UNIVERSITY OF SAN CARLOS SEC. 13.

CONTENTS OF THE ARTICLES OF

SCHOOL OF LAW & GOVERNANCE INCORPORATION..............................................................23
SEC. 14. FORM OF ARTICLES OF
Business Organization 2 INCORPORATION ....27 SEC. 15. AMENDMENT OF THE
Revised Corporation Code
Reviewer ARTICLES.....................28
SEC. 16. GROUNDS FOR DISAPPROVAL OF AOI OR
Atty. Eugenio Espedido AMENDMENTS..................................................................29

EH403 SY 2019-2020 SEC. 17. CORPORATION NAME ......................................29

CORPO COMMITTEE: SEC. 18. REGISTRATION, INCORPORATION AND
Gaviola, Keeshia Earl T. COMMENCEMENT OF CORPORATION EXISTENCE .....30
Li, Jinnelyn O.
Tagaloguin, Elmar M. SEC. 19. DE FACTO CORPORATION ..............................31
Torres, Chezka Bianca P. SEC. 20. CORPORATION BY ESTOPPEL........................31
SEC. 21. EFFECT OF NON-USE OF CORPORATE
SOURCES
CHARTER AND CONTINUOUS INOPERATION...............34
Discussion of Atty. Espedido & Atty. Gaviola (2018-2019) |
Herbosa | Prior Year Notes: Gaviola, Tanya & Beer Notes | UP TITLE III. BOARD OF DIRECTORS/TRUSTEES AND
Law Notes 2019 | San Beda MemAid 2019 OFFICERS.............................................................................34
Disclaimer: This material is not for sale. The authors do not SEC. 22. QUALIFICATIONS OF THE BOD/BOT ...............35
guarantee the absolute correctness, completeness or
SEC. 23. ELECTION OF DIRECTORS OR TRUSTEES....37
accuracy of this reviewer. This is intended to be used as a
supplement to your personal readings. Please be vigilant in SEC. 24. CORPORATE OFFICERS ..................................39
cross-referring with your own notes. We have arranged Atty. SEC. 25. REPORTORIAL REQUIREMENTS.....................41
E.’s discussion to align with the codal provisions, and thus
this reviewer does not completely follow the flow of his class SEC. 26. DISQUALIFICATION OF DIRECTORS,
discussions. TRUSTEES, OR OFFICERS..............................................42
SEC. 27. REMOVAL OF DIRECTORS/TRUSTEES...........42
Kindly note that the portions of these reviewers marked
with double asterisks (**) were not discussed by Atty. SEC. 28. VACANCIES in the board....................................42
E., but for purposes of the mock bar and/or better
SEC. 29 COMPENSATION OF DIRECTORS OR
understanding, the authors thought to include such
TRUSTEES ............................................................................
notes in this material.
...............44
Tip: To easily reach a specific section or title in this
document, simply press CTRL + <click the section you SEC. 30. LIABILITY OF DIRECTORS, TRUSTEES OR
want to go to>. OFFICERS .........................................................................44
SEC. 31. DEALINGS OF DIRECTORS, TRUSTEES OR
OFFICERS .........................................................................45
SEC. 32 INTERLOCKING DIRECTORS ............................46
TABLE OF CONTENTS
SEC. 33. DISLOYALTY OF A DIRECTOR .........................47
TITLE I. GENERAL PROVISIONS, DEFINITIONS AND SEC. 34. EXECUTIVE COMMITTEE .................................48
CLASSIFICATIONS.................................................................2
TITLE IV. POWERS OF THE CORPORATION.....................48
SEC. 1. TITLE OF THE CODE .............................................2
SEC. 35. CORPORATE POWERS AND CAPACITY .........48
SEC. 2. CORPORATION
SEC. 36. POWER TO EXTEND OR SHORTEN
DEFINED .....................................4 SEC. 3. CLASSES OF CORPORATE TERM..........................................................50
CORPORATIONS..........................11 SEC. 37 POWER TO INCREASE OR DECREASE CAPITAL
SEC. 4. CORPORATIONS CREATED BY SPECIAL LAWS STOCK...............................................................................50
OR CHARTERS..................................................................14 SEC. 38. POWER TO DENY PRE-EMPTIVE RIGHT ........51
SEC. 5. CORPORATORS AND INCORPORATORS, SEC. 39. SALE OR OTHER DISPOSITION OF ASSETS..52
STOCKHOLDERS AND MEMBERS...................................14
SEC. 40. POWER TO ACQUIRE OWN SHARES..............52
SEC. 6. CLASSIFICATION OF SHARES ...........................15
SEC. 41. POWER TO INVEST CORPORATE FUNDS IN
SEC. 7. FOUNDERS’ SHARES..........................................16 OTHER CORPORATIONS/BUSINESSES.........................53
SEC. 8. REDEEMABLE SHARES ......................................16 SEC. 42. POWER TO DECLARE DIVIDENDS ..................54
SEC. 9. TREASURY SHARES ...........................................16 SEC. 43. POWER TO ENTER INTO MANAGEMENT
TITLE II. INCORPORATION AND ORGANIZATION OF CONTRACT........................................................................59
PRIVATE CORPORATIONS..................................................22 SEC. 44. ULTRA VIRES ACTS ..........................................59
SEC. 10. NUMBER AND QUALIFICATIONS OF TITLE V. BYLAWS ................................................................60
INCORPORATORS ............................................................22
SEC. 45. ADOPTION OF BY LAWS...................................60
SEC. 11. CORPORATE TERM...........................................23
SEC. 46. CONTENTS OF BYLAWS...................................61
SEC. 12. CAPITAL STOCKS..............................................23
SEC. 47. AMENDMENT TO BYLAWS ...............................61
 TITLE VI. MEETINGS............................................................62

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SEC. 48. KINDS OF MEETINGS........................................62 TITLE I. GENERAL PROVISIONS, DEFINITIONS AND
CLASSIFICATIONS
SEC. 49. REGULAR & SPECIAL MEETINGS OF
STOCKHOLDERS OR MEMBERS.....................................62
SEC. 1. TITLE OF THE CODE
SEC. 50. PLACE & TIME OF MEETINGS OF
STOCKHOLDERS OR MEMBERS.....................................65 Section 1. Title of the Code. This Code shall be known as
the “Revised Corporation Code of the Philippines”.
SEC. 51. QUORUM IN MEETINGS....................................65
SEC. 52. REGULAR & SPECIAL MEETINGS OF
DIRECTORS/TRUSTEES; QUORUM ................................65
SEC. 53. WHO SHALL PRESIDE AT MEETINGS .............66 INTRODUCTION
SEC. 54. RIGHT TO VOTE OF SECURED CREDITORS &
The Revised Corporation Code of the Philippines (RCC) was
ADMINISTRATORS............................................................66
signed into law by Pres. Rodrigo Duterte on 20 February 2019,
SEC. 55. VOTING IN CASE OF JOINT OWNERSHIP OF and became effective on 23 February 2019, following its
STOCK ...............................................................................66 publication in 2 newspapers of general circulation.
SEC. 56. VOTING RIGHT FOR TREASURY SHARES......67
In its repealing clause, the Revised Corporation Code
SEC. 57. MANNER OF VOTING; PROXIES ......................67 expressly repealed the 1980 Corporation Code, which had no
amendments for almost 39 years.
SEC. 58. VOTING TRUSTS ...............................................68
TITLE VII. STOCKS AND STOCKHOLDERS .......................70 Notes:
From 149 sections, the RCC now has 188 sections. Being a
SEC. 59. SUBSCRIPTION CONTRACT.............................70
special law, it is a combination of substantive and procedural
SEC. 60. PRE-INCORPORATION SUBSCRIPTION..........70 law.
SEC. 61. CONSIDERATION FOR STOCKS ......................71 The most important innovation is the introduction of
the OPC, or one-person corporation. This is a very
SEC. 62. CERTIFICATION OF STOCK & TRANSFER OF new concept. We have abandoned the old concept of
SHARES.............................................................................72 at least 5 incorporators being required to make a
corporation.
SEC. 63. ISSUANCE OF STOCK CERTIFICATES ............73
o There is a new concept because many
SEC. 64. LIABILITY OF DIRECTORS FOR WATERED investors refrain from investing much into
STOCKS.............................................................................75 businesses, because when they invest into
SEC. 65. INTEREST ON UNPAID SUBSCRIPTIONS........77 sole proprietorships, their liability is unlimited.
o However, forming a corporation under the old
SEC. 66. PAYMENT OF BALANCE OF SUBSCRIPTION..77 law required 5 incorporators, and
SEC. 67. DELINQUENCY SALE ........................................78 businessmen may not be comfortable with
doing business with five other persons. So
SEC. 68. WHEN SALE MAY BE what they did before was they incorporated a
QUESTIONED ................79 corporation together with family members.
Sometimes, they did it with their drivers,
SEC. 69. COURT ACTION TO RECOVER UNPAID
gardeners and laundrywomen, etc. The SEC
SUBSCRIPTION.................................................................79
realized that we are just fooling ourselves,
SEC. 70. EFFECT OF DELINQUENCY..............................79 that incorporators can sometimes be had in
SEC. 71. RIGHTS OF UNPAID SHARES, circumvention of the law. That is why they
NONDELINQUENT ................................................................. now allow the OPC.
...........................79 However, note that 80-90% of the Code remains the
same with the Old Code.
SEC. 72. LOST OR DESTROYED CERTIFICATES...........80
TITLE VIII. CORPORATE BOOKS AND RECORDS ............82 TYPES OF BUSINESS ORGANIZATIONS

SEC. 73. BOOKS TO BE KEPT; STOCK TRANSFER (1) Sole Proprietorships

AGENT .................................................................................... A form of business organization with only one proprietary
........82 owner. It is when a person personally or a single individual
SEC. 74. RIGHT TO FINANCIAL STATEMENTS...............86 conducts business under his own name or under a
business name.
APPENDIX.............................................................................87
P.D. 902-A ..........................................................................87 (2) Partnerships
By a contract of partnership, two or more persons bind
NATIONALIZED ACTIVITIES (SEC. 8, RA 7042)...............87 themselves to contribute money, property or industry to a
SEC. 3, R.A. 8179 (AMENDING SEC. 8, RA. 7042)...........88 common fund, with the intention of dividing the profits
among themselves. Two or more persons may also form a
R.A. No. 11232 partnership for the exercise of a profession.
An Act Providing for the Revised Corporation Code of the
Philippines
 Page 2 of 88 | EH403 2019-2020 Corporation Law
(3) Corporation
An artificial being created by operation of law, having the Manage Managed by Absence Power to
right of succession and the powers, attributes and ment the sole of any do
proprietor agree business
properties expressly authorized by law or incident to its
existence. ment, is
every vested in
SOLE PART CORPO partner is the Board
PROPRIET -NERSHIP -RATION an agent of
OR -SHIP of the Directors
partner (BOT) or
ship Board of
Trustees
Comme Starts upon Created Created by
nce - selling by mere operation
ment agree of law
ment of Transfer Transferrab Needs Does not
the parties ability of le through consent need prior
Interest asset sale of all consent of
partners the stock
No. of Sole At least 2 New Law: (based holders
Incorpo proprietor persons One on
rators Person delectus
Corporati personae)
on is
allowed Right of No right of succession There is
Succession right of
Old Law: succession
At least 5
incorpora
tors

Comme No juridical Execution From the

nce - personality of the date of What is the basic distinction between the three? A: The veil
ment of contract issuance of corporation fiction only exists in a corporation, and not in a
Juridical of the sole proprietorship or a partnership.
Personality Certificate
of Atty. Espedido.: A Corporation, such as a One Person
Incorpora Corporation (OPC) enjoys the veil of corporate fiction and a
tion by the limited liability whereas a Sole Proprietorship’s liability may not
SEC be limited at all.

One of the requirements of an OPC to exist is to declare how

Liability Liable up to Liable Stockholder much capital he intends so that his liability will be based on that
the extent of persona s are liable capital. He must prove that he has separated that capital from
personal lly and only to the his personal funds. The amount declared as capital for the
properties subsi extent of Corporation has been separated from the personal funds.
diarily for their Unless he can do that, he might be liable as a Sole Proprietor.
partnershi investme
p debts to nts as ADVANTAGES OF A CORPORATION
3rd represent
persons ed by the (1) More capitalization
shares (2) Limited liability – veil of corporate fiction applies (3)
subscribed Right of succession – upon the death of a stockholder, the
by them heir becomes the new stockholder which provides stability
for the business to continue
Important: (4) Transferability of interest – does not require the
Veil of consent of other stockholders
Corporate (5) Easier management – management is centralized in
Fiction the Board of Directors
applies
only to a DISADVANTAGES OF A CORPORATION
Corpo
ration (1) Higher Income Tax Liability (May be taxed twice)
Corporate Income Tax and Income Tax to
Stockholders
 Illustration. When the corporation acquires income, it participation of stockholders in the management is in
will be subject to corporate income tax. When it is the election of the Board of Directors.
distributed to the shareholder as cash dividends, it will
also be an income of the shareholder and such are (3) No delectus personae – investing with people you do
taxable income of the shareholder. not know; there is no personal touch; no delectus
personae
(2) Less Participation in the Management. Participation of
stockholders in a corporation is indirect. (4) Dissolution – dissolution is granted by the State, unlike
in a Partnership which can be dissolved anytime.
Indirect – means the management of the corporation Dissolution of a Corporation requires consent of the
is entrusted to the Board of Directors. The only State because it is imbued with public interest.
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(5) Greater degree of government control and supervision What do you think about PAGCOR?
A: It is an artificial being.
(6) Difficulty in meeting requirements – high cost of
formation and operations Does it have the right of succession?
A: It has.
SEC. 2. CORPORATION DEFINED
The Philippine Airlines before was a private corporation.
Section 2. Corporation Defined. A corporation is an And it was government-owned. Now, it has been privatized.
artificial being created by operation of law, having the right Meaning, the shares of stock of the government were sold
of succession, and the powers, attributes, and properties
to private persons. PAGCOR is a private corporation.
expressly authorized by law or incidental to its existence.
Therefore, we have demonstrated the fact that private
corporations may be?
A: They can be private or government-controlled.
This course is actually called Business Organizations II. TYPES OF CORPORATIONS
But what will we be studying in this course?
A: We will be studying about private corporations, as 1. Public corporations
distinguished from public corporations. Created to govern a portion of the State. Its purpose is
for the general good and welfare (Sec. 3, Act 1456).
Private corporations are different from public corporations in
that the latter are created and governed by special charters. 2. Private corporations
Created for some private purpose, benefit, aim or end.
What is a public corporation? It may either be stock nor non-stock, government
A: It is one created by the State either by general or special act owned or controlled, or quasi-public.
for purposes of administration of local government or rendering
services in the public interest. 3. Publicly-listed corporations
Private corporations whose stocks are listed in the
PRIVATE CORPORATION VS. PUBLIC CORPORATION PSE (Philippine Stock Exchange).

PRIVATE CORPORATION PUBLIC CORPORATION Examples:

(1) San Miguel Corporation
Formed for a private Formed or organized (2) Philippine Long Distance Telephone Company
purpose, benefit or end. to govern a portion (3) SM Prime Holdings, Inc.
of the State.
4. Quasi-public corporations
Examples: Private corporations performing public functions.
1. Municipalities (Example: VECO)
2. Provinces
3. Autonomous Regions 5. Government-Owned and Controlled Corporations
such as the ARMM Private corporations created by the Congress through
and the CAR a special charter and the majority of its shareholdings
are owned by the government.

A GOCC has a personality of its own, separate and

distinct from that of the government.
What about Region 7?
A: It is not a public corporation because its purpose is for Examples:
geographical determination and there is no election of Regional (1) Development Bank of the Philippines
Representatives. Its only purpose is for the clustering of the (2) Philippine Ports Authority
provinces forming part of that region. (3) Philippine Amusement and Gaming
Corporation
How about ARMM and CAR? (4) Land Bank of the Philippines
A: These are autonomous regions that have their own (5) Manila International Airport Authority
governors and boards. These are public corporations.
**NOTES:
How do we define private corporations? 1. The test to determine whether a GOCC or private
A: They are corporations that are established for a private corporation: if a corporation is created by its own
purpose or benefit. charter for the exercise of a public function, then
 GOCC; if by incorporation under the general instrumentality of the government performing functions of a
corporation law, then private corporation (Baluyot vs. particular branch of the government.
Holganza, 2000)
If the employees of a GOCC are illegally dismissed, where
What about the Department of Education? do they go?
A: It is not a public corporation. It is an instrumentality of the A: It depends on what is written on their special charter. They
government under the Executive Branch. are not covered under the Revised Corporation Code, and they
are also not covered in the Labor Code. Moreover, many of
What is a government instrumentality? them are covered by the Civil Service Rules even if they are
A: It is not a private or a public corporation, but an private corporations.

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CONSEQUENCES OF BEING A CORPORATION GEN: A corporation cannot be held criminally liable under the
Revised Penal Code.
What are the consequences of a corporation existing as an
artificial being? Rationale: Crimes under the RPC have the element of intent
A: which corporations are not capable of, as it has no mind of its
(1) It has a separate and distinct personality from its own. As a creature of the law, its intention cannot be
members or shareholders, thus incurs separate liability (2) determined. It can also not be sent to jail because it has no
It enjoys rights separate from the stockholders (3) corporal or physical existence.
Properties of the corporation are separate from the XPNs:
properties of the stockholders.
(1) When the crime is punishable by a special law; Atty.
RIGHTS OF A CORPORATION Espedido: The special law must specify that it
imposes penalties on the officers of the corporation.
What rights does a corporation have? To be able to punish the officers, the law should
A: specifically provide that in case the corporation
(1) Constitutional rights becomes liable, the officers shall be directly
(2) Civil rights punishable for the commission of the act or violation,
(3) Economic rights and that they will suffer the penalty of imprisonment.
Otherwise, they cannot be held liable.
Note: A corporation does not have political rights.
(2) When the penalty imposed is a fine;
Civil and Economic Rights: A corporation can be made criminally liable by being
made to pay a fine. Fines are not civil obligations, but
(1) Right to sue or be sued
are penalties.
(2) Right to own and dispose of properties
(3) Right to enter into contracts
(3) When the corporation violates the Anti-Money
(4) Right to non-impairment of contracts
Laundering Act (AMLA)
Constitutional Rights:
Penalties in the AMLA include:
(1) Right to due process and equal protection of the law
a. Suspension
b. Revocation of license
Section I, Article III of the Constitution
c. Fine
“No person shall be deprived of life, liberty or property
without due process of law, nor shall any person be
denied the equal protection of the law.” PRINCIPLE OF LIBERALITY OF CONTRACTS

(2) Right against unreasonable searches and seizure Rule: Anyone can stipulate any provision in a contract as long
(3) Right against non-impairment of contracts as such provision is not contrary to law, morals, public policy,
and public order. This right is enjoyed by both natural and
(4) Right against self-incrimination
juridical persons.
Note: An artificial being has a separate set of rights from
Note: A corporation also enjoys the right to liberality of
that of natural persons. Artificial persons enjoy certain
contracts. However, there is an additional condition: a
rights that persons also enjoy, but not all rights.
corporation is not only bound by the limitations imposed under
the principle of liberality of contracts, but is also bound by the
What rights can a corporation not exercise? provisions in the Articles of Incorporation.
A:
(1) Political rights – for example, the right to vote and be Thus, a corporation’s existence must be within the
voted for boundaries of the Revised Corporation Code and its
(2) Right to life – granted only personality in accordance to Articles of Incorporation.
law
(3) Right to liberty – a corporation is not a corporal being
Atty. Espedido: In other words, you cannot just say that you can
(it has no physical existence) which can be detained
enter into any contract under the principle of liberality of
unlike a natural person. A corporation cannot move,
contracts but the contract must also be confined within the
and therefore it is impractical to send the corporation
privilege granted by the State.
to jail.
Important: Although you can enter into any contract, your
CRIMINAL LIABILITY OF A CORPORATION
 authority or power to enter into a contract must be confined Stockholders cannot be held personally liable because their
within the authority granted to you by the State. liability is limited to the extent of their investments. It is unlike a
Partnership where the partners can be held personally liable.
LIABILITY OF CORPORATIONS IN CASE OF DEBT
Reason: In a corporation, there is a veil of corporate fiction. The
Consequence of having a separate juridical personality: The main difference between the two is that, while both partnership
debts of the corporation cannot be demanded by the creditors and corporation are juridical persons, the veil of corporate entity
against the stockholders. applies only to corporations.

