COURSE OUTLINE

Corporation Law Notes

By: Atty. Josh Carol T. Ventura

TITLE I. GENERAL PROVISIONS

A. Section 1, CCP – Title of the Code. The code shall be known as “The Corporation Code of the Philippines”. The evolution of
private corporations can be described in three waves:

1. First wave – during the Spanish regime up to April 1, 1906.

a. These so-called “corporations” were termed as sociedad anonima and governed by the Code of Commerce
which was based on the Spanish Code of 1885. Examples are names like De la Cruz Company Ltd.
b. Sociedad anonima had features similar to the present corporations such as limited liability of the
members and centralized management.
2. Second wave – from April 1, 1906 to May 1, 1980 when Act No. 1459 or the Corporation Law was passed.
a. The sociedad anonima was replaced by the American concept of corporation.
b. Existing sociedad anonima may opt to reorganized under the Corporation law.
c. Those that did not opt to reorganized continue to exist but its existence should not be more than 50
years, subject to extension for another 50 years.
3. Third wave – from May 1, 1980 to present when Act No. 1459 was amended by Batas Bilang No. 68 otherwise
known as the Corporation Code of the Philippines was passed.

 Is the Corporation Code of the Philippines a General law or a special law? It is a general law referred to in Article 14,
Section 4, 1973 Constitution.

B. Section 2, CCP – Corporation defined. The following are the attributes (stamp/earmark) of a corporation:

1. It is an artificial being. The legal consequences are:

a. It is a juridical person. Articles 44 to 45 of the New Civil Code.
i. Article 44 – Enumerates the kinds of juridical persons.
ii. Article 45 – Juridical persons that are governed by the laws creating or recognizing them. Private
corporations are regulated by laws of general applications on the subject.
b. It is capable of obtaining rights and obligations.
c. It has a personality separate and distinct from the stockholders or members. As such:
i. Stockholders/members are not liable for obligations of the corporation.
ii. Creditors of the corporation cannot attach the separate or personal properties of the
stockholders/members for obligations contracted by the corporation.
d. Is a corporation, being artificial person, claim for damages?
i. Art. 2216, NCC “No proof of pecuniary loss is necessary in order that moral, nominal, temperate,
liquidated or exemplary damages may be adjudicated. The assessment of such, except liquidated
ones, is left to the discretion of the court according to the prevailing circumstances.”
ii. Moral damages includes physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation, and similar injury. (Art. 2217, NCC)
iii. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or
invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying
the plaintiff for any loss suffered by him. (Art. 2221, NCC)
iv. The court may award nominal damages in every obligation arising from any source enumerated in
Art. 1157 (sources of obligation), or in every case where any property right has been invaded. (Art.
2222, NCC)
v. Temperate or moderate damages, which are more than nominal but less than compensatory
damages, may be recovered when the court finds that some pecuniary loss has been suffered but its
amount cannot, from the nature of the case, be proved with certainty. (Art. 2224, NCC)
vi. Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach
thereof. (Art. 2226, NCC)
vii. Exemplary or corrective damages are imposed, by way of example or correction for the public good,
in addition to the moral, temperate, liquidated or compensatory damages. (Art. 2229, NCC)
viii. Mambulao Lumber Case – Moral damages maybe recovered in the case of besmirched reputation.
e. Is a corporation covered by the protection of the bill of rights in the Constitution?
i. Yes, as the bill of rights also covered juridical persons (Stonehill vs. Diokno, 20 SCRA, 392, Bache & Co.
(Phil) Inc. vs. Ruiz, 37 SCRA 823, Asian Surety & Insurance Co., Inc. vs. Herrera, 54 SCRA 312).
Business Organization II (Notes) Page 1 of 33 pages
 f. Can a corporation commit a crime? YES.
i. A corporation is not liable for the criminal acts committed by its officers.
ii. However, under the new rule on criminal liability, the corporation is subsidiarily liable in order to
prevent injustice.
g. Can a corporation be formed for the purpose of practicing a profession? NO.
i. Sec. 88 of CCP – “Non-stock corporations may be formed or organized for charitable, religious,
educational, professional, …”
ii. However, according to jurisprudence, a corporation cannot engage in the practice of profession
because it cannot comply with the personal qualification required by law for the practice of
profession.
h. Does a corporation have citizenship? NO.
i. One of the constitutional rights of a citizen is the right to vote and right to vote is limited to citizens
only. Can a corporation vote?
ii. Since the corporation cannot vote, it has no citizenship. What it has is nationality only.

2. It is created by operation of law. As such:

a. What is the difference between the phrase “created by operation of law” and “created by law”?
a. “Created by operation of law” means by compliance with the requirements of the law.
b. “Created by law” means by act of congress.
c. Mere consent to form a corporation is not sufficient, unlike a partnership.
d. To form a corporation, the State must give its consent either by a special law called charters in the case of
government owned or controlled corporations or a general enabling law such as the Corporation Code of the
Philippines.
e. Can Congress of the Philippines create a private corporation? NO, Congress cannot create a private
corporation, unlike in the case of a government owned and controlled corporations. All private corporations
are created by compliance of the Corporation Code of the Philippines.

3. It has the right of succession. As such:

a. The corporation will remain to exist during the term of its existence as stated in the articles of incorporation
regardless of any change in the members or stockholders.
b. Its existence is neither affected by the transfer of shares by a stockholder to a third person.

4. It possesses the powers, attributes and properties expressly authorized by law or incident to its existence. As
such:
a. It possesses express powers stated as the primary purpose in the Articles of incorporation during
incorporation.
b. It possesses implied powers so that the primary purpose can be achieved.
c. Can a corporation be a partner in a general partnership? NO.
i. A partner can bind a partnership while stockholders or members cannot. Only the BOD can bind a
corporation.
ii. To allow it would violate the principle of “mutuality of agency”, in the case of general partnership,
where each partner is an agent of the partnership. In the case of a corporation, stockholders or
members are not agents of the corporation.

C. Section 3, CCP – Classes of corporations. The Corporation Code enumerates only 2 classes of corporations. Corporations
maybe formed either as stock or non-stock.

1. Stock corporations are those which:

a. Have capital stock divided into shares.
b. Are authorized to distribute to holders of such shares dividends or allotments of the surplus profits on the
basis of the number of shares held.
c. Can a corporation be organized as non-stock, non-profit corporations but with capital divided into shares?
i. YES, under the old Corporation Law (Collector vs. Club Filipino).
ii. NO, under the new Corporation Code. The SEC will not approve such application for registration.
d. What is then the classification of a corporation that was registered as a non-stock, non-profit but is declaring
dividends?
i. Collector of Internal Revenue vs. Club Filipino Inc. de Cebu, 5 SCRA 321 – The corporation was
organized with capital stock divided into shares but its primary purpose is not to engage in business
but to provide recreation to its members. The BIR imposed a percentage tax with surcharge and
compromise penalty from it as a keeper of a bar and restaurant. Club Filipino refused to pay stating
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 that the bar-restaurant was a necessary incident to the operation of its club and golf course. Ruling:
The SC held that the fact that the Club derived profit from the operation of its bar-restaurant does not
necessarily convert it into a profit-making enterprise. Said facilities are necessary adjuncts of the
Club to foster its purpose and profits derived therefrom are purely incidental. What is determinative
of whether or not the Club is engaged in such business is its object or purpose, as stated in its articles
and by-laws. Nowhere in the its articles of incorporation or by-laws could be found an authority for
the distribution of its dividends.
ii. May such power to declare dividends considered as implied for a corporation organized as a non-
stock corporation like in the case of Club Filipino? NO, on the basis of the ruling in the above case.
e. This case was decided under the old Corporation Law. Will the same set of facts as in the case of Collector vs.
Club Filipino be decided in the same way under the Corporation Code of the Philippines?
i. NO, because of Section 43 that expressly grants a stock corporation the power to declare dividends.
This provision was not present in the old corporation law. Hence the power to declare dividends is
determined by what is stated in the articles and by-laws.
f. What is then the determining factor to consider a corporation as stock or non-stock?
i. It is not the fact that the purpose as stated in the articles is silent as to declaration of dividends.
ii. Rather, if the purpose is to engage in profit with capitalization divided into shares of stocks, said
corporation is deemed a stock corporation whether or not the articles and by-laws is silent as to the
authority to distribute dividends because of Sec. 43.

D. Section 5, CCP – Corporators and incorporators, stockholders and members.

1. Corporators – are those who compose a corporation whether as stockholders or members. Corporators are of
two kinds:
a. Stockholders – those who compose a stock corporation.
b. Members – those who compose a non-stock corporation.
2. Incorporators – are those stockholders or members mentioned in the articles of incorporation.
3. Are all corporators considered as stockholders or members? YES.
4. Are all corporators considered as incorporators? NO.
5. Are all incorporators considered as stockholders or members? YES.

E. Section 6, CCP – Classification of shares. Shares of stocks of a corporation may be divided into classes or series of shares
according to its rights, privileges or restrictions as the articles of incorporation may provide subject to the following
restrictions:

1. General rule is: shares shall not be deprived of voting rights, except:
a. preferred shares
b. redeemable shares
2. Exception to the exceptions: Non-voting shares may still be entitled to vote on the following matters: (AASI-
IMID)
a. Amendment of the articles of incorporation.
b. Adoption and amendment of by-laws.
c. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate
property.
d. Incurring, creating or increasing bonded indebtedness.
e. Increase or decrease of capital stock.
f. Merger or consolidation of the corporation with another corporation or other corporations.
g. Investment of corporate funds in another corporation or business in accordance with the Code.
h. Dissolution of the corporation.
3. Where non-voting shares are provided for, there must always be a class or series of shares with complete voting
rights. As such:
a. The corporation cannot provide that all shares are non-voting.
b. When the corporation provides for non-voting shares, it is mandatory that some of the shares must be
voting shares.
4. Banks, trust companies, insurance companies, public utilities and building and loan associations shall not issue
no-par value shares.
a. What is par value? A par value is a nominal amount assigned to each share of stock as provided for in
the articles.
5. Preferred shares are those shares of stocks that have preferences over other classes of shares in the following
aspects:
Business Organization II (Notes) Page 3 of 33 pages
 a. As to distribution of dividends.
b. As to distribution of assets upon liquidation of the corporation.
6. Terms and conditions of preferred shares or any series of shares may be fixed by the board of directors only
when the articles of incorporation authorizes it and the effectivity of such terms and conditions shall take effect
upon the filing with the SEC.
7. No par value shares shall be issued for a consideration less than P5.00 per share. The consequences are:
a. All the proceeds from the issuance of the no-par shares shall be considered as legal capital and should not
be available for distribution of dividends.
8. What is the situs of shares of stocks?
Example: Mr. A is an American citizen and residing in Davao City. He owns shares of stocks of XYZ Corp., a
Philippine Corporation with principal office address at Makati, Metro Manila. Mr. A is indebted with Bank of
the Philippines, Davao Branch, with his shares of stocks with XYZ Corp. made as collateral. At the same time,
Mr. A received dividends from XYZ Corp.
Questions: (1) What is the situs of Mr. A’s shares of stocks?
(2) Where should the bank register the chattel mortgage of Mr. A?
(3) Where should the bank file the foreclosure case?
(4) With respect to the tax consequence of the dividends, is it tax exempt? If not, where should
he file his return, Makati or Davao?
a. General Rule – The domicile of the owner of the shares.
b. Exceptions:
i. For purposes of execution, attachment and garnishment – the situs of the shares is the
domicile of the corporation, not the owner of the shares.
ii. For purposes of registering the chattel mortgage over the shares of stock – the situs of the
shares is the province in which the corporation has its principal place of business or office.
iii. For purposes of taxation – the situs of the share is the domicile of the corporation, not the
domicile of the owner of the share.

F. Section 7, CCP – Founders’ shares. What are its characteristics?

1. Classified as such in the articles of incorporation.

2. May be given certain rights and privileges not enjoyed by owners of other forms of stocks.
3. If granted the exclusive right to vote and be voted for in the election of directors, such right shall not exceed 5
years and subject to the approval of the SEC.
4. When will the five years commenced? – From the date of approval by the SEC.

G. Section 8, CCP – Redeemable shares. What are its characteristics?

1. Can be issued only when said shares are provided for in the articles of incorporation.
2. Redeemable upon the expiration of a fixed period regardless of existence of unrestricted retained earnings.
3. Terms and conditions affecting the redeemable shares are required to be provided for in the articles of
incorporation and stated on the certificate of stock.

H. Section 9, CCP – Treasury shares. What are its characteristics?

1. They are shares that have been issued and fully paid.
2. That they are subsequently reacquired by the issuing corporation by purchase, redemption, donation or through
other lawful means.
3. Unlike other shares, they can be re-issued for a reasonable price fixed by the BOD.
4. They cannot be voted upon.
5. They are not entitled to dividends.

