited Capacity No corporation under the Corporation Code, shall possess or

exercise any corporate powers, except those conferred by law, its Articles of Incorporation, those

implied from express powers and those as are necessary or incidental to the exercise of the powers

so conferred. The corporations capacity is limited to such express, implied and incidental powers.

*Corporation may be restrained from engaging a particular transaction because it is beyond their

powers.

*General Capacity a corporation can perform any act for as long as it is lawful, moral and notcontrary to public policy or order.

Ultra Vires Doctrine Even if the act is lawful, moral and not contrary to public order or policy

but such act is not within the express, implied and incidental powers of the corporation such act

shall be void for being ultra vires.

*These doctrines are based on Section 2 and Section 45 of the Corporation Code.

22.Classification of Private Corporations:1. As to existence of Stocks:

Stock Corporation Corporations which have capital stock divided into shares and are authorized

to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis

of the shares held. (Sec. 3)

Non-stock Corporation A corporation where no part of its income is distributable as dividends

to its members, trustees, or officers, subject to the provisions of this Code on dissolution. (Sec. 87)

Q: Is it correct to say that a Non-stock corporation cannot generate income on their own?

A: NO

23.As to function/organizers:

Public Corporation for public purpose and organized by the State.

Private Corporation for profit making functions and organized by private persons alone or with

the State


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24.As to laws of Incorporation (Place of Incorporation) :

Domestic Corporation corporation formed, organized or existing under the Philippine Laws.

Foreign Corporation corporation formed, organized or existing under any laws other than those

of the Philippines and whose laws allow Filipino citizens and corporations to do business in its owncountry or state. (Sec. 123)

*License is necessary for; 1. Regulation purposes and 2. Access to local courts.

4. As to legal status:

De Jure Corporation corporation created in strict or substantial compliance with the mandatory

requirements for incorporation and the right of which to exist as a corporation cannot be

successfully attacked or questioned by any party even in a direct proceeding for that purpose by the

state.

De Facto Corporation the due incorporation of any corporation claiming in good faith to be a

corporation under the Corporation Code, and its right to exercise corporate powers, shall not be

inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry

may be made by Solicitor General in a quo warranto proceeding. (Sec. 20)

- organized with a colourable compliance with the requirements of a valid law and its existence

cannot be inquired collaterally.

- There is an irregularity or defect in the constitution or organization.

Can be compared to a voidable contract, i.e., valid until annulled.

*Can be challenged by the State later on.

Cases: Hall v Piccio; Seventh Adventist v Northeastern Mindanao Mission

*The filing of the Articles of Incorporation and the issuance of the certificate of registration are the

essential requisites for the existence of a de facto corporation.

Requisites:

1. The existence of a valid law under which it may be incorporated;

2. An attempt in good faith to incorporate; 3. Use of corporate powers;

4. Filing of the Articles of Incorporation;

5. Subsequent compliance with the requirement of law.

*In both corporations, there must be a certificate of registration issued.

Doctrine of Corporation by Estoppel All persons who assume to act as a corporation knowing

it to be without authority to do so shall be liable as general partners for all debts, liabilities and

damages incurred or arising as an result thereof: Provided, however, that when any such ostensible

corporation is sued on any transaction entered into 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 or corporate personality. (Sec. 21)

- Group of persons which holds itself out as a corporation and enters into a contract with a thirdperson on the strength of such appearance cannot be permitted to deny its existence in an action

under said contract.

Case: Lim Tong Lim v CA

*Lim is stopped because he benefited from the transaction.

Remedy: To ran after those persons responsible for the representations

Essence: They are precluded from denying their existence by their previous act or conduct


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Holding Corporation it is one which controls another as a subsidiary by the power to elect

management. It is one that holds stocks in other companies for purposes of control rather than for

mere investment.

Affiliate one related to another by owning or being owned by common management or by a

long-term lease of its properties or other control device. It may be the controlled or controlling

corporation, or under common control.

Subsidiary Corporation one which is so related to another corporation that the majority of its

directors can be elected either directly or indirectly by such other corporation. It is always controlled.

Open Corporation one which is open to any person who may wish to become a stockholder or

member thereto.

Close Corporation those whose shares of stock are held by limited number of persons like the

family or other closely knit group. (Sec. 96)

FORMATION AND ORGANIZATION OF A PRIVATE CORPORATION:

25.Submission of Articles of Incorporation; contractual significance

*The life of a corporation commences from the issuance of the Certificate of Registration by the SEC

upon filing of the Articles of Incorporation and other documents.

Article of Incorporation is the charter of the corporation, and the contractual relationships

between the State and the corporation, the stockholder and the State, and between the corporation

and its stockholders.

Contractual Significance:

1. The issuance of a certificate of incorporation signals the birth of the corporations juridical

personality;

2. It is an essential requirement for the existence of a corporation, even a de facto one.

26.Contents and Form of the Articles of Incorporation (Secs. 14 and 15)

Contents of Articles of Incorporation:

1. Corporate Name;

2. Purpose Clause;

3. Principal office;

4. Term of existence;5. Incorporators;

6. Directors or trustees;

7. Capitalization;

8. Shares of stock;

9. Treasurers Affidavit.


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Corporate Name

Purpose: Identification

*Corporation can not adopt any name or group of words at its pleasure because of statutory

limitation, viz., Sec. 18 of the Corporation Code which provides that: No corporate name maybe allowed by the SEC if the proposed name is identical or deceptively or confusingly similar

to that of any existing corporation or to any other name already protected by law or

is patently deceptive, 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 amended name.

SEC Guideline x x x b. In order to prevent confusion and difficulties of administration, supervision

and control, if the proposed name contains a word already use as a part of the firm name or style of

a registered entity, the proposed name must contain two other words different and distinct from the

name of the company already registered or protected by law. x x x

Case: Ang Mga Kaanib Ni Jesus Cristo

*The phrase Ang Mga Kaanib are words merely descriptive of membership while the phrase Sa

Bansang Pilipinas are merely descriptive of the place.

*Both parties are religious institutions

*Both use the acronym H.S.K.

As a rule, generic name or descriptive word may be used as a corporate name.

Reason: public domain; can be used by anyone; public use.

Exception: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.

Requisites:

1. Period of use;

2. The use must be exclusive.

Case: Lyceum of the Philippines

*The exclusivity requirement was not satisfied by Lyceum of the Philippines.

*In case of change of name, the corporation is not dissolve nor create a new corporation; it also

does not extinguish the corporate liability.

*Change of name can be done by amending the Articles of Incorporation.