Page 5 of 88 | EH403 2019-2020 Corporation Law

Illustration. debts and has already received a demand letter. Corporation A
A corporation incurred debts and its assets are not is now anticipating that the creditor might proceed against their
sufficient to pay its debts. Can the creditors demand assets.
payment from its stockholders?
A: Generally, no. If the assets are not enough, it will be Corporation A now created Corporation B and made it appear
considered as losses on the part of the creditor. that the assets of Corporation A were already sold to
Corporation B.
Atty. Espedido: In case the corporation incurs debts and their
assets are no longer sufficient, the creditors may organize When the sheriff came to attach the property of Corporation A,
themselves and discuss the matter with the corporation. To aid the sheriff was shown a document that the assets are sold to
the creditors for whatever is due to them, they could agree to Corporation B.
pursue rehabilitation. Do you think that the sheriff can go after Corporation B? A:
Normally, the sheriff might be hesitant. The sheriff will not want
In a rehabilitation, the assets of the corporation will be gathered. to violate the rights of Corporation B.
It will not be enough so the court will apply a receiver who will
determine how the creditors will be paid. Atty. Espedido: But lawyers have a way of pursuing Corporation
B. They can proceed to Corporation B by proving that the
The receiver’s job is to settles as much as possible – keep the assets were actually owned by Corporation A through
business of the Corporation going, such as appoint some establishing that the stockholders of Corporation A are the
managers, so that the business will continue, earn income, and same stockholders of Corporation B.
such profits will be now distributed to the creditors. However,
this may not be a one-time payment. They will now program the Show that the assets were only transferred to defraud the
payment. In this manner, the creditors will be protected. creditors. So this is an instance when the corporate veil may be
lifted.
VEIL OF CORPORATE FICTION
RELATIONSHIPS OF A CORPORATION
A corporation has a separate and distinct personality from its
shareholders, officers, and directors. Once said corporate When we organize or form a corporation, we will establish
fiction is created, the veil hides the stockholders such that various relationships. Relationships are necessary.
when a corporation incurs liability, the stockholders are
shielded from liability. In so far as the law is concerned, we are Relationships formed by a corporation
only dealing with the corporation.
(1) Relationship between Corporation and the
Otherwise, without the veil, would you still like to be a Shareholders
stockholder? Which is why it is necessary to execute the Articles of
Atty. Espedido: There is no point. In other words, that veil is the Incorporation. It manages the relationship between the
protection of the stockholders. corporation and the shareholders.

Can the veil of corporate fiction be enjoyed by a (2) Relationship among Shareholders themselves The
partnership? articles and the law provide the regulation and
A: No. While a corporation and a partnership are both juridical monitors this relationship
persons, the veil of corporate fiction only applies to
corporations. (3) Relationship between the Corporation and the
State
PIERCING THE VEIL OF CORPORATE FICTION A corporation is created by the State. It is the state
that granted the privilege; thus, it can also be
When can there be piercing of the veil of corporate fiction? withdrawn by the state. Therefore, you must be
A: When the corporate veil: (Memory Aid: PDFJ) 1. Defeats compliant with the provisions of the law. Any violation
public convenience; will cause the suspension or eventual revocation.
2. Is used to perpetuate fraud;
3. Is used to defend a crime; (4) Relationship between the Corporation and the
4. Is used to justify a wrong. Public
The public here includes the clients.
Illustration.
Corporation A defrauds its creditors by transferring its In forming a corporation, your objective is to gather friends and
assets to Corporation B people in order to get funds or ask for investments.

Corporation A has five (5) stockholders. Corporation A incurred Atty. Espedido: In forming a corporation, the main purpose is
 fundraising. Because when you do not have money or earn profits, can the investors demand payment from you? Are
investments, it will be difficult to run a business. you obliged to return their money?

The easiest option is to borrow. But if you do not have financial A: No. By contributing money, they have exposed themselves
assets, do you think the bank will lend to you? What will the to risk. In business, you do not guarantee profits.
bank require? Financial statements. The FS however will show
that you have zero assets. No bank will lend to you. Because if On the other hand, if you borrowed money from the bank and
the manager lends to you without collateral, he will lose his job. you cannot return it, there will be interest to be paid,
If you do not pay your debt, you might even be sent to jail compounded interest, and the bank may foreclose your
because you defrauded the bank. property.
On the other hand, if you form a corporation, even if you do not
Page 6 of 88 | EH403 2019-2020 Corporation Law
DIFFERENCE BETWEEN A LENDER & AN INVESTOR Content of the By-Laws of the Corporation
(1) How many boards and officers will be elected
LENDER INVESTOR (2) Term of office
(3) Functions and Powers
No risk presumed Takes the risk because (4) Manner of election
there is no guarantee of (5) When will the stockholders and/or board meet
success or profits in (6) Definition of various types of shares
business. (7) Etc.
RELATIONSHIP BETWEEN THE CORPORATION AND
STATE

Note: When you invest, you share opportunities. You share A corporation is a creation of the law. In other words, it is a
risks as well. privilege granted by the State. The term extended or granted by
What is the difference between an investor and a lender? the state is subject to the condition that the corporation will
A: The investor takes a risk. comply with the reportorial requirements and behave within the
bounds of the law. Otherwise, the State may revoke or cancel
Atty. Espedido: Nobody can guarantee success. But more or the license. It may also suspend and/or charge a fine.
less, if there is hard work and perseverance, success follows.
PARTNERSHIP VS CORPORATION
RELATIONSHIP BETWEEN A CORPORATION & THE PARTNERSHIP CORPORATION
SHAREHOLDERS

The relationship between the corporation and the stockholders Manner of Created by Created by law
is well established in the Articles of Incorporation (AOI). The Creation mere or by operation
AOI is considered as the contract or agreement of the agreement of of law
Corporation and the Stockholders. Since this is their the parties
agreement, the AOI binds their relationship and regulates their
relationship. No. of At least 2 One Person
Incorporators persons Corporation
Illustration. Old law: at
A funeral parlor is turned into a hospital least 5
incorporators
The primary purpose of the corporation is to maintain,
operate, run and manage a funeral parlor. May the Commenceme Moment of From the date of
corporation maintain, operate and manage a hospital nt of Juridical execution of the issuance of
instead? Personality the contract the Certificate
A: It cannot, because their agreement is to engage in a funeral of
business. Incorporation
by the SEC
What can the stockholder do?
A: Even if the Board of Directors (BOD) want to have a hospital,
Powers May exercise Exercise power
they cannot immediately do so if the Articles of Incorporation is
power only expressly
not amended. The stockholders must ratify it, and there should
authorized by granted by law
be an amendment of the Articles of Incorporation
the partners or implied from
those granted
The moment the corporation intends to pursue another
or incident to its
business, the stockholder may ask for an amendment of the
existence
Articles of Incorporation to reflect such changes. Otherwise, the
contract will be violated.
Management Absence of Power to do
Note: Amending the Articles of Incorporation is basically any business is
amending the contract between the shareholders and the agreement, vested in the
corporation. every partner Board of
is an Directors or
RELATIONSHIP AMONG SHAREHOLDERS THEMSELVES agent of the Board of
partnership Trustees
This is still an agreement among themselves. This can be found
in their by-laws.
 Effect of Partner can Suit against the them
Mismanagement sue a co- member of the
partner BOD or BOT
must be in the
name of the
corporation

Rights of No right of Has right of

Succession succession succession
Transferabili Needs consent Without prior
ty of of all partners consent of
Extent of Liable Stockholders Interest (based on other
Liability to 3rd personally are liable only delectus stockholders
Persons and to the extent personarum)
subsidiarily of their
for partnership investments as
debts to 3rd represented by Term of Any period of Perpetual
persons the shares Existence time
subscribed by

Page 7 of 88 | EH403 2019-2020 Corporation Law

One of the requirements for an OPC to exist is to declare how
much capital he intends so that his liability will be based on that
Old law: 50 capital. He must prove that he has separated that capital from
years and his personal funds, that the amount declared as capital for the
extendible for corporation has been separated from the personal funds.
another 50 Unless he can do that, he will be liable as a sole proprietor.
years
ADVANTAGES OF A CORPORATION
Firm Name For limited May adopt any
partnership, name as long (1) More capitalization
requires LTD as it is not the (2) Limited liability (the veil of corporate fiction applies to
in its name same or similar corporations)
to other (3) Right of succession (upon the death of a stockholder,
registered firm the heir becomes the new stockholder which provides
name stability for the business to continue)
(4) Transferability of interest – does not require the
Dissolution May be Dissolved only consent of the other stockholders
dissolved with consent of (5) Easier management – management is centralized in
anytime by the the the Board of Directors
will of any or State
all partners DISADVANTAGES OF A CORPORATION

Governing Laws Civil Code Governed by a (1) Higher income tax liability
general law The profits of the corporation is taxed twice: corporate
which is the income tax and income tax on the stockholders for the
Revised dividends
Corporation
Code or a Illustration. When the corporation acquires
special charter income, it will be subjected to corporate income
tax. When it is distributed to the shareholder as
cash dividends, it will also be an income of the
shareholder and such are taxable income of the
shareholder.
Why is management in a corporation better?
A: (2) Less participation in the management of the business
1. There are fewer members, and as a result, it is easier to Shareholders only have an indirect participation in the
convene and communicate, while in a partnership, management of the corporation
“everyone talks”. o “Indirect” – means that the management of the
2. Management is vested on persons with expertise. corporation is entrusted to the Board of
Directors. The only participation of the
Basic Distinction stockholders in the management is the
The veil of corporate fiction only applies to corporations, and is election of the Board of Directors.
not to sole proprietorships or partnerships.
(3) No delectus personae
Atty. Espedido: A corporation, such as a One Person A shareholder will be investing in the business with people he
Corporation (OPC) enjoys the veil of corporate fiction and a doesn’t know; there is no personal touch; there is delectus
limited liability, whereas a sole proprietorship’s liability may not personae.
be limited at all.
(4) Dissolution
 Dissolution is granted by the State, unlike in a partnership
which can be dissolved anytime. The dissolution of a Management Absence of any Power to do
corporation requires the consent of the State agreement, business is
because it is embued with public interest. every partner vested in the
is an agent of Board of
the partnership Directors or
(5) Greater degree of government control and supervision
Board of
Trustees
(6) Difficulty of organization
Organizing a corporation requires a high cost of formation and
Rights of No right of Has right of
operations
Succession succession succession
Summary of Differences between a Partnership and
Corporation (Note: Only these were highlighted during
recitation) Extent of Liable Stockholders are
Liability to 3rd personally and liable only to the
PARTNERSHIP CORPORATION Persons subsidiarily for extent of their
partnership investments as
Manner of Created by Created by law debts to 3rd represented by
Creation mere or by operation persons the shares
agreement of of law subscribed by
the parties them

Commenceme Moment of From the date of Transferabili Needs consent Without prior
nt of Juridical execution of the the issuance of ty of of all partners consent of other
Personality contract the Certificate of Interest (based on stockholders
Incorporation by delectus
the SEC personarum)

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Atty. Espedido: The life of the corporation begins in the are obliged to pay. This is the initial amount that shall be
issuance of the Certificate of Incorporation issued by the SEC. used in starting the corporation.

CONTENTS OF THE If you are a new corporation, how much should be

ARTICLES OF INCORPORATION subscribed?
A: The Revised Corporation Code does not require a
(1) Name of the Corporation minimum subscribed capital stock.
(2) Purpose
(a) Primary Purpose – main business Reason: To attract the formation of more business
Example: Operate and establish the best funeral organizations.
parlor of all time and name it “Libing Things”
(b) Secondary purpose – may refer to incidental or XPN: However, the the 25% subscribed capital stock is
related products or activities compulsory when there is an increase in the capital stock.
(3) Nature of the business Thus, it requires that at least 25% must be subscribed,
(4) Term – perpetual term; you could exist for as long as and 25% must be paid-up.
you wish. If you want to stop, just dissolve it along the
way A/N: Under the Old Corporation Code, newly formed
(5) Address – Purpose: In order that the SEC will know corporations were required to have 25% of their ACS
where to send notices or serve you summons subscribed, of this subscribed capital stock, 25% must be
(6) Names of the Stockholders paid-up (paid-up capital stock). However, this requirement
(7) Names of the Incorporators has now been removed under the Revised Corporation
Note: Incorporators may now be juridical persons so Code.
long as they present appropriate authority. (Old law:
only natural persons) Note: You do not have to pay the subscription
(8) Capital Structure of the Corporation immediately. The balance or may be due or payable later.
When will the balance be due?
CAPITAL STRUCTURE A: It depends on the Board. The Board may indicate the date
when the balance will be due or will simply announce or make a
Three levels of capital structure: call on the balance.

(1) Authorized Capital Stock (ACS) – the maximum amount How is it paid?
that a corporation intends to invest on a business A: The paid-up capital may either be done in cash or property
equivalent to the amount you intend to pay.
(2) Subscribed Capital Stock (SCS) – the number of shares
a stockholder intends to invest in the corporation which he If payment is through property, how will the equivalent of
commits himself to pay – it is the committed investment the property be determined?
of the stockholder A:
(1) The value will be determined through an appraisal.
(3) Paid-Up Capital – stock actually paid for by the (a) The SEC will send an appraiser OR
stockholders; it is the initial amount that the stockholders (b) You will be required to submit an appraisal report of
 your property done by a duly accredited appraiser, Otherwise if the SEC discovers that somebody is already
together with the Articles of Incorporation, to the SEC. using the same name, SEC might deny or return to you
your papers and come up with another name.
(2) The SEC personnel will verify WON the paid-up capital has
been deposited to the bank in addition to the certified bank To save time, they require you to give 3 alternative names.
deposit, which shall accompany the Articles of SEC is free to choose from those 3 alternative names.
Incorporation.
(2) Issuance of the Certificate of Incorporation – If all the
(3) The treasurer’s affidavit will indicate that at least 25% of the requisites are in order, the SEC will issue the Certificate of
subscribed capital has been paid, OR under the present Incorporation.
code, there will be now a verification. (Does not necessarily
by the treasurer but some other officers of the corporation, That is the official document that will give the birth of your
indicating among others that at least 25% of the corporation. Once you receive this, all the stockholders
subscriptions have been paid and that it was made with will be convened and we will have the first stockholders
cash or properties. meeting.

APPLICATION WITH THE SEC STEPS AFTER THE BIRTH OF THE CORPORATION

Atty. Espedido: More or less these are the contents of an Article (1) Organization meeting of the stockholders
of Incorporation. You may submit this to the SEC. The main agenda is the election of the Board.

(1) Verification – The SEC will go over your Article of (2) Meeting of the Board of Directors, Election of Officers
Incorporation and verify the name. Before you submit your Once the Board of Directors are elected, they could
Articles of Incorporation, you have to confirm or verify the adjourn the stockholders meeting and the directors
name that you intend to use. themselves will now hold its first Board Meeting.

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In that meeting, they will elect the officers based on the volume of power, so much that the services of VECO may
ballots (President, Chairman, Vice President, Secretary, not be enough, prompting you now to maintain your own
Treasurer). If they may want to, they will select the COO power plant.
(child of the owner).
You now have your own power plant within the cement
RIGHT OF SUCCESSION factory. You have officers and employees residing within
your cement factory. Because you have extra power for
If a stockholder or a member dies, withdraws, is insolvent, or your cement factory, you started selling this extra power to
suffers incapacity, the corporation will still continue and not be your EEs inside the compound.
dissolved.
If you are VECO, do you have a reason to complain? A:
When all the stockholders die, the heirs will become The best approach would be to ask the EEs who they would
stockholders. The rights, as well as the interests of the want to provide electricity for them. They will definitely side with
deceased stockholders will now be transferred to the heirs at the cement factory because the rates are subsidized.
the moment of death because succession starts at the moment
of the death of the deceased person. The corporation may argue that it is not doing business per se
but only providing assistance to their EEs – extending facilities
POWERS, ATTRIBUTES, PROPERTIES to their EEs.

These rights may be determined in the Articles of Incorporation, Important: So long as you can justify that the act is incidental to
the Corporation Code, and the By-Laws. These are the sources the main purpose, you are allowed to execute such power.
of rights and obligations of the stockholders. Illustration 3.
USC + Dance lessons after class
Illustration 1.
Transportation Company + Big building for Garage After class hours, the entire school will be vacated. The
best way to succeed is to maximize the use of assets. Thus,
If you are a transportation company, you are managing, the priests hired dancing instructors and offered dancing
operating, and maintaining a fleet of buses. What do you lessons to interested matrons and engaged the services of
think your powers could be? macho dancing instructors. At least they can earn some
A: Demand fare. You have the power to pursue and engage in more for two (2) hours.
the business of transportation
Can they engage in maintaining and operating a dancing
Your neighbors are complaining because your business is school?
transportation, but you also own a big building. Do you A: No, because this is not incidental. Offering academic
think you can maintain a big building as a garage? A: Yes, courses is the principal purpose of USC. Thus, the dancing
it is allowed. Maintaining a big building is incidental to the school is beyond its purpose.
business.
Illustration 4.
Illustration 2. Mining Company + Postal Service
Cement Factory + Electricity
There was a mining company in the mountain and to travel
You are operating a cement factory. It requires a big from the mining site from the big city was very difficult. So
 the EEs communicated with their families through mail (no Illustration 5.
cellphones at this time). The mails were carried by the Railroad Company + Buying Tracts of Land
company facilities and delivered to the city. The EEs
requested that their mails could be coursed through the A railroad company was buying tracts of land where they
company parcels. could install their railings.

The company agreed for it is for the benefit of the EEs Somebody complained that they cannot expropriate since
provided that the EEs will make payment – a subsidized the company’s power is merely to engage in railroad
mailing payment. business. They argued that the company cannot compel
owners to sell their land to the company because only the
LBC complained because the mining company is now government has the power to do so.
engaged in delivering parcels and mails. There is now a
competition between the company engaged in mining and SC Ruling: The buying of the lands is for the furtherance of the
the company carrying parcels. business of the railroad. It is incidental to being a railroad
company.
What do you think?
A: SC said that it is still incidental because at that time, Atty. Espedido: These are some of the several illustrations of
transportation was very difficult, no more cellphones or any primary powers and incidental powers.
other mode of communication.