TITLE II. INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

A. Section 10, CCP – Number and qualifications of incorporators.

1. Number of incorporators – not less than 5 nor more than 15 persons.

a. Can 5 natural persons where 4 of them own 1 share each and the rest is owned by a single person legally
form a corporation? YES. The law does not prohibit it.

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 2. Qualifications of incorporators:
a. Must be natural persons. Is there an exception that an incorporator can be a juridical person?
i. Except in rural banks where the law allows a cooperative or corporation to be an incorporator
(Sec. 4, R.A. 720 as amended by P.D. 122 (Rural Bank Act).
b. All of legal age without suffering from any legal impediment to bind a valid contract.
c. Majority of whom are residents of the Philippines.
i. Can a foreigner be an incorporator? YES provided the corporation complies with the
requirements under the Constitution and special laws such as Foreign Investment Act on the
percentage of Filipino ownership in the corporation.
d. Each incorporator must own at least 1 share.
3. Steps in organizing a corporation:
a. Promotional stage – getting the desired percentage of shares to be subscribed and paid.
i. Who does this? The promoter.
ii. Under the Securities Act, shares of stock cannot be sold publicly unless the corporation is first
registered with the SEC.
b. Drafting articles of incorporation.
i. The contents of the articles of incorporation are contained in Sec. 14, CCP.
ii. The purpose contained in the articles of incorporation confers and limits the powers of the
corporation.
iii. The primary purpose must be specific and may be more than 1.
iv. The secondary purposes may be totally alien to the primary purpose and may not be related to
each other.
c. Organization

B. Section 11, CCP – Corporate term.

1. Should exist for a period not exceeding 50 years from the date of incorporation unless sooner dissolved or
extended.
2. The original 50 years can be extended for another 50 years by amending the articles of incorporation.
3. Any extension should be filed not earlier than 5 years from expiration of the 50-year period, except for
justifiable reason for an early extension as may be determined by the SEC.
a. Can a corporation file for extension of corporate life after its corporate life has expired? NO, because
there is no more term to extend. (Al Hambra Cigar Case).

C. Section 12, CCP – Minimum capital stock required for stock corporations. The rules are:

1. No minimum capitalization for private corporations unless required by special law like insurance companies
(P5M), investment houses (P20M).
2. However, the paid up capital should not be less than P5,000 (Sec. 13).
3. What is meant by paid up capital?
4. There are 3 terminologies that are often encountered in corporation law:
a. Authorized capital stock
b. Subscribed capital stock
c. Paid up capital stock

D. Section 13, CCP – Amount of capital stock to be subscribed and paid for purposes of incorporation. The rules are:

1. At least 25% of the authorized capital stock as stated in the articles must be subscribed at the time of
incorporation.
2. At least 25% of the subscribed capital stock must be paid at the time of subscription.
3. How should the balance paid:
a. Must be paid on the date or dates fixed in the subscription contract without need of call.
b. In the absence of the fixed date, upon call for payment by the BOD.
c. What is meant by “call”?

E. Section 14, CCP – Contents of the Articles of Incorporation.

F. Section 15, CCP – Form of Articles of Incorporation. Must substantially comply with the form prescribed in the law.

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G. Section 16, CCP – Amendment of Articles of Incorporation. The rules are:

1. Any provision or matter stated in the articles may be amended by a majority vote of the BOD or BOT; and
2. The vote or written assent of the stockholders representing at least 2/3 of the outstanding capital stock or
members.
3. Dissenting stockholders can exercise their appraisal right.
4. The amendment shall take effect upon approval by the SEC.
a. What if the SEC will not act on the amendments? It shall be considered approved upon the date of filing if
not acted by the SEC within 6 months from the date of filing or for cause not attributed to the
corporation.
5. How should the amendments be made on the articles?
a. The articles, as amended, shall be indicated by underscoring the change or changes made.
b. The amended articles shall be duly certified under oath by the corporate secretary and majority of the
BOD or BOT.
c. The certification must state that said amendment or amendments have been duly approved by the
required vote of the stockholders or members.
d. The amended articles must be submitted to the SEC for approval.
e. When does an amendment take effect? Upon the approval by the SEC.

H. Section 17, CCP – Grounds when articles or amendment may be rejected or disapproved.

1. Instances where favorable recommendation by appropriate government agencies such as the monetary board of
the BSP, insurance commissioner, Dept. of Education, is necessary for the approval of the articles:
a. Banks
b. Banking and quasi-banking institutions
c. Building and loan associations
d. Trust companies & other financial intermediaries
e. Insurance companies
f. Public utilities
g. Educational institutions
h. Other institutions governed by special laws

I. Section 18, CCP – Corporate name.

1. May a corporation choose to use a name already used by other registered corporation?
a. Universal Mills Corp vs. Universal Textile Mills Inc., 78 SCRA 62. – The SC ruled that although the names
were not identical they are undisputably so similar that confusion would arise in the mind of the public,
specially since they were engaged in a similar businesses.
b. The present procedure of the SEC will prevent this because before the registration papers are submitted
for processing, the corporate name has to be approved first.
c. When an amended name is approved, the SEC must issue an amended certificate of incorporation
indicating the amended name.

J. Section 19, CCP – Commencement of corporate existence.

1. Juridical personality is deemed incorporated from the date the SEC issues a certificate of incorporation under
its official seal.
2. This is a de jure corporation.

K. Section 20, CCP – De facto corporations. Elements:

1. There is a valid law under which it is incorporated.

a. What if the law under which the corporation is incorporated is subsequently declared void?
i. The prevailing view is that there can neither be a de facto corporation nor a de jure corporation.
It is a total nullity. The only exception is with respect to obligations contracted. It remains
valid and the corporation is liable. For purposes of paying the obligation, the corporation is
deemed existing.
ii. However, there has been an increasing tendency to recognize its existence where the
corporation in good faith did all that is required under the said statute to form a corporation.
The limited liability could still be possible under the doctrine of estoppel.
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 iii. Municipality of Malabang, Lanao Del Sur, et. al vs. Pangandapun Benito, et. al (27 SCRA 533)
 Facts: Petitioner is the mayor of Malabang while respondents are the mayor and councilors
of Balabagan. Balabagan was created into a municipality through E.O. 386 issued by Pres.
Garcia. Petitioner sought to nullify E.O. 386 in accordance with the ruling in Pelaez v. Auditor-
General and Municipality of San Joaquin vs. Siva. In Pelaez case, the Supreme Court ruled that
the power to create barrios lies with the provincial board, not the president. That Sec. 68 of
the Administrative Code, though grants the president the power to create municipalities, is
unconstitutional because it is an undue delegation of legislative power and the power to the
president over local governments pertains only to mere supervision. That the Sec. 68 of the
Revised Administrative Code is deemed repealed by the subsequent adoption of the 1935
Constitution. Respondents argued that the Municipality of Balabagan is at least a de facto
corporation, having been created by a color of a statute before the same was declared
unconstitutional, and its officers were duly elected.
 Ruling: While the municipality of Balabagan was created under the statute before the same
was declared unconstitutional, there is still no de facto corporation because there is no other
valid statute to give color of authority to its creation.
2. Attempt to incorporate in good faith.
a. When is there “substantial” or “colorable” compliance?
i. There is substantial compliance when the corporation is issued with a certificate of
incorporation. (Hall, et al vs. Piccio, et al, 86 Phil 603)
ii. If the corporation is still in the process of formation, it is clear that there is no substantial
compliance, hence no de facto corporation.
iii. Bergeron vs. Hobbs et. al. (Supreme Court of Wisconsin) – As a general rule, where an attempt to
organize a corporation fails, by omission of some substantial step or proceeding required by the
statute, its members or stockholders are liable as partners for its acts and contracts.
iv. Harill vs. Davis (US Circuit Court of Appeals) – The defendants, before their corporation was
formed, ordered goods from the plaintiff. The Plaintiff sought to recover the price of the goods.
Ruling: The general rule is that when parties engage in business under a common name, they
are liable as partners. The exception is when they duly form a corporation, their liabilities will
be limited. There is no de facto corporation at the time the obligations were incurred because the
papers for incorporation were not submitted yet.
3. Assumption of corporate powers e.g. transacting business as a corporation.
4. A certificate of incorporation was issued despite defect in its incorporation.
 Question: What is the legal implication when a corporation is declared de facto? Its existence
cannot be collaterally attacked in any proceeding. The action should be direct in the form of a quo
warranto action by the State through the Solicitor General. Before such action, the corporation continues
to enjoy juridical personality.

L. Section 21, CCP – Corporation by estoppel. General principles are:

1. All persons who assumes 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 a result thereof.
2. When the ostensible corporation is sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality.
3. One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the
ground that there was in fact no corporation.
4. To whom will Sec. 21 apply?
a. Third party
b. Alleged (ostensible) corporation
5. Example: A entered into a contract with X Company who represented to be a duly organized corporation. X
Company failed to pay the purchase price of the goods delivered by A in accordance with the contract. A sued X
Company. Can X Company put up the defense that it is not duly incorporated, hence no capacity to be sued? NO.
 Supposing it was X Company who entered into a contract with A. At the time of the contract, A knew that
X Company was not duly incorporated. X Company made deliveries and A defaulted in his payments. X
Company filed a suit against A. Can A put up a defense that X Company is not a duly organized
corporation? NO, he is precluded from denying its corporate existence on a suit brought by X Company.
 Supposing A was ignorant of such defect in the incorporation of X Company, can he put up the defense
that X Company is not duly incorporated? NO.
 Are there exceptions?

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 o Harrill vs. Davis (US case), Salvatierra vs. Garlitos, 103 Phil 757 (1958)  Yes, when business
associates fraudulently misrepresent the existence of the corporation, they can be sued in
their individual liability.
o Where associates were ignorant of the defective incorporation, and a likewise innocent third
person dealt with the corporation as such, the latter cannot hold the associates personally liable.
6. What are the distinctions between de facto doctrine and estoppel doctrine.
a. When all the requisites of a de facto corporation are present, then the defectively formed corporation will
have the status of a de jure corporation in all cases brought or against it.
b. When any of the requisites is absent, estoppel doctrine will apply only if under the circumstances of the
particular case then before the court, either the defendant association is estopped from defending on the
ground of its lack of capacity to be sued, or the defendant third party had dealt with the plaintiff as a
corporation and is deemed to have admitted its existence.
7. Question: Can a corporation be organized by estoppel? NO. The parties in a corporation by estoppel is liable as
general partners, pro-rata with respect to their present and future properties.
8. Question: Suppose there was fraud by the parties in procuring the SEC certificate. What is the status of the
corporation?
Answer: Not a de jure corporation because it failed to comply with the law. Not a de facto corporation because
there is no bona fide attempt to incorporate. Hence, it is a non existing entity.
9. Question: What legal action is available to stop the non-existing entity to operate as such? Any person can file an
action to cancel or revoke the SEC certificate under P.D. 902. Quo warranto is not the remedy.

M. Section 22, CCP. Effects of non-use of corporate charter and continuous inoperation of a corporation. (2-5 rule)

1. Requirements after the date of incorporation (from issuance of SEC certificate):

a. Must formally organize – meaning adopt its by laws and elect the BOD and its officers in accordance with
the by-laws.
b. Must commence the transaction of its business.
c. All of these must be done within 2 years from date of incorporation.
2. What are the effects if it failed to comply with the foregoing requirements?
a. Its corporate powers will cease.
b. The corporation is deemed dissolved.
3. What if the corporation complied the foregoing requirements within 2 years from its incorporation but during its
life, it failed to continuously operate for a period of 5 years?
a. Such becomes a ground for suspension or revocation of its franchise or SEC certificate.
4. Is there an exception? Yes, when the cause is beyond the control of the corporation as maybe determined by the
SEC.

N. Section 46 of CCP. Adoption of by-laws.

1. Question: What is a by-laws? It is a document pertaining to the provisions for the government of the corporation.
2. Question: When should the corporation adopt its by-laws? Before incorporation or after incorporation? BOTH,
under Sec. 46 of the CCP.
a. If done before incorporation – it must be filed together with the articles of incorporation. It must be
approved and signed by ALL incorporators. But the by-laws take effect only upon issuance of the SEC
certificate.
b. If done after incorporation – must be filed within one month from notice of issuance of the SEC certificate.
It must be approved by the majority of the outstanding capital stock, excluding treasury shares or
majority vote of the members and filed with the SEC. The by-laws shall take effect only upon approval of
the SEC.
3. Question: What is the effect if the corporation failed to adopt its by-laws with the said period of 1 month? The
SEC certificate may be revoked or the corporation may be fined by the SEC.
4. Question: What are the requisites of valid by-laws?
a. It must be consistent with law and the articles of incorporation.
b. It must be consistent with public policy.
c. It must general and uniform.
d. It must be reasonable
e. It must not impair vested rights.
5. Question – Are the stockholders or members bound by the by-laws before its approval by the SEC? There are
two views.