Procedure:

1. Obtain approval of majority of the Board and 2/3 stockholders;2. Submission to the SEC for approval.

Purpose Clause


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*Only one primary purpose. Primary purpose defines the business activities of the corporation. It is

the ordinary course of business of the corporation.

*Secondary Purpose is for future expansion. There is no limit on the secondary purpose.

*In case the primary purpose is not viable then secondary purpose may be used.

Principal Office

*The principal place of business may determine the venue of court cases involving corporations. It

may also determine if service of summons and notices was properly made. It is also important for

tax purposes (local taxation).

*The SEC requires the exact address to be indicated in the Articles of Incorporation.

*It is the residence of the corporation. It is where the corporation maintains its books and records

and where normally the bulk of its business is being conducted or undertaken.

*For personal action, venue is the residence.

Term of Existence

*A corporation has a maximum term of 50 years. It may be extended for a period not exceeding 50

years in any single instance.

As a rule, no extension can be made earlier than 5 years prior to the expiration of the term.

*No limitations regarding number of extension can apply.

Reason: To compel the stockholders to meet the corporations term.

Exception: If for compelling reasons, earlier extension will be allowed.

*During the three year winding up period, the corporation still has personality but activities arelimited to the liquidation of the corporation affairs and not to transact further business.

As a rule, after the term has expired, no more extensions be allowed or entertained by the SEC.

Reason: No more period to extend.

Exception: Doctrine of Relation The filing and recording of a certificate of extension after the

term cannot relate back to the date of the passage of the resolution of the stockholders to extend

the life of the corporation. However, the doctrine of relations applies if the failure to file the

application for existence within the term of the corporation is due to neglect of the officer with

whom the certificate is required to be filed or to wrongful refusal on is part to receive it.

*The delay in submitting the application for extension is justifiable.

Keywords:1. Excusable delay;

2. Beyond the control of the corporation (insuperable intervening causes)

Incorporators


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*Once an incorporator always an incorporator. (Fait accompli an accomplished fact which cannot

be altered)

*They are the signatories to the Articles of Incorporation.

*They are originally forming the corporation

Q: What is the reason behind the phrase that an incorporator is not always a corporator?

A: To be an incorporator it is not necessary to own a share unlike as a corporator.

*Number is limited to 5 to 15.

*They must have a contractual capacity.

*Juridical person cannot create another juridical person.

*There is no citizen requirement but special laws may require otherwise.

*Majority must be a resident of the Philippines.

Directors and trustees

*The Board of Directors is the governing body in a stock corporation while Board of Trustees is thegoverning body in a non-stock corporation.

*They exercise the powers of the corporation.

Qualifications:

1. Every director must own at least one (1) share of the capital stock;

2. Majority of the directors or trustees must be residents of the Philippines.

*Any director who ceases to be the owner of at least one share of the capital stock of the

corporation of which he is a director shall thereby cease to be a director.

*Trustees of non-stock corporations must be members thereof.

*Initial directors/trustees shall hold office for one year until their successors are elected and

qualified.

Capitalization

Section 14(8) states that: If it be a stock corporation, the amount of its authorized capital stock

in lawful money of the Philippines, the number of shares into which it is divided, and in case the

share are par value shares, the par value of each, the names, nationalities and residences of the

original subscribers, and the amount subscribed and paid by each on his subscription, and if some or

all of the shares are without par value, such fact must be stated.

*It is required that at least 25% of the subscribed capital must be paid and in no case may be paid-up capital be less than P5,000.

Authorized Capital Stock the amount fixed in the articles of incorporation to be subscribed and

paid by the stockholders of the corporation.

*Shows the total number of shares

Subscribed Capital that portion of the authorized capital stock that is covered by subscription

agreements whether fully paid or not.


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Paid-Up Capital the portion of the authorized capital stock which has been subscribed and

actually paid.

Outstanding Capital Stock the total shares of stock issued to subscribers or stockholders,

whether or not fully or partially paid except treasury shares so long as there is a binding subscription

agreement.

Shares of stock

Q: Why shares of stock?

A: Because there is a share on the capitalization.

Economic Value:

1. expectancy on the share in the profits

2. expectancy on the share of assets in case of dissolution/liquidation.

Political Value:

1. vote2. control in the management of the corporation.

Doctrine of Equality of Shares 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.

- Provides that where the Article of Incorporation do not provide for any distinction of the shares of

stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and

privileges and are also subject to the same liabilities.

Classes of Shares:

35.Par Value Share shares that have a nominal value in the certificate of stock.

Contractual Significance: The minimum price at which the shares are to be issued.

*The price is fixed. It is stated in the Articles of Incorporation.

36.No Par Value Share those shares which do not have nominal value. However, they have issuedvalue stated in the certificate or articles of incorporation.

*There is flexibility in the price.

*The price is determined by the Board.Limitations:

1. No par value shares cannot have an issued price of less than P5.00;

2. The entire consideration for its issuance constitutes capital so that no part of it should be

distributed as dividends;

3. They cannot be used as preferred stocks;


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4. They cannot be issued by banks, trust companies, insurance companies, public utilities and

building and loan association (Reason: imbued with public interest);

5. The articles of incorporation must state the fact that it issued no par value shares as well as the

number of said shares;

6. Once issued, they are deemed fully paid and non-assessable.

37.Voting Shares shares with the right to vote. They have the right to participate in themanagement of the corporation through the exercise of such right.

38.Non-voting Shares shares without the right to vote.

*Has only a limited right to vote.

General Rule: Shareholder owning non-voting shares has no right to vote.

Exceptions:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the

corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of 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 the

Corporation Code; 8. Dissolution of the corporation.

*The exceptions are exclusive; the list is a closed list

Statutory Constraint: Sec. 6 of the Corporation Code

*The corporation cannot provide for shares with no voting rightGeneral Rule: Only redeemable and preferred shares are deprived of voting right.

Exception: Common shares may be denied of its voting right in the following instances: 1.

Delinquent in paying the subscription; 2. If there was a founders share where it was given the right

to vote exclusively for 5 years (Sec. 7).

39.Common Shares the most common type of shares which enjoy no preference.

*The basic class of stock ordinarily and usually issued without extraordinary rights and privileges,

and the owners thereof are entitled to a pro rata share in the profits of the corporation and in itsassets upon dissolution and, likewise, in the management of its affairs without preference or

advantage whatsoever.

40.Preferred Shares- shares which enjoy preference as to dividends or assets upon dissolution asstated in the Articles of Incorporation.


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Reason: To attract investors.

*Preference does not give them a lien upon the property nor make them creditors of the

corporation.

*Characterized as redeemable shares.