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EFFECT OF INCOMPLETE (B) Under the Revised Corporation Code
INCORPORATION PAPERS 1. Stock Corporation
2. Non-Stock Corporation
Rule: Failure to acquire or comply with the requirements for an
issuance of a Certificate of Incorporation does not justify (C) As to number of corporators
making it into a partnership. 1. Corporation Sole
2. One Person Corporation
Atty: Espedido: If the papers are not in order, the SEC will not 3. Corporation Aggregate
issue a Certificate of Incorporation. The incorporators will have
to make the necessary corrections. (D) Whether it is Open or Close
1. Open Corporation
If the incorporators will not comply, the SEC will have to deny 2. Close Corporation
the issuance of a Certificate of Incorporation.
(E) As to Legal or Corporate Existence
The incorporators cannot engage in business as a corporation. 1. De jure corporation
They also cannot argue that they are now a partnership 2. De facto corporation
because the intention is not to pursue a partnership but to
organize a corporation. (F) Whether it is for a religions purpose or not
1. Ecclesiastical Corporation
SEC. 3. CLASSES OF CORPORATIONS 2. Lay Corporation
Section 3. Classes of Corporations. Corporations formed
or organized under this Code may be stock or nonstock (G) As to Formation
corporations. Stock corporations are those which have 1. Domestic Corporation
capital stock divided into shares and are authorized to 2. Foreign Corporation
distribute to the holders of such shares, dividends, or
allotments of the surplus profits on the basis of the shares (H) As to their relation to another corporation
held. All other corporations are nonstock corporations. 1. Holding or Parent Corporation
2. Subsidiary Corporation
3. Affiliated Corporation
(I) As to its nationality**
1. Philippine national
VARIOUS TYPES OF CORPORATIONS (Outline) 2. Foreign corporation

(A) As to purpose (A) AS TO PURPOSE

1. Public Corporation
2. Private Corporation (1) Public Corporation
(a) Publicly Listed created to govern a portion of a State
(b) Quasi-Public
(c) Government Owned and Controlled (2) Private Corporation – created for private ends (a)
Corporation (GOCC) Publicly listed – private corporations that are publicly
 listed in the Philippine Stock Exchange which means their (2) Non-Stock Corporation
shares can be bought and sold on the PSE Examples: All other corporations; they do not issue shares and
San Miguel Corporation, do not distribute profits to its members.
Ayala Land Corporation However, they still own profits for expenditures and to
improve their facilities. They cannot distribute the
(b) Quasi-Public Corporations – private corporations profits to its members. They have to plough this back
performing public functions to the corporation for the benefit of the members in
Example: VECO providing electricity terms of improvement of facilities.

(c) Government Owned and Controlled Corporations (C) AS TO NUMBER OF CORPORATORS

(GOCC) – created by Congress through a special
charter for which the government is the majority (1) Corporation Sole – one member or corporator; for purely
stockholder religious purposes
Examples: PAGCOR, Landbank of the
Philippines, SSS, GSIS (2) One Person Corporation – one member or corporator
also but not limited to purely religious purposes
(B) UNDER THE REVISED CORPORATION CODE
(3) Corporation Aggregate – consisting of more than one
(1) Stock Corporation corporator or member
Those which have capital stock divided into shares and are
authorized to distribute to the holders of such shares, dividends, Basis why the State is liberal in the establishment of
or allotments of the surplus profits on the basis of the religious corporations as a corporation sole: Constitutional
shares held. right to Freedom of Religion and Separation of Powers
It has capital stocks divided into shares and distributed to the between the Church and the State.
holders.
A stock corporation is also considered as a corporation for Atty. Espedido: Any attempt of preventing anyone from
profit. exercising his religion, from establishing his own church, can
Purpose of dividing shares: Determine the share in the profits. be
Page 11 of 88 | EH403 2019-2020 Corporation Law
considered as a violation to his freedom of religion. Thus, the first refusal xxx”
State would just want to know where you are located and the
funds that the church has earned. Note:
Close corporation – one whose articles of incorporation
Notes: provide that:
Corporation sole – one formed for the purpose of 1. All issued stock, exclusive of treasury shares, shall
administering and managing, as trustee, the affairs, be held by persons not exceeding 20;
property and temporalities of any religions 2. All issued stock shall be subject to one or more
denomination, sect, or church, by the chief archbishop, specified restrictions on transfer; and
bishop, priest, rabbi, or other presiding elder of such 3. The corporation shall not list in any stock exchange
religious denomination, sect or church. or make any public offering of its stock of any
class.
(D) AS TO WHETHER IT IS OPEN OR CLOSE
Notwithstanding the foregoing, a corporation shall not
(1) Open Corporation be deemed a close corporation when at least 2/3 of its
open to any person who may wish to become shareholders. voting stock or voting rights is owned or controlled by
Most of these are publicly listed. another corporation which is not a close corporation.

(2) Close Corporation (E) AS TO LEGAL OR CORPORATE EXISTENCE

limited to selected persons or members of a family.
This qualification is contained in the Articles of (1) De jure corporation
Incorporation (AOI) and the Stock Certificate. The stock corporation existing in fact or in law
certificate indicates that these holders shall not be allowed
to dispose the shares UNLESS he offers it to the existing (2) De facto corporation
holders first. existing in fact but not in law
IOW, it cannot be an absolute prohibition. Otherwise, it (F) WHETHER IT IS FOR A RELIGIONS PURPOSE OR NOT
will violate the right of an owner which includes the right to
own, right to possess, and right to dispose. (1) Ecclesiastical Corporation
Relative Prohibition – you are required to offer this to for religious purposes
existing stockholders. Only when there are no
(2) Lay Corporation
existing stockholders that would buy that you can
sell it to others. purpose other than religion

**Other types of religious/charitable corporations:

Atty. Espedido: Disqualifications on the sale of shares of a
close corporation can be found in the articles of incorporation,
(3) Corporation Sole
or in the certificates of stock.
incorporated by one person
a corporation formed for the purpose of administering and
For example, in the Stock Certificate, you may place a
managing, as trustee, the affairs, properties and
qualification that “The holder of these shares cannot sell these
temporalities of any religious denomination, sect or
shares UNLESS the existing holders exercise their right of
church, by the chief archbishop, bishop, priest, rabbi
 or other presiding elder of such religious denomination, sect or (2) Foreign Corporation
church. formed under any laws other than those of the
A corporation sole has no nationality but for the purpose of Philippines
applying nationalization laws, nationality is determined not by
the nationality of its presiding elder, but by the (H) AS TO THEIR RELATION TO ANOTHER
nationality of the its members constituting the sect in CORPORATION
the Philippines.
o Thus, the Roman Catholic Church can acquire (1) Parent Corporation
lands in the Philippines even if it is corporation which holds ownership of various
headed by the Pope (Roman Catholic corporations, thereby having control over such
Apostolic, et. al. vs. Register of Deeds of corporations. It has the capacity to elect or control
Davao City, G.R. No. L-8451) other corporations.
** A holding company is a parent corporation which
(4) Corporation Aggregate (Religious Society) A religious has no other business aside from the holding of the
organization incorporated by more than one person shares of its subsidiaries, which it controls

(5) Eleemosynary Corporation (2) Subsidiary Corporation

One organized for a charitable purpose owned and controlled by the holding or parent
corporation. The holding corporation elects the Board
(G) AS TO FORMATION of Directors (BOD) for the subsidiary.

(1) Domestic Corporation (3) Affiliated Corporation

a corporation formed, organized or existing under the laws of those related to the parent corporation or subsidiary
the Philippines. corporation

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Although performing other activities, these activities are
very much related or part of the other companies (e.g.
they are part of the supply chain perhaps). Thus, if the
owner of the company creates another corporation related
to the other corporation, then it can be considered sister
companies.

Illustration.

**NOTES: A trucking company is engaged in hauling products. The owner

noted that the products are brought to various warehouses that
What is the difference between an affiliate and a are owned by other people. Thus, the owner of the logistics
subsidiary? company decided to construct a warehouse.
A: The difference lies in the level of ownership of the
parent company in a certain corporation. The owner of the trucking company also convinced the
producer and the manufacturer that he can assign someone to
The terms “affiliate” and “associate” corporation are monitor the products. Thus, a third business was made –
used synonymously to describe a company whose Warehouse Management. The owner also created another one
parent only possesses a minority stake in the ownership as a marketing arm, thus a Sales Force company.
of the company.
Summary: So the Trucking Company here is the parent
On the other hand, a subsidiary is a business whose corporation, and it owns the subsidiaries: (1) Warehouse
parent holds a majority stake or is a majority Company for leasing, a (2) Warehouse Management and a (3)
shareholder of 50% or more of all shares. Some Sales Force Company. These various businesses, in relation to
subsidiaries are even wholly owned, meaning the each other, are called sister companies and would constitute a
parent corporation owns 100% of the complete chain – they are related to each other.
subsidiary.
Another example: Aboitiz Company as the owner of Union Bank,
VECO, real estate, and many other activities. So these are the
subsidiaries of Aboitiz – the more generic term would be
affiliates.
(4) Sister Company
**(I) AS TO NATIONALITY
fellow subsidiary with respect to another subsidiary; both
owned by the parent corporation
PLACE OF INCORPORATION TEST:
 Where the corporation was created: at least sixty percent (60%) of the members of
the Board of Directors of both corporations must
(1) Domestic Corporation be citizens of the Philippines, in order that the
(2) Foreign Corporation corporations shall be considered a Philippine
national.
CITIZENSHIP OF STOCKHOLDERS
(2) Foreign-owned corporation
(1) Philippine National Majority of the stockholdings are owned by
100% owned by the Filipino citizens, even if incorporated foreigners, even if incorporated in the Philippines.
abroad.
Sec. 3, Foreign Investment Act of 1991 (R.A. 7042): TESTS TO DETERMINE CITIZENSHIP OF
STOCKHOLDERS (Applies when the corporation is not 100%
Definition: owned by Filipino citizens)
The term "Philippine national" shall mean a
citizen of the Philippines or a domestic A. Control Test
partnership or association wholly owned by At least 60% of the outstanding capital stock
citizens of the Philippines; or a corporation which are entitled to vote are owned by Filipino
organized under the laws of the Philippines of citizens
which at least sixty percent (60%) of the capital
stock outstanding and entitled to vote is owned B. Grandfather Rule
and held by citizens of the Philippines; or a If the percentage of Filipino ownership is less
trustee of funds for pension or other employee than 60%, then only the number of shares
retirement or separation benefits, where the corresponding to such percentage shall be
trustee is a Philippine national and at least sixty counted as Philippine nationality.
(60%) of the fund will accrue to the benefit of the
Philippine nationals: Provided, That where a Narra Nickel vs. Redmont
corporation and its non-Filipino stockholders own The control test is still the prevailing mode of determining
stocks in a Securities and Exchange Commission whether or not a corporation is a Filipino corporation, within the
(SEC) registered enterprise, at least sixty percent ambit of Sec. 2, Art. II of the 1987 Constitution. When in the
(60%) of the capital stocks outstanding and mind of the Court there is doubt, based on the attendant facts
entitled to vote of both corporations must be and circumstances of the case or in the 60-40 Filipino equity
owned and held by citizens of the Philippines and ownership, then it may apply the Grandfather Rule.

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What do you mean by “doubt”? corporation was incorporated in the Philippines.
A: “Doubt” is any circumstance which renders the beneficial
ownership and control of the corporation outside of Filipino Sec. 8 of RA 7042 (Foreign Investments Act of 1991)
ownership. It is not when a corporation’s Filipino ownership enumerates the activities that are limited to Filipinos.
falls below 60%. This is not a circumvention of the law. It is a valid structure
UNLESS it is established that it is used to truly circumvent the
Where does the 60% requirement apply to, the voting law or the Constitution.
shares or the outstanding shares?
Atty. Gaviola: The interpretation wherein the SC said that the Basis: The Foreign Investment Act, where it only requires that
restriction must apply to each type of share (Gamboa vs. Teves, 60% of the investee corporation and investor corporation’s
G.R. 176579) is the correct interpretation. This is because outstanding capital stock entitled to vote be owned by Filipino
when you say outstanding capital stock entitled to vote, that citizens, and that at least 60% of their Board of Directors should
is very general. be composed of Filipino citizens.

You cannot say that preferred stocks are not entitled to vote SEC. 4. CORPORATIONS CREATED BY SPECIAL LAWS
in the election of directors. Only when they are deemed OR CHARTERS
non-voting expressly can they be deprived of their right to vote,
but only in the election of directors. For all the other items Section 4. Corporations Created by Special Laws or
enumerated in the RCC, they are required to vote. Charters. – Corporations created by special laws or charters
shall be governed primarily by the provisions of the special
law or charter creating or applicable to them, supplemented
A/N: This was lifted from the IBL class of Atty. Gaviola.
by the provisions of this Code, insofar as they are
applicable.
**NOTES

NATIONALIZED ACTIVITY

This is determined by looking at the Foreign Investment SEC. 5. CORPORATORS AND INCORPORATORS,
Negative List (FINL), which enumerates activities which are STOCKHOLDERS AND MEMBERS
limited to or reserved for Filipinos. It is a list of economic
activities whose foreign ownership is limited to a maximum of
40% of the equity capital. Of the enterprise engaged therein.

If the activity is listed, then that activity can be performed even

by a corporation which is 100% foreign-owned, even if such
 Section 5. Corporators and Incorporators, Stockholders
and Members. – Corporators are those who compose a PARTIES INVOLVED IN THE ORGANIZATION OF A
corporation, whether as stockholders or shareholders in a CORPORATION
stock corporation or as members in a nonstock corporation.
Incorporators are those stockholders or members mentioned Who are the persons involved in the organization of a
in the articles of incorporation as originally forming and corporation?
composing the corporation and who are signatories thereof. A: They are:
(1) Incorporators (4) Promoters
(2) Corporators (5) Underwriters
These activities include, but are not development and use; 2. Public utility INCORPORATORS
corporations; (6) Founders
limited to:
3. Land ownership;
1. Natural resources exploration,
(3) Board of Directors/ Trustees
stockholder of Corporation A).
Incorporators are the organizers of the corporation upon its
inception. They are mentioned in the AOI as originally forming
4. Educational institutions; and and composing the corporation, and who are signatories
5. Advertising companies. thereof.

Atty. Gaviola: It is an erroneous belief among foreigners and Under the New Code, juridical persons can now be
their attorneys that they need Filipino stockholders in order to incorporators.
incorporate in the Philippines.
Under the Old Code, only natural persons can be
Get rid of the notion that you need to have citizenship in order
to incorporate because to be an incorporator, all that is required incorporators. CORPORATORS
is to be a resident. In fact, only a majority need to be residents.
Corporators are those who fund the corporation. These refer to
Take note that a domestic corporation can be foreign-owned. the stockholders, investors, and incorporators themselves.
This happens when a corporation incorporated in the They are people who have interest over the corporation.
Philippines is composed of foreigners. In the same way, a
foreign corporation can be considered a Philippine national Stockholders – in a stock corporation
when 100% of its capital stock or its stockholders are Filipino
Members – in a non-stock corporation
citizens.
BOARD OF DIRECTORS OR TRUSTEES
CORPORATE LAYERING
The Board of Directors or Board of Trustees are the group of
This is a type of arrangement whereby a corporation has for its people who manage the corporation.
stockholder another corporation. (i.e. Corporation B is the

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PROMOTERS GEN: A corporation is not bound by the contract. A corporation,
until organized, has no life and no legal existence. It could not
The promoters promote the corporation itself. They convince have had an agent (the promoter) who could legally bind it.
the people to invest. They tell the people that they are
organizing such corporation. However, they are not committed XPNs: A corporation may be bound by the contract if it makes
to buy the shares, and are purely salesmen. the contract its own by:

**NOTES: 1. Adoption or ratification of the entire contract after

corporation
Promoters are persons who, acting alone, or with others, take 2. Acceptance of the benefits under the contract with
initiative in founding and organizing the business or enterprise knowledge of the terms thereof
of the issuer and received consideration thereof (Sec. 3.10, RA 3. Performance of its obligation under the contract
8799, The Securities Regulation Code)
Note: The contract must of course be one which is within the
LIABILITY OF THE PROMOTER powers of the corporation to enter.

GEN: The promoter binds himself personally and assumes the UNDERWRITERS
responsibility of looking to the proposed corporation for
reimbursement. Underwriters are mostly banking companies.

XPNs: As distinguished from promoters who have no commitment

1. Express or implied agreement to the contrary 2. since they simply promote, underwriters have commitment such
Novation, not merely adoption or ratification, of the that they guarantee the sale of stocks and if these were not
contract sold, they will be the ones who will buy the shares. The
underwriters therefore assume liability.
LIABILITY OF THE CORPORATION FOR THE PROMOTER’S
ACTS Example: The underwriters commit that 60% of the stocks will
be bought. If they cannot sell such committed shares, they will
guarantee that they will buy such stocks themselves. Thus, the laws provide that for a period of 5 years or less – they
have the right to vote and be voted upon. NO ONE ELSE have
What are roadshows? the right to nominate and elect. This is used to guide the infant
A: Roadshows are usually done by big corporations. If you corporation.
want to promote the formation of a corporation, you may
conduct a roadshow. You go around the country or the world The certificate of the founders’ shares defines the privilege that
and do a roadshow. the holders of this share shall have.

You tell them about the corporation and the business, and **Notes on Founders’ Shares
convince them to join – usually accompanied by the
underwriters who help convince. Changes in founder’s share expressly provided that the
**NOTES: exclusive right to vote and be voted on founders share in the
An underwriter is any party that evaluates and assumes another election of directors should not violate the Anti-Dummy Law and
party’s risk for a fee. The fee is often a commission, premium, the Foreign Investments Act.
spread, or interest.
Underwriting services are provided by some large financial Anti-Dummy Law
institutions, such as banks, or insurance or investment houses, Persons not allowed to have an interest in nationalized
whereby they guarantee payment in case of damage corporations often just nominate Filipino citizens to be legal
or financial loss and accept the financial risk for stockholders when in reality, it is the prohibited persons who
liability arising from such guarantee. An underwriting are actually controlling the corporation. This is a violation of the
arrangement may be created in a number of situations Anti
including insurance, issues of security in a public Dummy Law, and is a criminal offense.
offering, and bank lending, among others.
SEC. 6. CLASSIFICATION OF SHARES
FOUNDERS
Section 6. Classification of Shares. – The classification of
The founders are those who came about the idea – they are the shares, their corresponding privileges, or restrictions, and their
think tanks of the corporation. stated par value, if any, must be indicated in the articles of
incorporation. Each share shall be equal in all respects to every
As a matter of fact, they are given privilege. They are entitled to other share, except as otherwise provided in the articles of
an exclusive right to vote and be voted for, but limited for 5 incorporation and in the certificate of stock.
years only from date of inception of the Corporation.
The shares in stock corporations may divided into classes or
What is the purpose of having the exclusive right to vote series of shares, or both. No share may be deprived of voting
and be voted for? rights except those classified and issued as “preferred” or
A: To ensure that the corporation will eventually succeed “redeemable” shares, unless otherwise provided in this Code:
because they are the ones who envisioned the Corporation. Provided, That there shall always be a class or series of shares
They have the idea of how the business shall proceed. with complete voting rights.