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 a. First, it is not effective among the stockholders or members because of Sec. 46 that states that the by-laws
shall be effective only upon approval by the SEC.
b. Second, it is effective among stockholders or members because it is a contract between them.
6. Question: What is the effect of the by-laws to 3rd persons? It is binding only to third persons only if the latter has
actual notice of the by-laws.
7. Question: Is the filing of the by-laws with the SEC serves as constructive notice? NO.

TITLE III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

A. Section 23, CCP. The board of directors or trustees.

1. Preliminary – BOD for stock corporation; BOT for non-stock corporation.

2. How is the control over the corporation allocated?
a. BOD/BOT – responsible for corporate policies and business affairs.
b. Officers – execute the policies
c. Stockholders/members – exercise residual power over fundamental corporate changes e.g.
amendments, disposal of properties, removal of directors or trustees.
3. What is the role of the BOD or BOT? (MECC)
a. They managed the affairs of the corporation.
b. They exercise the powers of the corporation.
c. They conduct the business of the corporation.
d. They control all properties of the corporation.
4. How are the BOD or BOT selected? By election from among the stockholders or members.
5. What is their term of office? 1 year and until their successors are elected and qualified.
6. What are the qualifications to be a BOD? Correlate it with Sec. 27.
a. Must be an owner of at least one share of stocks of the corporation.
b. The share of stock must be in his name in the stock and transfer book.
c. Majority of the board must be residents in the Philippines.
d. Not convicted by final judgment of an offense carrying an imprisonment exceeding 6 years or offenses
in violation of the Corporation Code.
 NOTE: Violations of the PENAL CODE, SPECIAL LAW that is criminal in nature, CORPORATION CODE.
7. Question: Can an alien become a board of director? Yes, but only in proportion to their alien equity.
8. Question: Suppose A is a director, being a holder of 1 share. Before his term expires a director, he sold his share
and the sale was duly recorded in the stock and transfer book. Will A continue to be a director until his 1 year
term expires considering that at the time of his election he was an owner of at least 1 share? NO. Any director
who ceases to be the owner of at least one share in a corporation of which he is a director shall cease to be a
director.
9. Question: Can the by-laws provide that in order to qualify as a board, he/she must be a holder of at least 5
shares? YES. Art. 23 speaks of at least 1 share.
10. Question: What in the case of BOT? How are they selected? By election from among the members of the
corporation.
11. Question: Is there an additional requirement in the case of BOT – YES. Majority of them must be residents of the
Philippines.
12. Some general principles under this Section:
a. The stockholders do not have the general management and control of the affairs of the corporation. They
are deemed to have consented to the management and control of the corporate affairs by the BOD or
BOT.
b. The BOD or BOT may appoint an executive committee to conduct ordinary business of the corporation, in
the intervals between the sittings of the board. The executive committee represents the board.
c. However, all members of the executive committee should be members of the BOD or BOT.
d. It is a cardinal principle that a director or officer of a corporation will not be permitted to make a private
or secret profit out of his official position. Any benefit or advantage received must be given to the
corporation. Correlate this with Sections 31, 32, and 33.
e. Question: Can a director liable for the acts or omissions of the co-directors or other officers? NO, unless
he connives or participates; he is negligent in not discovering or acting to prevent it.

Business Organization II (Notes) Page 9 of 33 pages

B. Section 24, CCP. Election of directors or trustees.

1. Questions: What is the required quorum for a valid election? Is an election by mere raising of hands valid? Or is it
necessary that the election must be in ballot in order to be legal? How many votes can a stockholder casts for 1
director?
2. In the case of a stock corporation, the requirements for a valid election are:
a. There must be a QUOROM of the stockholders during the election, which means that there must be
present, in person or by proxy, the OWNERS of the MAJORITY of the OUTSTANDING capital stock.
b. Election must be by BALLOT, if requested by any voting stockholder or member.
c. Only those stockholders whose shares of stocks are in their names in the stock and transfer books can
vote in person or proxy.
3. Question: How should a stockholder vote his shares of stocks? By the use of cumulative voting. What does this
mean?
a. Example: X, Y, W, and Z own 4,000 shares of stock and each of A, B, C, D, and E owns 200 shares or 1,000
shares in all and there are 5 directors to be voted. X, Y, W, and Z are majority stockholders while A, B, C,
D, and E are the minority stockholders. The highest vote that the majority stockholders could give one
director shall be 4,000 votes assuming that they vote for all 5 directors. The minority stockholders can
join forces and can also elect one director by casting 5,000 (1,000 times 5 directors) to 1 director.
4. Question: Can the by-laws provide for a different manner of voting directors other than cumulative voting? NO.
According to SEC Opinion, cumulative voting is mandatory.
5. Question: Can delinquent stocks be voted? NO.
6. How is voting done in the case of a non stock corporation?
a. Each member is allowed to cast only 1 vote for 1 candidate.
b. The member who gets the highest number of votes is declared elected.
c. Majority of the member should be present in person or by proxy.

C. Section 25, CCP. Corporate Officers, quorum.

1. What should the corporation do after electing BOD or BOT? The BOD or BOT must elect the officers of the
corporation. It is the election of the officers that formally organize the corporation.
2. Who are the officers to be elected?
a. President - who must be a director.
b. Treasurer – who may or may not be a director.
c. Secretary – who shall be a resident and citizen of the Philippines.
d. Such other officers as the by-laws provide.
3. May a treasurer be required to be a director? NO, unless the by-laws require it.
4. Is it required that the officers should be Filipino? NO. There is no citizenship requirement in the code for the
officers, except in industries or business reserved only for Filipino citizens.
5. Can an officer holds 2 or more positions in a concurrent capacity?
a. General rule: YES.
b. Exception: An officer cannot act both as president and secretary or president and treasurer at the same
time. These are incompatible positions.
6. What are the duties of the officers?
a. Those duties as the law provides.
b. Those duties as the by-laws provides.
7. What is the required quorum of the BOD or BOT to transact business?
a. General rule: Simple majority of the BOD or BOT.
b. Exception: Unless a greater majority is required by the articles of incorporation.
8. When is a corporate act of the BOD or BOT in transacting business considered valid?
a. General rule: When the decision is arrived at by a majority vote of the board or trustees who are present
during the meeting.
b. Exception: During election of corporate officers when the required vote is majority of ALL members of
the board.
9. Can a board delegate the attendance and voting in a board meeting by proxy? NO, because the board is elected on
the basis of personal choice.
10. Is it required that the participation of a member of the board be physical? NO. What is required is that the
member of the board, though physically absent, can deliberate the pros and cons of the resolution in issue.
11. Is verbal notice of board meeting sufficient? – YES, unlike a stockholder’s meeting where the code requires it to be
in writing.

Business Organization II (Notes) Page 10 of 33 pages

 12. Can the board meeting be held in any other places? YES, provided it is not prohibited in the by-laws. So the board
can be held even outside the Philippines. NOTE that the rule is different from stockholder’s meeting where
the same can be held only in the principal place of business.
13. Supposing there is quorum at the start of a board meeting. During its deliberations, some of the board went out
for some reasons leaving the rest not in quorum and a resolution was passed. Is the resolution valid? YES,
because the quorum is considered continuing until the meeting is terminated.
14. Exception: Supposing some of the board walked out for a valid reason leaving the rest not in quorum.
Subsequently, a resolution was passed. Is the resolution valid?
a. NO, because meeting ceased to have a valid quorum.
b. Supposing the issue of quorum was not raised when the resolution was adopted, will the answer be the
same? YES.
15. Salvador B. Lopez vs. Ericta
 A quorum of 12 members of the Board of Regents voted on a resolution as follows: YES – 5 votes; NO – 4
votes; ABSTAIN – 3 votes. Is the resolution carried out? NO. An abstain vote is considered as cast
vote. Hence should not be counted together with the yes votes.
16. Can a board create corporate officers? – NO. Corporate officers are created only by the by-laws and the
corporation code.
17. Can the board delegate the exercise of its powers? YES, by creating an executive committee but only on specific
matters of implementation, not for making policies.
18. Can a stockholder become an officer? YES.
19. Is an officer who is also a stockholder covered by the Labor Code? NO, because there is no employer-employee
relationship.
20. What is the remedy in case there is a conflict between an officer who is at the same time a stockholder and the
corporation? The issue is deemed an intra-corporate controversy cognizable by the SEC and not the labor
arbiter.

D. Section 26, CCP. Report of election of directors, trustees and officers.

1. What should the corporation do after electing the directors, trustees and officers? It must submit to the SEC the
names, nationality, and residences of the directors, trustees and officer elected within 30 days from their
election.
2. Supposing an elected board die, resigns, or had ceased to hold office, what should the corporation do? The heir, in
case of death, or the secretary of the corporation in the other cases, must report such fact to the SEC.

E. Section 27, CCP. Disqualification of directors, trustees or officers.

1. What the disqualification of directors, trustees or officers?

a. Conviction by a final judgment of an offense punishable by imprisonment for a period exceeding 6
years.
b. Violation of the Corporation Code of the Philippines. Relate this to Section 144 of the code.
2. Question: Supposing X was elected as a board. However, his election was contested on the ground that he was
previously charge with estafa punishable by imprisonment of more than 6 years.
a. Will the disqualification prosper? NO, because there is no conviction by final judgment yet.
b. Suppose X was finally convicted of estafa after his term expires, will the disqualification prosper? NO,
because the case becomes moot and academic.
c. Suppose X was previously convicted by final judgment and was sentenced to more than 6 years
imprisonment, will he be disqualified to run for the board? It will depend. If X was convicted within 5
years from his election, he is disqualified. Otherwise, NO.

F. Section 28, Removal of directors or trustees.

1. Can a director be removed without cause?

a. General rule: YES. A director may be removed with or without cause.
b. Exception: In the case of removal without cause, it should not be used to deprive the minority
stockholders of their right of representation under Section 24.
2. How do we know that a director was voted by the minority stockholders? When minority stockholders cumulate
their votes and cast it to a single director.
3. What is the required vote to remove a director? 2/3 of the outstanding capital stock or 2/3 of the members
who are entitled to vote in the case of a non stock corporation.

Business Organization II (Notes) Page 11 of 33 pages

 4. When should the removal take place? It shall take place either:
a. In a regular meeting.
b. In a special meeting called for the purpose of removing the director.
5. What are the other requisites to legally remove a director?
a. There should be previous notice to the stockholders or members of the intention to remove a director.
b. In the case of a special meeting, the meeting must be called by the secretary on order by the president.
c. Notice of the special meeting shall contain the time, place, and purpose of such meeting.
d. Publication of the notice of special meeting. In case there is no publication, the written notice must be in
accordance with the code.
6. If the secretary or president refuses to call a special meeting, what is the remedy? The stockholders who hold at
least majority of the outstanding stocks or majority of the members entitled to vote may make a written
demand to call a special meeting addressed to the secretary of the corporation.
7. Suppose the secretary refuses to call a special meeting after receiving the written demand or if there is no
secretary of the corporation, what is the remedy? Any stockholder or member, signing the notice to call a
meeting, may address the said notice directly to the stockholders or members.
8. How should the vacancy from such removal filled up? It shall be filled up by election either in:
a. The same meeting of the removal of the director, without need of further notice.
b. In another special meeting after giving notice in accordance with the code.

G. Section 29, CCP – Vacancies in the office of the director or trustee.

1. When should Section 29 apply? This will apply when there is a vacancy resulting from causes e.g. death,
resignation, incapacity other than removal under Section 28 or expiration of term.
2. How should the vacancy filled up?
a. It is to be filled up by a vote of at least majority of the remaining directors or trustees.
b. Provided, that the remaining directors or trustees would still constitute a quorum.
3. What if the remaining directors or trustees do not constitute a quorum, what is the remedy? The filling up of the
vacancy must be done by the stockholders or members in a regular or special meeting called for the purpose.
4. What will be the term of the newly elected board? The new director or trustee will serve only for the unexpired
term of his/her predecessor.
5. Supposing the corporation would like to increase the number of directors, what should be done?
a. Amend the articles of incorporation.
b. The amendment should be approved by the SEC.
c. The new directors will be elected by the stockholders or members in a regular or special meeting duly
called for the purpose. NOTE that the election of additional board is done by the
stockholders/members.
6. Can the stockholders or members elect new directors prior to approval of the amendment by the SEC? YES,
provided that:
a. The notice of the meeting expressly state that the new directors will be elected in the same regular
meeting or special meeting called for the purpose.
b. The amendment of the articles of incorporation, together with the names, nationality, and residences
of the newly elected board are submitted to the SEC for approval.
7. What is then the main difference between Sec. 28 and 29?
a. In Sec. 28, the act of replacement is done by the stockholders who own majority of the outstanding
stocks or majority of the members entitled to vote.
b. In Sec. 29, the act of replacement may be done by the remaining directors, if they still constitute a
quorum.
8. In summary, what are the instances where the vacancies are to be filled up by a vote of the stockholders or
members?
a. In case of removal of a member of the BOD or BOT.
b. If the remaining members of the board do not constitute a quorum and therefore could not fill the
vacancies created by death, resignation or disqualification of the director.
c. If the vacancy is created because of increase in the number of directors at any time of the year.