Kinds:

1. Preferred shares as to assets share which gives the holder thereof preference in the

distribution of the assets of the corporation in case of liquidation;

2. Preferred shares as to dividends share which gives the holder thereof preference in the

distribution of the dividends to the extent agreed upon before any dividends at all are paid to the

holders of common shares;

3. Participating preferred shares the holders thereof are still given the right to participate with

the common stockholders in dividends beyond their stated preference;

4. Non-participating preferred shares where there is no such participation;

5. Cumulative preferred shares the shareholder is entitled to recover dividends in arrears.

While dividend declaration may not be compelled, once it is declared, the shareholder is entitled to

the said arrears;6. Non-cumulative preferred shares not entitled to arrears only to present dividends.

41.Redeemable Shares are those which permit the issuing corporation to redeem or purchase itsown shares.

Limitations:

1. Redeemable shares may be issued only when expressly provided for in the Articles of

Incorporation;

2. The terms and conditions affecting said shares must be stated both in the certificate of stockrepresenting such share;

3. Redeemable shares may be deprived of voting rights in the Articles of Incorporation, unless

otherwise provided in the Corporation Code;

4. The corporation is required to maintain a sinking fund to answer for redemption price if the

corporation is required to redeem;

5. The redeemable shares are deemed retired upon redemption unless otherwise provided in the

Articles of Incorporation;

6. Unrestricted retained earnings is not necessary before shares can be redeemed but there must be

sufficient assets to pay the creditors and to answer for operations.

42.Treasury Shares shares which have been earlier issued as fully paid and have thereafter beenacquired by the corporation by purchase, donation, redemption or through some lawful means.

- Shares which are previously issued by the corporation but subsequently reacquired by the

corporation.

*Retired thus can no longer be re-issued.


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*They are not entitled to dividends.

*They are not entitled to voting rights. Rationale: to prevent abuse by the management.

*These shares may again be disposed of for a reasonable price fixed by the Board of Directors.

43.Founders Shares classified as such in the articles of incorporation may be given certain rightsand privileges not enjoyed by the owners of other stocks, provided that where the exclusive right tovote and be voted for in the election of directors is granted, it must be for the 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 approval by the SEC.

Treasurers affidavit

*The SEC shall not accept the Articles of Incorporation of any stock corporation unless accompanied

by a sworn statement of the Treasurer elected by the subscribers showing that at least 25% of the

authorized capital stock of the corporation has been subscribed, and at least 25% of the total

subscription has been fully paid to him in actual cash and/or in property the fair valuation of which isequal to at least 25% of the said subscription, such paid up capital being not less than P5,000.

*If the Treasurers affidavit is false such act is tantamount to fraud. (PD 902-A)

*Fraud on the part of the corporation is a ground for revocation or suspension of license depending

upon the extent of the violation committed.

*If theres no Treasurers Affidavit, the first ground shall apply, i. e., noncompliance with the

minimum requirement.

General Rule: 25% must be subscribed and 25% must be paid.

Exception: If the law provides otherwise, i.e., special laws.

45.Grounds for rejection of the Articles of Incorporation1. The articles of incorporation or any amendment thereto is not substantially in accordance with the

form prescribed herein;

2. The purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, orcontrary to government rules and regulations;

3. The Treasurers Affidavit concerning the amount of capital stock subscribed and/or paid is false;4. The percentage of ownership of the capital stock to be owned by citizens of the Philippines has not

been complied with as required by existing laws or the Constitution.

Dual FranchiseRequirement: No articles of incorporation or amendment to articles of

incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust

companies and other financial intermediaries, insurance companies, public utilities, educational

institutions, and other corporations governed by special laws shall be accepted or approved by the

Commission unless accompanied by a favourable recommendation of the appropriate government

agency to the effect that such articles or amendment is in accordance with law.


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46.Commencement of Corporate Existence

Sec. 19 of the Corporation Code states that A private corporation formed or organized under

this Code commences to have corporate existence and juridical personality and is deemed

incorporated from the date the SEC issues a certificate of incorporation under its official seal; andthereupon the incorporators, stockholders/members and their successors shall constitute a body

politic and corporate under the name stated in the articles of incorporation for the period of time

mentioned therein, unless said period is extended or the corporation is sooner dissolved in

accordance with law.

*For purposes of determining whether a corporation enjoys the status of a de facto corporation, it

must have been at least issued a certificate of registration.

47.Amendment of the Articles of Incorporation

Sec. 16 of the Corporation Code states that: Unless otherwise prescribed by this Code or by

special law, and for legitimate purposes, any provision or matter stated in the articles of

incorporation may be amended by a majority vote of the board of directors or trustees and the vote

or written assent of the stockholders representing at least 2/3 of the outstanding capital stock,

without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions

of this Code, or the vote or written assent of at least 2/3 of the members if it be a non-stock

corporation.

*It is effective upon the approval of the SEC.

*There may be an amendment by inaction.Amendment by Inaction Upon filing with the SEC

of the amendment and the Commission failed to act on it within 6 months from the date of filing for

a cause not attributable to the corporation.

48.Effects of Non-Use of Corporate Charter

Sec. 22 of the Corporation Code states that: If a corporation does not formally organize and

commence the transaction of its business or the construction of its work within 2 years from the

date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved.

However, if the corporation has commenced the transaction of its business but subsequently

becomes continuously inoperative for a period of at least 5 years, the same shall be a ground for the

suspension or revocation of its corporate franchise or certificate of incorporation. This provision shall

not apply if the failure to organize, commence the transaction of its businesses or the construction

of its works, or to continuously operate is due to causes beyond the control of the corporation as

may be determined by the SEC.

*The period must be counted from the issuance of the Certificate of Incorporation.


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*Automatic dissolution is not contemplated under Section 22. (SEC Opinion).

*Section 22 must be read in conjunction with Sec 6(1) of PD 902-A which requires that the

corporation must be given the opportunity to be heard in compliance with the requirement of due

process before the revocation of its license.

CONTROL AND MANAGEMENT OF A CORPORATION:

49.Levels of Corporate Control

1. By Stockholders/Shareholders;

2. By Corporate Officers;

3. By Directors/Trustees

50.Board of Directors/Trustees General Powers of the Board

Sec. 23 of the Corporation Code states that: Unless otherwise provided in this Code, the

corporate powers of all corporations formed under this Code shall be exercised, all business

conducted and all property of such corporations controlled and held by the board of directors or

trustees to be elected from among the holders of stocks, or where there is no stock, from among

the members of the corporation, who shall hold office for one year until their successors are elected

and qualified.

Powers of the Board of Directors:1. Corporate Powers;

2. Manage the Corporation; and

3. Control over and hold the properties of the Corporation.

*Board of Directors/Trustees is the statutory representative of the corporation.