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Holders of nonvoting shares shall nevertheless be entitled to preference in the distribution of dividends and in the distribution
vote on the following matters: of corporate assets in case of liquidation, or such other
preferences: Provided, That preferred shares of stock may be
(a) Amendment of the articles of incorporation; issued only with a stated par value. The board of directors,
(b) Adoption and amendment of bylaws; where authorized in the articles of incorporation, may fix the
(c) Sale, lease, exchange, mortgage, pledge, or other terms and conditions of preferred shares of stock or any series
disposition of all or substantially all of the corporate thereof: Provided, further, That such terms and conditions shall
property; be effective upon filing of a certificate thereof with the Securities
(d) Incurring, creating, or increasing bonded indebtedness; (e) and Exchange Commission, hereinafter referred to as the
Increase or decrease of authorized capital stock; (f) Merger or "Commission".
consolidation of the corporation with another corporation or
other corporations; Shares of capital stock issued without par value shall be
(g) Investment of corporate funds in another corporation or deemed fully paid and nonassessable and the holder of such
business in accordance with this Code; and shares shall not be liable to the corporation or to its creditors in
(h) Dissolution of the corporation. respect thereto: Provided, That no-par value shares must be
issued for a consideration of at least Five pesos (₱5.00) per
Except as provided in the immediately preceding paragraph, share: Provided, further, That the entire consideration received
the vote required under this Code to approve a particular by the corporation for its no-par value shares shall be treated
corporate act shall be deemed to refer only to stocks with as capital and shall not be available for distribution as
voting rights. dividends.

The shares or series of shares may or may not have a par A corporation may further classify its shares for the purpose of
value: Provided, That banks, trust, insurance, and preneed ensuring compliance with constitutional or legal requirements.
companies, public utilities, building and loan associations, and
other corporations authorized to obtain or access funds from SEC. 7. FOUNDERS’ SHARES
the public whether publicly listed or not, shall not be permitted
to issue no-par value shares of stock.

Preferred shares of stock issued by a corporation may be given

Section 7. Founders’ Shares. – Founders’ shares may be
given certain rights and privileges not enjoyed by the owners What are “shares”?
of other stock. Where the exclusive right to vote and be A: Shares represent the interest or the investment of a
voted for in the election of directors is granted, it must be for stockholder in a corporation.
a limited period not to exceed five (5) years from the date of
incorporation: **NOTES:
Provided, That such exclusive right shall not be allowed if its The terms “share” or “stock” may be used
exercise will violate Commonwealth Act No. 108, otherwise interchangeably to refer to shares of stock in a
known as the "Anti-Dummy Law"; Republic Act No. 7042, corporation.
otherwise known as the "Foreign Investments Act of 1991"; A share of stock is a unit of division of the capital
and otherwise known as "Foreign Investments Act of 1991"; stock of a corporation. The stock represents:
and other pertinent laws. 1. The right interest or right of the stockholder in the
management of the corporation through the
exercise of his voting rights;
2. The interest or right of the stockholder in the
earnings of the corporation in the form of the
SEC. 8. REDEEMABLE SHARES
dividends to be distributed (for a discussion on
Section 8. Redeemable Shares. - Redeemable shares may dividends, see Sec. 42); and
be issued by the corporation when expressly provided in the 3. The interest or right of the stockholder in the
articles of incorporation. They are shares which may be residual assets of the corporation upon its
purchased by the corporation. They are shares which may be dissolution.
purchased by the corporation from the holders of such A stockholder may own a share even if he is not
shares upon the expiration of a fixed period, regardless of holding a certificate of stock
the existence of unrestricted retained earnings in the books
of the corporation, and upon such other terms and How do we classify shares?
conditions stated in the articles of incorporation and the A: Shares are classified as:
certificate of stock representing the shares, subject to rules (1) Common shares
and regulations issued by the Commission. (2) Preferred shares
(3) Par value shares
(4) No-par value shares
(5) Founder’s shares
(6) Redeemable shares
SEC. 9. TREASURY SHARES (7) Treasury shares
(8) Convertible shares
Section 9. Treasury Shares. - Treasury shares are shares
of stock which have been issued and fully paid for, but (9) Voting shares
subsequently reacquired by the issuing corporation through (10) Non-voting shares
purchase, redemption, donation, or some other lawful (11) Shares in escrow
means. Such shares may again be disposed of for a
reasonable price fixed by the board of directors. DOCTRINE OF EQUALITY OF SHARES

Each share shall be equal in all respects to every other share,

except as otherwise provided in the AOI and stated in the
certificate of stock.

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**OTHER IMPORTANT PRINCIPLES TO REMEMBER The portion of the subscribed/outstanding capital stock that
has been fully paid.
(1) Authorized Capital Stock
Refers to the amount of capital stock as specified in the AOI. (5) Unissued Capital Stock
Additional shares may not be issued unless the AOI is That portion of the capital stock that is not issued or
amended by the vote of the stockholders. However, subscribed. It cannot vote, and draws no dividends.
unissued authorized shares may be issued at a later date
without amendment of the AOI or approval of the (6) Legal Capital
shareholders. It is the amount equal to the aggregate part value and/or
issued value of the outstanding capital stock. When par
(2) Subscribed Capital Stock value shares are issued above par, the share premium or
It is the amount of capital stock subscribed (purchased), excess is not considered as a part of the legal capital.
whether fully paid or not. It connotes an original
subscription contract for the acquisition by a subscriber of In the case of no-par value shares, the entire consideration
unissued shares in a corporation and would, therefore, received forms part of the legal capital, and shall not be
preclude the acquisition of shares by reason of subsequent available for distribution as dividends.
transfer from a stockholder or resale of treasury shares.
(7) Shareholder’s Equity (Subscribed Capital) That portion of
(3) Outstanding Capital Stock the capital of the corporation that is composed of all the
It is the portion of the capital stock which is issued and investments that the subscribers put in (meaning, for stock
held by persons other than the corporation itself. corporations issuing par value shares at a price above par,
the share premium is included). It is also known as the
(4) Paid-up Capital Stock subscribed capital of the corporation.
 COMMON VS. PREFERRED SHARES
Unless otherwise provided, preferred shares are deemed
non-participating.
COMMON SHARES

Entitle the holders to a pro rata share in the profits of the

corporation without preference over the other
stockholders.
They are given voting rights Cumulative vs. Non-cumulative
**The most common type of shares, which enjoy no
preference, but the owners thereof are entitled to Cumulative Regardless of lack of profits in any
management of the corporation (via the exclusive right given year, and lack of declaration of
to vote), and to equal pro-rata division of profits after dividends, the arrears (amount of
preference. It represents a residual ownership interest dividends undeclared or unpaid)
in the corporation. have to be paid to the preferred
stocks in a subsequent year (once
PREFERRED SHARES profits are made), before any
dividends can be paid to the
Shares having certain rights and privileges not available to common stocks.
holders of common shares.
**NOTES: Non-cumulative Entitlement to receipt of dividends
Stocks which are given preference by the issuing corporation in: essentially depends on the
(1) Distribution of dividends; declaration of said dividends.
(2) Distribution of the assets of the corporation in
case of liquidation; or Unless otherwise stipulated, preferred stocks are deemed
(3) Such other preferences as may be stated in cumulative.
the AOI which do not violate the Code.
Unless the right to vote is clearly withheld, a preferred
stockholder would have such right as it is incident to stock
ownership.
Limitations: KINDS OF PREFERRED SHARES AS TO DIVIDENDS
1. Preferred shares can only be issued with par value 2.
Preferred shares must be stated in the AOI and in the (a) Preferred participating shares
COS. (b) Preferred cumulative shares
3. The BOD may fix the terms and conditions only
when so authorized by the AOI, and such terms PREFERRED PARTICIPATING SHARES
and conditions shall be effective upon the filing of
a certificate with the SEC. Preferred shareholders already earned premium for their
preferred shares and they still participate in the distribution of
**PREFERENCE AS TO DIVIDENDS the common shares. They take both – they have preference
and they also participate.
Participating vs. Non-participating
Who can issue preferred shares?
Participating Those which, after getting their fixed A: Every corporation can issue preferred shares.
dividend preference, share with the
common stocks with the rest of the CUMULATIVE PREFERRED SHARES
dividends.
Shares which entitle the holder not only to the payment of
Non Those which, after getting their fixed current dividends but also to dividends in arrears.
participating dividend preference, have no more
right to share in the remaining
dividends with the common stocks.

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Illustration. time, what does the BIR assess?
Corporation has cumulative preferred shares. A: The BIR will assess the corporation for Improperly
Accumulated Earnings Tax (IAET).
Year 1 – the corporation has not declared dividends
Year 2 – the corporation decided to declare PAR VALUE VS. NON-PAR VALUE SHARES
dividends
PAR VALUE SHARES
In this case, if the stipulated dividend is not paid in Year 1, it
shall be added to the dividend which shall be due in Year 2 and Par value is the minimum issue price of a share of stock which
the accumulated dividends must be paid to the holder of said must be stated in the AOI and in the Certificate of Stock (COS).
preferred share before any dividend may be paid to the holders If the incorporators agreed to the price, that is the price at which
of common stock. the shares will be sold to the public.

Even if the Corporation has profits, is it obliged to give Who can issue par value shares?
dividends? A: Any stock corporation is free to issue par value shares as
A: No. indicated in its AOI.

If the Corporation does not declare dividends for a long **NOTES:

 These are shares with a stated value set out in the AOI. thereof, to be invested, from time to time, in loans to the
This remains the same regardless of the profitability of the members upon real estate for home purposes.
corporation (in comparison, the market or fair value of
a share of stock fluctuates depending on the DISTINCTION BETWEEN PAR-VALUE AND NO-PAR VALUE
company’s profitability). This gives rise to financial SHARES
stability and is the reason why banks, trust
corporations, insurance companies and building and If the assets of the corporation have all been exhausted
loan associations must always be organized with par and there are still creditors, can the creditors go after the
value shares. shareholders?

NO-PAR VALUE SHARES Non-Par Value Par-Value

These are shares without a stated value. No – the creditors cannot Yes – the creditors can go
go after such holders. The after the shareholders.
You still have to pay for these shares, but its value is not stated non par value shares are
in the AOI and in the COS. There is no fixed value stated in the deemed fully paid. The subscribers are
Articles of Incorporation but issued for a consideration not less liable to corporate
than five (5) pesos per share. creditors for their
unpaid subscriptions
**NOTES:
A no-par share does not purport to represent any stated
proportionate interest in the capital stock measured by
value, but only an aliquot part of the whole number of
Can a corporation lower the par value of shares? A: No.
such shares of the issuing corporation (Agbayani)
This is because the value of the par value is stated in the AOI,
No-par value shares cannot have an issue price of less
and changing it will mislead the public.
than P5.00 per share
Once issued, they shall be deemed fully paid and non
assessable, and the holders of such shares shall not be The practice of selling shares for a price lower than its par
liable to the corporation or to its creditors in respect value is called watering down of stocks, and these shares are
thereto. known as “watered stocks”.
The entire consideration received by the corporation shall be
treated as capital, and shall not be available for distribution as WATERED STOCKS
dividends.
The AOI must state the fact that the corporation issues no-par These are stocks sold or issued at a price less than the stocks’
par value. The value of these shares is diluted, in that the
value shares and the number of such shares No-par shares
public is not apprised of the real value of the corporation.
cannot be issued as preferred stocks

Who cannot issue no-par value shares? Illustration.

A: Corporations who have access to public funds, such as:
(1) Banks; A corporation has 100Mn authorized capital shares, each with a
(2) Trusts; par value of P1.00.
(3) Insurance and pre-need companies;
(4) Public utilities; Normally, the public would expect that the corporation has
(5) Building and loan associations; and authorized capital in the amount of P100,000,000 (100Mn
(6) Other corporations authorized to obtain funds from the shares x P1.00 par value).
public (whether publicly-listed or not)
Now let’s say that the corporation initially issued 99.5Mn shares
**Note: Building and loan associations are organizations with for P1.00, and issued the remaining 500k shares for P0.50 only.
the object of accumulating money from their members. The
money is then collected in periodical payments into the treasury How much is now the authorized capital of the corporation?
A: Still P100,000,000.

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But how much capital actually came in? Where exclusive right to vote and be voted for in the election of
A: Only P99,750,000. directors is granted, such right must be for a limited period not
to exceed 5 years subject to the approval of the SEC. The 5-
Computation: year period shall commence from the date of approval by the
99,500,000 shares X P1.00 = P99,500,000 500,000 shares SEC.
X P0.50 = + 250,000 Total P99,750,000
What is the purpose for granting founders the exclusive
What is the effect? right to vote and be voted for?
A: The corporation is misleading the public. It is not fair to the A: To ensure that the corporation will eventually succeed
public, and does not anymore reflect the actual capital structure because they are the ones who envisioned the Corporation.
of the corporation They have the idea of how the business shall proceed.

FOUNDER’S SHARES Thus, the laws provide that for a period of 5 years or less – they
have the right to vote and be voted upon. NO ONE ELSE have
**These are shares, classified as such in the AOI, which are the right to nominate and elect. This is used to guide the infant
given certain rights and privileges not enjoyed by the owners of corporation.
other stocks.
The certificate of the founders’ shares defines the privilege that
the holders of this share shall have. fixed period, regardless of the existence of unrestricted
retained earnings in the books of the corporation, and
What is the rule regarding founders’ rights and privileges? upon such other terms and conditions stated in the articles
A: They must be clearly expressed in the corporate charter, to of incorporation and the certificate of stock representing
provide adequate information to third parties dealing with the the shares, subject to rules and regulations issued by the
corporation. Commission.

What are some examples of special rights or privileges What is the purpose of redeemable shares?
that may be given to founder’s shares that are not given to A: They are issued for the purpose of attracting capital.
common shares?
A: These include: **LIMITATIONS:
1) Preference in the payment of dividends and/or
distribution of assets in case of liquidation (1) Redeemable shares may be issued only when
2) Right to convert the shares into other shares expressly provided for in the AOI.
3) Right to cumulative dividends (2) The terms and conditions affecting said shares must
be stated both in the AOI and in the COS.
What is the purpose of the founder’s shares? A: It may be (3) Redeemable shares may be deprived of voting rights
given to encourage organizers and promoters to make large in the AOI.
investments in the proposed corporation. (4) The corporation is required to maintain a sinking fund to
answer for redemption price if the corporation is
Exclusive right to vote to be voted for required to redeem.
Note: If the exclusive right to vote and be voted for in the (5) The redeemable shares are deemed retired upon
election of directors is granted, such right must be limited for a redemption unless otherwise provided in the AOI. (6)
period not exceeding five (5) years. Unrestricted RE is not necessary before shares can be
The limit is non-extendible. redeemed, but there must be sufficient assets to pay the
The limitation is designed to prevent possible abuse of the creditors and to answer for operations (Republic Planters
Board. A lifetime term of the Board absolutely deprives Banks vs. Agana, G.R. No. 51765, 1997) (7) Redemption
other stockholders/members of the opportunity to cannot be made if such redemption will result in
participate in the management of the corporation. insolvency or inability of the corporation to meet its
What happens after the five-year limit is over? Founders obligations.
shall have equal rights with the holders of common shares.
Atty. E.; instead of borrowing from banks, the corporation is
REDEEMABLE SHARES borrowing money from the public.

These are shares which permit the issuing corporation to There are many ways of acquiring funds from the corporation:
redeem or purchase its shares. 1. Borrow from the banks
2. Borrow from the public
Redeemable shares are redeemable at a fixed date or at the
option of either the issuing corporation or the stockholder You have heard that bonds are floated, this is just the
or both at a certain redemption price. corporation issuing bonds to the public, telling the public that if
you buy these bonds, we will buy this back from you in 5 years
These shares may be issued by the corporation when expressly with interest or premium. Or, redeemable shares, this is an
provided in the articles of incorporation. option to raise more money with the public.

They are shares which may be purchased by the corporation We distinguish redeemable shares from the bank, in that banks
from the holders of such shares upon the expiration of a are lenders and redeemable shareholders are investors.

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What is the difference? So we can only demand when?
A: Redeemable shareholders assume a risk, particularly that A: When we have profits, then we pay.
the corporation will become insolvent before the expiration of
the redemption period. Can it be obliged to pay?
A: Yes. That was your promise. To buy back the shares with a
IOW, as far as the lender is concerned, the moment, the premium of course.
loan is due, he may collect. If the corporation has no cash,
what will the banks do? So here’s the investor, here’s the lender. So that if the
A: (1) Demand payment, or (2) Foreclose on the collateral. investor now demands for the reacquisition of his shares
because the due date has arrived, can the corporation say
Can the corporations say: please do not get our capital? that they will use their profits for another purpose?
A: They cannot. A: No.

Bank says not our problem, our problem is to collect, if we This is what the law calls what?
cannot collect, we get properties. A: Unrestricted retained earnings.

On the other hand, when we talk about redeemable shares? Can the corporation even refuse by saying we do not have
A: If the corporation is insolvent, the shareholder cannot unrestricted RE?
demand redemption. A: No.
Atty. Espedido: Restricted or not, if you have surplus, pay. The
corporation has to pay, so long as there is surplus, unrestricted Party Dealing with Dealing with investors
or not. involved lenders/creditors

The only situation where the corporation can refuse to pay is

when the corporation is insolvent, otherwise, the corporation When Compel Demand payment
will be touching their capital and will be violating the trust fund demandable payment upon on the date of
doctrine. maturity date redemption
without any
IOW, clearly, what is the difference between the investor conditions. Condition: The
and the lender? investor can
A: The investor takes a risk. In so far as the compel to redeem
creditor is only when there
What is that risk? concerned, once are profits. The
A: The corporation will not redeem the shares if the corporation it is due and corporation is
becomes insolvent. demandable, the obliged to buy
creditor will back the shares
However, since he is an investor, does he enjoy anything? compel the with a premium.
A: Rights to dividends during the period while he is still the corporation to
holder (before the redemption period comes), if dividends are pay. NOTE: Regardless
declared. whether it is
restricted or not, as
On the other hand, if there are such dividends declared, long as there is
can the lender also collect on such dividends? surplus, it is
A: No, he cannot. obliged to pay.