H. Section 30, CCP. Compensation of directors.

1. Can the board, by their action, provide compensation for themselves?

a. General rule: NO.

Business Organization II (Notes) Page 12 of 33 pages

 b. Exceptions:
i. When the by-laws provides for such compensation.
ii. When the stockholders representing at least majority of the outstanding capital stock voted for
such compensation.
iii. In the case of extraordinary or unusual service provided by the director to the corporation.
2. What are the limitations to the granting of compensation?
a. But in either case where compensation is allowed, such compensation should be given only after the
services are actually rendered.
b. The total yearly compensation of the directors should not exceed 10% of the net income before tax.
c. The compensation should not be granted retroactive effect.

I. Section 31, CCP. Liability of directors, trustees or officers.

1. When will a director or trustee be liable for damages?

a. When the director or trustee willfully and knowingly vote or assent to a patently unlawful act of the
corporation.
b. When they acquire any personal or pecuniary interest in conflict with their duty. Correlate this with
Sections 32 and 33.
2. When will an officer be liable for damages?
a. When the officer is guilty of gross negligence or bad faith in directing the affairs of the corporation.
Correlate this Sec. with 45.
b. When they acquire any personal or pecuniary interest in conflict with their duty.
3. What is the nature of their liability? Their liability is joint and solidary.
4. Are the directors, trustees or officers liable for damages if the damage pertains to the stockholders, members or
other persons? YES.
5. What is the consequence if the director, trustee, or officer acquires personal or pecuniary interest adverse to the
corporation? He/she is liable not only for the damage cause but must also account for the profits that would
have accrued to the corporation in accordance with Sec. 32 and 33.

J. Section 32, CCP. Dealings of directors, trustees or officers with the corporation.

1. Note that this section refers to contracts between a director with the corporation
2. The rules under this section are:
a. Contract entered into by one or more directors/trustees or officers with the corporation is voidable, at
the option of the corporation.
b. Exceptions (meaning the contract is valid):
i. The presence of such director/trustee in the board meeting approving the contract is not
necessary to constitute a quorum.
ii. The vote of such director/trustee is not necessary for the approval of the contract.
iii. The contract is fair and reasonable.
iv. In the case of an officer, the contract with the officer has been previously authorized by the
board.
c. In the case of exceptions (a) and (b), how can the contract be validated? It may be valid through
ratification by the stockholders representing 2/3 of the outstanding capital stock or 2/3 of the members
in a meeting called for the purpose.
d. What are the requirements in the case of ratification?
i. Full disclosure of the adverse interest in such meeting.
ii. That the contract is fair and reasonable.
3. Is the director/trustee liable for damages in cases where the board chooses not to question the deal? YES, despite
that the contract is valid until annulled. The stockholders can hold the director/officer liable for the damage caused to
the corporation.

K. Section 33, CCP – Contracts between corporations with interlocking directors.

1. Note that this section refers to contracts between two or more corporations.
2. The board of directors in the contracting corporations are interlocking.
a. What is meant by interlocking?
 It means that the directors of the contracting corporation are either the same persons or one or some
them are the same directors of the other contracting corporation.

Business Organization II (Notes) Page 13 of 33 pages

 3. What are the rules in this section?
a. The contract entered into under this section is valid, subject to the following conditions:
i. There is no fraud involved.
ii. The contract is fair and reasonable.
4. When is the contract under this section become voidable? When is the interest of the interlocking director
considered nominal that is, the director’s stockholdings is 20% or less of the outstanding capital stock. In this
instance, a doubt is created. Section 32 will apply.
5. Who may declare the contract void? The contracting corporation where the stockholding of the director is less
than 20%.
6. What are the distinctions between Sections 32 and 33?
a. Sec. 32 refers to contracts between a director/trustee and the corporation where he/she is a
director/trustee while Sec. 33 refers to contracts between 2 or more corporations with common
directors/trustees.
b. As a general rule, the contract under Sec. 32 is considered voidable while the contract under Sec. 33 is
valid.

L. Section 34, CCP – Disloyalty of a director.

1. Relate this section with Section 31 regarding liability for damages.

2. The purpose of this section is to prohibit the director to compete with the business of the corporation.
3. When is a director considered disloyal? When he competes with the business of the corporation even if the funds
used belong to him.
4. Effects of disloyalty:
a. The profits realized by the director of a business that competes with the corporation will be forfeited in
favor of the corporation.
b. What is the exception? When the disloyal act is ratified by the stockholders representing 2/3 of the
outstanding capital stock.

M. Section 35, CCP – Executive Committee.

1. What is the purpose of creating an executive committee? To delegate corporate powers to enable the committee
to meet immediate problems and give prompt solutions.
2. What is the role of an executive committee in the corporation? It acts only specific matters within the
competence of the board and:
a. delegated to it by a majority vote of the board;
b. or those delegated to it by the by-laws.
3. What is the composition of the board? It is composed of not less than 3 members of the board duly appointed by
the board.
4. What specific matters that cannot be delegated to the executive committee?
a. Those that requires the approval of the stockholders.
b. Those pertaining to filling up the vacancy of the board.
c. Those pertaining to amendment or repeal of by laws.
d. Those pertaining to adoption of new by laws.
e. Those amendment or repeal of board resolutions which is expressly non repealable or amendable.

TITLE IV. POWERS OF CORPORATIONS

A. Section 36, CCP – Corporate powers and capacity.

1. Memorize this section. (BID A DORM SSS)

2. The powers of the corporation may be classified into:
a. Express;
b. Incidental;
c. Inherent.
3. What are express powers? Those powers that are expressly provided by the articles of incorporation and the
Corporation Code.
4. What are incidental powers? Those powers that are incidental to corporate existence such as:
a. power of succession;
b. power to sue and be sued;
c. power to enter into contract.
Business Organization II (Notes) Page 14 of 33 pages
 5. What are the implied powers? Those implied from the express and incidental powers in order to protect its
interest or business such as:
a. Acts to protect debts owing the corporation.
b. Acts which involve embarking on a different line of business, to protect debts;
c. Acts in the usual course of business.
d. Acts which are in part or wholly designed to protect or aid employees
e. Acts to increase the business.
6. What is the effect of the act of the corporation that is not within the express, incidental or implied powers? The act
is considered ultra vires under Section 45.
7. Can corporation make reasonable donations? YES, under Sec. 36. However, it cannot validly make donations for
political or partisan purposes.

B. Section 37, CCP – Power to extend or shorten corporate term.

1. What is the procedure to extend or shorten the life of a corporation? By amending the articles of incorporation in
a meeting duly called for such purpose and complying the following requisites:
a. Majority vote of board of directors/trustees.
b. Ratification by at least 2/3 of the outstanding capital stock or members.
c. Written notice of stockholders’ meeting indicating the time and place of such meeting.
d. Said notice must be served to the stockholders/members either in person or by mail addressed to the
place of residence.
2. Supposing a stockholder is against the action of extending the corporate life, what is his remedy? Exercise his
appraisal right.
3. Can a dissenting stockholder exercise his appraisal right if the action is to shorten the life of the corporation?
YES, as can be gleaned from Section 37. Note that the last paragraph in Sec. 37 specifically mentions only the
“extension” of corporate existence. No mention about shortening the life.

C. Section 38, CCP – Power to increase or decrease capital stock; incur create or increase bonded indebtedness.

1. What are the requirements in order to legally increase/decrease capital stock or incur, create or increase bonded
indebtedness?
a. Majority vote of the BOD.
b. 2/3 vote of the outstanding capital stock.
c. A stockholders meeting called for said purpose.
d. Written notice of such meeting specifying the date, time, place, and the purpose and served personally or
by mail.
e. Certification signed by the majority of the directors and countersigned by the chairman and secretary of
the board specifying those enumerated in Sec. 38.
f. Prior approval by the SEC.
2. In the case of capital increase, 25%-25% rule must be complied. Compliance thereof must be subscribed under
oath by the treasurer.
3. In the case of capital decrease, the same is not allowed if it will prejudice the rights of corporate creditors.
4. Is appraisal right applicable in Sec. 38? Ans. NO. Why?

The policy behind the non-granting of appraisal right with respect to the increase and decrease of the capital
stock of the corporation is the fact that every stockholder should come into the corporation setting aware that
the expediencies of corporate life may require that eventually the corporation may need to increase
capitalization to fund its operations or expansions, and needs to look primarily into its equity investors to
fund the same.

In the increase, a stockholder may always sell his stock if he dissents to the increase of the capital stock.
Moreover, such appraisal right may defeat the purpose of the corporation in increasing the funds; by
increasing the funds for survival, if you grant the appraisal right in effect you pay out capital when you seek to
keep more money inside.

In the decrease of capital stock, why appraise when in effect you will be returning capital to your
stockholders.

Despite the board resolution approving the increase in capital stock and the receipt of payment on the future
issues of the shares from the increased capital stock, such funds do not constitute part of the capital stock of
Business Organization II (Notes) Page 15 of 33 pages
 the corporation until approval of the increase by SEC. Central Textile Mills, Inc. vs. National Wages and
Productivity Commission, 260 SCRA 368 (1996).

A reduction of capital to justify the mass layoff of employees, especially of union members, amounts to
nothing but a premature and plain distribution of corporate assets to obviate a just sharing to labor of the
vast profits obtained by its joint efforts with capital through the years, and would constitute unfair labor
practice. Madrigal & Co. v. Zamora, 151 SCRA 355 (1987).

Why do you need the consent of the stockholders when you increase or decrease capital stock?
 When you increase the capital stock, stockholders have to put in more money to maintain their
proportionate interest in the corporation, as such the increase dilutes the value of the stock they have prior to
such increase. Moreover, such increase affects their rights as in their voting capacity, their sharing in the
dividends, their participation in the management, the extent of their participation in the dissolution of the
corporation, etc. The consent of the stockholders is needed because such change once again affects their
contractual expectation when they first entered into the corporation.

But in decreasing capital stock, why do you again need the consent of the stockholders whereas in effect they
will be receiving part of their investment? Such once again affects their contractual expectation when they
entered into the corporation

Source: Villanueva’s Book

D. Section 39, CCP – Power to deny pre-emptive right.

1. What is pre-emptive right? It is a stockholder’s right to subscribe to all issues or disposition of shares of any class
in proportion to their present stockholding. Under B.P. No. 68 the right extends to the unsubscribed portion of the
original unissued stock.
2. What is the purpose of the pre-emptive right? It is to enable the stockholder to retain his proportionate control in
the corporation.
3. Is there a difference in the word “issue” and “disposition” in Section 39? – YES. The work “issue” means
issuances of new shares of stocks while “disposition” may refer to the reissuance of treasury stocks.
4. Can pre-emptive right be denied to the stockholders? YES. The same can be denied by amending the articles of
incorporation. However, such amendment should take prospective effect.
5. Aside from this, are there other exceptions where pre-emptive right can be denied to the stockholders? YES, in
case of:
a. Shares to be issued in order to comply with laws requiring stock offering or minimum public ownership.
b. Shares issued in good faith in exchange for property needed for the corporation.
c. Shares issued in payment of previously contracted debts.
d. Shares issued to obtain loans or services of technical personnel.
6. Is there any legal requirement under these exceptions? YES. The consent and approval of 2/3 of the outstanding
capital stock is necessary.

E. Section 40, CCP – Sale or other disposition of assets.

1. What are the requirements to make the sale or disposition of corporate assets valid?
a. Majority vote of the board.
b. Authorization of 2/3 of the outstanding capital stock/members. It means prior approval by the
stockholders.
c. Stockholders meeting called for such purpose.
d. Written notice specifying the date, time, place and purpose of such meeting.
2. If during the stockholders meeting, some stockholders do not approve the disposition but the act was with 2/3
consent, what is the remedy of the dissenting stockholders, if any? They can exercise their right of appraisal.
3. What kind of disposition where 2/3 vote of the outstanding capital stock is necessary? Such sale or disposition of
all or substantially all of the corporate properties.
4. May the board disregard such sale after such authorization? YES, at its discretion but must respect the rights of
third parties, if applicable.
5. Is the approval of the stockholder necessary in the case where the board disregards such authorization? NO.
6. What is meant by “substantially all”? When such disposal of properties will render the corporation incapable of
continuing operation to accomplish its purpose.

