Revised Corporation Code of the Philippines also known as R.A. No.

11232

I. Attributes of Corporation

Definition of Corporation – It is an artificial being created by operation of law, having

the right of succession and the powers, attributes and properties expressly authorized by
law or incident to its existence.

a. It is an artificial being.

i. Implications of corporation for being artificial being

1. The corporation cannot be held criminally liable particularly the penalty

of imprisonment but it may be held liable for fines for corporate crimes.
The corporate officers who approve the particular corporate crime will be
the ones to be held criminally liable.

2. As a general rule, a corporation is not entitled to moral damages

because, not being a natural person, it cannot experience physical
suffering or sentiments like wounded feelings, serious anxiety, mental
anguish and moral shock except when a corporation has a reputation
that is debased, resulting in its humiliation in the business realm such in
the case of civil action for damages on the ground of libel or defamation.

3. The corporation is not entitled to constitutional right against self-

incrimination.

ii. Doctrine of separate personality means that a corporation has a personality

separate and distinct from the stockholders and affiliated companies.

iii. Limited liability rule means that the stockholders are liable only up to the
extent of their capital contribution when it comes to corporation’s liabilities.

iv. Trust fund doctrine means that assets of the corporations are considered trust
fund reserved for payment of liabilities to creditors of the corporation.

v. Doctrine of Piercing the veil of corporate fiction as an exception to

doctrine of separate personality

a. Fraud cases – When corporate fiction is used to commit fraud.

b. Alter ego cases – When the corporation is a mere

instrumentality or alter ego of the stockholders or owners.

c. Defeat public convenience cases – When the corporate

fiction is used to commit tax evasion or to justify a wrong or to
defend a crime.

d. Equity cases – In case of labor cases in order to promote social

justice.

b. It is created: (1) by operation of law in case of private corporation or (2) by

enactment of special law in case of public corporation.

i. The 1987 Constitution provides that only public corporations may be created by
special law while all private corporations must be created by operation of general
corporation law which is the Corporation Code of the Philippines a.k.a. R.A. No.
11232 through filing articles of incorporation to SEC and waiting for the latter's
issuance of certificate of registration.
 ii. Concession theory means that a corporation owes its existence to the law and
the state and the extent of its existence, powers and liberties is fixed by its
charter. Thus, it only possesses properties, attributes, rights and powers
provided by law or incident to its existence.

c. It enjoys the right of succession because it continues to exist despite the

death of the founders since the heirs or assignees of the stockholders will
inherit the shares of their predecessors.

i. Right of succession best describes the strong juridical personality of the

corporation.

ii. Corporate Tem - A corporation shall have perpetual existence unless its articles
of incorporation provides otherwise. Corporations with certificates of
incorporation issued prior to the effectivity of the Corporation Code and which
continue to exist shall have perpetual existence, unless the corporation, upon a
vote of its stockholders representing a majority of its articles of incorporation:
Provided, That any change in the corporate right of dissenting stockholders in
accordance with the provisions of the Corporation Code. A corporation whose
term has expired may apply for revival of its corporate existence, together with
all the rights and privileges under its certificate of incorporation and subject to all
of its duties, debts and liabilities existing prior to its revival. Upon approval by
the SEC, the corporation shall be deemed revived and a certificate of revival of
corporate existence shall be issued, giving it perpetual existence, unless its
application for revival provides otherwise. No application for revival of certificate
of incorporation of banks, banking and quasi-banking institutions, preneed,
insurance and trust companies, non-stock savings and loan associations
(NSSLAs), pawnshops, corporations engaged in money service business, and
other financial intermediaries shall be approved by the Commission unless
accompanied by a favorable recommendation of the appropriate government
agency.

iii. Period for renewal of corporate term of private corporation

1. A corporate term for a specific period may be extended or shortened by
amending the articles of incorporation: Provided, That no extension may
be made earlier than three (3) years prior to the original or subsequent
expiry date(s) unless there are justifiable reasons for an earlier extension
as may be determined by the SEC: Provided, further, That such
extension of the corporate term shall take effect only on the day
following the original or subsequent expiry date(s).

iv. Effect of failure to renew the corporate term within the deadline for
renewal
1. A corporation with a fixed term whose term has expired may apply for
revival of its corporate existence, together with all the rights and
privileges under its certificate of incorporation and subject to all of its
duties, debts and liabilities existing prior to its revival. Upon approval by
SEC, the corporation shall be deemed revived and a certificate of revival
of corporate existence shall be issued, giving it perpetual existence,
unless its application for revival provides otherwise.

d. It has the powers, attributes, properties expressly authorized by law or

incident to its existence.

i. Types of powers of corporation

1. Express powers refer to the powers expressly provided, enumerated

and granted by the Corporation Code or special law to a corporation
a. To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage and deal with real and personal property,
securities and bonds.
b. For stock corporations, to issue and sell stocks to subscribers
and treasury stock, for nonstock corporation, to admit members
c. To enter into merger or consolidation
 d. To establish pension, retirement, and other plans for the benefit
of its directors, trustees, officers and employees
e. To sue and be sued
f. To make reasonable donations for public welfare, hospital,
charitable, cultural, scientific, civic or similar purposes
g. Right of succession
h. To adopt and use of corporate seal
i. To amend its articles of incorporation
j. To adopt its by-laws
k. To enter into a partnership, joint venture, merger, consolidation,
or any other commercial agreement with natural and juridical
persons
l. In case of domestic corporation to give donations in aid of any
political party or candidate or for purposes of partisan political
activity. However, no foreign corporation shall give donations in
aid of any political party or candidate or for purposes of partisan
political activity.

2. Implied or necessary powers are those inferred from or reasonably

necessary for the exercise of the provided powers of the Corporation.
They flow from the nature of the underlying business enterprise.
a. To issue checks or promissory note or bill of exchange or
mercantile documents
b. To establish a local post office in case of a mining company
c. To operate power plant in case of a cement factory company
d. To sell, supply or manage advertising materials in case of an
advertising company

3. Incidental or inherent powers are powers that attached to a

corporation at the moment of its creation without regard to its expressed
powers or particular primary purpose and may be said to necessarily
arise from its being a juridical person engaged in business. They flow
from the nature of the corporation as a juridical person.
a. Right of succession
b. Right to have corporate name
c. Right to make by-laws for its governance
d. Right to sue and be sued
e. Right to acquire and hold properties for the purposes authorized
by the charter

ii. Ultra Vires Acts or Contracts are acts committed outside the object for which
a corporation is created as defined by the law of its organization and therefore
beyond the express, implied and incidental powers of the corporation.

iii. Status of Ultra Vires Acts by the Corporation

1. Ultra vires acts which are illegal per se – Null and void
2. Ultra vires acts for failure to comply with voting formality required by law
– Null and void but the declaration of nullity may be barred by estoppel
3. Ultra vires acts for being outside the primary and secondary purposes of
the corporation – Voidable on the part of the other party

iv. Status of ultra vires acts or contracts by the corporate officers in behalf
of the Corporation

1. Ultra vires acts which are illegal per se – Null and void
2. Ultra vires acts which are unauthorized or when the corporate officers
exceed their authority – Unenforceable but they may become
enforceable on the basis of (1) express or implied ratification by the
corporation (2) doctrine of estoppel or (3) doctrine of apparent authority
of the corporate officers
 e. Advantages of forming a corporation
i. Continuity of existence
ii. Limited liability on the part of investors
iii. Strong juridical personality
iv. Legal capacity to act as a distinct unit
v. Centralized management
vi. Ease in transferability of shares of stocks in case of stock corporation
vii. Ease in raising funds

f. Disadvantages of forming a corporation

i. High cost of formation
ii. Little voice of stockholders in management
iii. Weakened credit rating because of limited liability feature
iv. Being subject to greater degree of governmental regulation
v. More taxes particularly indirect double taxation

II. Types of Corporation

a. As to formation and nature

i. Public corporation is a corporation created by special law for public purpose.

1. Municipal corporation is a public corporation created by special law

for the governance of a particular local territory.

2. Government owned and controlled corporation is a public

corporation created by special law for public purpose but performing
proprietary or commercial functions.

ii. Private corporation is a corporation created by operation of law for private

interest.

1. Civil corporation is a private corporation for profit or business.

2. Quasi-public corporation a.k.a. public utility is a private

corporation owned by private individuals but performing an essential
governmental function.

iii. Corporation by prescription is a corporation created by lapse of time. It is the

only corporation that obtains juridical personality even without franchise granted
by state or even without filing articles of incorporation to SEC.

b. As to purpose

i. Civil corporation is a corporation created for profit.

ii. Lay corporation is a corporation created for a purpose other than religion.

iii. Eleemosynary corporation is a corporation created for charity.

iv. Ecclesiastical or religious corporation is a corporation created for religious

purposes.