So, once reacquired, what happens? Exception:

A: The redeemable shares become treasury shares. Corporation is
So-called treasury shares, because they are now in the insolvent
custody of the treasurer. So what happens to these shares?
A: They become part of the capital. Assumpti No assumption The investor takes
on of of risks; the risk because
And therefore, while before they were outstanding, are they Risk the corporation
still so? Lender can may or may not
A: Not anymore. They have been reunited with its parents, it’s collect upon have retained
now back home, it’s no longer outstanding. arrival of the earnings
due date without
However, may it still be entitled to dividends? A: No. any conditions
Because if they are allowed to be entitled to dividends, it would
create a situation where the corporation would be paying itself. Distributi Not entitled to During the period
on of dividends; only while he is still the
However, because these are issued shares, would it have dividends paid for the holder (before the
the right to vote? balance + period comes), he
A: No, because otherwise, the current board would just use interest is an investor.
these to vote for themselves, because the board acts on behalf Thus, when
of the corporation – manage the properties of the corporation, dividends are
since these are properties, they will use these properties to cast declared, he is
votes in their favor pertaining to these shares. So this will allow entitled to such.
incumbent directors to perpetuate themselves in office.
BORROWING REDEEMABLE
FROM A BANK SHARE
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TREASURY SHARES Special Features of Treasury Shares

What are treasury shares? (1) Once reacquired, it shall form part of its capital as a
A: These are stocks and were fully paid, but were reacquired corporate asset.
by the corporation through:
1) Purchase, (2) They can only be reacquired if there are unrestricted
2) Donation, retained earnings.
3) Sale, and
4) Other lawful means. (3) It is not entitled to dividends because in effect, the
corporation is paying itself, which is absurd. Otherwise,
Nature of Treasury Shares it will involve double sale for the same shares.
Treasury shares are part of capital. When these shares were
bought or reacquired, surplus money will be used and not (4) It is not entitled to the right to vote because the
capital money. Otherwise, we will be violating the Trust Fund corporation is not a stockholder. If allowed and the
Doctrine. BOD exercises such right as representative of the
corporation, it can be subject to abuses.
Being part of capital, the treasury shares can be sold again. As
to how much, it is the Board that will decide. If they are were voting shares when issued, now
 that they are back, who may vote? provided in the AOI.
Answer: NO ONE. Treasury shares have no voting
rights. Generally, is the corporation authorized to buy back all of
its shares?
If the law were to give them voting rights, since these A: No.
treasury shares are owned by the corporation, the
BOD necessarily will act on behalf of the corporation. Why not?
If they were given voting rights, the BOD will definitely A: It would violate the trust fund doctrine. Such that when you
vote for them all the time. keep expending funds to buy back all the shares, it would
disadvantage creditors, because it will reach a point where the
(5) They can only be reacquired if there are unrestricted capital will used up.
retained earnings.
THE TRUST FUND DOCTRINE
Unrestricted retained earnings – assets The Trust Fund Doctrine means that the capital stock,
less liabilities; not allocated for anything; properties and other assets of a corporation are regarded as
equity in trust for the payment of corporate creditors.
absolutely free; no restrictions or
appropriations.
Stated simply, the trust fund doctrine states that all funds
received by the corporation in payment of the shares of stock
GEN: When it comes to treasury shares, the
shall be held in trust for the corporate creditors and other
corporation is not always free to buy back the
stockholders of the corporation. Under such doctrine, no fund
shares. It requires that there should be
shall be used to buy back the issued shares of the stock
unrestricted retained earnings, otherwise, the
except only in instances specifically allowed by the Code.
corporation will violate the Trust Fund Doctrine
(Boman Environmental Development Corporation vs. CA,
because if they were to buy it back without
G.R. No. 77860, 1988)
unrestricted retained earnings, the creditors
cannot go after the corporation to satisfy unpaid
debts because there is no more capital to speak
of.

XPN: Redeemable Shares – which can be issued By way of exception, however?

regardless of WON there are unrestricted retained A: If it is specifically provided for in the AOI, such as
earnings redeemable shares.
Reason: It is issued to gain more capital and the
public is aware that these are just redeemable CONVERTIBLE SHARES
shares.
A type of preferred stock that the holder can exchange for a
(6) It can be resold by the corporation predetermined number of common shares at a specified time.

(7) It is not considered as outstanding shares because it VOTING VS. NON-VOTING SHARES
is back to the corporation – it is in already
GEN: No share may be deprived of voting rights.
**NOTES: XPNs:
1. Preferred non-voting shares;
Such shares may be disposed of again for a reasonable price 2. Redeemable shares;
fixed by the BOD. 3. Shares as provided by the Code (treasury shares)
Treasury shares have no voting right as long as such shares
remain in the Treasury. There shall always be a class/series of shares which have
Pre-emptive right of stockholders in close corporations shall complete voting rights.
extend to reissuance of treasury shares unless otherwise

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VOTING SHARES Shares that are not provided with voting rights but subject to
exceptions.
Shares that are provided with voting rights on any issue on the
corporation. The voter can participate in any meeting and on Exceptions: Holders of non-voting shares shall nevertheless be
any issue that may be raised during the meeting. entitled to vote on the following matters:

Reason: A shareholder is a part-owner of the corporation. (1) Amendment of the articles of incorporation (2) Adoption and
Since the shareholder cannot interfere with the management, amendment of the bylaws (3) Sale, lease, exchange, mortgage,
he can only exercise his ownership by voting on certain issues. pledge, or other
As part owner, he has the right to protect his ownership. Hence, disposition of all or substantially all of the corporate
entitles him to vote. property

NON-VOTING SHARES Note: In determining whether there is a disposition of

all or substantially all of the corporate property, the
guide is when such sale already affects the operations
 of the corporation. When the corporation could no
longer carry out its business, then that will be the point Section 10. Number and Qualifications of Incorporators.
when it will have to be open for voting, including non – Any person, partnership, association or corporation, singly
voting shares. or jointly with others but not more than fifteen (15) in
number, may organize a corporation for any lawful purpose
or purposes: Provided, That natural persons who are
SC ruled that 80% is considered “substantially all”.
licensed to practice a profession, and partnerships or
associations organized for the purpose of practicing a
(4) Incurring, creating, or increasing bonded indebtedness (5) profession, shall not be allowed to organize as a corporation
Increase or decrease of authorized capital stock (6) Merger or unless otherwise provided under special laws. Incorporators
consolidation of the corporation with another corporation or who are natural persons must be of legal age.
other corporations
(7) Investment of corporate funds in another corporation or
Each incorporator of a stock corporation must own or be a
business in accordance with this Code; and
subscriber to at least one (1) share of the capital stock.
(8) Dissolution of the corporation
A corporation with a single stockholder is considered a One
Reason why a stockholder with non-voting shares is still Person Corporation as described in Title XIII, Chapter III of
entitled to vote on these issues:
this Code.
Because the fundamental contract of these parties is the
Articles of Incorporation.

In obligations and contracts, we have learned that if we change

the terms and conditions of the contract, we can novate the
contract. What is necessary in novation is the consent of both Who are incorporators?
parties. If you need to change anything in the AOI, you need A: They are the individuals who form the corporation. They are
consent. All parties must be able to participate WON they agree typically nominated directors or members, who will initially
on the change of the agreement. manage the corporation.

RIGHT OF APPRAISAL Under the old law, there was a minimum requirement of 5
incorporators, but under the new law, a single person may form
For those who dissent the proposed agreement, they could a corporation.
exercise their right of appraisal. Such right can be exercised by
a stockholder who disagrees with the decision of the Board of However, for purposes of practicality and convenience, there
Directors to amend the Articles of Incorporation. The dissenting remains the limit of not more than 15 incorporators in a stock
stockholder can demand the corporation to buy back his shares corporation. However, the number of trustees may be more
at their fair market value. than 15.
SHARES IN ESCROW
Who can be incorporators?
Issued or committed to a particular shareholder, but deposited A: Natural and juridical persons.
with a 3rd person or a deposit account pending the fulfilment by
that 3rd person for which it was reserved of the conditions For natural persons:
expressly provided in the certificate of stocks 1) Must be of legal age
2) Must have capacity to contract
Share is subject to an agreement; share is deposited with a 3rd
person to be kept by the depositary until the performance of a Note: The law does not prescribe a residency requirement.
certain condition. Unlike the old code, majority of the incorporators need not
be residents of the Philippines.
TITLE II. INCORPORATION AND ORGANIZATION OF
PRIVATE CORPORATIONS What is the requirement for incorporators?
A: Whether natural or juridical, they must be subscribers and
SEC. 10. NUMBER AND QUALIFICATIONS OF have financial interest in the corporation.
INCORPORATORS

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SEC. 11. CORPORATE TERM
 Rule: A corporation whose term has expired may apply for a
Section 11. Corporate Term. – A corporation shall have revival of its corporate existence to the Commission. Upon the
perpetual existence unless its articles of incorporation approval by the Commission, the corporation shall be deemed
provides otherwise. revived and a certificate of revival of corporate existence shall
be issued.
Corporations with certificates of incorporation issued prior to SEC. 12. CAPITAL STOCKS
the effectivity of this Code and which continue to exist shall
have perpetual existence, unless the corporation, upon a Section 12. Minimum Capital Stock Not Required of
vote of its stockholders representing a majority of its articles Stock Corporations. —Stock corporations shall not be
of incorporation: Provided, That any change in the corporate required to have a minimum capital stock, except as
right of dissenting stockholders in accordance with the otherwise specifically provided by special law.
provisions of this Code.

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 Authorized Capital Stock
(3) years prior to the original or subsequent expiry date(s) Refers to the maximum amount of capital which the corporation
unless there are justifiable reasons for an earlier extension will receive when it issues all its shares.
as may be determined by the Commission: Provided, further,
That such extension of the corporate term shall take effect Subscribed Capital Stock
only on the day following the original or subsequent expiry Refers to the committed amount of capital which the
date(s). corporation will receive from its existing subscribers

A corporation whose term has expired may apply for revival Paid-Up Capital
of its corporate existence, together with all the rights and Refers to the amount of capital which the corporation already
privileges under its certificate of incorporation and subject to received from its subscribers. This represents the paid portion
all of its duties, debts and liabilities existing prior to its of the subscribed capital.
revival. Upon approval by the Commission, the corporation
shall be deemed revived and a certificate of revival of If you are a new corporation, how much should be
corporate existence shall be issued, giving it perpetual subscribed?
existence, unless its application for revival provides A: The Revised Corporation Code does not require a minimum
otherwise. subscribed capital stock.

No application for revival of certificate of incorporation of Reason: To attract the formation of more business
banks, banking and quasi-banking institutions, preneed, organizations.
insurance and trust companies, non-stock savings and loan
associations (NSSLAs), pawnshops, corporations engaged Exception: However, the 25% subscribed capital stock is
in money service business, and other financial compulsory when there is an increase in the capital stock. Thus,
intermediaries shall be approved by the Commission unless it requires that at least 25% must be subscribed, and 25% must
accompanied by a favorable recommendation of the be paid-up.
appropriate government agency.
SEC. 13. CONTENTS OF THE ARTICLES OF
INCORPORATION

GEN: A corporation shall have a perpetual existence. Section 13. Contents of the Articles of Incorporation. - All
XPN: When the AOI provides otherwise. corporations shall file with the Commission articles of
incorporation in any of the official languages, duly signed and
When the Corporation Effect acknowledged or authenticated, in such form and manner as
was Formed may be allowed by the Commission, containing substantially
the following matters, except as otherwise prescribed by this
After 3 February 2019 The corporation shall have Code or by special law:
a perpetual existence,
unless its AOI provides (a) The name of corporation;
otherwise.
(b) The specific purpose or purposes for which the corporation
Before 3 February 2019 The corporation shall be is being formed. Where a corporation has more than one stated
deemed to have a purpose, the articles of incorporation shall indicate the primary
perpetual existence, purpose and the secondary purpose or purposes: Provided,
unless the corporation, That a nonstock corporation may not include a purpose which
upon a vote of its would change or contradict its nature as such;
stockholders representing
a majority of its (c) The place where the principal office of the corporation is to
outstanding capital stock, be located, which must be within the Philippines;
notifies the SEC that they
intend to retain its original (d) The term for which the corporation is to exist, if the
term pursuant to the corporation has not elected perpetual existence;
corporation’s AOI.
(e) The names, nationalities, and residence addresses of the
incorporators;

REVIVAL OF A CORPORATION (f) The number of directors, which shall not be more than fifteen
 (15) or the number of trustees which may be more than fifteen (g) The names, nationalities, and residence addresses of
(15); persons who shall act as directors or trustees until the first
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regular directors or trustees are duly elected and qualified in i. If it be a nonstock corporation
accordance with this Code; 1. the amount of its capital
2. the names, nationalities, and residential addresses
(h) If it be a stock corporation, the amount of its authorized of the contributors, and
capital stock, number of shares into which it is divided, the par 3. amount contributed by each
value of each, names, nationalities, and subscribers, amount
subscribed and paid by each on the subscription, and a j. Such other matters consistent with law and which the
statement that some or all of the shares are without par value, if incorporators may deem necessary and convenient.
applicable;
NAME OF THE CORPORATION (See also Sec. 17)
(i) If it be a nonstock corporation, the amount of its capital, the
names, nationalities, and residence addresses of the Essential to the existence of the corporation since it is through
contributors, and amount contributed by each; and it that the corporation can sue and be sued, and perform all
legal acts.
(j) Such other matters consistent with law and which the
incorporators may deem necessary and convenient. Importance: For identification purposes; the name is important
in order to distinguish it from other organizations.
An arbitration agreement may be provided in the articles of
incorporation pursuant to Section 181 of this Code.1âwphi1 A corporate name shall be disallowed by the SEC if the
proposed name is either:
The Articles of incorporation and applications for amendments 1. Identical or deceptively or confusingly similar to that of
thereto may be filed with the Commission in the form of an any existing corporation or to any other name already
electronic document, in accordance with the Commission's rule protected by law; or
and regulations on electronic filing. 2. Patently deceptive, confusing, or contrary to existing
laws
CONTENTS OF THE ARTICLES OF
What are the limitations on the name of the corporation?
INCORPORATION a. The name of the corporation; A: A corporation cannot use a name:
(1) That is already reserved or registered for the use of
b. The specific purpose or purposes for which the corporation another corporation;
is being formed. Where a corporation has more than one (2) That is protected by law;
stated purpose, the articles of incorporation shall indicate (3) That is contrary to law, rules and regulations; (4) That is
the primary purpose and the secondary purpose or identical or confusingly similar with other corporations’
purposes: Provided, That a nonstock corporation may not names.
include a purpose which would change or contradict its
nature as such; Illustration 1.
Haplos-Haplos Corporation vs. Hapyod-Hapyod
c. The place where the principal office of the corporation is to Corporation
be located, which must be within the Philippines;
If the business of the corporation was to provide most
d. The term for which the corporation is to exist, if the effective and comfortable massage in the city, that’s the
corporation has not elected perpetual existence; principal business, what do you want to call your
corporation? Remember, it has to be descriptive of the
e. The names, nationalities, and residential addresses of the corporation.
incorporators; A: Haplos-Haplos Corporation.

f. The number of directors, which shall not be more than fifteen So that, if one corporation is already registered as Haplos
(15) or the number of trustees which may be more than Haplos Corporation, do you think the SEC will allow you
fifteen (15); register as Hapyod-Hapyod Corporation?
A: No, because if it confuses the public, then the SEC will now
g. The names, nationalities, and residential addresses of allow it.
persons who shall act as directors or trustees until the first
regular directors or trustees are duly elected and qualified Illustration 2.
in accordance with this Code; Planter’s Peanuts vs. Grower’s Peanuts

h. If it be a stock corporation: What about Planter’s Peanuts and Grower’s Peanuts?

1. the amount of its authorized capital stock Atty. Espedido: It violates!
2. number of shares into which it is divided
3. the par value of each, Illustration 3.
4. names, nationalities, and residence addresses of Efficascent Oil
the original subscribers
5. amount subscribed and paid by each on the One corporation came out with “Efficient Oil Corporation”,
subscription, and do you think somebody will complain?
6. a statement that some or all of the shares are A: Yes! The Efficascent Oil will complain. Especially if you
without par value, if applicable; follow the color scheme, samot na!
 Page 24 of 88 | EH403 2019-2020 Corporation Law
Illustration 4. also be given another franchise by the LTFRB – a secondary
United Nations Food Corporation franchise – which is intended for the carrying out of a specific
business.
United Nations Food Corporation, what do you think?
A: No. It would fall under limitation #2. The fact that you are given a primary franchise is not a
guarantee that you can immediately pursue any business that
If you are a fan of food, what will go into your mind if you you want, especially if the business that you are trying to
see that name? pursue would involve public interest or public utilities.
A: This must be run by the United Nations.
Purpose?
So if the SEC will have to examine that, it might be A: It’s important to state this in the AOI, because it would serve
disapproved. This is misleading. The public might believe as the guideline within which the corporation can operate.
this is operated, maintained and run by the United Nations.
The best chefs in the world, if you were the SEC, what Otherwise?
would be a good name? A: It could mislead the public.
A: International Food Corporation. So that if you perform something not within the purpose?
A: It would consist an ultra vires act.
Atty. Espedido: In practice, SEC will ask you to submit three
corporation names to save time. So that, if one name is not Ultra vires acts?
allowed or accepted by SEC, then they will just pick from the A: These acts will be deemed as void acts, and not binding on
remaining names submitted. the corporation. It’s beyond your powers as a corporation.

**NOTES: So all these must be indicated in the AOI. Could you

change any one of these?
Right to a Corporate Name – A corporation’s right to use A: It’s possible.
its corporate and trade name is a property right, a right in
rem, which it may assert or protect against the whole world How?
in the same manner as it may protect its tangible property A: Majority of the BOD + 2/3 of the OCS or the members.
against trespass or conversion.
What happens to the 1/3 shares?
Statutory Limitations on the Form and Use of Corporate A: They may exercise their right of appraisal. (Purchase shares
Name: at fair market value).
1) In respect to a corporate name already registered or
otherwise protected by law, the proposed name must Atty. Espedido: As a creation of law, the corporation have to
not be: work within the boundaries of the privilege extended by the
a. Identical State.
b. Deceptively or confusingly similar;
2) Patently deceptive, confusing or contrary to law; It will serve as a guide in determining WON the corporation is
3) Must contain either: acting within its authority or powers as indicated in the Articles
a. “Incorporated” or “Inc.”, or of Incorporation.
b. “Corporation” or “Corp.”;
4) Must not consist solely of generic, geographical and/or If it is beyond the powers prescribed by law – it becomes an
descriptive terms and names; and ultra vires act which is deemed void, meaning it is not binding.
5) Must comply with other policies provided by SEC
Memorandum No. 14, Series of 2000 **NOTES:
A corporation can only have one (1) primary purpose. However,
Doctrine of Secondary Meaning as Applied to Corporation it can have several secondary purposes. A corporation has only
Names – The doctrine of secondary meaning originated in the such powers are as expressly granted to it by law and by its
field of trademark law. Its application has, however, been AOI, those which may be incidental to such conferred powers,
extended to corporate names since the right to use a corporate those reasonably necessary to accomplish its
name to the exclusion of others is based upon the same purposes, and those which may be incident to its
principle which underlies the right to use a particular trademark existence.
or tradename (Lyceum of the Philippines vs. CA, G.R. No. A corporation may not be formed for the purpose of practicing a
101897, 1993) profession like law, medicine or accountancy.