Business Organization II (Notes) Page 16 of 33 pages

 7. Is the sale or disposition of corporate assets in the course of business requires the approval of the board and
authorization of the stockholders? NO.
8. When is a sale or disposition considered in the course of business? When such sale or disposition is:
a. necessary in the usual and regular course of business of the corporation.
b. If the proceeds of such sale or disposition be appropriated for the conduct of its remaining business.

F. Section 41, CCP – Power to acquire own shares.

1. This is the section that regulates treasury stocks.

2. What are the requirements in order that the corporation can acquire its own shares?
a. It must have unrestricted retained earnings to cover the purchase price of the shares acquired.
3. What are the instances where the corporation acquires its own shares?
a. When the corporation would like to eliminate fractional shares arising out of stock dividends.
 Example, A owns 15 shares. The corporation declares 10% stock dividend. How many shares
will A acquires from the stock dividend? Answer: 1.5 shares. The corporation will not issue
certificate of stock for the 0.5 share. Said share is a fractional share.
b. When the corporation collects indebtedness against a stockholder arising from unpaid subscription,
delinquency sale.
c. As payment in favor of dissenting stockholders in their exercise of appraisal right.
d. As payment in favor of a withdrawing stockholders.

G. Section 42, CCP – Power to invest corporate funds in another corporation or business or for any other purpose.

1. Correlate this section with Sec. 45 on ultra vires acts.

2. There are two reasons for investing corporate funds:
a. To attain its primary purpose – Only approval of the board is required.
b. To attain its secondary purpose – Requires the approval of majority of the board and ratified by 2/3
vote of the outstanding capital stock or members in a meeting called for such purpose.
c. To attain other purposes, not secondary – The act is ultra vires.
3. The written notice must state the:
a. Proposed investment; and
b. Time and place of the meeting.
4. What is the right of any dissenting stockholder? Appraisal right.

H. Section 43, CCP – Power to declare dividends.

1. Who has the power to declare dividends? The board.

2. What is the requirement that a corporation can validly declare dividends? Only if it has unrestricted retained
earnings.
3. What is meant by unrestricted retained earnings? Portion of dividends not set aside by the corporation for
specific purpose, e.g. for plant expansion, for redemption of stocks or bonds.
4. Are delinquent stocks entitled to receive dividends? YES, provided:
a. In the case of cash dividends – the same shall be applied first for the unpaid subscription, cost, and
expenses.
b. In the case of stock dividends – the same shall be withheld until the unpaid subscription is fully paid.
5. Example: A subscribed to P5,000 shares of stocks. Made a down payment of P3,000 and the balance of payable on
Dec. 31, 2005. On Dec. 31, 2004, the corporation declared cash dividend of which A is entitled to P100 and stock
dividend of which A is entitled to 20 additional shares. Questions:
a. How much should A be entitled to received cash dividend?
b. How much should A be entitled to received stock dividend?
6. What is the vote requirement to declare and issue dividends?
a. In case of cash dividend – only the majority vote of the board of directors.
b. In case of stock dividend – the majority vote of the board and the approval of 2/3 vote of the
stockholders in a meeting called for the purpose.
7. Can a corporation retain its profits without declaring dividends?
a. YES, provided its accumulated retained earnings shall not exceed 100% of its paid-in capital.
b. Give example.
8. When is a corporation legally allowed to retain more than 100% of its profits compared to its paid in capital?
When allowed by law.

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 9. Can stock dividends be issued to a non-stockholder in payment of services rendered? NO. (Nielson & Co. vs.
Lepanto Consolidated Mining Co., G.R. No. L-21601).
10. Can dividends be declared from paid in capital? NO, except:
a. In cases of liquidation.
b. In the case of wasting asset corporation.
11. Can the board revoke its earlier declaration of dividends?
a. Yes, in the case of cash dividends but prior to announcement to stockholders.
b. Yes, in the case of stock dividends but prior to its actual issuance.
12. In case of improperly accumulated retained earnings, who can compel the corporation to declare dividends? SEC.

I. Section 44, CCP – Power to enter into management contract.

1. What is a management contract? A contract entered into between 2 corporations wherein the corporation agrees
that the other contracting corporation will manage its affairs.
2. Requirements in order that the contract maybe valid? The general rule on the required vote is majority:
a. Approval of the board.
b. Approval of the stockholders or members representing majority of outstanding capital stocks or
members entitled to vote.
c. Both corporations must approve the contract.
3. What is the instance where the required vote is 2/3, not just majority?
a. In cases where the stockholders representing majority of the outstanding capital stock of both
corporations control more than 1/3 of the outstanding capital stock of the managing corporation.
b. In cases where the members representing majority of the members entitled to vote of both
corporations control more than 1/3 of the members entitled to vote of the managing corporation.
4. Example: A, B, C, D, and E are the stockholders of X Corporation. On the other hand A, B, X, Y, and Z are
stockholders of Y Corporation. A and B of X Corporation and Y and Z of Y Corporations are the majority
stockholders of their respective corporations. X and Y Corporations entered into a contract where the affairs of X
Corporation will be managed by Y Corporation. What are the requirements in order that the contract will be
valid? The management contract has to be approved only by majority vote of the board and stockholders of
both corporations unless A, B, Y, & Z control more than 1/3 of the outstanding capital stock of Y Corporation, in
which case, majority vote of the board and 2/3 vote of the stockholders of both corporations is necessary.
5. What is the maximum term of the contract? Not more than 5 years.
6. Can the contract be extended? YES, but the extension shall not exceed 5 years.
7. Is there a limit of the extension? None.

J. Section 45, CCP – Ultra vires acts of corporations.

1. While a corporation is a creation of the state, since it is legal personality is measured upon its compliance with the
general law that created it, such as the corporation code, its operation is not just measured by the law creating it.
The code allows the contracting parties (incorporators) some leeway on how it will be operationalized.
This is the essence of allowing the incorporators the authority to stipulate whatever purpose it may
undertake (Sec. 14) and exercise of powers essential or necessary to attain its purpose (Sec. 36).
2. This section refers to the acts of a corporation that are unauthorized, not illegal. Distinguish an illegal act from
an ultra vires act.
3. The act of the corporation refers to the exercise of corporate powers such as:
a. Express powers – those powers expressly stated in the articles of incorporation and the corporation
code, particularly Sec. 36.
b. Incidental powers – those powers that are incidents of its existence like the power to sue and be sued,
to enter into contracts, and succession.
c. Implied powers – those powers that are inherent from the express and incidental powers.
4. When the corporation exercises corporate powers that are not within its express, incidental or implied powers,
such act becomes ultra vires.
5. What is the effect of an ultra vires act, void or voidable? VOIDABLE that can be subject to ratification by all the
stockholders, if the act is not illegal or third persons are prejudiced.
6. What is the basic distinction of a void and voidable act?
a. Void act is a non existing act in contemplation of law. It creates no obligation. It is as if it does not exist
at all.
b. Voidable act is a valid act until annulled. It transmits obligations.

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 7. Relate this principles to void and voidable contracts in the New Civil Code:
a. Art. 1403 – void contracts.
b. Art. 1390 – on voidable contracts.
8. If the act is void, what are the legal consequences?
a. Under the Revised Rules of Court – The corporation may be proceeded by quo warranto action of the
Solicitor General that may lead to its dissolution.
b. Under PD 902-A (Regulation of the SEC) – The SEC may suspend or revoke its certificate of registration.
c. On the parties to an ultra vires act:
i. If the contract was fully executed – The parties will be left as they are as both parties are in bad
faith. We apply the principle of estoppel.
ii. If the contract is still executory – Neither party can demand performance of the obligation.
iii. If the other party has partly performed his obligation while the other has not – The latter can
demand performance, provided that the contract is not illegal.
d. On the rights of stockholders:
i. Tthe stockholder may bring either an individual or derivative suit to enjoin an ultra vires act.
ii. If the act has already been performed, a derivative suit for damages against the directors may be
filed, depending whether the directors acted in good faith and with necessary diligence.
9. What is a derivative suit? It is a suit by a stockholder in behalf of the corporation if the corporation refused to file
an action.

TITLE V. BY-LAWS

A. Section 46, CCP – Adoption of by-laws.

1. When should a corporation adopt its by-laws?

a. Prior to incorporation
b. After incorporation
2. What are the requirements if the by-laws is adopted prior to incorporation?
a. The by-laws must be approved and signed by all incorporators.
b. Must be submitted to the SEC together with the articles of incorporation.
3. What are the requirements if the by-laws is adopted after incorporation?
a. Approval by the stockholders representing at least majority of the outstanding capital stock or members.
b. Must be signed by the stockholders or members voting for them.
c. Certification by the majority of the directors/trustees.
d. Certification by the corporate secretary.
e. Must be filed with the SEC together with a copy of the articles of incorporation.
4. What are the requisites of a valid by-laws?
a. It must be consistent with law and the articles of incorporation or corporate charter.
b. It must be consistent with public policy.
c. It must be general and uniform.
d. It must be reasonable.
e. It must not impair vested right.
5. When should the by-laws takes effect? It will take effect upon the approval by the SEC.
6. Take note of the last paragraph of Sec. 46 where a certification is required for specially designated corporations
before its by-laws or amendment thereto will be accepted by the SEC for approval.
7. Take note of the right of the stockholders/members regarding inspection of the by-laws during office hours.
8. Take note that a corporate by-laws is internal to govern the internal affairs of the corporation. As such:
a. It cannot affect the rights of persons who are not stockholders or members of the corporation.
b. It cannot govern strangers and notice to them is not presumed.

B. Section 47, CCP – Contents of by-laws.

1. Take note of this section. (MM QQ PP EE SO)

2. Supposing an officer of the corporation refused to respect, obey or implement any of the provision of the by-laws,
will an action of mandamus lie against such officer? YES.
3. Is the principle of waiver applicable in cases of continuous disregard by a party in whose favor a provision of the
by-laws is intended? YES.

Business Organization II (Notes) Page 19 of 33 pages

C. Section 48, CCP – Amendments to by-laws.

1. What are the requisites for a valid amendment to the by-laws?

a. Majority vote of the board.
b. Vote of the stockholders or members representing majority of the outstanding capital stock or members
entitled to vote.
c. A valid meeting of the stockholders or members, either regular or special.
d. In other words, amendment of by-laws is not deemed a fundamental change where 2/3 vote of the
stockholders is necessary.
2. Can the power to amend or repeal the by-laws be delegated to the board? YES, but must comply with the
following requisites:
a. Concurrence of the stockholders representing at least 2/3 of the outstanding capital stock or members
representing at least 2/3 of members entitled to vote.
b. Question: Why is 2/3 vote required, not majority? Is there a conflict? NO. The vote is a vote to delegate
the power to amend the by-laws to the board, not the vote to approve the amendment.
3. How should such delegation be revoked? By a vote of the stockholders representing the majority of the
outstanding capital stock or majority of the members entitled to vote.
4. Can the stockholders or members revoke such delegation anytime and for any cause? YES.

TITLE VI. MEETINGS

A. Section 49, CCP – Kinds of meetings.

1. What are the two kinds of meetings of the stockholders and the board mentioned in this section?
a. Regular meeting – That which is fixed in the by-laws and done at regular intervals.
b. Special meeting – That which is done at any date other than that fixed in the by-laws.
2. What is the rule on notice of meeting?
a. Regular meeting – Generally, no notice is required except when required by law.
b. Special meeting – Notice is always required.

B. Sections 50 to 52, CCP – Regular and special meetings of stockholders or members; Place and time of meetings of
stockholders or members; Quorum in meetings.

1. What are the requirements for the regular stockholders meeting?

a. It must be held annually.
b. It must be held on the date fixed in the by-laws.
c. It must be held in the principal place of business.
2. What is the rule on notice of meeting?
a. Notice must be in writing.
b. Must be sent to all stockholders or members of record.
c. Must be sent at least 2 weeks prior to the meeting, unless the by-laws requires a shorter period.
d. In the case of special meeting, the notice must be sent at least 1 week, unless the by-laws requires a
shorter period.
e. Notice can be waived in any meeting.
3. Who calls the meeting? The corporate secretary.
4. Supposing the corporate secretary fails or refuses to call a meeting, what is the remedy? The SEC will call the
meeting upon petition of a stockholder or member.
5. How will the SEC call the meeting? It shall issue an order directing the petitioning stockholder or member to call
a meeting.
6. Who will preside the meeting?
a. The president of the corporation under Sec. 54, unless provided by the by-laws.
b. The petitioning stockholder or member, in special cases.
7. Supposing the by-laws does not fix the date of the regular stockholders meeting. When will such meeting be held?
It will be held on any day in April as determined by the board.
8. Supposing the stockholders or membership meeting is improperly held, what is the rule with respect to the
validity of the actions done during such meeting? The general rule is that the meeting is illegal hence all
actions adopted during such meeting is unauthorized.
9. Is there an exception where the action is deemed valid? YES. The proceedings will be valid provided that:
a. The act or business is not ultra vires.
b. All the stockholders or members are present during such meeting.
Business Organization II (Notes) Page 20 of 33 pages
 10. What is the required quorum to conduct a valid meeting? Majority.
11. Supposing a corporation is composed of 30 stockholders with each stockholder representing equal shares.
Sixteen stockholders were present during the stockholders meeting. An action was passed to invest corporate
funds in another corporation by majority vote of those present.
a. Is there a valid stockholders meeting if all other requisites for a valid meeting are present? YES.
b. Is the action legal is the same is not ultra vires? NO, because the required vote is 2/3 or 20 in accordance
with Sec. 42.
c. What should be done to legalize the action? Call a special stockholders meeting to ratify the action by at
least 2/3 vote.