1. Corporation sole is a religious corporation with a single corporator.

2. Corporation aggregate or religious society is a religious corporation

governed by Board of Trustees.
c. As to being subject to direct attack by the state

i. De jure corporation is a corporation both in fact and in law. Its juridical

personality is not subject to the direct attack by the state.

ii. De facto corporation is a corporation in fact but not in law. Its juridical
personality is subject to direct attack by the state through a special civil action of
quo warranto proceedings.

iii. Ostensible corporation or corporation by estoppel is not actually a

corporation since it does not have a charter. However, the persons pretending to
be corporation will be liable as general partners for the contracts they have
entered into.

1. When such ostensible corporation is sued on any transaction entered by

it as a corporation or on any tort committed by it as such, it shall not be
allowed to use as defense its lack of corporate personality.

2. When persons entered into a contract or obligation with ostensible

corporation as such, such persons cannot resist performance of the
obligation on the ground that there was in fact no corporation.

d. As to nationality - Doctrine of Incorporation means that the nationality of the

corporation is determined by the place of its incorporation or the law that created such
corporation.

i. Domestic corporation is a corporation created by Philippine Law particularly

RA No. 11232. Domestic corporation is no longer required to obtain license from
SEC to engage business in the Philippines. It may sue and be sued in Philippine
courts.

ii. Foreign corporation is a corporation created by law of other countries. Foreign

corporation is required to obtain license from SEC before it may engage in
business in the Philippines. It must appoint a resident agent in the Philippines
before it may be given by license by SEC to engage in business in the
Philippines.
1. Right to sue of foreign corporation not doing business in the Philippines
before Philippine Courts
a. It may sue and be sued in Philippine courts for isolated
transactions it entered into within Philippine territory.
b. It may sue in Philippine courts for violation of its intellectual
property rights.
2. Right to sue or personality to be sued of a foreign corporation doing
business in the Philippines with license
a. It may sue and be sued in Philippine courts.
3. Effects if a foreign corporation doing business in the Philippines without
licenses
a. It may be sued on Philippine courts.
b. Generally, it may not sue before Philippine courts except in case
of estoppel. However, it must obtain the necessary license and
submit proof of its compliance with the requirement of law for
the suit to prosper.

e. As to control or ownership

i. Holding or parent corporation is a corporation that controls another

corporation.

ii. Subsidiary corporation is a corporation being controlled by another

corporation.

iii. Affiliate is a corporation which is a member of a group of companies.

iv. Associate is a corporation being significantly influenced by an investor.

 f. As to presence of stocks and distribution of dividends

i. Stock corporation is a corporation whose capital stock is divided into shares of

stocks and is authorized to declare dividends to its stockholders.

ii. Nonstock corporation is a corporation which has no shares of stocks and is

not authorized to declare dividends.

1. Mode of conversion of nonstock corporation to stock

corporation
a. By dissolving the nonstock corporation and forming a new stock
corporation.

2. Modes of conversion of stock corporation to nonstock

corporation
a. By mere amendment of articles of incorporation; or
b. By dissolving the stock corporation and forming a new nonstock
corporation.

iii. Transferability of membership in a nonstock corporation

1. Membership in a non-stock corporation and all rights arising therefrom
are personal and non-transferable, unless the articles of incorporation or
the by-laws otherwise provide.

iv. Revocation of membership in a nonstock corporation

1. Membership shall be terminated in the manner and for the causes
provided in the articles of incorporation or the by-laws. Termination of
membership shall have the effect of extinguishing all rights of a member
in the corporation or in its property, unless otherwise provided in the
articles of incorporation or the by-laws.

III. Types of shares in a corporation

a. As to rights

i. Common stocks or ordinary shares are those shares of stocks with complete
voting rights. They must be present in every corporation. They may be issued as
par value shares or no-par value shares.

ii. Preferred stocks or preference shares are those shares of stocks with
special privilege in dividend distribution or liquidation. They must be issued with
stated par value. If silent, preferred stocks are noncumulative, nonparticipating
and preferred as to net income or dividends.
1. Cumulative Preferred Stocks entitle the owner thereof to payment
not only of current dividends but also back dividends not previously paid
whether or not during the past year’s dividends were declared or paid.
2. Noncumulative Preferred Stocks grant the holders of such shares
only to the payment of current dividends but not back dividends when
and if dividends are paid to the extent agreed upon before any other
stockholders are paid the same.
3. Participating Preferred Stocks entitle the shareholders to participate
with the common shares in excess distribution at some predetermined or
at a fixed ratio as may be determined.
4. Nonparticipating Preferred Stocks entitle the shareholder thereof to
receive the stipulated preferred dividends and no more.

iii. Redeemable preference shares are those shares of stocks which may be
redeemed by the issuing corporation at the period stated despite the absence of
unrestricted retained earnings provided that the total assets of the corporation
are still higher than its total liabilities after payment to redeemable preferred
stockholders.
 iv. Convertible preference shares are those that are changeable by the
stockholder from one class to another at a certain price and within a certain
period.

v. Treasury shares are those shares issued but subsequently reacquired by the
corporation. They have no voting rights whatsoever and may be issued even
below par value so long as the price is reasonable. They may be acquired only if
there is unrestricted retained earnings in order not to violate the concept of Trust
Fund Doctrine.

b. As to voting

i. Voting shares are those which have complete voting rights which are the
common stocks.

ii. Nonvoting shares are those classified as such in the Articles of Incorporation
and shall have limited voting rights.
1. Corporate acts when nonvoting preferred shares may still vote
(I3 AM SAD)

a. Incurring, creating or increasing bonded indebtedness

b. Investments of corporate funds in another corporation or
another business purpose
c. Increase or decrease of capital stock
d. Amendment of Articles of Incorporation including changing the
corporate term
e. Merger or consolidation of corporations
f. Sale or disposition or pledge or mortgage of all or substantially
all of corporate property
g. Adoption and amendment of by-laws
h. Dissolution, rehabilitation or liquidation of the corporation

2. Corporate acts when nonvoting preferred shares are not

allowed to vote (GRRADE)

a. Granting of compensation of directors

b. Removal of directors
c. Ratification of disloyalty of directors or voidable contract
involving self-dealing director or interlocking director
d. Approval of management contract
e. Distribution of stock dividends
f. Election of directors

c. Presence of par value

i. Par value shares are those shares with face value stated in the certificate of
stock.

1. Minimum par value – There is no minimum par value or maximum par

value.

2. Minimum issue price of par value – The minimum issue price of par
value shares is the par value because shares as a general rule shall not
be issued below par except treasury shares which may be issued below
par as long as the price is reasonable.

3. Legal capital in case of par value shares – The total par value of
shares issued and subscribed excluding the share premium in excess of
par.
 ii. No par value shares are those shares without face value in the certificate of
stock but must have issued value. Only common stocks may be classified as no
par value shares.

1. Minimum stated value – None as long as the minimum issue price is

P5

2. Minimum issue price of no-par value shares – P5

3. Legal capital in case of no-par value shares – The total

consideration received including the share premium.

iii. Corporations that cannot issue no-par value shares (BLTBPIPO)

1. Building and Loans Association
2. Trust Company
3. Bank
4. Public utility
5. Insurance company
6. Preneed company
7. Other corporations authorized to obtain or access money from the public
(whether publicly listed or not)

d. Other types of shares

i. Founders' shares are those shares issued to founders of the corporation and
may be given special privilege such as exclusively right to be elected in the Board
of Directors. However, such special privilege given to founders' shares shall not
exceed 5 years.
ii. Promoters' shares are those shares issued to the promoters of the
corporation.
iii. Escrow shares are those shares the issuance of which is subject to a
suspensive condition.
iv. Watered shares are those shares issued for a price even below par resulting to
overstatement of capital, overstatement of assets or understatement of liability.
It violates trust fund doctrine.

IV. Formation of Private Stock Corporation or Incorporation refers to the performance of

conditions, acts, deeds, and writings by incorporators, and the official acts, certification or
records, which give the corporation its existence. Filing of articles of incorporation and
applications for amendments thereto with SEC in the form of electronic document is now
allowed subject to the rules and regulations to be issued by SEC.

a. Conditions precedent for acquiring juridical personality

i. Submission of Articles of Incorporation to SEC
1. Articles of Incorporation refers to the document that defines the
charter of relationships between the State and the corporation, the
stockholder and the State, and between the corporation and its
stockholders. It is submitted by the incorporators of a proposed
corporation to SEC in order to obtain the Certificate of Registration. It is
more important than By-Laws.