PURPOSE CLAUSE Limitations on the Purpose of a Corporation

(1) A non-stock corporation may not include a purpose
(1) Primary Franchise – right to exist as a corporation (2) which would change or contradict its nature as such. (2)
Secondary Franchise – intended for the carrying out of a The SEC shall reject the AOI or disapprove any
specific business amendment when the stated purpose/s of the corporation
are patently unconstitutional, illegal, immoral, or contrary
Atty. Espedido: Once you are issued a certificate of to government rules or regulations.
incorporation, this is called primary franchise – this means you
have the right to exist as a corporation. Stretching the Purpose Clause
It is legal to stretch the meaning of the purpose clause to cover
If you are dealing or engaged in the jeepney business, you will new and unexpected situations. There is no need to amend the
 Page 25 of 88 | EH403 2019-2020 Corporation Law
AOI to accommodate new situations. (SEC Opinion No. 08-24, INCORPORATORS
October 22, 2008)
(See Sec. 5 for a discussion on incorporators).
PRINCIPAL OFFICE
(See Sec. 10 for the number & qualifications of incorporators.)
Importance: For the SEC to be able to locate and identify
where the corporation is and to know where to serve summons DIRECTORS/TRUSTEES
and notices.
If you are a stockholder, can you be a director? A: Yes, to
Address? Why, what’s important about it? be a director, it is a requirement that such is at least a holder of
A: Because this address is where summons and notices will be one (1) share.
sent by the court/s or SEC or other government agencies.
Requirements for a President and Vice President President –
So that you would know where to serve. Alright. must be a director, thus, a holder of 1 share Vice President –
does not require to be a holder of 1 share but once he assumes
So that if the address is “somewhere in the hinterlands of presidency, he is required to be a holder of at least 1
Mindanao”? share
A: This would not be in compliance with the requirement
because it would be impossible to identify the exact location, **NOTES:
because it’s not specific.
Qualifications for Directorship/Trusteeship Under Other
**NOTES: Sections of the RCC

Salient Points: Board of Trustees of Trustees of educational

Educational institutions organized as
1. Must be located in the Philippines;
Institutions (Sec. nonstock corporations
2. Must specify the city or province;
106) shall not be less than 5
3. The street/number is not necessary; nor more than 15,
4. Important in determining venue in an action by or provided that the
against the corporation, or on determining the province number of trustees shall
where a chattel mortgage of shares should be be in multiples of 5.
registered.
Close Corporations All stockholders are
Principal Office Address
considered members of
The AOI must state the place where the principal office of the
the board of directors,
corporation is to be located, which must be within the
thus
Philippines.
allowing 20 members in
the board
Purposes of Fixing the Principal Office Address 1. To fix the
residence of the corporation in a definite place, instead of
allowing it to be ambulatory; Corporation Sole A corporation sole may
(Sec. 108) be formed by the chief
2. For purposes of the stockholders’ or members’ meeting;
archbishop, bishop,
3. To determine the place where the books and records of
priest, minister, rabbi,
the corporation are ordinarily kept.
or other presiding elder
of such
TERM OF EXISTENCE religious denomination,
sect or church
(See Sec. 11.)
One Man Corporation The single stockholder
**NOTES: shall be the sole director
(Sec. 121)
The corporate term is necessary in determining at what and president of the
point in time the corporation will cease to exist or have lost OPC
its juridical personality.
Sec. 139 of the Code provides that a corporation shall
nevertheless be continued as a body corporate for three (3)
years after the effective date of dissolution, for
the purpose of: The RCC provides for the minimum qualifications and
1. Prosecuting and defending suits by or disqualifications of the directors/trustees which the corporation
against it; may not do away with. However, the by-laws may provide
2. Enabling it to settle and close its affairs; for additional qualifications and disqualifications.
3. Dispose of and convey its property; and (See Sec. 46. Contents of Bylaws) – A private corporation may
4. Distribute its assets. provide the following in its by-laws:
Extension of corporate term prior or earlier than 3 years is (f) The directors’ or trustees’ qualifications, duties and
allowed only if there is justifiable reason. On the day of the responsibilities
expiration of the corporate term, extension is still allowed.
However, after the expiration of its term, extension is no
longer
allowed since the corporation ceases to exist
already, and there is nothing to extend.
 For further discussion: o See Sec. 26 for Disqualifications of Directors
o See Sec. 22 for Qualifications of Directors

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SEC. 14. FORM OF ARTICLES OF INCORPORATION (In case some shares have par value and some are without par
value): That the capital stock of said corporation consists of
Section 14. Form of Articles of Incorporation. - Unless ________________________________ shares, of which
otherwise prescribed by special law, the articles of _______________________ shares have a par value of
incorporation of all domestic corporations shall comply ___________________________PESOS (₱_______) each,
substantially with the following form: and of which ____________________ shares are without par
value.
Articles of Incorporation Eight: That the number of shares of the authorized capital
of stock stated has been subscribed as follows:
_____________________ Name of Nationality No. of Amount Amount
(Name of Corporation) Subscriber Shares Subscribed Paid
Subscribed
The undersigned incorporators, all of legal age, have voluntarily
agreed to form a (stock) (nonstock) corporation under the laws
of the Republic of the Philippines and certify the following:

First: That the name of said corporation shall be

"_________________", Inc. Corporation or OPC";

Second: That the purpose or purposes for which such

corporation is incorporated are: (If there is more than one
purpose, indicate primary and secondary purposes);

Third: That the principal office of the corporation is located in

the City/Municipality of _______________, Province of
______________________, Philippines;
(Modify No. 8 if shares are with no-par value. In case the
Fourth: That the corporation shall have perpetual existence or a corporation is nonstock, Nos. 7 and 8 of the above articles may
term of ___________ years from the date of issuance of the be modified accordingly, and it is sufficient if the articles may be
certificate of incorporation; modified accordingly, and it is sufficient if the articles state the
amount of capital or money contributed or donated by specified
Fifth: That the names, nationalities, and residence addresses of persons, stating the names, nationalities, and residence
the incorporators of the corporation are as follows: addresses of the contributors or donors and the respective
amount given by each.)
Name Nationality Residence
Ninth: That _______________________ has been elected by
the subscribers as Treasurer of the Corporation to act as such
until after the successor is duly elected and qualified in
accordance with the bylaws, that as Treasurer, authority has
been given to receive in the name and for the benefit of the
corporation, all subscriptions, contributions or donations paid or
Sixth: That the number of directors or trustees of the given by the subscribers or members, who certifies the
corporation shall be ___________________; and the names, information set forth in the seventh and eighth clauses above,
nationalities, and residence addresses of the first directors or and that the paid-up portion of the subscription in cash and/or
trustees of the corporation are as follows: property for the benefit and credit of the corporation has been
duly received.
Name Nationality Residence
Tenth: That the incorporators undertake to change the name of
the corporation immediately upon receipt of notice from the
Commission that another corporation, partnership or person
has acquired a prior right to the use of such name, that the
name has been declared not distinguishable from a corporation,
or that it is contrary to law, public morals, good customs or
public policy.
Seventh: That the authorized capital stock of the corporation is
____________________ PESOS (₱______), divided into ____ Eleventh: (Corporations which will engage in any business or
shares with the par value of ___________________ PESOS activity reserved for Filipino citizens shall provide the following):
(₱_____________) per share. (In case all the shares are
without par value): That the capital stock of the corporation is "No transfer of stock or interest which shall reduce the
__________________ shares without par value. ownership of Filipino citizens to less than the required
 percentage of capital stock as provided by existing laws shall (Names and signatures of the incorporators)
be allowed or permitted to be recorder in the proper books of
the corporation, and this restriction shall be indicated in all ____________________________
stock certificates issued by the corporation." (Name and signature of Treasurer)

IN WITNESS WHEREOF, we have hereunto signed these

Articles of Incorporation, this ______ day of _____, 20___ in
the City/Municipality of _________________, Province of
________________, Republic of the Philippines.

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**CERTIFICATE OF INCORPORATION RIGHT.

The SEC has the ministerial duty to approve an application for APPRAISAL RIGHT
registration and issue the Certificate of Incorporation provided Right of the dissenting stockholder to leave the corporation
all the requirements of law with respect to the AOI are complied by determining the value of his shares, and demand the
with. corporation to buy back his shares at their fair market
value (FMV)
A corporation commences to have corporate existence and Another instance where the corporation can buy back the
juridical personality and is deemed incorporated only from the shares
moment the SEC issues to the incorporators a Certificate of Note: But unlike redeemable shares, in this case, the
Incorporation under its official seal. dissenting stockholder can be paid only if there are
unrestricted retained earnings.
SEC. 15. AMENDMENT OF THE ARTICLES What are unrestricted retained earnings?
A: The surplus profits of the corporation which are not allocated
Section 15. Amendment of Articles of Incorporation. - for anything.
Unless otherwise prescribed by this Code or by special law,
and for legitimate purposes, any provision or matter stated in IMPROPERLY ACCUMULATED EARNINGS
the articles of incorporation may be amended by a majority The corporation to avoid double taxation may not declare
vote of the board of directors or trustees and the vote or dividends.
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 Illustration.
accordance with the provisions of this Code. The articles of Travelling to Europe as an incentive instead of declaring
incorporation of a nonstock corporation may be amended by dividends
the vote or written assent of majority of the trustees and at
least two-thirds (2/3) of the members. Instead of declaring dividends, they will not declare dividends
and tell all the stockholders “we will go to Europe as your
The original and amended articles together shall contain all incentive, and undergo training and observe the latest trends.
provisions required by law to be set out in the articles of You can bring your family.”
incorporation. Amendments to the articles shall be indicated
by underscoring the change or changes made, and a copy Everybody travelled to Europe. They were given pocket
thereof duly certified under oath by the corporate secretary money and per diem. Did they distribute dividends? A: No
and a majority of the directors or trustees, with a statement dividends distributed, yet the stockholder enjoyed the part from
that the amendments have been duly approved by the the corporation.
required vote of the stockholders or members, shall be
submitted to the Commission. Will they be taxed?
A: If the government is aware that this is being done, the
The amendments shall take effect upon their approval by the government can charge them for IAET (Improperly
Commission or from the date of filing with the said Accumulated Earnings Tax).
Commission if not acted upon within six (6) months from the
date of filing for a cause not attributable to the corporation. They must declare the dividends, otherwise, they will be
penalized by the BIR.

What do they do now?

A: They can present expansion plans. This is a restriction of
their earnings. IOW, they can say that they do not have
How do we amend the Articles of Incorporation? unrestricted earnings because these are earmarked already for
A: Initiated by the Board itself. future expansions.

What are the requirements for amending the AOI? Another Exception: Loan condition – borrowing huge amounts
A: of money from the bank. When you loan from the bank, the
(1) By a majority vote of the Board of Directors or Board of bank imposes a lot of conditions. Usually, one of the conditions
Trustees imposed is that the corporation cannot declare dividends
(2) Vote or the written assent of the stockholders of at least without the consent of the bank. The bank wants to be sure
2/3 representing the outstanding capital stocks that it can collect its credit.

What is the option of the 1/3 of the OCS or members that WHEN AMENDMENT TAKES EFFECT
dissented?
A: Dissenting stockholders may exercise their APPRAISAL
 What happens after the amendment? Limitations
A: It requires the approval by the SEC to take effect. 1. Requirements imposed by the Code or by special laws
2. Must be for a legitimate purpose
When will it take effect? 3. Must be approved by the directors/trustees, and the
A: stockholders/members through the vote requirement 4.
(1) From date of approval by the SEC Appraisal right
(2) From of filing when there is inaction by the SEC 5. Both the original and the amended articles together
within 6 months from filing must contain all the provisions required by law to be
set out in the articles
**NOTES 6. Will take effect only:

Page 28 of 88 | EH403 2019-2020 Corporation Law

a. Upon their approval by the SEC by the
issuance of a certificate of amended articles; accordance with law.
or
b. From the date of filing with the SEC, if the SEC
did not act upon it within 6 months from
the date of filing for a cause not attributable to
the corporation.

Procedure
1. The original and amended articles together shall
contain all provisions required by law to be set out in
the AOI
2. The articles, as amended, shall be indicated by
underscoring the change/s made
3. A copy shall be submitted to the SEC:
a. Duly certified under oath by the corporate
secretary and a majority of the directors or
trustees
b. Stating the fact that the amendment/s have
been duly approved by the required vote of
the stockholders or members

SEC. 16. GROUNDS FOR DISAPPROVAL OF AOI OR

AMENDMENTS
Section 16. Grounds When Articles of Incorporation or
Amendment May be Disapproved. The Commission may
disapprove the articles of incorporation or any amendment
thereto if the same is not compliant with the requirements of
this Code: Provided, That the Commission shall give the
incorporators, directors, trustees, or officers as reasonable
time from receipt of the disapproval within which to modify
the objectionable portions of the articles or amendment. The
following are ground for such disapproval:

(a) The articles of incorporation or any amendment thereto is

not substantially in accordance with the form prescribed
herein; **GROUNDS TO DISAPPROVE INITIAL APPLICATION FOR
INCORPORATION AND AMENDMENT OF ARTICLES
(b) The purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral or contrary to government 1. Articles or amendment is not substantially in accordance
rules and regulations; with the form prescribed by law;
2. The purpose/s of the corporation is patently unconstitutional,
(c) The certification concerning the amount of capital stock illegal, immoral, or contrary to government rules and
subscribed and/or paid is false; and regulations.
3. Certification concerning the amount of capital stock
(d) The required percentage of Filipino ownership of the subscribed and/or paid is false.
capital stock under existing laws or the Constitution has not 4. Percentage of Filipino ownership of capital stock under
been complied with. existing laws or the Constitution is not complied with.

No articles of incorporation or amendment to articles of **INDUSTRIES REQUIRING PRIOR AUTHORITY BEFORE

incorporation of banks, banking and quasi-banking INCORPORATION (REGULATED CORPORATIONS)
institutions, preneed, insurance and trust companies,
NSSLAs, pawnshops and other financial intermediaries shall 1. Banks
be approved by the Commission unless accompanied by a 2. Banking and quasi-banking institutions
favorable recommendation of the appropriate government 3. Pre-need, insurance and trust companies
agency to the effect that such articles or amendment is in 4. Non-stock savings and loan associations (NSSLAs) 5.
Pawnshops
 6. Other financial intermediaries SEC. 17. CORPORATION NAME

Note: These industries cannot incorporate or apply for Section 17. Corporation Name. - No corporate name shall be
amendment without the prior authority of the government allowed by the Commission if it is not distinguishable from that
agencies governing or controlling them. (Ex. Certificate to already reserved or registered for the use if another corporation,
Incorporate from the BSP before incorporating a bank) or if such name is already protected by law, rules and
regulations.
The Certificate of Incorporation is to be attached to the Articles
of Incorporation. A name is not distinguishable even if it contains one or more of
the following:
**NOTES
(a) The word "corporation", "company", incorporated", "limited",
Only substantial and not strict compliance is required. The above "limited liability", or an abbreviation of one of such words; and
grounds are not exclusive. Example of another ground is the
capital requirement. (b) Punctuations, articles, conjunctions, contractions,
If there is no valid ground for disapproval, the SEC is duty bound prepositions, abbreviations, different tenses, spacing, or
to approve the same, it being the SEC’s ministerial duty given number of the same word or phrase.
the right to association.
The Commission upon determination that the corporate name
**DUE PROCESS IN THE REJECTION OF THE AOI is: (1) not distinguishable from a name already reserved or
registered for the use of another corporation; (2) already
Before rejecting the AOI, the SEC should give the incorporators protected by law; or (3) contrary to law, rules and regulations,
reasonable time within which to correct or modify the may summarily order the corporation to immediately cease and
objectionable portions of the articles or amendments. desist from using such name and require the corporation to
register a new one. The Commission shall also cause the
Any decision of the Commission rejecting the AOI or removal of all visible signages, marks, advertisements, labels
disapproving any amendment thereto is appealable by Petition prints and other effects bearing such corporate name. Upon the
for Review to the CA in accordance with the pertinent
provisions of the Rules of Court.
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approval of the new corporate name, the Commission shall the last paragraph)
issue a certificate of incorporation under the amended name.
The corporation and its responsible directors or officers may be
If the corporation fails to comply with the Commission's order, held:
the Commission may hold the corporation and its responsible 1. In contempt, and/or
directors or officers in contempt and/or hold them 2. Be administratively, civilly and/or criminally liable
administratively, civilly and/or criminally liable under this Code under the Code and other applicable laws, and/or 3. May
and other applicable laws and/or revoke the registration of the result in the revocation of the corporation’s registration
corporation.
Atty. Gaviola: Late December 2017, SEC came out with a new
**REQUIREMENTS FOR A VALID CORPORATE NAME regulation concerning corporate names. Under the Intellectual
Property Code, the moment you create a trade name and start
(1) Distinguishable from a name already reserved or registered using a trade name, it is already protected even if it is not yet
for the use of another corporation. registered under the Intellectual Property Code. But under this
new regulation, if the corporation is doing business under a
T/N: A name is not distinguishable even if it contains one trade name different from its corporate name, the trade name
or more of the following: should be included in its AOI. In that regard, the protection
(a) The word “corporation”, “company”, “incorporated”, granted by Sec. 17 of the RCC is extended to that trade name.
“limited”, “limited liability”, or an abbreviation of
one of such words; and What is the effect if the trade name is not included in the
(b) Punctations, articles, conjunctions, contractions, AOI?
prepositions, abbreviations, different tenses, A: SEC Rules provide that such trade name can be used by
spacing, or number of the same word or phrase. some other corporations subject to the consent of the owner of
the trade name.
(2) One that is not yet protected by law;
Note: The trade name and corporate name need not be the
(3) Not contrary to law, rules, and regulations. same.
Illustration:
Atty. Gavi: Upon determination by the Commission that the Trade Name: Penshoppe
corporate name violates either of the three requirements, it may Corporate Name: Golden ABC
summarily order the corporation to immediately cease and
desist from using such name, and to register a new one. It shall **GROUNDS TO QUESTION CORPORATE NAME
also cause the removal of visible signages, marks, ads, etc.
bearing such corporate name. (1) Complainant corporation has acquired prior right over the
use of such corporate name; and
Upon approval of the new corporate name, the Commission (2) Proposed name is either:
shall issue a certificate of incorporation under the amended a. Identical;’ or
name. b. Deceptively or confusingly similar to that of any
existing corporation or to any other name already
**EFFECT OF FAILURE TO COMPLY WITH SEC ORDER (in protected by law; or
 c. Patently deceptive, confusing or contrary to existing
laws. Section 18. Registration, Incorporation and
Commencement of Corporation Existence. - A person or
group of persons desiring to incorporate shall submit the
**TEST IN DETERMINING IDENTITY/SIMILARITY
intended corporate name to the Commission for verification.
If the Commission finds that the name is distinguishable
If it has the tendency to mislead a person using ordinary care from a name already reserved or registered for the use of
and discrimination. another corporation, not protected by law and is not contrary
to law, rules and regulation, the name shall be reserved in
What if the corporation desires to incorporate a subsidiary? favor of the incorporators. The incorporators shall then
Atty. Gaviola: Usually you will have the same name. The SEC submit their articles of incorporation and bylaws to the
allows it, provided that the corporation which had a priority right Commission.
will send you a letter of consent. In this case, you cannot
reserve your name online. You will have to write a letter to the If the Commission finds that the submitted documents and
SEC main office in Manila to basically grant permission for the information are fully compliant with the requirements of this
subsidiary to use the name of the parent. So, just because it’s
Code, other relevant laws, rules and regulations, the
similar, it’s automatically not allowed. So, if the corporation with Commission shall issue the certificate of incorporation.
the prior right consents, then, it will be allowed. But it has to be
proven that there is a parent-subsidiary/affiliate.
A private corporation organized under this Code commences
its corporate existence and juridical personality from the
See also discussion of Corporate Name under Sec. 13. date the Commission issues the certificate of incorporation
under its official seal thereupon the incorporators,
SEC. 18. REGISTRATION, INCORPORATION AND stockholders/members and their successors shall constitute
COMMENCEMENT OF CORPORATION a body corporate under the name stated in the articles of
EXISTENCE incorporation for the period of time mentioned therein,
unless said period is extended or the corporation is sooner
dissolved in accordance with law.

After the requirements are complied with, the SEC shall now
issue the Certificate of Incorporation.