General Rule: All corporate powers emanate from the Board of Directors/Trustees.

Exception: Unless otherwise provided in this Code. (Limiting Clause)

The limiting clause means that there are certain corporate matters that cannot be done by the

Board by reason that such matters fall upon the shareholders; or corporate matters that cannot be

resolved by the Board alone, i.e., it must be done with the approval of the shareholders.

Business Judgment Rule

Business Judgment Rule questions of policy or management are left solely to the honest

decision of officers and directors of a corporation and the courts are without authority to substitute

their judgment for the judgment of the board of directors; the board is the business manager of the


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corporation and so long as it acts in good faith its orders are not reviewable by the courts or the

SEC.

- A resolution or transaction pursued within the corporate powers and business operations of the

corporation, and passed in good faith by the board of directors/trustee, is valid and binding, and

generally the courts have no authority to review the same and substitute their own judgment, even

when the exercise of such power may cause losses to the corporation or decrease the profits of a

department.

*Great respect is accorded to the decisions of the Board of Directors/Trustees.

*The directors are not liable to the stockholders in performing such acts.

Qualifications of the Board Members

Sec. 23 of the Corporation Code states that: Every director must have at least one share of the

capital stock of the corporation of which he is a director, which share shall stand in his name on the

books of the corporation. Any director who ceases to be the owner of at least one share of thecapital stock of the corporation of which he is a director shall thereby cease to be a director.

Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees

of all corporations organized under this Code must be residents of the Philippines.

*In order to be eligible as director, what is material is the legal title to and not beneficial title or

ownership of the stocks appearing on the books of the corporation.

*The directors/trustees must be natural persons.

*They must also be of legal age.

*He must possess other qualifications as may be prescribed in the by-laws of the corporation.

*Under Sec. 27 of the Corporation Code: No person convicted by final judgment of an offense

punishable by imprisonment for a period exceeding 6 years, or a violation of this Code committedwithin 5 years prior to the date of his election or appointment, shall qualify as a director, trustee or

officer of any corporation.

Reason: The position is based on trust and confidence.

*No citizenship requirement.

*The By-Laws may provide additional qualifications/disqualifications.

Election of the Board Members

Sec. 24 of the Corporation Code provides that: At all elections of directors or trustees, theremust be present, either in person or by representative authorized to act by written proxy, the

owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of

the members entitled to vote. The election must be by ballot if requested by any voting stockholder

or member. In stock corporations, every stockholder entitled to vote shall have the right to vote in

person or by proxy the number of shares of stock standing, at the time fixed in the by-laws, in his

own name on the stock books of the corporation, or where the by-laws are silent at the time of the

election; and said stockholder may vote such number of shares for as many persons as there are


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directors to be elected or he may cumulate said shares and give one candidate as many votes as the

number of directors to be elected multiplied by the number of his shares shall equal, or he may

distribute them on the same principle among as many candidates as he shall see fit: Provided, that

the total number of votes cast by him shall not exceed the number of shares owned by him as

shown in the books of the corporation multiplied by the whole number of directors to be elected:

Provided, however, that no delinquent stock shall be voted. Unless otherwise provided in the articles

of incorporation or in the by-laws, members of the corporations which have no capital stock may

cast as many votes as there are trustees to be elected but may not cast more than one vote for one

candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting

of the stockholders or members called for an election may adjourn from day to day or from time to

time but not sine die or indefinitely if, for any reason, no election is held, or if there not present or

represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if

there be no capital stock, a majority of the member entitled to vote.

*It is the stockholders or corporators who elect members of the Board of Directors.

*The only procedure required by the Code is through Election. There can be no other modes.

*The election must be by ballot if requested by any voting member or stockholder.*A stockholder cannot be deprived in the articles of incorporation or in the by-laws of his statutory

right to use any of the methods of voting in the election of directors.

*No delinquent stock shall be voted.

*It is not required that the candidate received the majority vote, what the law provides is only

plurality of votes.

*Majority number is required only for the existence of a quorum.

Not included in outstanding capital stocks: 1. Unissued stocks;

2. Non-voting stocks;

3. Treasury Shares.

Methods of Voting:1. Straight Voting every stockholder may vote such number of shares for as many persons as

there are directors to be elected.

2. Cumulative Voting for One Candidate a stockholder is allowed to concentrate his votes and

give one candidate as many votes as the number of directors to be elected multiplied by the number

of his shares shall equal.

*Example: X has 10 shares in his name; there are 5 numbers of directors to be elected. X has 50

votes (10x5) available to him. X may opt to concentrate all his 50 votes to a particular candidate.

3. Cumulative Voting by Distribution a stockholder may cumulate his shares by multiplying

also the number of his shares by the number of directors to be elected and distribute the same

among as many candidates as he shall see fit.

*Example: X has 10 shares in his name; there are 5 numbers of directors to be elected. X has 50

votes available to him. X may opt to distribute the votes to as many candidates as there are

provided that the total number of votes does not exceed 50.

Purpose of cumulative voting: To protect the minority stockholders.

*The elected officer must act as a body.

*In a stock corporation, cumulative voting is a statutory right whereas in a non-stock corporation,

cumulative voting is applicable if it is provided in the Article of Incorporation.


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Sec. 26 of the Corporation Code provides that: Within 30 days after the election of the directors,

trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall

submit to the SEC, the names, nationalities and residences of the directors, trustees and officers

elected. Should a director, trustee or officer die, resign or in any manner cease to hold office, his

heirs in case of his death, the secretary, or any other officer of the corporation, or the director,

trustee or officer himself, shall immediately report such fact to the SEC.

Term of Office

*The directors or trustees shall hold office for one (1) year subject to the hold over principle,

i.e., they continue in office until their successors are elected and qualified.

*The one year period does not apply to directors initially elected for purposes of incorporation.

Quorum Requirement in Board Meetings

Sec. 25 of the Corporation Code states that: Unless the articles of incorporation or the by-laws

provide for a greater majority, a majority of the number of directors or trustees as fixed in the

articles of incorporation shall constitute a quorum for the transaction of corporate business, and

every decision of at least a majority of the directors or trustees present at a meeting at which there

is a quorum shall be valid as a corporate act, except for the election of officers which shall require

the vote of a majority of all the members of the board.

Q: Is the director allowed to let a proxy attend a board meeting in behalf for himself?

A:NO. Proxy prohibition.

Reason: Because of their personal qualifications.*Quorum requirement should always be computed based on the number specified in the Articles of

Incorporation regardless of ensuing vacancies.

*The basis is always the number specified in the Articles of Incorporation.