2. Qualifications of Incorporators of Proposed Private Corporation

a. Any person, partnership, association or corporation, singly or jointly
but not more than fifteen (15) in number may become incorporators.
Provided, That natural persons who are licensed to practice a
profession, and partnerships or associations organized for the
purpose of practicing a profession, shall not be allowed to organize
as a corporation unless otherwise provided under special laws.
b. Incorporators who are natural persons must be of legal age.
c. In stock corporations, each must own or be subscriber of at least
one share of the capital stock, while in nonstock corporations,
members are not owners of shares of stocks, and their membership
depends on terms provided in the articles of incorporation.
d. Compliance with the required minimum ownership of Filipino or
maximum ownership of foreigners in industries reserved to Filipinos
 i. Nationality requirement in certain industry
reserved for Filipinos
1. Mass Media – 100% reserved to Filipinos
2. Advertising – 70% reserved to Filipinos
3. Public Utility – 60% reserved to Filipinos
4. Educational Institution – 60% reserved
to Filipinos
5. Exploration, evaluation and
development of natural resources –
60% reserved to Filipinos
6. Ownership of land – 60% of the
stockholders of the Corporation must be
Filipinos

3. Contents of Articles of Incorporation (Refer to the table at the last

page of the handout)

4. Required vote for amendment of Articles of Incorporation

a. For simple amendment, the articles of incorporation may be
amended by at least majority vote of the board of directors or
trustees and the vote or written assent of the stockholders
representing at least two-thirds (2/3) of the outstanding capital
stock, without prejudice to the appraisal right of dissenting
stockholders in accordance with the provisions of this Code, or
the vote or written assent of at least two-thirds (2/3) of the
members if it be a non-stock corporation. (Example - Increasing
the sits in the Board of Directors)
b. For very important amendment, articles of incorporation may be
amended by a majority vote of the board of directors or trustees
and the ratification vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock, without
prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code, or the ratification
vote of at least two-thirds (2/3) of the members if it be a non-
stock corporation. (Examples - (a) Changing the corporate term;
(b) Increasing or Decreasing Authorized Capital Stock; (c)
Increasing or Incurring Bonds Indebtedness or Bonds Payable
c. Effectivity of Approval of Amendment of Articles of
Incorporation
i. Upon approval by Securities and Exchange Commission;
or
ii. Upon lapse of six (6) months from the date of
submission to SEC if there is inaction by SEC for causes
not attributable to the corporation

ii. Capital stock requirement prior to incorporation

1. Minimum authorized capital stock – There is no express minimum

authorized capital stock unless required by special law.
2. Minimum subscribed capital – None
3. Minimum paid-up capital – None

b. Juridical personality of a private corporation

i. Moment of start of juridical personality of a private corporation

1. The juridical personality of a private corporation begins from the
moment the SEC issues the certificate of registration.

ii. Certificate of registration refers to the document issued by the SEC to a

newly formed corporation which evidenced the existence of the juridical
personality of the corporation. It is also known as the primary franchise of a
corporation.
 iii. Effect of failure to formally organize within 5 years from the date of
incorporation
1. The corporation is ipso facto or automatically dissolved by operation of
law without need of a court order or SEC decision.

iv. Effect of continuous inoperation for a period of at least 5 years after its
formal organization (Delinquent Corporation)
1. The SEC may, after due notice and hearing, place a corporation which
subsequently becomes inoperative for a period of at least five (5) years
under delinquent status. A delinquent corporation shall have a period of
two (2) years to resume operations and comply with all requirements
that SEC shall prescribe. Upon compliance by the corporation, the SEC
shall issue an order lifting the delinquent status. Failure to comply with
the requirements and resume operations within the period given by the
SEC shall cause the revocation of the corporation’s certification of
incorporation. The SEC shall give reasonable notice to, and coordinate
with the appropriate regulatory agency prior to the suspension,
revocation of the certificate of incorporation of companies under their
special regulatory jurisdiction.

V. Governance of a Corporation
a. By-Laws refers to the rules of action adopted by a corporation for its internal
government and for the regulation of conduct, and it prescribes the rights and duties of
its stockholders or members towards itself and among themselves in reference to the
management of its affairs.. It neither affects nor prejudices third persons. It is less
important than Articles of Incorporation.
i. Contents of By-Laws (Refer to the table at the last page)

ii. Submission of By-Laws – By-laws shall be submitted to SEC at the time of

submission of Articles of Incorporation.

iii. Required vote for adoption or amendment of by-laws or delegation to

board of directors of power to amend by-laws or revocation of
delegated power to the board

1. Adoption of pre-incorporation by-laws

a. Majority vote of the incorporators or subscribers or member-
founders

2. Amendment of Post-incorporation by-laws when there is no

valid stockholders' delegation to the Board of Directors of the
power to adopt or amend by-laws
a. At least majority vote of the board of directors and approval by
at least majority vote of the stockholders

3. Amendment of Post-incorporation by-laws when there is valid

stockholders' delegation to the Board of Directors of the
exclusive power to amend by-laws
a. At least majority of the board of directors

4. Delegation to the board of directors of the power to adopt or

amend post-incorporation by laws by stockholders
a. At least 2/3 vote of the stockholders

5. Revocation of Delegated power board of directors to amend

post-incorporation by laws by stockholders
a. At least majority vote of the stockholders

b. Governing body of the Corporation

i. Stock corporation – Board of Directors
ii. Nonstock corporation – Board of Trustees
iii. Corporation sole – Trustee
iv. One Person Corporation – Single Stockholder
c. Number of members of the board
i. Stock corporation – 1 to 15
ii. Ordinary nonstock corporation – 1 but may exceed 15
iii. Educational nonstock corporation – 5 or 10 or 15
iv. Corporation sole – One
v. One Person Corporation - Single Stockholder

d. Term of office of members of the board

i. Stock corporation – One year
ii. Ordinary nonstock corporation – Three years
iii. Educational nonstock corporation – Five years

e. Qualifications of members of the board of directors or trustees

i. He must own at least one share of the capital stock of the corporation or a
member.
ii. He must be of legal age.
iii. The number of directors, which shall not be more than fifteen (15) or the
number of trustees which may be more than fifteen (15).
iv. Compliance with the required minimum ownership of Filipino or maximum
ownership of foreigners in industries reserved to Filipinos
Note: The Corporation may provide additional qualifications to directors in its
corporate by-laws provided such qualifications are just and reasonable and not
violative of Corporation Code of the Philippines.
f. Mandatory Presence of Independent Directors - The board of the following
corporations vested with public interest shall have independent directors constituting at
least twenty percent (20%) of such board:
i. Corporation whose securities are registered with SEC, corporations listed with an
exchange (PSE);
ii. Corporation with assets of at least P50,000,000 and having 200 or more
shareholders, each holding at least 100 shares of a class of its equity shares;
iii. Banks and quasi-banks, nonstock savings and loan associations, pawnshops,
corporations engaged in money service business, preneed, trust and insurance
companies, and other financial intermediaries; or
iv. Other corporations engaged in business vested with public interest similar to the
above, as may be determined by the SEC, after taking into account relevant
factors which are germane to the objective and purpose of requiring the election
of an independent director, such as the extent of minority ownership, type of
financial products, or securities issued or offered to investors, public interest
involved in the nature of business operations, and other analogous factors.

Definition of Independent Director - An independent director is a person who,

apart from shareholdings and fees received from the corporation, is independent of
management and free from any business or other relationship which could, or could
reasonably be perceived to materially interfere with the exercise of independent
judgment in carrying out the responsibilities as a director. Independent directors must be
elected by the shareholders present or entitled to vote in absentia during the election of
directors. Independent directors shall be subject to rules and regulations governing their
qualifications, disqualifications, voting requirements, duration of term and their limit,
maximum number of board memberships and other requirements that the SEC will
prescribe to strengthen their independence and align with international business
practices

g. Grounds for temporary disqualifications of members of the board for a period

of at least five (5) years from conviction
i. Conviction by final judgment (1) Of an offense punishable by imprisonment for a
period exceeding six (6) years, (2) For violating this Code; and (3) For violating
“The Securities Regulation Code”; or
ii. Found administratively liable for any offense involving fraudulent acts; or
iii. By a foreign court or equivalent foreign regulatory for acts, violations or
misconduct similar to those enumerate in letter (i) and (ii) above.
h. Election of the members of the board
i. Quorum for validity of meeting for election of members of the board of
directors
1. At least majority of the outstanding capital stock (Outstanding capital
stock = Issued shares (including fully paid and partially paid (subscribed
shares) – treasury shares – delinquent shares)
ii. Electorate in election of directors
1. The common stockholders and voting preferred stockholders
iii. Required vote to elect a director
1. The director garnering the highest number of vote will be elected.
(Plurality rule)
iv. Required number of stocks to have one guaranteed sit in the Board of
Directors
1. (Outstanding capitals stock/(Number of sits to be elected +1)) + 1
v. Manner of voting
1. Stock corporation – As a general rule, cumulative voting in order to
give the minority interest the opportunity to exercise their right of
representation.
2. Nonstock corporation – Variation of cumulative voting and straight
voting

i. Filling up of vacancy in the board

i. By plurality vote of outstanding voting stockholders – The stockholders

can always fill up the vacancy.