C. Sections 53 to 54, CCP – Regular and special meetings of directors or trustees; Who shall preside at meetings.

1. What is the required frequency of board meetings?

a. Regular board meetings – must be held at least monthly.
b. Special board meetings – at any time upon the call of the president or as provided in the by-laws.
2. Where should the board meetings be conducted? Anywhere within or outside the Philippines unless provided
for by the by-laws.
3. What is the rule on notice of meeting? Both regular and special meetings require a notice. The notice must
contain the following:
a. Date, time and place of the meeting.
b. Must be sent to the board member at least 1 month prior to the meeting, unless waived.
4. Who shall preside during such meeting? The president, unless provided by the by-laws.
5. IMPORTANT: Distinguish this from regular meeting of the stockholders where notice is not required.

D. Sections 55 to 59, CCP. – Right to vote in special cases.

Section 55. Right to vote of pledgors, mortgagors and administrators.

1. Who is entitled to vote for shares of stocks that are pledged or mortgaged? The pledgor or mortgagor shall have
the right to attend and vote such shares provided that following requisites are complied:
a. Authority in writing by the pledgee or mortgagee.
b. Such written authority must be recorded in stock and transfer book of the corporation by the pledgor or
mortgagor.
2. In the case of stocks under administration. Can the administrator vote for such stocks? YES, provided the
following requisites are complied:
a. An appointment by the court.
b. Is recording of such authority required? The provision is silent about it.

Section 56. Voting in case of joint membership of stock.

1. Who has the right to vote if stocks are owned by 2 or more persons? ALL.
2. What is required to exercise the right to vote? Consent of ALL, unless there is a written proxy signed by all the
co-owners authorizing one of them to vote.
3. What is meant by “consent of all”? It means that all the co-owners must be unanimous.
4. When a stock is owned in “and/or” capacity. How is the right to vote exercised? By anyone of the co-owners.

Section 57. Voting right for treasury shares.

1. Treasury stocks are not entitled to vote as long as the same remains in the treasury of the corporation.
2. What is meant by “still in the treasury” of the corporation? It means that the shares are not reissued.

Section 58. Proxies.

1. What is meant by proxy? It means that the exercise of the stockholder/member’s right is done a person other
than the owner.
2. What is the requirement of a valid proxy?
a. Must be in writing.
b. Must be signed by the stockholder/member.
c. Must be registered with the corporate books before the scheduled meeting through the corporate
secretary.
Business Organization II (Notes) Page 21 of 33 pages
 3. What is the validity of the proxy?
a. General rule. It is valid only for the meeting for which it is intended.
b. If it is provided that it shall be valid for a continuing period, it must not be longer than 5 years at any
one time.

Section 59. Voting trusts.

1. What is a voting trust? It is an agreement whereby stockholders may dispose of their shares and still retain
control of the corporation.
2. Who are the parties of a valid voting trust agreement?
a. The stockholder who retains the beneficial title.
b. The voting trustee who has the legal title and exercises the rights of the stockholder.
3. What are the requisites of a valid and effective voting trust agreement?
a. It must be in writing.
b. It must be notarized.
c. It must specify the terms and conditions.
d. It must be filed with the SEC.
4. What are the effects of a valid and enforceable voting trust agreement?
a. The shares of stocks covered by the voting trust agreement will be cancelled.
b. New shares will be issued in the name of the trustee or trustees and shall be noted in the stock and
transfer books of the corporation that the new shares are issued pursuant to the voting trust agreement.
c. The stockholder retains the right to examine the books of the corporation.
5. What is the maximum term of a voting trust agreement?
a. General Rule: Not exceeding 5 years at any one time.
b. Exception: In the case where the trust agreement is executed as a requirement of a loan. In this case the
term may exceed 5 years but automatically expires upon full payment of the loan.
6. What are the other prohibitions of a trust agreement other than the term?
a. It shall not be used to circumvent the law against monopolies and illegal combinations in restraint of
trade (Monopoly).
b. It shall not be used for purposes of fraud.
7. What is the effect after a valid voting trust agreement is about to expire?
a. It may be extended for a period of not less than 5 years.
b. If not extended, the voting stock certificates and the certificates of stock in the name of the trustee shall
be cancelled.
c. New certificate of stocks will be reissued in the name of the transferor.
9. Question: Suppose there is a breach of the voting trust agreement after the votes are cast by the voting trustee,
can the stockholder change the result? NO. The other stockholders already acquired a vested right. His remedy is
to file damages against the voting trustee.
10. IMPORTANT: Distinguish Sections 58 and 59.
a. Proxy – is generally for the particular meeting intended.
b. Voting trust – for a period of time, not exceeding 5 years at a time.
c. Proxy – need not be notarized.
d. Voting trust – must be notarized.
e. Proxy – requires recording only in the corporation.
f. Voting trust – requires filing with the SEC.
g. Proxy – the stock certificates are not cancelled, hence no new shares of stocks are issued in lieu thereof.
h. Voting trust – stock certificates are cancelled and new shares are issued in lieu thereof.

TITLE VII. STOCK AND STOCKHOLDERS

A. Section 60, CCP – Subscription Contract.

1. What is meant by subscription contract? It is a contract between a corporation and the subscriber for shares of
stocks of the said corporation.
2. What is the rule with respect to subscription contract? It applies only to unissued shares. It does not apply to
treasury stocks.

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B. Section 61, CCP – Pre-incorporation subscription.

1. What is the general rule regarding irrevocability of subscription contracts of shares of a corporation that is still
to be incorporated? The contract is irrevocable within 6 months.
2. What are the exceptions?
a. It can be revoked if the corporation fails to incorporate after six months.
b. It can be revoked within 6 months if all subscribers will give their consent to the revocation.
3. What is the exception to the exception?
a. Even if all the subscribers give their consent, the contract cannot be revoked if the articles are already
submitted to the SEC.

C. Section 62, CCP – Consideration for stocks.

1. What are the rules with respect to consideration for issuance of stocks?
a. Par value or stated value shares cannot be issued below the par value or stated value.
b. Consideration maybe in cash, property, labor or services actually rendered, previously incurred
indebtedness, amounts transferred from unrestricted retained earnings.
c. If the consideration consists of tangible or intangible property, the value should be initially determined
by the incorporators or the board of directors subject to the approval by the SEC.
d. What is the rule with respect to shares issued in exchanged of promissory note?
i. If the transaction is between a corporation and the stockholder, shares cannot be issued in lieu
of promissory note.
ii. However, such is allowed if the transaction is between a stockholder and another stockholder.
This is a case of sale or alienation.
e. Shares of stock shall not be issued in exchange for future services.
f. The issued price of no-par value shares may be fixed in the articles of incorporation or by the board, if
the latter is authorized to fix the price by the articles, bylaws, or majority of the stockholders.

D. Section 63, CCP – Certificate of stock and transfer of shares.

1. What is a certificate of stock? It is an evidence of ownership. The certificate is signed by the president or vice
president, countersigned by the secretary or assistant secretary, and sealed with the corporate seal.
2. What is the nature of shares of stock? It is a personal property.
3. How is a certificate of stock be legally transferred?
a. By delivery of the certificate of stocks.
b. And indorsed by the stockholder or his agent.
4. How should the transfer be concluded to bind the corporation?
a. The transfer should be recorded in the stock and transfer book in the name of the transferee.
b. No transfer shall be recorded by the corporation until the same is fully paid.

E. Section 64, CCP – Issuance of stock certificates.

1. When should the corporation issue the certificate of stocks? Only when the shares are fully paid.
2. In the case of delinquent shares, all the interest and expenses shall be fully paid before the certificate of stocks can
be validly issued.

F. Section 65, CCP – Liability of directors for watered stocks.

1. What is a watered stock? Shares of stocks issued below par or stated value.
2. When is a director liable for watered stock? When he consented to the issuance of the stocks below par or stated
value.
3. What is the liability of a director for watered stock? He and the stockholder concerned (buyer) are solidarily liable
to the corporation and its creditors for the difference in the price.

G. Section 66, CCP – Interest on unpaid subscriptions.

1. What is the rule on payment of interest on subscription?

a. General Rule – No interest shall accrue.
b. Exception – When provided for in the by-laws.

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H. Sections 67 to 69, CCP – Remedies of the corporation to enforce payment of unpaid subscription.

Section 67. Payment of balance of subscription.

1. When should subscription be paid? On the date agreed in the subscription contract.
2. If the subscription contract does not provide for date of payment, when should the corporation demand payment
of subscriptions? At anytime upon CALL of the board of directors. Unpaid subscription is not deemed
delinquent until the CALL is made.
3. What is the legal effect if the subscriber fails to pay his subscription? The entire balance of the subscription will
become due and demandable and the subscriber will be liable to pay interest at the legal rate or that agreed in the
by-laws. Maturity of the subscription becomes accelerated.
4. When shall the shares become delinquent? Unpaid subscription becomes delinquent if there is no payment within
30 days from date subscription becomes due or CALL.
5. What is the legal effect if the shares become delinquent? The shares shall be subject to sale.

Section 68. Delinquency sale.

a. Who shall order the sale of delinquent shares? The board of directors.
b. The board, by resolution, should state the unpaid subscription, accrued interest, date, time and place of the sale.
c. The date of sale shall not be less than 30 days nor more than 60 days from the date the stocks becomes delinquent
(that is, if not paid within 30 days).
d. What are the procedures of delinquency sale?
a. Notice must be sent, in person or registered mail, to the delinquent stockholder.
b. Notice must be published once a week for 2 consecutive weeks in the newspaper of general circulation
in the province or city.
c. Sale to the highest bidder if the delinquent stockholder fails to pay on the date specified for the sale.
e. How should the amount of the delinquency shares computed? It is computed by adding:
a. unpaid subscription
b. accrued interest
c. costs of advertisement
d. expenses of sale
f. To whom shall the delinquent shares be sold if the delinquent stockholder fails to pay? Highest bidder.
g. Who is the highest bidder? Supposing the unpaid obligation of the delinquent shares of 5 is P1,000. During the
auction sale the following bid out: A – P1,000 for 5 shares; B – P1,100 for 4 shares; C – P1,100 for 3 shares.
 Who is the highest bidder between A, B, and C?
 C is the highest bidder because he offered to pay in full the obligation with the smallest number of shares.
h. Since the unpaid obligation is only P1,000 and C’s bid is P1,100, where will the excess of P100 go?
 To the corporation.
i. What about the 2 shares since C is willing only to accept 3 shares?
 To the delinquent stockholder.
j. Supposing there is no bidder during the auction, what happened to the delinquent shares? It shall be paid by the
corporation from its unrestricted retained earnings and the shares will become treasury stocks.

Section 69. When sale may be questioned.

1. Can a delinquent stockholder question the regularity of the notice of sale or the sale itself of his delinquent
shares?
a. General Rule – NO.
b. Exception – If he has paid or tendered to the purchaser of the stocks the amount the latter paid for such
shares and the interest.
2. Is there a prescriptive period to file such action? YES. The action must be filed within 6 months from the date of
sale.

I. Section 70, CCP – Court action to recover unpaid subscription.

1. This section provides for another remedy to collect unpaid subscription.

2. The remedy provided is by court proceedings for collection.
3. What is the distinction between CALL and COURT PROCEEDING?
a. In CALL, the collection is done by the board of director; while in COURT PROCEEDING, the collection is
done by court process.
Business Organization II (Notes) Page 24 of 33 pages
 b. In CALL, the delinquent shares are sold in public auction; while in COURT PROCEEDING, the delinquent
stockholder is forced to pay his unpaid obligation.

J. Section 71, CCP – Effects of delinquency.

1. What are the rights of the delinquent shares? Only the right to receive dividends in accordance with Section 43.
2. Delinquent shares are denied all other rights like right to vote, preemptive right, representation.

K. Section 72, CCP – Rights of unpaid shares.

1. Section 71 refers to delinquent shares. Section 72 refers to unpaid shares.

2. Unpaid shares enjoy all the rights of a shareholder.

TITLE VIII. CORPORATE BOOKS AND RECORDS

A. Section 74, CCP – Books to be kept; stock transfer agent.

1. The books to be kept by the corporations are:

a. Journals and ledgers.
b. Minute book for stockholders/members meeting.
c. Minute book for board meetings.
d. Stock and transfer book.
2. The books are to be kept at the principal office of the corporation.
3. It should be accessible to the stockholders/ members for inspection during reasonable business hours. This right
cannot be denied to the stockholder/member without reasonable cause.