*The corporation can modify the number by providing a different provision in the articles of

incorporation, however, the law provides that the modification must be for a number greater than

that provided in the law. It cannot provide for a number less than the general requirement of the

code.

*For voting purposes, majority of the member present constituting a quorum. Except: election of

directors.

Removal of Board Members

Sec. 28 of the Corporation Code states that: Any director or trustee of a corporation may be

removed from office by a vote of the stockholders holding or representing at least 2/3 of the

outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at least 2/3


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of the members entitled to vote: Provided, that such removal shall take place either at a regular

meeting of the corporation or at a special meeting called for the purpose, and in either case, after

previous notice to stockholders or members of the corporation of the intention to propose such

removal at the meeting. A special meeting of the stockholders or members of a corporation for the

purpose of removal of directors or trustees, or any of them, must be called by the secretary on

order of the president or on the written demand of the stockholders representing or holding at least

a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written

demand of a majority of the members entitled to vote. Should the secretary fail or refuse to call the

special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the

call for the meeting may be addressed directly to the stockholders or members by any stockholder

or member of the corporation signing the demand. Notice of the time and place of such meeting, as

well as of the intention to propose such removal, must be given by publication or by written notice

prescribed in this Code. Removal may be with or without cause: Provided, that removal without

cause may not be used to deprive minority stockholders or members of the right of representation

to which they may be entitled under Sec. 24 of this Code.

Requisites:1. It must take place either at a regular meeting or special meeting of the stockholders or members

called for the purpose;

2. There must be previous notice to the stockholders or member of the intention to remove;

3. The removal must be by a vote of the stockholders representing 2/3 outstanding capital stock or

2/3 of members;

4. The director may be removed with or without cause unless he was elected by the minority, in

which case, it is required that there is cause for removal.

Reason: The functions of directors are fiduciary in nature.

Requisites for the removal of minority directors are:

1. Justifiable cause;2. Satisfaction of the voting requirements, i.e., 2/3 of OCS or members.

*It is the secretary of the corporation upon order of the president or in case there is no secretary,

stockholder representing majority of the outstanding capital stocks or member signing the demand

who may call a meeting for the purpose of removal.

Vacancies in the Board

Sec. 29 of the Corporation Code provides that: Any vacancy occurring in the board of directors

or trustees other than by removal by the stockholders or members or by expiration of term, may befilled by the vote of at least a majority of the remaining directors or trustees, if still constituting a

quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting

called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only or the

unexpired term of his predecessor in office. A directorship or trusteeship to be filled by reason of an

increase in the number of directors or trustees shall be filled only by an election at a regular or at a

special meeting of stockholders or members duly called for the purpose, or in the same meeting

authorizing the increase of directors or trustees if so stated in the notice of the meeting.


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General Rule: Power to elect directors is vested in the stockholders

Exception: Vacancy occurring in the board of directors or trustees other than by removal by the

stockholders or members or by expiration of term may be filled by the vote of at least a majority of

the remaining directors or trustees if still constituting a quorum.

Compensation of Board Members

Sec. 30 of the Corporation Code provides that: In the absence of any provision in the by-laws

fixing their compensation, the directors shall not receive any compensation, as such directors,

except for reasonable per diems: Provided, however, that any such compensation other than per

diems may be granted to directors by the vote of the stockholders representing at least a majority of

the outstanding capital stock at a regular or special stockholders meeting. In no case shall the total

yearly compensation of directors, as such directors, exceed 10% of the net income before income

tax of the corporation during the preceding year.

General Rule: Directors are not entitled to receive compensationExceptions:

1. When their compensation is fixed in the by-laws;

2. If compensation is granted to directors by the vote of the stockholders representing at least a

majority of the outstanding capital stock at a regular or special stockholders meeting.

Limitation: In no case shall the total yearly compensation of directors exceed 10% of the net

income before income tax of the corporation during the preceding year.

Reason: In order to avoid temptation on the part of directors to abuse powers by appropriating

compensation packages since they are in control of corporate assets.

60.Corporate Officers Concept of Corporate Officers

*Corporate powers reside on the Board of Directors; decision/policymaking resides on them.

Implementation of rules/policy lies on the corporate officers

Categories:

1. Statutory Corporate Officers President (must be a stockholder); Secretary (must be a

resident and citizen of the Philippines); Treasurer (must be a resident and citizen of the Philippines).

2.As provided by the By-Laws must be clearly stated in the By-Laws that such office is acorporate office.

3. Those designated by the Board of Directors provided the Board of Directors is

authorized to do so by the By-Laws.

Validity and Binding Effect of Acts of Corporate Officers


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General Rule: No one, even corporate officers can bind the corporation. It is only the Board of

Directors who has the authority to bind the corporation.

Exceptions:

1. If the By-Laws provides that such act is part of the function of such office;

2. If authorized by the Board of Directors

Doctrine of Apparent Authority

Doctrine of Apparent Authority/Doctrine of Estoppel If a corporation, knowingly permits one

of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out

to the public as possessing the power to do those acts; and thus, the corporation will, as against

anyone who has in good faith dealt with it through such agent, be stopped from denying the agents

authority.

Cases: Peoples Aircargo; Inter-Asia; Lapu-Lapu

*Requires good faith on the part of third person.

64.Liability of Directors, Trustees and Officers Instances when Corporate Officers/Directors are held Solidarily Liable

Sec. 31 of the Corporation Code provides that: Directors or trustees who wilfully and knowingly

vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence

or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in

conflict with their duty as such directors or trustees shall be liable jointly and severally for alldamages 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.

General Rule: Directors/Trustees/Officers are not solidarily liable with the corporation.

Exceptions:

66.Wilfully and knowingly vote for and assent to patently unlawful acts of the corporation (Sec. 31).

Case: Carag v NLRC

67.Guilty of gross negligence or bad faith in directing the affairs of the corporation (Sec. 31).


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Case: David v Construction Industry

68.Acquire any personal or pecuniary interest in conflict of their duty (Sec.31).69.Consent to the issuance of watered stocks or having knowledge thereof, fails to file objections with

the secretary (Sec. 65).70.Agree or stipulate in a contract to hold himself personally liable with the corporation.71.By virtue of a specific provision of law such as BP 22; Trust receipts Law; RA 7832 (Anti-Electricity

Pilferage Act of 1997); Securities Regulation Code

*In Carag v NLRC, the Supreme Court held that not any violative of law, the Code means that

violation must have a corresponding penalty. Patently unlawful act means that a law declares an act

unlawful and that such law provides penalty for that unlawful act.