ii. By majority vote of remaining members of board of directors with

quorum but only if the reason of vacancy is death, resignation,
abandonment or disqualification.
1. Reasons of vacancy in the board that disqualifies the board with
quorum to fill up the vacancy therefore stockholders may only
fill up the vacancy. (REI)
a. Removal of directors
b. Expiration of term
c. Increase in sits

j. Emergency Board - When the vacancy prevents the remaining directors from
constituting a quorum and emergency action is required to prevent grave, substantial,
and irreparable loss or damage to the corporation, the vacancy may be temporarily filled
from among the officers of the corporation by unanimous vote of the remaining directors
or trustees. The action by the designated director or trustee shall be limited to the
emergency action necessary, and the term shall cease within a reasonable time from the
termination of the emergency or upon election of the replacement director or trustee,
whichever comes earlier. The corporation must notify the SEC within three (3) days from
the creation of the emergency board, stating therein the reason for its creation.

k. Compensation or salary of board members – The directors as a general rule are not
entitled to compensation except reasonable per diems.

i. Required vote for granting compensation to board of directors

1. At least majority vote of the outstanding capital stock excluding the
directors

ii. Maximum limit for salary of board of directors

1. 10% of net income before tax of the immediately preceding year

iii. Reasonable per diems of board of directors

1. At least majority vote of the board of directors
l. Creation of Executive Committee

i. Requirement for creation of executive committee

1. It must be created only by virtue of provision in the by-laws.

ii. Membership of executive committee

1. It must consist of at least three members of the board of directors.

iii. Powers that cannot be delegated by board of directors to executive

committee (FAAD)
1. Filling up of vacancy in the board
2. Adoption or amendment of by-laws
3. Approval of corporate acts requiring approval or ratification by
stockholders
4. Distribution or declaration of any time of dividends

m. Acts of management or administration

i. Quorum for validity of meeting

1. At least majority of the directors as stated in the Articles of Incorporation

ii. Required vote for approval of act of management or administration

1. At least majority of the directors who attended the meeting with
quorum.

iii. Business judgment rule or Doctrine of Management Prerogative means

that the decision of the board of directors on matters of management cannot be
changed by the court unless such management decision is ultra vires or
destructive of the interest of minority stockholders.

n. Election of corporate officers

i. Quorum for validity of meeting

1. At least majority of the directors as stated in the Articles of Incorporation

ii. Required vote for election of corporation

1. At least majority of the directors as stated in the Articles of Incorporation

iii. Qualification of mandatory corporate officers

1. President
a. Qualifications of a corporate President
i. He must be a stockholder.
ii. He must be a director.
iii. He must be neither secretary nor treasurer.
2. Secretary
a. Qualifications of a corporate Secretary
i. He must be a Filipino national.
ii. He must be a resident of the Philippines.
iii. He must not be a president.
3. Treasurer
a. Qualifications of a corporate treasurer
i. He must not be a president.
ii. He must be a resident of the Philippines.

4. Compliance Officer - If the corporation is vested with public interest,

the board shall elect a compliance officer.
o. Three-fold duties of directors - The directors or trustees elected shall perform their
duties as prescribed by law, rules of good governance, and by-laws of the corporation.

i. Duty of loyalty

1. Contract with self-dealing director

a. Status – Voidable on the part of the corporation

b. Requisites to be perfectly valid
c. Ratification in case of voidability
i. At least 2/3 of the outstanding capital stock
d. Exceptional vote in case of material contract involving
corporation imbued with public interest
i. At least 2/3 (at least 10 out of 15) of entire membership
of the board including majority (at least 2 out of 3) of
independent directors

2. Contract between corporation with interlocking director

a. Status – Generally valid

b. Instance when it becomes voidable
c. Ratification in case of voidability
i. At least 2/3 of the outstanding capital stock

3. Ratification of disloyalty of director

i. At least 2/3 of the outstanding capital stock

ii. Duty of obedience

1. The Board of Directors must follow BP 68 and all implementing rules and
regulations issued by SEC.

iii. Duty of diligence

1. The Board of Directors must observe ordinary diligence or diligence of
good father of a family in making business judgment for the corporation.

p. Meeting of Board of Directors

i. Place of Meeting

1. Place stated in the by-laws; or

2. In or out of the Philippine territory

ii. Frequency of Meeting

1. Frequency stated in the by-laws; or
2. Monthly

iii. Minimum days of giving notice to directors

1. At least two days before the scheduled meeting

q. Management Contract is a legal agreement that grants operational control of a

business initiative (managed corporation) to a separate group (managing corporation).

i. Required vote for approval of management contract without

interlocking director

1. At least majority vote of board of directors with ratification of at least

majority of stockholders of managed corporation
2. At least majority vote of board of directors with ratification of at least
majority of stockholders of managing corporation
 ii. Required vote for approval of management contract with interlocking
director

1. At least majority vote of board of directors with ratification of at least 2/3

of stockholders of managed corporation
2. At least majority vote of board of directors with ratification of at least
majority of stockholders of managing corporation

VI. Rights of a stockholder

a. Doctrine of equality of shares means that all shares have equal rights except as
provided in the Articles of Incorporation.

b. Right to participation in management through voting

i. Entitlement to vote – As a general rule, all stocks are entitled to vote to

except those which have limited voting rights because they classified as non-
voting in the Articles of Incorporation and therefore allowed to vote only on
fundamental corporate acts.

ii. Stocks which completely have no voting rights

1. Treasury shares
2. Delinquent shares
3. Fractional shares
4. Escrow shares before the fulfillment of suspensive condition or arrival of
suspensive period

iii. How to vote

1. Personal voting by stockholders
2. Through an agent by virtue a proxy agreement
a. Proxy refers to a written authorization given by one person to
another so that the second can act for the first. It also refers to
the agent or holder of authority or person authorized by an
absent stockholder or member to vote for him at a stockholders’
meeting.
b. Requirements of proxy for validity
i. It shall be valid only for the meeting which is was
intended unless classified as continuing proxy.
ii. It shall be in writing.
iii. It shall be filed before the scheduled meeting with the
corporate secretary.
iv. It shall be signed by the shareholder/member
concerned.
v. It shall be valid and effective for a period of 5 years at
any one time.
c. Term of proxy
i. A period not exceeding 5 years.

3. Through a trustee in a voting trust agreement

a. Voting trust agreement refers to the agreement whereby
stockholders (trustors) of a stock corporation confers upon a
trustee the right to vote and other rights pertaining to the shares
and it should not be used to circumvent the law against
monopolies and illegal combinations in restraint of trade or for
fraud purposes.
b. Requirement of voting trust for validity
i. It should be in writing.
ii. It should be notarized.
iii. It should be filed before the corporate secretary.
iv. It shall be valid and effective for a period of 5 years at
any one time.
c. Term of voting trust
i. A period not exceeding 5 years
 4. Differences between proxy and voting trust

a. Proxy need not be notarized while voting trust agreement

must be notarized.
b. There is no transfer of title to proxy while there is transfer of
title to trustee.
c. The proxy must vote in person while the trustee may vote in
person or by proxy.
d. Proxy can only act at a specified meeting if not continuing
proxy while trustee is not limited to act at any particular
meeting.
e. Proxy is revocable at any time while voting trust agreement
is irrevocable.
f. The proxy votes as an agent while the trustee votes as an
owner.
g. Proxy (agent) cannot become a director while trustee
(stockholder) can become a director.

5. Voting by co-owners

a. Unanimously
b. Exceptional case when a co-owner may vote alone
i. When the certificate of stock provides “and/or”
ii. When there is proxy or voting trust granted to a co-
owner

6. Voting through remote communication or in absentia by

stockholders or members in the election of directors or trustees
a. When so authorized in the by-laws or by a majority vote of the
board of directors/trustees, the stockholders or members may
also vote through remote communication or in absentia.
Provided, that the right to vote through such modes may be
exercised in corporations vested with public interest,
notwithstanding the absence of a provision in the bylaws of such
corporations. A stockholder or member who participates through
remote communication or in absentia shall be deemed present
for purposes of quorum.

c. Meeting of Stockholders

i. Place of Meeting
1. Always in the city or municipality where the Principal Office of the
Corporation is located preferably in the principal office of the corporation

ii. Frequency of Meeting

1. Frequency stated in the by-laws; or
2. Annually

iii. Date of Meeting

1. Date stated in the by-laws; or
2. Any date after April 15

iv. Minimum days of giving notice to Stockholders

1. For regular meeting - At least 21 days before the scheduled meeting
2. For special meeting – At least one week before the scheduled meeting
d. Propriety rights

i. Right to dividends

1. Entitlement to dividends
a. The stockholders are entitled to dividends only upon declaration
by the board of directors.

2. Requirement for declaration of dividends

a. There must be unrestricted retained earnings.

3. Extent of right to dividends

a. Of full-fledged stockholder – Full right

b. Of subscribers which are not yet delinquent – Full right
c. Of subscribers which are already delinquent – The delinquent
subscribers are entitled to dividends but the cash dividends shall
be offsetted to the subscription balance while the certificate of
stocks of stock dividends will be withheld until the subscription
balance is fully paid.

ii. Right to inspect corporate books

1. Requirements for exercise of the right to inspect

a. The right must be exercised during reasonable hours on

business days.
b. The person demanding the right has not improperly used any
information obtained through any previous examination of the
books and records of the corporation.
c. The demand is made in good faith or for legitimate purpose.