B. Section 75, CCP – Right to financial statements.

1. The stockholder/member cannot be denied the right to examine the financial statements of the corporation
during reasonable business hours.
2. This right includes the right to examine the corresponding books of accounts.

TITLE IX. MERGER AND CONSOLIDATION

A. Section 76, CCP – Plan of merger or consolidation.

1. Merger is the process of combining two or more corporations into one corporation, which is one of the
constituent corporation.
2. Consolidation is the process of combining two or more corporations into one corporation, which is a new
corporation.

B. Section 77, CCP – Stockholder’s or member’s approval.

1. The decision to merge or consolidate must be approved by the board of both corporations and approved by the
stockholders or members representing 2/3 of the outstanding capital stock or members of each corporation.
2. The dissenting stockholder may exercise his appraisal right.

C. Section 79, CCP – Articles of merger or consolidation.

1. After the approval of the merger/consolidation, an article of merger or consolidation, as the case maybe, shall be
executed by each constituent corporation, signed by the president and certified to by the secretary.

D. Section 80, CCP – Effects of merger or consolidation.

1. The existing obligations of the old corporation shall be assumed by the new corporation.
2. This section cannot be used to escape liabilities to 3rd persons.
3. In case of merger or consolidation, debts and obligations of the old corporation are transmitted to the new
corporation.
4. Question: Supposing a corporation is dissolved and a new corporation is created in lieu of the dissolved one.
What is the effect of such dissolution on the newly created corporation? In cases where all the stockholders of the
Business Organization II (Notes) Page 25 of 33 pages
 dissolved corporation are also stockholders of the new corporation, there is in effect a de facto merger. The
liabilities of the dissolved corporation become the liabilities of the new corporation.

TITLE X. APPRAISAL RIGHT

A. Section 81, CCP – Instances of appraisal right.

1. What is an appraisal right? It is the right of a dissenting stockholder to demand the payment at fair value of his
share in cases provided for by the corporation code.
2. The instances of appraisal right are:
a. In the case amendment of the articles that change or restrict the rights of the stockholder.
b. In the case of sale, lease, exchange, transfer, mortgage, pledge and other dispossession of all or
substantially all of the corporate properties.
c. In the case of merger and consolidation.
d. In the case of investment of corporate funds under Sec. 42.

B. Section 82, CCP – How right is exercised.

1. The procedure to exercise the appraisal right is as follows:

a. Make a written demand to make payment on the shares by the corporation within 30 days from date of
voting.
b. Surrender of the certificate of stocks to the corporation.
c. Payment by the corporation of the fair value of the shares on the day prior to the date of vote.
2. How should the market value be determined? By agreement of the stockholder and the corporation, which should
be done within 60 days.
3. What should be done if the stockholder and the corporation cannot agree on the fair value of the shares within 60
days? The value will be determined by 3 disinterested persons; one by the stockholder, one by the corporation,
one to be chosen by the stockholder and corporation.
4. Payment of the fair value of the stocks should be made from the unrestricted retained earnings.

C. Section 83, CCP – Effect of demand and termination of right.

1. From the time of demand for payment of the fair value of the shares, all the rights of the stockholder are
suspended, except the right to receive payment of the fair value of the shares.
2. If the corporation fails to pay the dissenting stockholder within 30 days from demand, the rights shall be
automatically restored.

TITLE XI. NON-STOCK CORPORATIONS

A. Section 87, CCP – Definition.

1. Characteristics of a non-stock corporation:

a. The capital account is not divided into shares of stocks.
b. No part of its income is distributed to the members, trustees, officers.
c. Dissolution of the corporation is governed by Sec. 94.
d. The profits are to be used in furtherance of its purpose.
2. Take note of the second paragraph that states, the provisions governing stock corporations, when pertinent, shall
be applicable to non-stock corporations.
3. What are the provisions governing stock corporations that are applicable to non stock corporations as
well?
a. Sec. 5.
b. Sec. 7 will apply only when the by-laws will classify some members as founding members.
c. Sec. 8, if the articles provide for redeemable membership. Correlate it with Sec. 89 as to the voting right
of the members according to the class or classes of membership.
d. Sec. 10. However, the no. of trustees can be more than 15 when the articles or by-laws provide it as
sanctioned under Sec. 92.
e. Sec. 11.
f. Sec. 14, but not all e.g. no. 8 on authorized capital stock.
g. Sec. 15 but not all e.g. no. 7th paragraph.
h. Sec. 16.
Business Organization II (Notes) Page 26 of 33 pages
 i. Sec. 17.
j. Sec. 18. Note of the case Lyceum vs. SEC where the SC ruled that the use of the word “lyceum” in the
corporate name of Lyceum of Baguio is not confusingly similar to the use of the same word in the
corporate name of Lyceum of the Philippines because such word is a generic name and Lyceum of the
Philippines failed to prove that it had acquired secondary meaning of the word “lyceum” so that it can
legally claim exclusivity.
k. Sec. 23 will apply if the articles provide that the term of the trustee is 1 year, otherwise the term is 3
years under Sec. 92.
l. Sec. 24 will apply except that cumulative voting will apply if provided in the by-laws.
m. Sec. 25 but the required quorum is fixed in the articles.
n. Sec. 26.
o. Sec. 28 will apply but only those members who are entitled to vote are allowed to vote for the removal of
a trustee applying Sec. 6.
p. Sec. 30 on compensation of directors will apply by analogy.
q. Sec. 31 on liability of directors, trustees, officers.
r. Sec. 32 on dealings of directors, trustees, officers.
s. Sec. 33 on corporate contracts with interlocking directors may be applicable if the membership is
coupled with proprietary interest.
t. Sec. 34 on disloyalty of director.
u. Sec. 35 on executive committee.
v. Sec. 36 on corporate powers and capacity. With respect to donations made by corporations, the same is
allowed if provided for in the articles. If the articles is silent about the power to donate, the same is
allowed provided that the donation is reasonable.
w. Sec. 37 on power to extend or shorten corporate life.
x. Sec. 38 on power to increase/decrease capital stock and bonded indebtedness. However, only on the
aspect of bonded indebtedness shall be applicable to a non-stock corporation. Note that issuance of
debentures does not require BOD approval because debentures are not bonded indebtedness.
y. Sec. 39 on the power to deny pre-emptive right. May apply in the concept of transferability of
membership. In the absence of the provision in the articles/by-laws, the membership cannot be
transferred. However if the articles/by-laws allows transfer of membership, pre-emptive right may be
made to apply by analogy.
z. Sec. 42 on the power to invest corporate funds.
aa. Sec. 44 on power to enter into management contract. Maybe made to apply by analogy.
bb. Sec. 45 on ultra vires act.
cc. Sec. 46 – 54 on corporate by-laws.
dd. Sec. 55 on right to vote of pledgors, mortgagors, administrators. Pledge or mortgage of membership is
allowed only when the articles/bylaws provide it as sanctioned in Sec. 90.
ee. Sec. 59 on voting trust. Voting trust is not allowed as a general rule. Exception, when allowed by the by-
laws because of the prohibition in Sec. 90.
ff. Sec. 73 on lost or destroyed certificates. It is applicable by analogy.
gg. Sec. 76 in relation to Sec. 77 on merger and consolidation. Allowed only if the two corporations are both
non-stock. If one is stock and the other is non-stock, the merger or consolidation is not allowed.

B. Section 94, CCP – Rules of distribution.

1. Members may receive assets of a non-stock corporation during dissolution if allowed in the articles. As a general
rule, the assets of a dissolved non-stock corporation should be distributed in accordance with this section.
a. Question: What about in the case of a stock corporation, how should its assets be distributed upon
dissolution? It shall be distributed in the following order:
i. First, corporate creditors in payment of obligations.
ii. Second, to the stockholders with claims against the corporation.
iii. Third, to the stockholders in return of capital.

TITLE XIII. SPECIAL CORPORATIONS

A. Foreign corporations.

1. A foreign corporation should secure a license with the SEC before it can engage business in the Philippines under
Sec. 124 and Sec. 126.

Business Organization II (Notes) Page 27 of 33 pages

 2. A foreign corporation doing business in the Philippines without a license can be sued. Hence, can file an answer
but cannot set up a counterclaim because it cannot sue.
3. Doing business means any of the following acts:
a. Operating a branch office.
b. Soliciting contracts.
c. Offering services.
d. Appointing an agent.
4. Can a foreign corporation without license to do business in the Philippines file a case in the Philippines for
violation of intellectual property? YES. License to do business is not necessary in enforcing intellectual property
right. La Coste case.
5. Can a single isolated transaction be considered as doing business in the Philippines? YES if intended to be the
start of the series of transactions.
6. Sec. 127 – Who can be a resident agent of a foreign corporation?
a. Any resident individual.
b. Any domestic corporation.
7. What laws shall govern a foreign corporation?
a. With respect to its internal affairs – the law of the country where the foreign corporation is organized
(Citibank case).

B. Corporation Sole.

1. Only the head of a religious organization can incorporate as a corporation sole.

2. Question: Can a group of religious ministers incorporate as a corporation sole? NO. If they wish to incorporate,
they can register as a religious society of a religious order.

C. Educational Corporation.

1. An application for registration as an educational corporation requires the favorable recommendation of the SEC.
2. It may be organized as a stock or non-stock corporation.
3. The term of the board of trustees is 5 years with term of the 1/5 of trustees expiring every year.

D. Close Corporation

1. All shares of stocks shall be held by persons not exceeding 20.

2. Restrictions on transfer of shares may be provided but should not be more onerous than the right of first refusal
under Sec. 98.
3. No listing of shares of stock in public.
4. It may not provide for a board of directors but all the stockholders who managed the corporation are held liable
as directors.
5. May provide for greater quorum requirements, not just simple majority.
6. The representation of the board of directors, if provided, may be apportioned among various groups of shares.
7. Pre-emptive right in the corporation may apply to treasury stocks under Sec. 102, unlike stock corporation.
8. In case of deadlocks by stockholders, the same will be arbitrated by the SEC as provided in Sec. 104.

2. DISSOLUTION

2.1 Nature of a dissolution:

 signifies the extinguishment of a franchise
 termination of its corporate existence for business purpose
 mere fact that the corporation has ceased to do business does not necessarily constitute a dissolution, if it is
still solvent and does not go into dissolution

2.2 Dissolution may either be:

2.2.1 de jure  one adjudged and determined by administrative or judicial sentence or brought about by an act
of sovereign power or which results from the expiration of the charter period of corporate life
2.2.2 de facto dissolution  a dissolution only of a business enterprise, while leaving intact the juridical entity

2.3 Three methods by which a stock corporation may be voluntarily dissolved are:
2.3.1 Voluntary dissolution where no creditors are affected. This is done by a majority vote of the directors, and
resolution of at least 2/3 vote of stockholders, submitted to the SEC.
Business Organization II (Notes) Page 28 of 33 pages
 2.3.2 Voluntary dissolution where creditors are affected. This is done by a petition for dissolution which must
be filed with the SEC, signed by the majority of the members of the BOD, verified by the president or
secretary, and upon affirmative vote of stockholders representing at least 2/3 of the outstanding capital stock
2.3.3 Dissolution by shortening of the corporate term. This is done by amendment of the articles of
incorporation.
 Allowing the expiration of the corporate term as provided in the articles of the corporation.

2.4 Section 118 Voluntary Dissolution Where No Creditors are Affected

 Only a SEC application is required.
 Process is equivalent to the application for amendment of articles of incorporation except that in addition
Publication of the notice of dissolution must also be complied with.

Procedural requirements:
1) Majority vote of the board of directors or trustees adopting a resolution for the dissolution of the
corporation.
2) Sending of notices to each stockholder/member either by registered mail or by special delivery, of the
time, place and object of the meeting calling for the approval of the dissolution of the corporation, at least
30 days prior to said meeting.
3) Publication of notice of meeting for 3 consecutive weeks in a newspaper published in the place where the
principal office of said corporation is located, and if none, in a newspaper of general circulation in the
Philippines.
4) Resolution adopted by the affirmative vote of the stockholders owning at least 2/3 of the outstanding
capital stock, or of at least 2/3 of the members, at a meeting held on the call of the directors or trustees.
5) Submission to SEC of a copy of the resolution authorizing the dissolution certified by a majority of the
BOD or trustees and countersigned by the secretary of the corporation.

QUESTION: If there are no creditors involved, may the SEC deny the application?
ANSWER: No, because it would constitute involuntary servitude and it would be against the constitutional
guarantee of association and the right to refuse to continue an association.