Self-Dealing Directors/Officers

Sec. 32 of the Corporation Code states that: A contract of the corporation with one or more of

its directors or trustees or officers is voidable, at the option of such corporation, unless all of 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. That the vote of such director or trustee was not necessary for the approval of the

contract; 3. That the contract is fair and reasonable under the circumstances; and 4. That in case of

an officer, the contract has been previously authorized by the board of directors. 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 atleast 2/3 of the outstanding capital stock or of at least 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 made at such meeting: Provided, however, that the contract is fair and reasonable under

the circumstances.

Example:

In XYZ Corporation, A is a director. The corporation acts through the Board of Directors. XYZ

Corporation and A entered into a lease contract. A as the lessor and XYZ Corporation as lessee. The

contract was approved by the Board of Directors.

Q: What is the status of the contract?

General Rule: The contract is voidable.Exception: If the requisites provided in Sec. 32 are present.

Exception to the Exception: If requirement number 1 or 2 is absent, in the case of a contract

with a director or trustee, such contract may be considered valid by the ratification of at least 2/3 of

the outstanding capital stock or 2/3 of the members.

Requisites:

1. 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;


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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;

4. In case of an officer, the contract has been previously authorized by the board of directors.

Reason:As presence in the board meeting might affect the status of the contract.

Self-Dealing Directors/Officers directors/officers who transact business with their own

corporation.

- This is not prohibited by law.

Interlocking Directors those who have been elected as directors in 2 or more different

corporations.

- May be prohibited by the By-Laws (Gokongwei case).

-Not prohibited by law however there are consequences.

Contracts involving Inter-locking Directors

Sec. 33 of the Corporation Code provides that: Except in cases of fraud, and provided the

contract is fair and reasonable under the circumstances, a contract between two or more

corporations having interlocking directors shall not be invalidated on that ground alone: Provided,

That if the interest of the interlocking director in one corporation is substantial and his interest in the

other corporation or corporations is merely nominal, he shall be subject to the provisions of the

preceding section insofar as the latter corporation or corporations are concerned. Stockholdings

exceeding 20% of the outstanding capital stock shall be considered substantial for purposes of

interlocking directors.

Example:

A is a director of two corporation, ABC Corporation and XYZ Corporation. XYZ Corporation and ABCCorporation entered into a lease contract where ABC Corporation is the lessor and XYZ Corporation

is the lessee.

Q: Can this contract be invalidated on the ground that there is an interlocking director?

A: NO.

Q: What is the status of the contract?

A: General Rule: Contracts between two or more corporations having interlocking directors are

valid.

Exceptions:

74.Contracts are void if contracts are fraudulent or if contracts are unfair and unreasonable.75.If the By-Laws prohibits interlocking director.

Case:Gokongwei, Jr. v SEC

*The interest is nominal if his interest is 20% or less of the outstanding capital stock. The interest is

substantial if his interest is more than 20% of the outstanding capital stock.


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*If the interlocking director has a substantial interest in one corporation and has a nominal interest

in the other corporation, the director must comply with the requisites provided in Sec. 32 on self-

dealing directors.

Reason: The case is analogous to that of transactions involving self-dealing directors because such

director holds substantial interest with the other company.

Doctrine of Corporate Opportunity

Sec. 34 of the Corporation Code states that: Where a director, by virtue of his office, acquires

for himself a 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 outstanding capital stock. This provision shall be applicable notwithstanding the fact

that the director risked his own funds in the venture.

General Rule: A director shall refund to the corporation all the profits he realizes on a businessopportunity which: 1. the corporation is financially able to undertake; 2. from its nature, is in line

with corporations business and is of practical advantage to it; and 3. the corporation has an interest

or a reasonable expectancy.

Exception: His act has been ratified by a vote of the stockholders owning or representing at least

2/3 of the outstanding capital stock.

*A business opportunity ceases to be corporate opportunity and transforms to personal opportunity

where the corporation refuses or is definitely no longer able to avail itself of the opportunity.

77.Executive Committee

Sec. 35 of the Corporation Code states that: The by-laws of a corporation may create an

executive committee composed of not less than 3 members of the board to be appointed by the

board. Said committee may act, by majority vote of all its members, on such specific matters within

the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the

board, except with respect to: (1) approval of any action for which shareholders approval is also

required; (2) the filing of vacancies in the board; (3) the amendment or repeal of by-laws or the

adoption of new by-laws; (4) the amendment or repeal of any resolution of the board which by its

express terms is not so amendable or repealable; and (5) a distribution of cash dividends to theshareholders.

Keyword: BY-LAWS

*It must be stated in the By-Laws.

*Board Resolution is not sufficient if there is no provision in the By-Laws.

*The decision of the executive committee is considered a Board Resolution.

*The decision of the executive committee is not subject to appeal to the board. However, if the

resolution of the Executive Committee is invalid it may be ratified by the Board.


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*The decision of the executive committee needs no confirmation from the Board.

Case: Filipinas Port, Inc.

*The corporation may create other committees.

Distinction: In executive committee, there is a statutory restriction on members whereas in other

committee there is no such restriction.

General Rule: The executive committee may act on specific matters within the competence of the

board as may be delegated to it in the by-laws or on a majority vote of the board.

Exceptions:

78.Approval of any action for which shareholders approval is also required;79.The filing of vacancies in the board;80.The amendment or repeal of by-laws or the adoption of new by-laws;81.The amendment or repeal of any resolution of the board which by its express terms is not so

amendable or repealable;

82.A distribution of cash dividends to the shareholders.

CORPORATE POWERS:

83.Doctrine of Limited Capacity; Concept ofUltra Vires Act

Sec. 45 of the Corporation Code states that: No corporation under this Code shall possess or

exercise any corporate powers except those conferred by this Code or by its articles of incorporation

and except such as are necessary or incidental to the exercise of powers so conferred.

Ultra Vires Acts an act committed outside the object for which a corporation is created asdefined by the law of its organization and therefore beyond the power conferred upon it by law.

Effects of Ultra Vires Acts:

84.Executed Contract courts will not set aside or interfere with such contracts.85.Executory Contract no enforcement even at the suit of either party.86.Partly executed and Partly executory contract principle against unjust enrichment shall

apply.

87.Classes of Corporate Powers1. Express2. Implied3. Incidental


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Express those expressly authorized by the Corporation Code and other laws, and its Articles ofIncorporation or Charter.

Implied those that can be inferred from or necessary for the exercise of the express powers. Incidental those that are incidental to the existence of the corporation.

Doctrine of Necessary Implication those which can be reasonably inferred from the express

powers given since they are necessary for the corporation to perform a particular act are deemed

part of such powers.