2. Justified grounds for denial of right to inspection of corporate

books

a. To obtain information as to business secrets or to assist reveal

business secrets
b. To secure business prospects or investment advertising list for
the purpose of selling it to an advertising agency
c. To find technical defects in corporate transactions in order to
bring nuisance or strike suits for purposes of blackmail or
extortion
d. To obtain information intended to be published as to embarrass
the company business
3. Remedies if the denial of the right to inspect by the corporation
is unjustified

a. File a petition for mandamus against the said corporate officer.

b. File an action for damages against the said corporate officer.
c. File a criminal action for violation of Corporation Code against
the responsible officer.

iii. Preemptive right

1. Preemptive right refers to the common-law right of shareholders to

subscribe to all issues or disposition of shares of any class in proportion
to their present shareholdings unless denied in the articles of
incorporation. It is intended to protect both the proprietary and voting
rights of a stockholder in a corporation, since such proportionate interest
determines his proportionate power to vote in corporate affairs when the
law gives the shareholders a right to affirm or deny board actions. It is a
common-law right that exists despite the absence of provision in the
Corporation Code of the Philippines.
 2. Extent of preemptive right
a. It extends to all issuance of shares.

3. Issuance of shares where preemptive right is not available

a. Shares to be issued to comply with laws requiring stock offering
or minimum stock ownership by the public such in the case of
initial public offering (IPO)
b. To shares that are being reoffered by the corporation after they
were initially offered together with all the shares to the existing
stockholders who initially refused them
c. Shares issued in good faith with approval of the stockholders
holding 2/3 of the outstanding capital stock in exchange for the
property needed for corporate purposes
d. Shares issued, with approval of the stockholders holding 2/3 of
the outstanding capital stock, in payment of previously
contracted debts of the corporation
e. Waiver of the right by the stockholder
f. In case of non-stock corporation since there is no control in
membership
g. In so far as the assignee is concerned, where the assignors have
previously exercised their pre-emptive rights to subscribe to new
shares
h. When the pre-emptive right is denied in the articles of
incorporation or amendment thereto

4. Validity of Denial of pre-emptive right

a. It must be denied in the articles of incorporation and cannot be
validly denied in the by-laws. The required vote for denial of pre-
emptive right is 2/3 of outstanding capital stock.

iv. Right of first refusal

1. Right of first refusal provides that a stockholder who may wish to sell
or assign his shares must first offer the shares to the corporation or to
other existing stockholders of the corporation, under terms and
conditions which are reasonable; and that only when the corporation or
the other stockholders do not or fail to exercise their option, is the
offering stockholder at liberty to dispose of his shares to third parties. It
arises only by virtue of contractual stipulations, in which case the right is
construed strictly against the right of persons to dispose of or deal with
their property. It is normally available in a close corporation as stated in
its articles of incorporation. It is a contractual right of a stockholder.

v. Right of Appraisal

1. Appraisal right refers to the right of a dissenting stockholder to

demand the payment of the fair value of his shares after dissenting from
a proposed corporate action involving a fundamental change in the
corporation in the cases provided by law when such right is available.
This right may be waived by a shareholder if he has done so knowingly
and intelligently. There must be unrestricted retained earnings before
the stockholder in an ordinary corporation may exercise this right.

2. Grounds for exercise of appraisal right (AIM-CSC)

a. Amendment to the articles that has the effect of changing or

restricting the rights of shareholder, or of authorizing preference
over those of outstanding shares
b. Investment of corporate funds in another corporation or in a
purpose other than the primary purpose.
c. Merger or consolidations
d. Changing corporate term whether shortening or extending
e. Sale, encumbrance or other disposition of all or substantially all
of the corporate property or assets.
 f. In a Close corporation, a stockholder may for any reason,
compel the corporation to purchase his shares when the
corporation has sufficient assets in its books to cover its debts
and liabilities exclusive of capital stock.

3. Manner of exercise of appraisal right

a. The dissenting stockholder shall make a written demand on the

corporation within 30 days after the date on which the vote was
taken for the payment of the fair value of his shares.
b. The withdrawing stockholder must submit his shares to the
corporation for notation of being dissenting stockholder within
10 days from his written demand.
c. All rights accruing to such shares shall be suspended from time
of demand for payment of the fair value of the shares until
either the abandonment of the corporate action.
d. The dissenting stockholder shall be entitled to receive payment
of the fair value of shares thereof as of the day prior to the date
on which the vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action.
e. The payment must be made by the corporation within 30 days
from the determination by the Board of Appraisers of the fair
value of the shares otherwise the rights of the dissenting
stockholders will be restored. The Board of Appraisers consists of
a person appointed by the corporation, a person appointed by
the dissenting stockholder and the third person appointed by the
two appointees. The decision of majority of the Board of
Appraisers on the determination of fair value of shares shall
prevail.
f. Stockholder must transfer his shares to the corporation upon
payment by the corporation.
g. Upon payment of the fair value of shares, all the rights of
dissenting stockholders are terminated and not merely
suspended.
h. There must be unrestricted retained earnings for the exercise of
appraisal right to prosper.

e. Remedial Right

i. Individual suit is an action brought by a stockholder against the corporation

for direct violation of his contractual rights. (Stockholder vs. Corporation)

ii. Representative suit refers to an action brought by a person in his own behalf
or on behalf of all similarly situated. (Association of Stockholders vs. Corporation)

iii. Derivative suit refers to a suit brought by one or more stockholders or

members in the name and on behalf of the corporation to redress wrongs
committed against it or to protect or vindicate corporate rights, whenever the
officials of the corporation refuse to sue or are the ones to be sued or hold
control of the corporation. The corporation is a necessary party to the suit. It is a
suit filed by a person who must be a shareholder to enforce a corporation’s
cause of action. (Stockholder in behalf of corporation vs. Board of Directors of
Corporation)

f. Obligations of a stockholder

i. Limited liability rule means that a stockholder is personally liable for the
financial obligations of the corporation to the extent only of his unpaid
subscription or that a stockholder’s liability for corporate debts extends only up
to the amount of his capital contribution.

ii. Trust fund doctrine means that assets of the corporations are considered trust
fund reserved for payment of liabilities to creditors of the corporation.
 i. Liability for watered stock

1. Instances of issuance of watered stock

a. Issuance of shares without consideration – bonus share
b. issuance of shares as fully paid when the corporation has
received a lesser sum of money than its par or issued value –
discount share
c. Issuance of shares for a consideration other than actual cash
such as property or services the fair valuation of which is less
than its par or issued price
d. Issuance of stock dividend where there are no sufficient retained
earnings or surplus to justify it

2. Nature of liability for issuance of watered stocks

a. Consenting director/officer, non-objecting director/officer despite
knowledge of issuance of watered stock, subscriber, subsequent
transferor and transferee shall be solidarily liable for the
difference between the fair value received at the time of
issuance of stock and the par or issue value of the same.

VII. Capital structure

a. Subscription agreement is an agreement between a corporation and a subscriber for
the acquisition of unissued shares of stocks of a corporation at a specified amount.

i. Nature of contract of subscription

1. Contract of subscription is an indivisible contract.
2. Contract of subscription is a consensual contract.
3. Contract of subscription is not covered by statute of fraud.

ii. Types of subscription contract

1. Pre-incorporation subscription
a. Period of irrevocability
i. It is irrevocable for a period of 6 months from the date
of subscription and after its submission to SEC.
b. Period for cancellation
i. It may be revoked after 6 months from the date of
subscription but it must be made before its submission
to SEC.
2. Post-incorporation subscription
i. It may not be revoked unless there is unrestricted
retained earnings to support its retirement in order not
to violate trust fund doctrine.
3. Subscriber of shares of stocks which are not yet delinquent are
entitled to the rights of a full-fledged stockholders except the right to
issuance of certificate of stocks.

b. Consideration for issuance of shares of stocks

i. Valid consideration

1. Cash
2. Noncash asset
3. Preexisting obligation of the corporation in case of equity swap
4. Services rendered
5. Conversion of other class of shares of stocks in case of conversion of
convertible bonds or conversion of convertible preference stocks
6. Unrestricted retained earnings in case of distribution of stock dividends
7. Shares of stock in another corporation; and/or
8. Other generally accepted form of consideration.

ii. Invalid consideration

1. Promissory note
2. Future services
 c. Shares of stocks refer to the interests or rights which the owner has in the
management of the corporation and its surplus profits, and on dissolution, in all of its
assets remaining after the payment of its debts. They do not represent co-ownership in
the assets of the corporation but such interests are merely indirect and inchoate.
i. Nature of shares of stocks as an asset
1. They are intangible and personal assets.
ii. Requirements for issuance of certificate of stock
1. They must be fully paid.

d. Payment of balance of subscription

i. Accrual of interest for subscription

1. Subscription contract with stated maturity date
a. The interest must accrue in the date stated in the subscription
contract.
2. Subscription contract without stated maturity date
a. The interest must accrue at the date of delinquency of shares.
3. Interest of subscription contract
a. The stated rate in the contract
b. In the absence, the legal interest rate which is 6% on or after
July 1, 2013 and 12% before July 1, 2013

ii. Delinquency of shares

1. Moment of delinquency of shares

a. Subscription contract with stated maturity date
i. Upon lapsing of 30 days from the maturity date stated in
the contract
b. Subscription contract without stated maturity date
i. Upon lapsing of 30 days from the date of payment as
stated in the call of Board of Directors for payment
2. Effect to rights of subscribers for delinquency shares
a. The rights of delinquent shares are suspended except right to
cash and stock dividends.