2.5 Sec. 119 – Voluntary Dissolution Where Creditors Are Affected

 File a formal petition for dissolution with the SEC.
 Proceedings are quasi-judicial in nature and conducted to ensure that the rights of the creditors are fully
protected.
 SEC not mandated to dissolve the corporation.

2.6 Dissolution by Expiration of the Corporate Term

 Corporation is deemed dissolved without need of further action on the part of the corporation.

2.7 Involuntary Dissolution

 May be dissolved by the filing with SEC of a verified complaint and after proper notice and hearing.

Grounds for Involuntary Dissolution:

1) Failure of the corporation to formally organize and commence the transaction of its business or the
construction of its works within 2 years from the date of its incorporation (adoption and approval of by-laws,
election of the board of directors and officers, establishment of the principal office and providing for the
subscription and payment of the capital). Commencing of business means preparatory acts geared towards
the fulfillment of the contracts.
2) Continuous inoperation for a period of 5 years after commencement of business.
3) Failure to adopt and file a code of by laws as provided for by law.
4) When the corporation has offended against a provision of law for its creation or renewal.
5) Committed or omitted an act which amounts to a surrender of its corporate rights, privileges or franchise
(Rule 66 of the RC).
6) Misuse of a right, privilege or franchise conferred upon it by law.
7) Continuance of the business would not be feasible.
8) Corporation is guilty of fraud in procuring certificate of registration.
9) Corp is guilty of serious misrepresentation.
10) Refusal to comply with the lawful order of SEC.
11) Failure to file required reports.

Business Organization II (Notes) Page 29 of 33 pages

3. LIQUIDATION

Nature of Liquidation:
 The process by which all the assets of the corporation are converted into liquid assets (cash) in order to pay
for the claims of corporate creditors, and the remaining balance if any, it to be distributed among
stockholders.
 Liquidation proceeding is in rem so that all other interested persons whether known to the parties or not.
 Settlement of the affairs of a corporation consisting of adjusting the claims and debts.
 Dissolution always precedes liquidation in view of the trust fund doctrine.
 Basis is Section 122, xxx nor corporation shall distribute any of its assets except upon lawful dissolution
and after payment of all its debts and liabilities.
 A single proceeding which is basically a two-phased proceeding –first phase is concerned with the approval
and disapproval of claims; 2nd phase is approval of the liquidation plan.

Methods of Liquidation:
1. Liquidation through Board of Directors or Trustees (normal method of procedure)
2. Liquidation through Trustee – Property of the corporation is transferred to the trustee; legal interest vests in
the trustee and beneficial interest in the stockholders and creditors; unless limited in its duration by the
deed of trust, there is no time limit which the trustee must finish the liquidation. The term includes the
counsel to whom was entrusted the pending case.
3. Liquidation through Receiver – Receivership is created by means of judicial or quasi-judicial appointment of a
receiver.

Distinctions between a trustee and a receiver:

Trustee Receiver
1. Trusteeship is basically a contractual 1. There is a need of judicial or quasi-judicial
relationship governed by the Law on trust. authorization.
2. Covers not only the property but the entire
2. Generally centered upon property.
business of the corporation.
3. Appointed by the BOD. 3. Appointed by the court or SEC.
4. Both have legal title to the assets of the
4. Same.
corporation.
5. The period of 3 years liquidation is not
5. Same.
applicable, it may go beyond three years

Powers and Functions of the SEC

 In general, this include enforcement of all laws affecting private corporations eg., Corporation Code, PD 902-
A, the Investment House Law, the Financing Act and other existing laws.
 It has the power to authorize the establishment and operation of stock exchanges, commodity exchanges and
other similar organizations and to supervise and regulate the same; including the authority to determine
their number, size and location, in the light of national or regional requirements for such activities with the
view to promote, conserve or rationalize investment.

Powers of SEC:
1. Regulatory powers of SEC under the Corporation Code:
a. to register private corporations, including the power to pass upon its articles of incorporation
b. to approve or disapprove amendments to the articles of incorporation
c. to approve or disapprove issuance of founder’s shares
d. to approve or disapprove increase or decrease in capital stock of a corporation
e. to determine sufficiency of terms of bonds issued by corporations
f. to approve or disapprove by-laws and amendments thereto
g. to approve the consideration of stock subscription other than actual cash
h. to de-list or delete corporate name confusingly similar with t h at already owned by another
i. to register stock transfer stock agent and issue licenses thereof
j. to approve or disapprove mergers or consolidations
k. to act on petitions for enforcement of appraisal rights and payment of fair value of shares of
dissenting stockholders

Business Organization II (Notes) Page 30 of 33 pages

 l. to arbitrate deadlocks in close corporations, and to compel dissolution of such corporation in
appropriate cases
m. to approve dissolution of corporation
n. to license foreign corporations
o. to suspend or revoke corporate franchise or license
2. The Securities Regulation Code gives SEC the power to protect public investors from fraudulent schemes by
regulating the sale and disposition of securities. The SRC expressly repealed Secs. 2, 4 and 8 of PD No. 902-A
and transferred SEC’s quasi-judicial power in Sec. 5 thereto to the RTC namely:
a. Fraud scheme proceedings (Sec. 5A)
b. Intra-corporate disputes (Sec. 5B)
c. Election of officers and directors (Sec. 5C)
d. Proceedings for suspension of payments (Sec. 5D)

SUSPENSION OF PAYMENTS

Two types of corporate Suspension of Payments Proceedings:

Insolvency Law P.D. No. 902-A

(Act No. 1956, as amended)
As to the suspensive effect of Does not cover secured creditors Under P.D. No. 902-A upon appt of
order issued by the court management com/rehab receiver
would cover all corporate
creditors, both secured and
unsecured
Expiry of the automatic stay in The automatic stay would expire Automatic stay has no time limit
the absence of any agreement after 3 months and prevails for so long as the
among creditors corporate debtor is under a mgmt
committee/rehab receiver and
there is no directive to liquidate
the assets
Final agreement on the manner Subject to the qualifying majority Mgmt committee/ rehab receiver
of payment of the obligations of votes under the Insolvency Law – is granted sufficient powers to take
corporate creditor (2/3 of the creditors voting shall such measures as are necessary to
unite upon the proposition, and bring back to financial health the
their claims represents at least 3/5 distressed co. without need to
of liabilities of the corporation) obtain creditors

CORPORATE REHABILITATION

Definition of Corporate Rehabilitation:

- A process to try to conserve and administer the corporation’s assets in the hope that it may eventually be able
to return from financial stress to solvency.
- Contemplates the continuation of corporate life and activities so that it be able to return to its former
condition of successful operations and financial stability.

 The SEC in considering whether to rehabilitate or not, the SEC gives preference to the interest of creditors
including employees

Interim Rules of Procedure on Corporate Rehabilitation (2000)

1) Rehabilitation proceedings are said to be in rem
2) Summary and non-adversarial in nature
3) Orders issued by RTC are immediately executory (sec. 5, rule 3)
4) Based on SEC Rules on Corporate Recovery
5) Legal basis is Sec. 5.2 of the SRC
6) Do not contain provisions for the appointment of a management committee
7) Rehabilitation receiver shall not take over the management and control of the debtor but shall closely oversee
and monitor the operators of the debtor during the pendency of the proceedings and for this purpose shall
have the powers, duties and functions of a receiver under PD 902-A and the Rules of Court (Sec. 14, Rule 4)

Business Organization II (Notes) Page 31 of 33 pages

Legal Effect of Appointment of Management Committee/Rehabilitation Receiver:
- AUTOMATIC STAY (American bankruptcy parlance) – Upon appointment of a management committee,
rehabilitation receiver, board or body …… all claims against the corporation …… under management or
receivership pending before any court shall be suspended accordingly.
- No duration or time limit under P.D. No. 902-A as cited in the case of RCBC vs. IAC, 213 SCRA 830, 838 (1992)
where SC ruled that the prohibition against foreclosure attaches as soon as a petition for rehabilitation is
filed. But in resolving the motion for reconsideration, SC reversed its ruling and ruled that the automatic stay
would be effective only upon appointment of a management committee.
- Conclusion: Pursuant to Section 6 d, together with Sections 5c and d, a court action is ipso jure suspended
only upon the appointment of a management committee or rehabilitation receiver.

Rationale of Automatic Stay:

- Suspension of actions is intended to give enough breathing space for the management
committee/rehabilitation receiver to make the business viable again without having to divert attention and
resources to litigation (Finasia Investments and Finance Corp. vs. CA, 237SCRA 446, 1994).

Claims – Debts or demands of a pecuniary nature or one involving monetary claim under the Finasia ruling but this is
changed already under the Interim Rules on Corporate Rehabilitation which defined claims to include all claims or
demands of whatever nature or character against a debtor or its property whether for money or otherwise
reversing the Finasia ruling. (Sec. 1, Rule 2)

Coverage of Automatic Stay:

- All creditors – both secured and non secured creditors

 In Alemar’s Sibal and Sons, Inc. vs. Elbinias 186 SCRA 94, 1990, the court held that during rehabilitation
receivership, the assets are held in trust for the equal benefit of all creditors to preclude one from obtaining an
advantage or preference over another by the expediency of attachment, execution or otherwise.

 As between creditors the key phrase is “equality is equity”, that is all creditors should stand on equal footing.

Powers of Management Committee/Rehabilitation Receiver:

1. To take custody of, and control over, all the existing assets and property of such entities under management.
2. To evaluate the existing assets and liabilities, earnings and operations of such corporations, partnerships or
other associations.
3. To determine the best way to salvage and protect the interest of the investors and creditors.
4. To study, review and evaluate the feasibility of continuing operations and structure and rehabilitate such
entities if determined to be feasible by the SEC now the RTC.
5. To report and be responsible to the SEC (now the RTC) until dissolved by the SEC (now the RTC).
6. May overrule or revoke the actions of the previous management and board of directors of the entity or
entities under the management notwithstanding any provision of law, articles of incorporation or by-laws to
the contrary.

 THEY ARE NOT SUBJECT TO ANY ACTION, CLAIM OR DEMAND FOR OR IN CONNECTION WITH ANY ACT DONE
OR OMITTED TO BE DONE BY IT IN GOOD FAITH.

 Under the Interim Rules on Corporate Rehabilitation, Rehabilitation Receiver is no longer allowed to take control
and manage the corporation. Its role is to closely oversee and monitor the operations of the debtor during the
pendency of the proceedings. But under the Interim Rules of Procedure on Intra-Corporate Controversies, the
management committee may be appointed by RTC in corporate rehabilitation proceedings.

 RTC is empowered to approve a rehabilitation plan even over the opposition of creditors holding a majority of the
total liabilities of the debtor, if in its judgment, the rehabilitation of the debtor is feasible and the option of the
creditors is manifestly unreasonable.

Business Organization II (Notes) Page 32 of 33 pages

 In determining whether or not the opposition of the auditors is manifestly unreasonable, the RTC shall
consider the following:
1. The plan would likely provide the objecting class of creditors with compensation greater than that which they
would have received if the assets of the debtor were sold be a liquidation with a 3 month period.
2. The shareholder should lose at least their controlling interest as the result of the plan.
3. The Rehabilitation receiver has recommended approval of the plan.

Effect of the approval of the rehabilitation plan by the RTC:

1. Binding effect upon the corporation debtor and creditors and all persons.
2. Corporate debtor to carry out the provisions of the plan.
3. Payments shall be made to creditors in accordance with the plan.
4. Contracts and other arrangements between the creditors and debtors shall be interpreted as continuing
except if it conflicts with the plan.
5. Any compromises on amounts or rescheduling of timing of payments by the debtor shall be binding on
creditors whether or not the plan is successfully implemented.

 Rehabilitation plan may be revoked if within 90 days from approval of the rehabilitation plan and after notice or
hearing, the same was secured through fraud.

INSOLVENCY PROCEEDINGS

Governing Law – Act No. 1956 (Insolvency Law)

Jurisdiction – RTC under the provisions of the Insolvency Law

Amendments:

Landmark case is Ching vs. Land Bank of the Philippines, 201 SCRA 190 (1991). The following permutations were
laid down:
a) Where the petition filed is one for declaration of a state of suspension of payments due to a recognition of the
inability to pay one’s debts and liabilities and where the petitioning corporation either:
a. Has sufficient property to cover all its debts but foresees the impossibility of meeting them when
they fall due (solvent but illiquid); or
b. Has no sufficient property(insolvent) but is under the management of a rehabilitation receiver or a
management committee
 The applicable law is PD 902 A pursuant to sec. 5 of paragraph d thereof
b) Where the petitioning corporation has no sufficient assets to cover its liabilities and is not under
rehabilitation receiver or management committee created under PD 902A and does not seek merely to have
the payment of its debts suspended, but seeks a declaration of insolvency, the applicable law is Act No. 1956
on voluntary insolvency.

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