91.Statutory Powers of a Corporation and the Limitations on their Exercise

Sec. 36 of the Corporation Code states that: Every corporation incorporated under this Code

has the power and capacity: 1. To sue and be sued in its corporate name; 2. Of succession by its

corporate name for the period of time stated in the articles of incorporation and the certificate ofincorporation; 3. To adopt and use a corporate seal; 4. To amend its articles of incorporation in

accordance with the provisions of this Code; 5. To adopt by-laws, not contrary to law, morals, or

public policy, and to amend or repeal the same in accordance with this Code; 6. In case of stock

corporations, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with the

provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; 7.

To 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 other corporations, as the

transaction of the lawful business of the corporation may reasonably and necessarily require, subject

to the limitations prescribed by law and the Constitution; 8. To enter into merger or consolidation

with other corporations as provided in this Code; 9. To make reasonable donations, including those

for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes:

Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party

or candidate or for purposes of partisan political activity; 10. To establish pension, retirement, and

other plans for the benefit of its directors, trustees, officers and employees; and 11. To exercise

such other powers as may be essential or necessary to carry out its purpose or purposes as stated in

the articles of incorporation.

Amendment of Articles of Incorporation

Sec. 16 of the Corporation Code states that: Unless otherwise prescribed by this Code or by

special law, and for legitimate purposes, any provision or matter stated in the articles of

incorporation may be amended by a majority vote of the board of directors or trustees and the vote

or written assent of the stockholders representing at least 2/3 of the outstanding capital stock,

without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions

of this Code, or the vote or written assent of at least 2/3 of the members if it be a non-stock

corporation.


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*The following are excluded in counting the outstanding capital stock: 1. Treasury stock; 2.

Unissued shares.

*Aside from the votes of majority of the board and assent of the 2/3 of the OCS, the approval of the

SEC is necessary for the amendment of the AOI.

*There is an implied approval of the SEC, i.e., failure to act on the application filed by the

corporation within 6 mos.

Q:How to get the approval of the stockholders?

A: 1. Call for a meeting; 2. Obtain the written assent of the stockholders.

*In Tan v Sycip, the Supreme Court held that in case of a non-stock corporation, membership is

personal and non-transferrable unless the by-laws provides otherwise. The deceased member is not

entitled to vote.

Four changes in Articles of Incorporation that require the approval of the stockholders.

1. Extension of corporate term;

2. Shortening of corporate term;

3. Increase or Decrease of Capital Stock;

4. Increase or Decrease of Bonded indebtedness.*Approval of Stockholders is necessary in these changes because they are necessary for the

corporations existence.

Extension/Shortening of Corporate Term

Sec. 37 of the Corporation Code states that: A private corporation may extend or shorten its

term as stated in the articles of incorporation when approved by a majority vote of the board of

directors or trustees and ratified at a meeting by the stockholders representing at least 2/3 of the

outstanding capital stock or by at least 2/3 of the members in case of non-stock corporation. Writtennotice of the proposed action and of the time and place of the meeting shall be addressed to each

stockholder or member at his place of residence as shown on the books of the corporation and

deposited to the addressee in the post office with postage prepaid, or served personally: Provided,

That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal

right under the conditions provided in this code.

Increase or Decrease of Capital Stock/ Incurrence, Creation or Increase of Bonded Indebtedness

Sec. 38 of the Corporation Code states that: No corporation shall increase or decrease itscapital stock or incur, create or increase any bonded indebtedness unless approved by a majority

vote of the board of directors and, at a stockholders meeting duly called for the purpose, 2/3 of the

outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring,

creating or increasing of any bonded indebtedness. Written notice of the proposed increase or

diminution of the capital stock or of the incurring, creating, or increasing of any bonded

indebtedness and of the time and place of the stockholders meeting at which the proposed increase

or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be


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considered , must be addressed to each stockholder at his place of residence as shown on the books

of the corporation and deposited to the addressee in the post office with postage prepaid, or served

personally. xxx.

Q: When the corporation increases its capital stock, is the 25% requirement necessary? How can it

be computed?

A:YES. The SEC ruled that the 25% applies to the increase amount.

*The corporation is required to maintain a sinking fund.

Q: What does bonded indebtedness mean?

A: Requires longer time of payment; special burden on the corporation; involves the important

assets of the corporation.

Denial of Pre-emptive Right

Sec. 39 of the Corporation Code states that: All stockholders of a stock corporation shall enjoy

pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to theirrespective shareholdings, unless such right is denied by the articles of incorporation or an

amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued

in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to

shares to be issued in good faith with the approval of the stockholders representing 2/3 of the

outstanding capital stock, in exchange for property needed for corporate purposes or in payment of

a previously contracted debt.

*Coming from the increased authorized capital stock.

* Similar to Right of First Refusal

*It is not a matter of right. It can be denied by the corporation through denial of such right in the

articles of incorporation.Purposes:

1. In order that the stockholder may be able to maintain their relative proportional voting trend and

control in the corporation; 2. To avoid dilution of their proportionate voting and control in the

corporation.

General Rule: Pre-emptive right is available to stockholders.

Exception: if it is denied in the Articles of Incorporation or through amendment.

Exception to the Exception: Pre-emptive right shall not extend to:

1. Shares to be issued in compliance with laws requiring stock offerings or minimum stock

ownership by the public;

2. Shares to be issued in good faith with the approval of the stockholders representing 2/3 of theoutstanding capital stock, in exchange for property needed for corporate purposes; and

3. In payment of a previously contracted debt.

*Pre-emptive right is satisfied as long as the corporation gives the stockholder the opportunity to

buy the shares.

*The offer must first be made to the stockholders.


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Sale or Disposition of Assets

Sec. 40 of the Corporation Code states that: Subject to the provisions of existing laws on illegal

combinations and monopolies, a corporation may, by a majority vote of its board of directors or

trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of itsproperty and assets, including its goodwill, upon such terms and conditions and for such

consideration, which may be money, stocks, bonds or other instruments for the payment of money

or other property or consideration, as its board of directors or trustees may deem expedient, when

authorized by the vote of the stockholders representing at least 2/3 of the outstanding capital stock,

or in case of non-stock corporation by the vote of at least 2/3 of the members, in a stockholders or

members meeting duly called for the purpose. Written notice of the proposed action and of the time

and place of the meeting shall be addressed to each stockholder or member at his place of

residence as shown on the books of the corporation and deposited to the addressee in the post

office with postage prepaid, or served personally: Provided, That any dissenting stockholder may

exercise his appraisal right under the conditions provided in this Code. A sale or other disposition

shall be deemed to cover substantially all the corporate property and assets if thereby the

corporation would be rendered incapable of continuing the business or accomplishing the purpose

for which it was incorporated. xxx.