3. Remedies of corporation for delinquent shares

a. Civil action by filing before a regular court an action to collect a

sum of money
b. Sale of delinquent shares
i. To highest bidder
ii. Acquisition by corporation and placing them to treasury
iii. Period fixed by law for the sale of delinquent shares
1. Not less than 30 days nor more than 60 days
from the date the stocks become delinquent

e. Certificate of stock – is the tangible evidence of the shares of stock.

i. Nature of the certificate of stock as instrument

1. It is a quasi-negotiable instrument in that sense that it may be
transferred by endorsement coupled with delivery but it is not negotiable
because the holder thereof takes it subject to personal and real defenses
available to the registered owners.

ii. Requirements for issuance of certificate of stock

1. The certificate must be signed by the president or vice president and
countersigned by the secretary or assistant secretary.
2. The certificate must be sealed with the seal of the corporation.
3. The par value, as to par value shares or the subscription as to no par
value shares must first be fully paid.
4. The certificate must be delivered.
5. The original certificate must be surrendered where the person requesting
the issuance of a certificate is a transferee from the stockholder.
 iii. Requirements for valid transfer of shares of stocks
1. Under Civil Code
a. Upon constructive delivery of shares of stocks in a contract of
sale
2. Under Corporation Code
a. There must be delivery of the certificate of stock.
b. The share of stock or certificate of stock must be indorsed by
the owner or his agent.
c. To be valid to the corporation and third persons, the transfer
must be duly recorded in the books of the corporation showing
the names of the parties, transaction date, number of certificate
and shares transferred.

f. Stock and transfer books

i. It refers to corporate book which contains the record of all stocks in the names
of the stockholders alphabetically arranged; the installment paid and unpaid on
all stock for which subscription has been made, and the date of payment of any
installment; a statement of every alienation, sale or transfer of stock made, the
date thereof, and by and to whom made; and such other entries as the by-laws
may prescribe. It must be set up and registered by the Corporation with the SEC
within 30 days from receipt of its certificate of registration.

ii. All entries must be made only by the corporate secretary in the absence of a
stock and transfer agent employed by the corporation. If any entry is made by
any officer other than the corporate secretary, such entry is null and void.

VIII. Dissolution and Liquidation of Corporation

a. Dissolution

i. Definition of corporate dissolution

1. It refers to the extinguishment of the corporate franchise and the
termination of corporate existence. It legally affects more the nature and
capacity of the juridical being of the corporate being.

ii. Modes of dissolution

1. Voluntary modes
a. Where creditors are not affected - By administrative application
to SEC submitting the board resolution and ratification by the
stockholders.
i. At least majority vote of the board of directors with
ratification of at least majority of stockholders
b. Where creditors are affected - By formal petition to SEC with
notice and hearing with creditors
i. At least majority vote of the board of directors with
ratification of at least 2/3 of stockholders
c. By shortening of corporate term - By amending the articles of
incorporation and submitting such amendment to SEC.
d. By merger or consolidation - By submitting the Board resolution
and ratification of the merging or consolidating corporation.

2. Involuntary modes
a. By expiration of corporate term
b. Failure to formally organize within 5 years from incorporation
c. Legislative dissolution
d. Dissolution by SEC on grounds under existing laws
 3. Ground for automatic dissolution of a corporation or ipso facto
corporate dissolution by operation of law
a. By expiration of corporate term although the corporation may
file an application for revival of corporation
b. Failure to formally organize within 5 years from incorporation
c. Approval by SEC of shortened corporate term
d. Approval by SEC of certificate of merger or consolidation

4. Grounds which will not automatically dissolve a corporation but

will require court order or SEC decision
a. Being De facto
b. Violation of laws or rulings of SEC
c. Failure to submit annual report or financial statements to
SEC
d. Continuous inoperation for a period of at least 5 years

b. Liquidation

i. Definition of Liquidation – It refers to the process of converting non-cash

assets of a liquidation corporation into cash and distributing the net proceeds to
creditors first and then the remainder to stockholders.

ii. Period of Liquidation – It shall be finished within a recommendatory period of

3 years counted from the dissolution of a corporation.

IX. Close Corporation

a. Requirements to be classified as close corporation

i. The number of stockholder must not exceed 20.
ii. Issues stocks are subject to transfer restrictions such as right of first refusal or a
right of preemption in favor of the stockholders or the corporation.
iii. The corporation shall not be listed in the stock exchange or its stocks should not
be public offered
iv. At least 2/3 of the voting stocks or voting rights are not owned or controlled by
another corporation which is not a close corporation.

b. Characteristics of close corporation

i. Stockholders may act as directors without need of election and therefore liable as
directors.
ii. Stockholders involved in the management of the corporation are liable as
directors.
iii. Quorum may be greater than mere majority.
iv. The corporate officers or employees may be elected or employed directly by the
stockholders instead by the board of directors.
v. Transfers of stocks to others, which would increase the number of stockholders
to more than the maximum are invalid.
vi. Corporate actuations may be binding even without a formal board meeting.
vii. Appraisal rights can be exercised regardless of existence of unrestricted retained
earnings.
viii. Pre-emptive right is absolute and available to all stock issuances unless restricted
by the articles of incorporation.
ix. Deadlocks are settled by SEC.

c. Disqualified corporations to be classified as close corporation (I COME BSP)

i. Insurance companies
ii. Corporations vested with public interest
iii. Oil companies
iv. Mining companies
v. Educational institutions
vi. Banks
vii. Stock exchange
viii. Public utilities
 d. Validity of restrictions on transfer of shares
i. Right of first refusal
ii. Right of first option

e. Void or Prohibited restriction on transfer of shares

i. Absolute prohibition on sale of shares of stocks

f. Preemptive rights of stockholders

i. It is absolute in nature and there are no exceptions.

g. Appraisal rights of stockholders

i. It is exercisable for any reason.

h. Deadlock in a close corporation

i. The SEC has the authority to break the deadlock of a close corporation.

X. Merger and consolidation

a. Difference between merger and consolidation

i. Merger refers to a business combination whereby one or more existing
corporations are absorbed by another corporation which survives and continues
the combined business. (PNB + Allied Bank = PNB)

iii. Consolidation refers to a business combination whereby two or more existing

corporations form a new corporation different from the combining corporation.
(Equitable Bank + PCI Bank = Equitable-PCI Bank)

b. Requisites of merger or consolidation

i. It must be approved by the board of each corporation by at least majority vote.

ii. It must be ratified by vote of stockholders representing at least 2/3 of
outstanding capital stock or members.
iii. It must be approved by the Securities and Exchange Commission.
iv. It must be approved by Philippine Competition Commission.

c. Effectivity of merger and consolidation

i. Upon approval by the SEC of certificate of merger or consolidation

d. Effects of merger and consolidation

i. There is automatic transfer of assets and the liabilities of the absorbed

corporation or constituent corporations which are dissolved to the merged
corporation or constituted corporation.
ii. The absorbed or constituent corporations are ipso facto dissolved by operation of
law without necessity of any further act or deed meaning the separate existence
of the constituent corporations shall cease.
iii. It will neither prejudice the rights of creditors nor impair any lien of the creditor
over the property of the absorbed corporations.
iv. It involves exchanges of properties, a transfer of the assets of the constituent
corporations in exchange for securities in the new or surviving corporation but
neither involves winding up of the affairs of the constituent corporations in the
sense that their assets are distributed to the stockholders.
 Provisions Applicable to One Person Corporation

1. Definition of One Person Corporation. A One Person Corporation is a corporation with a

single stockholder.

2. Who may become One person Corporation

a. Natural person
b. Trust established by a Trustor to a Trustee for the benefit of a beneficiacy
c. Estate of a deceased person

3. Entities not allowed to form One Person Corporation

a. Banks
b. Non-bank financial institutions
c. Quasi-banks
d. Pre-need
e. Trust entity/company
f. Insurance
g. Public entities
h. Publicly listed entities
i. Non-charted government-owned and controlled corporations (GOCCs)
j. A natural person who is licensed to exercise a profession (CPA or Lawyers) for the
purpose of exercising such profession except as otherwise provided under special laws

4. Minimum Capital Stock Not Required for One Person Corporation. - A One Person
Corporation shall not be required to have a minimum authorized capital stock except as otherwise
provided by special law.