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What would the issuance of the Certificate of Incorporation Northeastern Mindanao Mission of Seventh Day Adventists,
mean? Inc., GR. No. 150416, 1950)
A: It is considered the birth of the corporation and the
corporation commences its juridical personality. What are the requisites to be considered a de facto
corporation?
Importance: The COI is the best evidence of the corporation’s A:
existence. (1) There is a valid law that deems to establish a
corporation;
We can now classify ourselves as what kind of corporation? (2) Substantial compliance with the requirements or a
A: It will now become a de jure corporation – which is a colorable attempt to organize a corporation under
corporation in fact and in law. such law;
(3) Good faith on the part of the corporation in exercising
SEC. 19. DE FACTO CORPORATION corporate powers.
Section 19. De Facto Corporations. - The due Illustration.
incorporation of any corporation claiming in good faith to be Group exercised good faith in substantially complying
a corporation under this Code, and its right to exercise with the requirements – De Facto Corporation
corporate powers, shall not be required into collaterally in
any private suit to which such corporation may be a party.
A group of five (5), after signing their Articles of Incorporation
Such inquiry may be made by the Solicitor General in a quo
and having it notarized, told someone else to file it at the SEC
warranto proceeding.
and did not bother to follow up. It did not even tell anyone to
check on the papers. Nevertheless, it went to say that it is now
a corporation since they have executed the articles. They
assumed credit with a supplied, and the supplier failed to
What is a de jure corporation? deliver, despite the transaction.
A: it is one created with substantial conformity to the mandatory
statutory requirements in the Corporation Code of the They secured everything and applied with all the requirements.
Philippines. They were able to receive the certificate of incorporation. They
entered into the same transaction above. The supplier argued
What is a de facto corporation? that the corporation cannot sue them because the suppliers
A: An association of persons existing under a valid law under went to SEC and discovered that the AOI did not contain any
which it may be incorporated after having attempted in good information on its capitalization (which is a fatal defect).
faith to incorporate, and assuming corporate powers (Seventh
Day Adventist Conference Church of Southern Phils. Vs. Can the suppliers file a motion to dismiss?
A: No. In this case, the corporation is considered a de facto as general partners for debts, liabilities and damages incurred
corporation because of its good faith in substantially complying or arising as a result thereof.
with the requirements to organize a corporation as provided by
law. **NOTES:
A group of persons which holds itself out as a corporation and
If someone really wants to question the existence of this enters into a contract with a third person on the strength of
corporation, it should only be the Solicitor General representing such appearance cannot be permitted to deny its existence in
the government, who is supposed to extend the privilege. Only an action under said contract.
the Solicitor General can question the existence of the
corporation through a quo warranto. “One who assumes an obligation to an ostensible corporation
as such, cannot resist performance thereof on the ground
Rule: The State must bring a direct proceeding to question the thereof that there was in fact no corporation.”
validity of its corporate existence through the Solicitor General
by filing a quo warranto proceeding. Its existence as a These are corporations who have exercised rights as a
corporation cannot be collaterally attacked either by the State corporation and has undertaken obligations as a corporation,
or by private individuals. even without validly incorporating. In which case, the persons
who made up the corporation are estopped from claiming that
SEC. 20. CORPORATION BY ESTOPPEL they are not. But they cannot, because there is no real
corporation, they will not be liable as a corporation. They will be
Section 20. Corporation by Estoppel. - All persons who liable as partners. They will be solidarily liable in their personal
assume to act as a corporation knowing it to be without the capacity.
authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result
thereof: Provided, however, That when any such ostensible Lack of corporate personality is not a defense that it can avail.
corporation is sued on any transaction entered by its as a
corporation or on any tort committed by it as such, it shall Requirements of a Corporation by Estoppel:
not be allowed to use on any its lack of corporate personality
as a defense. Anyone who assumes an obligation to an (1) Representation by a group to the public;
ostensible corporation as such cannot resist performance (2) Knowing that they do not have the authority to act as a
thereof on the ground that there was in fact no corporation. corporation; and
(3) Third parties contracting with them are induced to
believe that they have the authority to act as a
corporation.

What is a corporation by estoppel? **NOTE:

A: A group of persons who assume to act as a corporation Estoppel is a defense available only to third persons against
knowing it to be without authority to do so, who shall be liable the ostensible corporation. When there is no third person
involved,
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and the conflict arises only among those assuming the form of
a corporation, who therefore know that it has not been Definition A corporation that A group of
registered, there is no corporation by estoppel. (Lozano vs. De exists in fact, but persons who
Los Santos, G.R. No. 125221, 1997) not in law. assume to act as
a corporation
knowing it to be
Illustration.
without authority
Group merely executed the articles and later transacted
to do so, who
with a supplier – Corporation by Estoppel
shall be liable as
general partners
A group of five (5), after signing their Articles of Incorporation for debts,
and having it notarized, told someone else to file it at the SEC liabilities and
and did not bother to follow up. It did not even tell anyone to damages incurred
check on the papers. Nevertheless, it went to say that it is now or arising as a
a corporation since they have executed the articles. They result thereof.
assumed credit with a supplied, and the supplier failed to
deliver, despite the transaction.

Can they sue the supplier?

A: Yes, they can sue the supplier as a CORPORATION BY
ESTOPPEL, but not as a corporation de facto. ICAB, there is
no substantial attempt at organizing a corporation – merely
executing the articles is not an attempt.

CORPORATION DE FACTO VS.

CORPORATION BY ESTOPPEL
Corporation de Corporation by
Facto Estoppel
 Can the bank sue them as a corporation?
Requisites 1. There is a valid 1.
A: Yes, they are deemed a corporation by estoppel.
law that Representati
deems to on by a group
to the What happens to the Motion to Dismiss?
establish a
corporation; A: It shall not be granted on the ground that they are
public;
considered as a corporation by estoppel
2. Substantial 2. Knowing that
they do not Who will pay the amount?
compliance
have A: They will be treated as general partners – they will be
with the
solidarily liable.
requirements or the authority to
a bona fide act as a
So what is the point of complying with all of these
attempt to corporation; and
requirement when they will be only treated on as a
organize a corporation?
corporation 3. Third parties
A: The law treats them as a corporation by reasons of equity. It
under such law; contracting
is not for purposes of giving them the privilege under the
and with
Revised Corporation Code but only for establishing their liability.
them are IOW if they are not treated as corporation, the loan will not be
3. Good faith on induced to paid.
the part of the believe that they
corporation in have the Illustration 3.
exercising authority to act The Corporation by Estoppel lends money to someone;
corporate as a corporation. debtor fails to pay
powers.
Let’s reverse the situation. Somebody borrowed from the five
people because they misrepresented themselves as a
corporation. The debtors did not pay. So the Omnibus
Illustration 1. Corporation are now demanding payment from the debtor. The
No papers were submitted to SEC debtor filed a motion to dismiss arguing that they
misrepresented themselves as a corporation.
There were 5 individuals who did not submit anything to SEC
and entered into a transaction with someone else. Will the motion to dismiss be entertained?
A: No. The debtor likewise cannot free itself from his liability of
the unpaid debts by invoking that he transacted with a
Can they be considered as a corporation?
corporation by estoppel.
A: No. There is no corporation at all.
Atty. Espedido: Bottom line: Once you have enjoyed certain
Illustration 2.
advantages, you cannot now question the existence of that
Five people misrepresented themselves as a corporation
corporation by estoppel. You cannot now say “I will not pay you
and borrowed money from a bank
because you are not a corporation”.
If the five of them went to the bank and told the bank that we
This is taken in a sense that a 3rd party cannot take advantage
they are a corporation – they called themselves the “Omnibus
of the fact that the lender is not a corporation. In the same
Corporation”. The bank lent them money. However, they failed
manner that the corporation by estoppel itself cannot pursue
to pay the bank and sued them as the Omnibus Corporation.
any transaction because it does not have any juridical
The lawyer of the Omnibus Corporation filed a motion to
personality.
dismiss arguing that it has no juridical personality.

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But if that relationship ripens into a transaction, by rule of equity, considered as a de facto corporation.
that relationship may be recognized and the parties may be
afforded a protection of the law. However, in the facts at hand, it was not mentioned that they
substantially complied with the requirements. They did not even
IOW, a corporation by estoppel is established only between the file the requirements. There act only ended upon the
parties. It does not have a juridical personality. The relationship notarization. ICAB, there was no honest intention.
only exists between the parties. We are not saying that they
gained juridical personality. Only that the law gives protection. Illustration 5.
RULE ON EQUITY requires that the rights of the parties Substantial compliance of the requirements and good faith
must be protected. of the corporation are both present

Illustration 4. The group failed to indicate the capital of the corporation.

No substantial compliance of the requirements However, for reasons we do not know, the examiners of the
SEC issued them an Articles of Incorporation.
There is another group that has signed and executed their AOI
and notarized it. After being authorized, they now entered into a Believing now that they received the juridical personality,
transaction. is it now a corporation?
Can they be considered as a corporation? A: It could now be considered as a de facto corporation
A: We have to qualify. If it is shown that they have substantially because there was substantial compliance and good faith on
complied with the requirements in good faith, they will be the part of the corporation.
HOWEVER, if they were subsequently notified of the defects of not issue, only the State can say that you do not exist as a
the requirements they have submitted and they still failed to corporation. For all intents and purposes, the de facto
comply with the requirements. They will not be considered as a corporation is considered as existing insofar as the public is
corporation de facto because it lacks the element of good faith concerned, except the State.

BUT PRIOR to that notification from the SEC, believing that it **NOTES
fulfilled the requirements and it proceeded into entering the
transactions – they are considered a corporation de facto. GOOD FAITH

What do you think is the justification of the law for treating The issuance of the COI is essential to the claim of good
them as a corporation de facto? faith. An association of persons to claiming to exercise the
A: For stability of business transactions – this is to promote powers of a corporation knowing that no COI had yet been
security of business transaction and to eliminate quibbling over issued to them cannot claim to be exercising such powers
irregularities. It is also for the protection of the 3rd persons and in good faith. (Hall vs. Piccio, G.R. No. L-2598, 1950)
consideration of equity.
If after incorporation, the incorporators discovered that they
REASONS FOR TREATING A CORPORATION BY have not complied substantially with the law and still
ESTOPPEL AS A CORPORATION continued transacting business as a corporation, without
doing anything to correct the defect, the privilege of a de
(1) Principle of Equity facto existence can no longer be invoked in good faith.
(2) Unjust Enrichment – “No one shall unjustly enrich himself at
the expense of another.” PURPOSES OF THE DE FACTO DOCTRINE

LIMITATIONS 1. To promote the security of business transactions and to

(1) The law only recognizes the transaction and the eliminate quibbling over irregularities.
rights of the parties in relation to that particular 2. A third person dealing with a corporation will rarely be
transaction and only insofar as the parties are prejudiced if the company is recognized as a
concerned. corporation in spite of minor defects in formation.
(2) Outside of that, it does not enjoy any privilege of a 3. Seldom would it be just to allow a wrongdoer to quibble
corporation at all. over such objections to escape liability or wrongdoing. 4. It
would be unjust to allow a claimant against a supposed
QUESTIONING THE VALIDITY OF CORPORATE company to assert the individual liability of innocent
EXISTENCE passive investors on the ground of flaws in the formal
steps of incorporation, when they have attempted in good
Rule: Assuming that a de facto corporation actually exists, its faith to comply with the statutory requirements and the
existence as a corporation cannot be collaterally attacked either objecting party is not prejudiced. (Villanueva, Corporate
by the State or by private individuals. Law)

The State must bring a direct proceeding to question the validity WHEN DE FACTO DOCTRINE DOES NOT APPLY
of its corporate existence through the Solicitor General by filing
a quo warranto proceeding. 1. A corporation whose purpose is prohibited by law or is
contrary to public policy;
Why the State? 2. A corporation created for the practice of learned
A: A corporation is a creation by law. It is a privilege granted by profession in the absence of a law expressly
the State so that it is only the State that can take it away. It is permitting the organization of such corporations.
the state that issues the Certificate of Incorporation. If it does (Note: The business organization for the practice of
profession shall be by particular partnership.)

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INSTANCES WHEN THERE IS A DE FACTO CORPORATION corporation. The only difference is that the due incorporation of
a de facto corporation may be directly inquired into by the
1. Failure to give the notice required by the statue for the Solicitor General in a quo warranto proceeding.
meeting for its organization;
2. Failure to fix and limit the amount of capital stock of the Conversely, in contrast to a de facto corporation, a de jure
company at the first meeting; corporation can successfully resist a suit brought by the State
3. Failure to issue stocks; challenging its existence.
4. Informalities in the proceedings of corporate meetings;
5. Lack of Certificate of Organization filed or executed; 6. SEC. 21. EFFECT OF NON-USE OF CORPORATE
Lack of elected BOD; CHARTER AND CONTINUOUS INOPERATION
7. Irregularities with respect to the number, term, place of
residence, and of meeting of the Board of Directors; 8.
Some of the persons elected as directors are disqualified;
and
9. In general, when there is a defect in the organization of
the corporation and not on its creation (Chung Ka Bio
vs. IAC, G.R. No. 71837, 1988)

CONSEQUENCE OF DE FACTO STATUS

For all intents and purposes, a de facto corporation has all the
same rights, powers, obligations, and liabilities as a de jure
 hearing, the Commission will place the Corporation under
Section 21. Effects of Non-Use of Corporate Charter and delinquent status
Continuous Inoperation. - If a corporation does not formally
organize and commence its business within five (5) year from
NOTE: There is no automatic revocation. The SEC will place
the date of its incorporation, its certificate of incorporation
the corporation under a delinquent status and the delinquent
shall be deemed revoked as of the day following the end of
corporation shall be given a period of two (2) years to resume
the five (5)-year period.
the operations and comply with the prescribed requirements of
the Commission.
However, if a corporation has commenced its business but
subsequently becomes inoperative for a period of at least
Once complied – the delinquent status is lifted and the
five (5) consecutive years, the Commission may, after due
corporation will have de jure status
notice and hearing, place the corporation under delinquent
status.
Failure to comply – cause the revocation of the Corporation’s
Certificate of Incorporation
A delinquent corporation shall have a period of two (2) years
to resume operations and comply with all requirements that
the Commission shall prescribed. Upon the compliance by GROUNDS FOR SUSPENSION
the corporation, the Commission shall issue an order lifting
the delinquent status. Failure to comply with the (a) The articles of incorporation or any amendment thereto is not
requirements and resume operations within the period given substantially in accordance with the form prescribed herein;
by the Commission shall cause the revocation of the (b) The purpose or purposes of the corporation are patently
corporation's certificate of incorporation. unconstitutional, illegal, immoral or contrary to government
rules and regulations;
The Commission shall give reasonable notice to, and (c) The certification concerning the amount of capital stock
coordinate with the appropriate regulatory agency prior to subscribed and/or paid is false; and
the suspension or revocation of the certificate of (D) The required percentage of Filipino ownership of the capital
incorporation of companies under their special regulatory stock under existing laws or the Constitution has not been
jurisdiction. complied with.
(E)
TITLE III. BOARD OF DIRECTORS/TRUSTEES AND
OFFICERS

After the Issuance of the Certificate of Incorporation (1) The law makes a distinction between ownership and
The stockholders will convene to elect the Board of management. The board (management) controls, operates
Directors. and exercises the powers of the corporation, while the
(2) Once the BOD is elected, they will convene to have set owners periodically elect, or when demanded by the
of officers. circumstances replace the board.

Whom do we elect? The Corporation Code follows the stakeholder-centered

A: President, Secretary, Treasurer, all officers listed in the by rather than the shareholder-centered model. Under this
laws of the corporation. model, owners are only one of the many corporate
EFFECT OF FAILURE TO ORGANIZE AND COMMENCE stockholders, who have diverse and varied interests. The
corporation, through its board, must take into account and
Rule: When the corporation does not formally organize and rank such interests in its actions.
commence its business within five (5) years FROM the date of
its incorporation – the Certificate of Incorporation (COI) will be Who are the corporation’s stakeholders?
deemed revoked or cancelled on the day following the end of A: They include but are not limited to:
the five-year period (1) Creditors
(2) Employees
EFFECT OF FAILURE TO OPERATE (3) Customers
(4) Suppliers
Rule: If the corporation becomes subsequently inoperative for (5) Government
at least five (5) consecutive years – AFTER due notice and (6) Community where the corporation operates

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Note: Stakeholders are different from shareholders. or Trustees. A corporation can act only through its directors and
officers. Acts of management pertain to the board and those of
Shareholders are those individuals or entities who own the ownership to the stockholders. (PSE vs. Litonjua, G.R. No.
corporation by holding the corporation’s share of stocks. On the 204014, 2016)
other hand, stakeholders are those who have an interest in the
operations of the corporation, an interest which is not While stockholders and members are entitled to receive profits,
necessarily pecuniary or financial. While a shareholder is the management and the direction of the corporation are lodged
always a stakeholder, a stakeholder is not always a with their representatives and agents – the board of
shareholder. directors/trustees. Acts of management pertain to the board;
and those of ownership to the stockholders/members. (Tan vs.
**DOCTRINE OF CENTRALIZED MANAGEMENT Sycip, G.R. No. 153468, 2006)

All business of the corporation shall be conducted and all its The concentration in the board of the powers of control of
properties shall be controlled and held by the Board of Directors corporate business and of appointment of corporate officers
and managers is necessary for efficiency in any large (a) Corporations covered by Section 17.2 of Republic Act No.
organization. Stockholders are too numerous, too scattered, 8799, otherwise known as "The Securities Regulation Code",
and unfamiliar with the business of a corporation to conduct its namely those whose securities are registered with the
business directly. And so the plan of corporate organization is Commission, corporations listed with an exchange or with
for the stockholders to choose the directors who shall control assets of at least Fifty million pesos (50,000,000.00) and having
and supervise the conduct of corporate business. (Filipinas two hundred (200) or more holders of shares, each holding at
Port vs. Go, G.R. No. 161886, 2007) least one hundred (100) shares of a class of its equity shares;

The power to purchase real property is vested in the Board of (b) Banks and quasi-banks, NSSLAs, pawnshops, corporations
Directors or Trustees. While a corporation may appoint agents engaged in money service business, preneed, trust and
to negotiate for the purchase of real property needed by the insurance companies and other financial intermediaries; and
corporation, the final say will have to be with the Board, whose
approval will finalize the transaction. A corporation can only (c) Other corporations engaged in businesses vested with
exercise its powers and transact its business through its Board public interest similar to the above, as may be determined by
of Directors, and through its officers and agents when the Commission, after taking into account relevant factors
authorized by a board resolution or by its by-laws. (Sps. Firme which are germane to the objective and purpose of requiring
vs. Ukal Enterprises and Development Corp., G.R. No. 146608, the election of an independent director, such as the extent of
2003) minority ownership, type of financial products or securities
issued or offered to investors, public interest involved in the
WHEN DOCTRINE OF CENTRALIZED MANAGEMENT NOT nature of business operations, and other analogous factors.
APPLICABLE
An independent director is a person who apart from
1. In the case of an Executive Committee duly authorized in shareholdings and fees received from any business or other
the by-laws; relationship which could, or could reasonable be received to
2. Where a corporate officer acts within the scope of his materially interfere with the exercise of independent judgment
authority under the by-laws or board resolution; 3. In case of in carrying out the responsibilities as a director.
close corporations, the stockholders may directly manage the
business of the corporation instead, if the AOI so provides. Independent directors must be elected by the shareholders
present or entitled to vote in absentia during the election of
SEC. 22. QUALIFICATIONS OF THE BOD/BOT directors. Independent directors shall be subject to rules and
regulations governing their qualifications, disqualifications,
Section 22. The Board of Directors or Trustees of a voting requirements, duration of term and term limit, maximum
Corporation; Qualification and Term. - Unless otherwise number of board membership and other requirements that the
provided in this Code, the board of directors or trustees shall Commission will prescribed to strengthen their independence
exercise the corporate powers, conduct all business, and and align with international best practices.
control all properties of the corporation.
**QUALIFICATIONS FOR A DIRECTOR
Directors shall be elected for a term of one (1) year from among
the holders of stocks registered in the corporation's book while (1) Must own at least 1 share of stock.
trustees shall be elected for a term not exceeding three (3) By ownership, what is required is legal ownership
years which is determined through the stocks and
from among the members of the corporation. Each director and transfer book reflecting one’s name as the owner
trustee shall hold office until the successor is elected and or holder thereof. Beneficial ownership is not
qualified. A director who ceases to own at least one (1) share of necessary.
stock or a trustee who ceases to be a member of the
corporation (2) Must not possess any of the disqualifications (See Sec.
shall cease to be such. 26.).