Q: What makes the disposition peculiar?

A: The disposition is of all or substantially all of the corporations properties and assets.

Q: What kind of disposition involve?

A: 1. Sell; 2. Lease; 3. Exchange; 4. Mortgage; 5. Pledge.

Requirements:

97.Majority vote of the Board.98.Vote of the Stockholders representing 2/3 of the OCS.99.The sale does not bring about the illegal combinations and monopolies.

*No need for the approval of the SEC.

Tests:

100. Quantitative Test no statutory test; pertains to the disposition of all assets101. Qualitative Test there is a statutory test; pertains to the disposition of

substantially all of its assets.

*The provision is so strict because the law wants the corporation will reach its expiration term.

Q: With the sale of all the assets of the corporation, will the same result to its dissolution?

A:NO. Possession or continued possession of corporate properties is not a condition for the

existence of a corporation. Corporation still exists despite the disposition of all its properties and

assets.


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Q: Will the buying corporation be made answerable for the liabilities of the selling corporation?

A: NO. The two corporations are two separate personalities thus they are separate and distinct from

each other hence the buying corporation cannot be held liable to the obligations of the selling

corporation.

General Rule: The sale of all or substantially all of the assets of the corporation does not make the

buyer answerable for the obligations of the seller.

Exceptions:

102. If the buyer expressly agrees to assume the obligations of the seller.103. If sale amounts to merger or consolidation.104. If and when application of piercing the veil of corporate entity doctrine is warranted.105. If the purchaser becomes a continuation of the seller.106. Sale was done in violation of the Bulk Sales Law.

Case: PNB v Andrada

Acquisition of Corporate Shares

Sec. 41 of the Corporation Code states that: A stock corporation shall have the power to

purchase or acquire its own shares for a legitimate corporate 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: 1. To eliminate fractional shares arising

out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out

of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during saidsale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares

under the provisions of this Code.

Requisites:

108. Unrestricted Retained Earnings109. The acquisition must be for legitimate purpose

Q: What is an unrestricted retained earnings?

A: Earnings not allocated for any other purpose.Q: What happens to reacquired shares?

A:General Rule: They are automatically deemed retired.

Exception: The AOI provides otherwise.

Trust Fund Doctrine The capital stock, property and other assets of the corporation are

regarded as equity in trust for the payment of the corporate creditors. The subscribed capital stock

of the corporation is a trust fund for the payment of debts of the corporation which the creditors


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have the right to look up to satisfy their credits. Corporation may not dissipate this and the creditors

may sue stockholders directly for the unpaid subscription.

Investment of Corporate Funds

Sec. 42 of the Corporation Code states that: Subject to the provisions of this Code, 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 when approved by a majority of the board of

directors or trustees and ratified by the stockholders representing at least 2/3 of the outstanding

capital stock, or by at least 2/3 of the members in the case of non-stock corporations, at a

stockholders or members meeting duly called for the purpose. Written notice of the proposed

investment and the time and place of the meeting shall be addressed to each stockholder or

member at his place of residence as shown on the books of the corporation and deposited to the

addressee in the post office with postage prepaid, or served personally: Provided, That any

dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, Thatwhere the investment by the corporation is reasonably necessary to accomplish its primary purpose

as stated in the articles of incorporation, the approval of the stockholders or members shall not be

necessary.

Requisites:

111. Majority vote of the Board112. Vote of the stockholders representing 2/3 OCS. Declaration of Dividends

Sec. 43 of the Corporation Code states that: The board of directors of a stock corporation may

declare dividends out of the unrestricted retained earnings which shall be payable in cash, in

property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided,

That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the

subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent

stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall

be issued without the approval of stockholders representing not less than 2/3 of the outstanding

capital stock at a regular or special meeting duly called for the purpose. Stock corporations are

prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock, except: 1.

When justified by definite corporate expansion projects or programs approved by the board ofdirectors; or 2. When the corporation is prohibited under any loan agreement 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 3. When it can be clearly shown that such retention is

necessary under special circumstances obtaining in the corporation, such as when there is need for

special reserve for probable contingencies.

*This section is exclusive to stock corporations.


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Dividends represents part of the earnings of the corporation which the board has decided to

distribute among the stockholders.

*The fact that the corporation has surplus earning does not mean that it is mandated to declare

dividends; it is still upon the sound discretion of the board of directors.

Reason: Trust Fund Doctrine

*There must be a unrestricted retained earnings before dividends may be declared.

*The board may opt to restrict its earnings, as the earnings may be allocated to legitimate business

purpose.

CASH DIVIDENDS

STOCK DIVIDENDS

does not require stockholders approval

Requires stockholders approval

The stockholders receive cash

The stockholders receive stocks

Creditor-debtor relationshipNo creditor-debtor relationship

Requisites for declaration of cash/property dividends:

114. Board approval115. Unrestricted Retained Earnings

Requisites for declaration of stock dividends:

1. Unrestricted Retained Earnings;2. Board approval;

3. Ratification by the stockholders.

Q: Why stockholders ratification is necessary in the declaration of stock dividends?

A: Because the earnings are capitalized. It is considered to be a corporate assets.

Q: May the board be compelled to declare dividends?

A:General Rule: NO.

Exception: Stock corporations are prohibited from retaining surplus profits in excess of 100% of

their paid-in capital stock.

Exceptions to the Exception:

116. Corporate expansion117. Pursuant to loan agreement118. Special circumstances/contingent liabilities

Q: Are the stock dividends considered as watered stocks because the stockholder concerned does

not pay anything therefor?


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A:NO. The unrestricted retained earnings are considered to be a consideration thus dividends

received through stocks are not watered stocks.

*The source of payment is the unrestricted retained earnings.

Q:Are delinquent stockholders entitled to receive dividends?

A:YES. But only in terms of cash dividends.

Q: Who are entitled to receive dividends?

A: Stockholders

*In Nielson case, the SC held that dividends cannot be given to non-stockholders.

*If there is date of record Dividends may be received by those persons who are holders of stocks

as of date of record.

*If there is no date of record dividends may be received by those persons who are holders of

stocks as of the declaration.

Q: When the corporation declares stock dividends, would it likewise create a creditor-debtor

relationship between the corporation and the stockholder?

A: NO. Stock dividends will not bring about a creditor-debtor relationship. When it comes to

shareholdings, the one holding the shares are considered investors; risk-takers.Q: Will legal compensation possible to occur?

A:NO. The parties are not mutually creditor-debtor of each other. The requisites under the Civil

Code on legal compensation are not present.

Management Contract

Sec. 44 of the Corporati

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