5. Articles of Incorporation of One Person Corporation. A One Person Corporation shall file
articles of incorporation in accordance with the requirements under Section 14 of Revised
Corporation Code. It shall likewise substantially contain the following:
(a) If the single stockholder is a trust or an estate, the name, nationality, and residence of the
trustee, administrator, executor, guardian, conservator, custodian, or other person exercising
fiduciary duties together with the proof of such authority to act on behalf of the trust or estate;
and
(b) Name, nationality, residence of the nominee and alternate nominee, and the extent, coverage
and limitation of the authority.

6. Bylaws of One Person Corporation - The One Person Corporation is not required to submit
and file corporate bylaws.

7. Display of Corporate Name or SUFFIX of One Person Corporation. - A One Person

Corporation shall indicate the letters "OPC" either below or at the end of its corporate name.

8. Officers of One Person Corporation - The single stockholder shall be the sole director and
president of the One Person Corporation.

9. Appointment of Treasurer, Corporate Secretary, and Other Officers. - Within fifteen (15)
days from the issuance of its certificate or incorporation, the One Person Corporation shall
appoint a treasurer, corporate secretary, and other officers as it may deem necessary, and notify
the Commission thereof within five (5) days from appointment. The single stockholder may not
be appointed as the corporate secretary. A single stockholder who is likewise the self-appointed
treasurer of the corporation shall give a bond to the Commission in such a sum as may be
required: Provided, That the said stockholder/treasurer shall undertake in writing to faithfully
administer the One person Corporation's funds to be received as treasurer, and to disburse and
invest the same according to the articles of incorporation as approved by the Commission. The
bond shall be renewed every two (2) years or as often as may be required.
10. Special Functions of the Corporate Secretary in One Person Corporation. - In addition to
the functions designated by the One Person Corporation, the corporate secretary shall:
a. Be responsible for maintaining the minutes book and/or records of the corporation;
b. Notify the nominee or alternate nominee of the death or incapacity of the single
stockholder, which notice shall be given no later than five (5) days from such occurrence;
c. Notify the Commission of the death of the single stockholder within five (5) days from
such occurrence and stating in such notice he names, residence addresses, and contact
details of all known legal heirs; and
d. Call the nominee or alternate nominee and the known legal heir to meeting and advise
the legal heirs with regard to, among others, the election of a new director, amendment
of the articles of incorporation, and other ancillary and/or consequential matters

11. Nominee and Alternate Nominee of One Person Corporation. - The single stockholder
shall designate a nominee and an alternate nominee who shall, in the event of the single
stockholder's death or incapacity, take the place of the single stockholder as director and shall
manage the corporation's affairs. The articles of incorporation shall state the names, residence
addresses and contact details of the nominee and alternate nominee, as well as the extent and
limitations of their authority in managing the affairs of the One Person Corporation until the
stockholder, by self determination, regains the capacity to assume such duties. In case of death
or permanent incapacity of the single stockholder, the nominee shall sot as director and manage
the affairs of the One Person Corporation until the legal heirs of the single stockholder have been
lawfully determined, and the heors have designated one of them or have agreed that the estate
shall be the single stockholder of the One Person Corporation. The alternate nominee shall sit as
director and manage the One Person Corporation in case of the nominee's inability, incapacity,
death, or refusal to discharge the functions as director and manager of the corporation, and only
for the same term and under the same conditions applicable to the nominee.

12. Change of Nominee or Alternate Nominee of One Person Corporation. - The singe
stockholder may, at any time, change its nominee and alternate nominee by submitting to the
Commission the names of the new nominees and their corresponding written consent. For this
purpose, the articles of incorporation need not be amended.

13. Minute Book of one Person Corporation. - A One Person Corporation shall maintain a
minutes book which shall contain all actions, decisions, and resolutions taken by the One Person
Corporation.

14. Records in Lieu of Meetings of One Person Corporation. - When action is needed on any
matter, it shall be sufficient to prepare a written resolution, signed and dated by the single
stockholder; and recorded in the minutes book of the One Person Corporation. The date of
recording in the minutes for all purposes under this Code.

15. Reportorial Requirements of One Person Corporation . - The One Person Corporation shall
submit the following within such period as the Commission may prescribe:
a. Annual financial statements audited by an independent certified public
accountant: Provided, That if the total assets or total liabilities of the corporation are less
than Six hundred thousand pesos (₱600,000.00), the financial statements shall be
certified under oath by the corporation's treasurer and president;
b. A report containing explanations or comments by the president on every qualification,
reservation, or adverse remark or disclaimer made by the auditor in the latter's report;
c. A disclosure of all self-dealings and related party transactions entered into between the
One Person Corporation and the single stockholder; and
d. Other reports as the Commission may require.

For the purpose of this provision, the fiscal year of a One Person Corporation shall be that set
forth in its articles of incorporation or, in the absence thereof, the calendar year.
The Commission may place the corporation fail to submit the reportorial requirements three (3)
times, consecutively or intermittently, within a period of five (5) years.
16. Liability of Single Shareholder in One Person Corporation. - A sole shareholder claiming
limited liability has the burden of affirmatively showing that the corporation was adequately
financed. Where the single stockholder cannot prove that the property of the One Person
Corporation is independent of the stockholder's personal property, the stockholder shall be jointly
and severally liable for the debts and other liabilities of the One Person Corporation. The
principles of piercing the corporate veil apply with equal force to One Person Corporations as with
other corporations.

17. Conversion from an Ordinary Corporation to a One Person Corporation . When a single
stockholder acquires all the stocks of an ordinary stock corporation, the later may apply for
conversion into a One Person Corporation, subject to the submission of such documents as the
Commission may require. If the application for conversion is approved, the Commission shall
issue a certificate of filing of amended articles of incorporation reflecting the conversion. The One
Person Corporation converted from an ordinary stock corporation shall succeed the later and be
legally responsible for all the latter's outstanding liabilities as of the date of conversion.

18. Conversion from One Person Corporation to an Ordinary Stock Corporation . - A One
Person Corporation may be converted into an ordinary stock corporation after due notice to the
Commission of such fact and of the circumstances leading to the conversion, and after
compliance with all other requirements for stock corporations under this Code and applicable
rules. Such notice shall be filed with the Commission within sixty (60) days from the occurrence
of the circumstances leading to the conversion into an ordinary stock corporation. If all
requirement a have been complied with, the Commission shall issue a certificate of filing or
amended articles of incorporation reflecting the conversion. In case of death if the single
stockholder, the nominee or alternate nominee shall transfer the shares to the duly designated
legal heir or estate within seven (7) days from receipt of either an affidavit of heirship or self-
adjudication executed by a sole heir, or any other legal document declaring the legal heirs of the
single stockholder and notify the Commission of the transfer. Within sixty (60) days from the
transfer of the shares, the legal heirs shall notify the Commission of their decision to either wind
up and dissolve the One Person Corporation or convert it into an ordinary stock corporation. The
ordinary stock corporation converted from One Person Corporation shall succeed the latter and
be legally responsible for all the latter's outstanding liabilities as of the date of conversion.
 CORPORATE ACTS WHICH REQURE AT LEAST MAJORITY VOTE OF THE BOD ALONE
(EVP)
Corporate Act Board of Directors Salient Points
Majority vote of all the members
Election of officers (Sec. 25, CC)
of the BOD
Vacancies in BOD if NOT due to  If the directors do not
removal, expiration of the term Majority vote of remaining constitutea quorum,
or increase in number of directors if quorum still exists stockholders have the right
directors (Sec. 29, CC) to elect
 Provided that there is
Power to acquire own shares unrestricted retained
Majority vote
(Sec. 41, CC) earnings
 Only for legislative purposes

CORPORATE ACTS WHICH REQUIRE AT LEAST MAJORITY VOTE OF THE BOD AND VOTE OF
THE STOCKHOLDERS REPRESENTING AT LEAST MAJORITY OF THE OCS (FAM)
Corporate Act Board of Directors Stockholders Salient Points
Fixing the issued Price Majority of quorum of Majority of OCS, if BOD
of No-par value shares BOD, if authorized by is not authorized by the
(Sec. 62, last par., CC) AOI or by-laws AOI
Amendment may be
Amendment or repeal made by the Board only
of By-laws or Adoption after due delegation by
Majority vote Majority of OCS
of new By-laws (Sec. the stockholders.
48, CC) Non-voting shares can
vote
Majority of
OCS/members of both
Majority vote of BOD of
Management Contract managing and managed
both managing and
(Sec. 44, CC) corporation and in some
managed corporation
cases 2/3 of
OCS/members

CORPORATE ACTS WHICH REQUIRE VOTE OF THE STOCKHOLDERS REPRESENTING AT LEAST

MAJORITY OF THE OCS ALONE (FFAD)
Corporate Act Stockholders Salient Points
 Reasonable per diems may be given
Fixing of compensation
 By-laws may provide for compensation
of directors (Sec. 30, Majority of OCS
 Limit: not more than 10% of the net income
CC)
before income tax
Adoption of By-laws Majority of
(Sec. 46, CC) OCS/members  Non-voting shares can vote
 Candidates with the highest number of votes
Election of get elected
Majority of
Directors/trustees (Sec.  Cumulative voting: No. shares x No. of
OCS/members
24, CC) directors to be elected
 Non-voting shares cannot vote
Fixing the issued Price  Stockholders/Members shall vote if the
of No-Par value shares Majority of OCS BOD/BOT are not authorized by the Articles of
(Sec. 62, last par., CC) Incorporation and the by-laws to fix the price
 CORPORATE ACTS WHICH REQUIRE VOTE OF THE STOCKHOLDERS REPRESENTING AT LEAST
2/3 OF THE OCS ALONE
(PARDS)

Corporate Act Stockholders Salient Points

 Only if the AOI or amendment thereto
denies pre-emptive right
Denial of pre-emptive right (Sec.  Denial extends to shares issued in good
2/3 of OCS
39, CC) faith in exchange for property needed for
corporate purposes or in payment of
previously contracted debts
Delegation of the power to
Amend, Repeal or Adopt New  Delegation can be revoked by majority OCS
2/3 of OCS
By-laws to BOD  Non-voting shares cannot vote
(Sec. 48, CC)
 Notice and statement of purpose are
necessary
 Must be made in a meeting called by the
secretary on President’s order or on written
Removal of Directors/Trustees 2/3 of
demand of majority of OCS
(Sec. 28, CC) OCS/members
 Non-voting shares cannot vote
 Removal without cause cannot be used to
deprive minority stockholders of their right
of representation
Ratification of act of disloyal
director 2/3 of OCS
(Sec. 34, CC)
 The contract must be fair and reasonable
under the circumstances
 Full disclosure of adverse interest of
Ratification of a contract of self- 2/3 of directors/trustees involved is necessary
dealing directors (Sec. 32, CC) OCS/members  Presence of director/trustee must be
necessary to constitute quorum OR the
vote of director/trustee must be necessary
for the approval of the contract
CORPORATE ACTS WHICH REQUIRE AT LEAST MAJORITY VOTE OF THE BOD AND VOTE OF
STOCKHOLDERS REPRESENTING AT LEAST 2/3 OF THE OCS (ADAM-LI³ES)

Corporate Act Board of Directors Stockholders Salient Points

 Non-voting shares can
vote
 Appraisal right is
available in certain
cases
Amendment of Articles Vote or written assent  Effective upon
Majority vote
of Incorporation of 2/3 of OCS/members approval by SEC, or
date of filing if not
acted upon within six
months
 Must be for a
legitimate purpose
Dissolution of
Corporation where  See sections 117-112
creditors are not Majority vote Majority vote  Non-voting shares can
affected (Secs. 118 and vote
119, CC)
Dissolution of
 See sections 117-112
Corporation where
Majority vote 2/3 of OCS/members  Non-voting shares can
creditors are affected
(Secs. 118 and 119, CC) vote
Adoption of plan of
distribution of assets of Majority vote of 2/3 of members having
non-stock corporation trustees voting rights
(Sec. 95 [2], CC)
 Non-voting shares can
vote
 Appraisal right is
available, except when
the plan is abandoned
Merger or Consolidation Majority of BOD of 2/3 of OCS/members of
 Any amendment to
(Sec. 77, CC) constituent corporations constituent corporations
the plan may be made
provided it is approved
by majority vote of the
board and 2/3 of
OCS/members
 Majority of the board
is sufficient if the
transaction does not
cover all or substantially
all of the assets of the
Sale, Lease, Exchange, corporation
Mortgage, Pledge,  Non-voting shares can
Dispose of all or vote
Majority vote 2/3 of OCS/members
substantially all of  Appraisal right is
corporate assets available
(Sec. 40, CC)  Notice is required
 If sale is abandoned,
director’s action is
sufficient, no need for
ratification by
stockholders
 Meeting is required
 Non-voting shares can
vote
Increase or decrease of
 No appraisal right
capital stock (Sec. 38, Majority vote 2/3 of OCS/members
 Notice requirement
CC)
 SEC prior approval
Prior approval of the
SEC is necessary for it
 is only from and after
the approval by the SEC
and the issuance by the
SEC of a certificate of
filing that the capital
stock shall stand
increased or decreased
 Treasurer’s sworn
statement is necessary
 No decrease of capital
stock if it will prejudice
right of creditors
 Meeting is required
 Non-voting shares can
vote
Incur, Create, Increase
 No appraisal right
Bonded Indebtedness Majority vote 2/3 of OCS/members
 Notice is required
(Sec. 38, CC)
 Registration of bonds
with the SEC is
necessary
 Non-voting shares can
vote
 Appraisal right
Investment of available
Corporate Funds in  Notice is required
another Corporation or  Investment in the
Business or for any Majority vote 2/3 of OCS/members secondary purpose is
other purpose other covered
than primary purpose  Stockholder’s
(Sec. 42, CC) ratification is not
necessary if the
investment is incidental
to primary purpose
 Non-voting shares can
vote
Extension or shortening  Appraisal right is
of corporate term (Sec. Majority vote 2/3 of OCS/members available
37, CC)  Notice requirement
 Effected through an
amendment of the AOI
There must be
Issuance of Stock
Majority of the quorum 2/3 of OCS/members unrestricted retained
Dividends (Sec. 43, CC)
earnings
Matters Usually Matters Usually Other Matters Matters that may Matters that
Found in the Found in the By- that May be be found in cannot be
Articles of Laws under Included in the Either Articles of provided for in
Incorporation Section 47 By-laws Incorporation or the By-Laws and
By-Laws must be
provided in the
articles of
incorporation
1. Name of the 1. Time, place and 1. Designation of 1. Providing for 1. Classification of
corporation manger of calling time when voting cumulative voting shares of stock and
and conducting rights may be in nonstock preferences
regular and special exercised by corporations. (24) granted to
meetings of stockholders of preferred shares.
directors, trustees, record. (24) (6)
places for meetings
of directors or
trustees may be
outside the
Philippines if it so
provided in the by-
laws.
2. Purpose clause 2. Time and 2. Providing for 2. Providing for 2. Provisions on
including primary manner of calling additional officers higher quorum founder’s shares.
and secondary and conducting for the requirement for a (7)
purpose which regular and special corporation. (25) valid board
may be unrelated meetings of the meeting. (25)
stockholders or
members.
3. Place of 3. Required quorum 3. Provisions for 3. Limiting, 3. Providing for
principal office in meetings of the compensation broadening or redeemable shares.
within the stockholders and of directors. (30) denial of the right (8)
Philippines the manner of to vote, including
voting. voting by proxy for
members in
nonstock
corporations. (29)
4. Term of 4. Form for proxies 4. Creation of an 4. Transferability of 4. Provisions on
existence of stockholders and executive membership in a the purposes of the
members and committee. (35) nonstock corporation. (14,
manner of voting. corporation. (90) 15, 36(11) and 45)
5. Names, 5. Qualifications, 5. Date of the 5. Termination of 5. Providing for the
nationalities and duties and annual meeting or membership in corporate term of
residences of compensation of provisions of nonstock existence. (13 and
incorporators directors, trustees, special meetings corporations. (91) 14)
officers and of the
employees. stockholders or
members. (50 and
53)
6. Number of 6. Time for holding 6. Quorum on 6. Manner of 6. Capitalization of
directors or annual election of meeting of election and term stock corporations.
trustees directors or stockholders or of office of trustees (14 and 18)
trustees, mode and members. (52) and officers in
manner of giving nonstock
notice thereto. corporation. (92)
7. Names, 7. Manner of 7. Providing for 7, Manner of 7. Corporate name
nationalities and election or the presiding distribution of (39)
residences of appointment and officer at assets in nonstock
temporary the term of office of meetings of the corporations upon
directors or all officers except directors or dissolution. (94)
trustees until the directors and trustees as well
election trustee. as of stockholders
or members. (54)
8. In case of 8. Penalties for 8. Procedure for 8. Providing for 8. Denial of pre-
stock corporation, violation of by-laws. issuance of staggered board in emptive rights (48)
amount of certificate of educational
authorized capital shares of stock. institutions. (108)
stock, number of (63)
shares, par value
of shares, issue
price of no par
value shares,
original
subscribers and
amount paid by
each
9. Manner of 9. Providing for
issuing stock interest on unpaid
certificates. subscriptions.
(66)
10. Such other 10. Entries to be
matters necessary made in the stock
for the proper and transfer book.
means of corporate (74)
business and
affairs.
11. Providing for
meetings of the
members in a
nonstock
corporation
outside of the
principal office of
the corporation.
(93)