The board of the following corporations vested with public Note: Majority of the directors must be residents of the
interest shall have independent directors constituting at least Philippines. Majority, not all. There is no citizenship requirement,
twenty percent (20%) of such board: except for nationalized industries. Even foreigners can be voted
as directors.

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INDEPENDENT DIRECTOR float bonds – they solicit capital from the public

Who are independent directors? (2) Corporations covered under the Securities Regulation
A: They are persons believed to be of independent mind. No Code, namely:
relationship at all with the corporation except for some token (b) Securities registered with the Commission
shareholdings. (c) Corporations listed with an exchange
(d) Corporations with assets of at least 50M
Instances when an Independent Director is required: (1) pesos, and having 200 or more holders of
Corporations vested with public interest such as financial shares, each holding at least 100 shares of a
institutions or corporations that have access to public class of its equity shares
funds, borrow from the public, or corporations that issue or
 (3) Banks, quasi-banks, NSSLAs, pawnshops, good faith, with due care and prudence. Contracts entered into
corporations engaged in money service business, by the BOD are binding upon the corporation and courts will not
preneed, trust and insurance companies, and other interfere.
financial intermediaries
XPNs:
Note: Independent Directors shall make up at least 20% of the (1) If the contracts are so unconscionable and
board such that when there are 10 members of the BOD, it oppressive as to amount to a wanton destruction
requires at least two independent directors. of the rights of the minority. (Ingersoll vs. Malabon
Sugar, G.R. No. L-27770, 1927)
COMPLIANCE OFFICER (2) If they violate their duties under Sec. 30 (director
willfully and knowingly assents to patently
Rule: Other than the President, Treasurer, and Secretary, a unlawful acts of the corporation, or are guilty of
compliance officer is also appointed in corporations vested with gross negligence or bad faith); and
public interest. (3) If they violate Sec. 33 (disloyalty of a director who
acquires for himself a business opportunity that
ELECTION CONTESTS should have belonged to the corporation, unless
his act is ratified by a 2/3 vote of the stockholders).
- Must follow the prescribed procedure in the by-laws, including
the period of instituting the same. CONSEQUENCES OF THE BUSINESS JUDGMENT RULE
- The matter should be referred to arbitration, if provided for in
the by-laws or the charter. 1. The resolution, contracts and transactions of the board
- In the absence of such procedure and/or period in the by laws, cannot be overturned or set aside by the stockholders or
the election contest must be filed within 15 days from the members, and not even the courts under the principle that
date of election. the business of the corporation has been left to the hands
of the Board.
POWERS OF THE BOARD 2. Directors and duly authorized officers cannot be held
personally liable for acts or contracts done with the
3-Fold Powers or Authority of the Board exercise of their business judgment.
(1) Corporate powers
(2) Conduct all business XPNs:
(3) Control or administer all properties of the corporation a. When the Code expressly provides otherwise; b.
When the directors or officers acted with fraud, gross
Nature of the Powers of the Board: Generally, the powers of negligence or bad faith;
the BOD cannot be delegated. c. When the directors or officers act against the
corporation in conflict of interest situations.
Exception: Ministerial functions
REMEDIES IN CASE OF MISMANAGEMENT
PRINCIPLE OF BUSINESS JUDGMENT RULE
a. Removal of directors pursuant to Sec. 27.
Under this principle, the stockholders cannot review the b. Derivative suit or complaint filed with the RTC. c.
decisions of the Board. If they do not want the decision of the Receivership.
Board, they cannot go to court and change the decision. d. Injunction if the act has not yet been done.
e. Dissolution if abuse amounts to a ground for quo
Atty: Espedido: The BOD can tell the stockholders that they warranto but the SolGen refuses to act.
have no authority to question or change their decision.
The wisdom of their decision, whether bad or good, cannot be Note: Dean Villanueva opined that a derivative suit may be an
reversed by the stockholders. Otherwise, it is useless to put exception to such Rule: this occurs when it is apparent that the
them there only to be reversed by the stockholders. However, it Board is not in a position to validly exercise its business
does not mean that they can decide on certain business judgment for the protection of the corporation, e.g.:
judgments by disregarding all existing limitations. a. When the Board itself has committed an act
causing damage to the corporation, or
**NOTES: b. When the Board is placed in a conflict of interests
scenario whereby it is unlikely that it would use
GEN: Directors cannot be held liable for mistakes or errors in such business discretion to file such suit for the
the exercise of their business judgment as long as they acted in best interest of the corporation.

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LIMITATIONS OF THE POWERS OF THE BOARD the law which defines the Board’s powers. So long as the
power is exercised within the law, nobody can question this.
It is subject to limitations imposed by:
(1) Constitution However, if the Board’s decision is illegal, the Business
(2) Laws Judgment Rule does not mean that they could do anything
(3) By-laws even if it is illegal. Business judgment rule is confined to the
(4) Articles of Incorporation decision of the board purely on business, and within the
boundaries of the law, within the boundaries of the AOI.
NATURE OF THE BOARD OF DIRECTOR’S POWER
SEC. 23. ELECTION OF DIRECTORS OR TRUSTEES
Their power is original – it comes from the law or the State. It is
Section 23. Election of Directors or Trustees. - Except when prescribed by law, rules of good corporate governance, and
the exclusive right is reserved for holders of founders' shares bylaws of the corporation.
under Section 7 of this Code, each stockholder or member shall
have the right to nominate any director or trustee who HOW ELECTIONS ARE CONDUCTED
possesses
all of the qualifications and none of the disqualifications and Normally, how do we replace officers?
none of the disqualifications set forth in this Code. A: Through an election.
At all elections of directors or trustees, there must be present, Who calls the meeting?
either in person or through a representative authorized to act by A:
written proxy, the owners of majority of the outstanding capital
(1) It is called by the secretary
stock, or if there be no capital stock, a majority of the members
a. On the order of the President
entitled to vote. When so authorized in the bylaws or by a
majority of the board of directors, the stockholders or members b. By a written demand of the stockholders
may also vote through remote communication or in absentia: representing at least a majority of the
Provided, That the right to vote through such modes may be outstanding capital stock, or a majority of
exercised in corporations vested with public interest, the members entitled to vote
notwithstanding the absence of a provision in the bylaws of
such corporations. (2) Called by any stockholder or member of the
corporation signing the demand by directly
A stockholder or member who participates through remote addressing the stockholders or members – if there
communication or in absentia, shall be deemed present for is no secretary, or the secretary despite demand,
purposes of quorum. refuses or fails to call the meeting

The election must be by ballot if requested by any voting **When are the elections held?
stockholder or member. A: Elections must be held once every year. The Code does not
provide when the first election of directors or trustees shall be
In stock corporations, stockholders entitled to vote shall have held. It authorizes the corporation to provide in the by-laws the
the right to vote the number of shares of stock standing in their time for the holding of the annual election of directors or
own names in the stock books of the corporation at the time trustees.
fixed in the bylaws or where the bylaws are silent at the time of
the election. The said stockholder may: (a) vote such number Who can elect?
of shares for as many persons as there are directors to be A: Majority of the stockholders
elected; (b) cumulate said shares and give one (1) candidate
as many votes as the number of directors to be elected Rule: At all elections of directors or trustees, there must be
multiplied by the number of shares owned; or (c) distribute present, either in person or through a representative authorized
them on the same principle among as many candidates as to act by written proxy, the owners of majority of the
may be seen fit: Provided, That the total number of votes cast outstanding capital stock, or if there be no capital stock, a
shall not exceed the number of shares owned by the majority of the members entitled to vote. When so authorized
stockholders as shown in the books of the corporation in the bylaws or by a majority of the board of directors, the
multiplied by the whole number of directors to be elected: stockholders or members may also vote through remote
Provided, however, That no delinquent stock shall be voted. communication or in absentia. [Section 23, paragraph 2]
Unless otherwise provided in the articles of incorporation or in
the bylaws, members of nonstock corporations may cast as Shareholders or members must be present either:
many votes as there are trustees to be elected by may not cast (a) In person;
more than one (1) vote for one (1) candidate. Nominees for (b) Through a representative authorized to act by written
directors or trustees receiving the highest number of votes proxy;
shall be declared elected. (c) Remote communication or
(d) In absentia
If no election is held, or the owners of majority of the
outstanding capital stock or majority of the members entitled to What happens if only a few stockholders appear and there
vote are not present in person, by proxy, or through remote is no quorum?
communication or not voting in absentia at the meeting, such A: A meeting cannot be validly held because as we said a
meeting may be adjourned and the corporation shall proceed quorum refers to the number of people required to validly hold a
in accordance with Section 25 of this Code. meeting. To constitute a valid meeting, the majority of the
stockholders must be present.
The directors or trustees elected shall perform their duties as

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What happens if the stockholders present for the holding provides that “notwithstanding any provision of the articles of
of such election are/is less than the majority? What incorporation or bylaws to the contrary, the shares of stock or
happens? A: In this case, plurality vote sets in, which means membership represented at such meeting and entitled to vote
that the nominee receiving the highest number of votes shall shall constitute a quorum for purposes of conducting an
be declared elected, even if the majority requirement was not election under this section. [Section 25 paragraph 4]
reached.
How do we proceed with the elections?
Atty. Espedido: Generally, a meeting cannot be validly held. A:
However, under the circumstances in our illustration, the law (1) Presiding officer will call for nominations.
 Everyone who has at least 1 share of stock is secure the issues you want to be approved in a meeting or the
entitled to be nominated. persons you want to be elected in the election, you try to gather
(2) Presiding officer will determine if the nominees as many proxies as you can, and cast the vote in behalf of the
have all of the qualifications and none of the stockholders. You will cast the vote yourself because you are
disqualifications the duly authorized representative.
(3) Other nominees will be tabulated
If you notice you have some PLDT subscriptions, you are a
QUORUM stockholder of PLDT. And from time to time, you will receive
notices from the PLDT. If management or the board would want
Rule: In the meeting of the stockholders, at least majority of the to approve something during the meeting, they would advise
owners of the outstanding capital stock should be present. you to send proxies as well.
Otherwise, we do not have a quorum. **NOTES:
Proxies shall be in writing, signed by the stockholder
What is a quorum? or member and filed before the scheduled meeting
A: It is the number of stockholders or members sufficient to with the corporate secretary. Unless otherwise
conduct a valid meeting. provided by the proxy, it shall be valid only for the
meeting for which it was intended. No proxy shall be
In a meeting of the board of directors, the majority usually valid and effective for a period longer than 5 years at
constitutes a quorum, but the by-laws can provide for another. any one time. (See Sec. 57.)

Kinds of Quorum VOTING TRUST AGREEMENT (See Sec. 58.)

(1) Simple majority A Voting Trust Agreement is a document similar to a proxy but
- The traditional kind. 50% + 1 longer in application or existence. It contemplates a situation
wherein the group of stockholders agree among themselves
(2) Qualified majority that in cases of issues to be presented for approval, they will
- The number stated in the by-laws. It can be more bot as one (block vote), and cast the vote as one.
than a simple majority, but it can never be lower
than the simple majority How many directors do we elect?
- Any number higher than 50% + 1 as provided for in A: It depends on the by-laws of the corporation.
the articles of incorporation (e.g. 2/3 or 3/4)
**NOTES
Note: Corporations can determine by themselves what
would constitute a quorum. There can be instances Election of Directors
when the quorum set by the corporation is less than (1) Done at any meeting called for the election of BOD and
the majority. Do not confuse quorum for majority. voted for by the stockholders. At all elections, owners
of the majority of the outstanding capital stocks must
**NOTES: be presented either:
1. In absence of the required majority, there will be failure a. In person;
of election. b. Through a representative authorized to act by
2. The law follows plurality voting, wherein the nominee written proxy (in absentia), e.g. proxy or trust;
with the highest number of votes shall be elects as a c. If allowed by the by-laws or majority of the
director. BOD, through remote communication (e.g.
3. The election is generally done through straight voting 4. telephone conference or video conference)
Cumulative voting is generally not permitted in a non stock
corporation, where each member may not cast more than Note: Such modes of attending the meeting and voting
1 vote for 1 candidate. may be utilized by corporations vested with public
PROXY interest although not provided in their by-laws.

A proxy is a written document which contains the authority (2) The election must be by ballot if requested by any
given to someone to represent the stockholder and cast his voting stockholder. Hence, voting by viva voces or roll
vote during the meeting. call (raising hands) is valid except when there is a
request that it be by ballot.
IOW, these documents are what we might consider as
Management Control Devices which are tools that the (3) Stockholders shall have the right to vote the number of
management uses to control the decisions. shares of stock standing in their own names (1 share
= 1 vote) as long as the total number of votes cast
Atty. Espedido: If you are part of management, and you want to shall

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not exceed the number of shares owned by the Vote such number of shares for as many persons
stockholders as shown in the books of the corporation as there are directors to be elected.
multiplied by the whole number of directors to be
elected. Example. A owns 100 shares. If there are 5
directors to be elected, A is entitled to 500 votes
Formula: multiplying 100 by 5. He may give to the 5
No. of votes = No. of shares x No. of vacant candidates 100 votes each.

seats Methods of voting: b. Cumulative voting (for 1 candidate)

Cumulate said shares and give 1 candidate as
a. Straight voting many votes as the number of directors to be
elected multiplied by the number of shares owned. c. Cumulative voting by distribution
Distribute them on the same principle as many
The privilege of cumulative voting is permitted for candidates as may be seen fit.
the purpose of giving minority stockholders
representation in the BOD. Stockholders shall Note: Comparison with non-stock corporations:
have the right to vote the number of shares of Members may cast as many votes as there are
stock standing in their own names. trustees to be elected, but may not cast more than
1 vote for 1 candidate, unless otherwise provided
A director elected because of the vote of the in the AOI or in the by-laws. They cannot
minority stockholders who untied in cumulative cumulate.
voting cannot be removed without cause. Illustration.
B, C, D, E and F agreed among themselves that
Illustration. they will be the directors with the exclusion of A.
There are 6 nominees for the 5 slots as a director, Each will have 50 votes. In order for them to be
nominees A B C D E have 20 shares each. elected, they should use cumulative voting. They
However, B C D E agreed to gang up against A, cannot prevent A from being elected, if they don’t
so the four (4) of them agreed to give F one share want him to be a member of the board. Their plan
each so that F will now be qualified to be however will not work because the law says,
nominated since he will be holding four shares. “protect the minority”. That’s the intention of the
law in cumulative voting.
How much shares do they have now?
A: (4) No delinquent stock shall be voted.
A 20 shares Delinquent stocks – declared by the Board as
delinquent because of their subscribers’ failure to pay
B 19 shares the balance after the same was due or after the Board
called for payment
C 19 shares
(5) Nominees for directors or trustees receiving the
D 19 shares highest number of votes shall be declared elected.

E 19 shares (6) If no election is held, or the owners of the majority of

the OCS or majority of the members entitled to vote
are not present in person, by proxy or through remote
F 4 shares communication or not voting in absentia at the meeting,
such meeting may be adjourned, and the corporation
shall follow the procedures laid out in Sec. 25.

Do you think they can ease out A? SEC. 24. CORPORATE OFFICERS
A: No, they cannot ease A out because in this Section 24. Corporate Officers. - Immediately after their
case, A can cumulate all his shares to vote for election, the directors of a corporation must formally organize
himself. Thus: an elect: (a) a president, who must be a director; (b) a
Shares Votes treasurer, who must be a resident of the Philippines; and (d)
(Shares X No. of such other officers as may be provided in the bylaws. If the
Directors) corporation is vested with public interest, the board shall
also elect compliance officer. The same person may hold
two (2) or more positions concurrently, except that no one
A 20 100 (20 x 5)
shall act as president and secretary or as president and
treasurer at the same time, unless otherwise allowed in this
B 19 95 (19 x 5) Code.

C 19 95 (19 x 5) The officers shall manage the corporation and perform such
duties as may be provided in the bylaws and/or as resolved
D 19 95 (19 x 5) by the board of directors.

E 19 95 (19 x 5)

F 4 20 (4 x 5) Page 39 of 88 | EH403 2019-2020 Corporation Law

REQUIREMENTS TO BECOME PRESIDENT

President – must be a director, who is a holder of at least

1 share
In this case, A B C D E will win in the elections,
but not F. This scenario illustrates the cumulative
Vice President – not required to be a holder of at least 1
voting.
share, but by the time he succeeds as President, the VP is
required to have at least one share by then
What is the purpose of cumulative voting?
A: The intention of such mode of voting is to
**BASIC CORPORATE OFFICERS
protect the interest of the minority shareholder
and ensure that the minority has representation
in the Board of Directors. (1) The president (must be a director)
(2) The treasurer (must be a resident of the Philippines) (3) TREASURER
The corporate secretary (must be a citizen and resident of
the Philippines) The treasurer must be a resident of the Philippines. The law
(4) In the case of public interest company, the compliance considers his immediate availability being the primary
officer custodian of the corporate funds, which is needed in
(5) Other officers as provided for in the by- the running of corporate affairs and implementation of the
board decision.
laws **RULE ON DUAL Has control over the funds and/or other assets of the
corporation
POSITIONS Has authority to receive in the name and for the benefit of
the corporation, all subscriptions, contributions or donations
GEN: Any director may hold 2 or more positions paid or given by the subscribers or members
concurrently. XPN: (1) President & secretary Certifies the information set forth in 7th and 8th clauses of
(3) President & treasurer the AOI, and that the paid-up portion of the subscription for
XPN2: (1) Unless otherwise allowed by the RCC (2) the benefit or credit of the corporation has been received
In an OPC, the president can be a He is one of the main signatories of financial statements
treasurer
CORPORATE SECRETARY
Rationale: To ensure faithful performance to their
Tasked to maintain corporate records, including the stock
functions. CHAIRMAN and transfer book
Upon order of the President, he sends notices and takes
minutes of meetings
Not a statutory corporate officer
Logically, he is the corporate officer with whom a
When his appointment is provided for in the by-laws, he
dissenting director must register his objection to a
generally sets the meeting and its agenda, and is the
particular corporate resolution, such as the issuance
default officer to preside the same
of a watered stock Primary officer tasked to make
He may be an independent director, provided he must
reports to the SEC Primary officer tasked to attest to
corporate resolutions He should thus ensure that none of
the information or statements in a report or certification
not hold an executive position and should not be
required by the code is: (1) incomplete, (2) inaccurate,
involved in the corporation’s day-to-day operations
(3) false or (4) misleading. Otherwise, he may be
He may be a non-Philippine national, even in
liable for willfully certifying a report Together with the
corporations requiring Filipino ownership, provided he President, he is authorized to use stock certificates
limits his role to that of a presiding officer during
Restrictions:
meetings
a. Should be a different person from the compliance officer
b. Should not be a member of the BOD

COMPLIANCE OFFICER
Required only in corporations that are vested with public
interest

Ensures that the members of the board and corporate

PRESIDENT officers comply with law, the corporate charter and by-laws
Should not be a member of the board
The president must be a director
Primary officer tasked to implement the decision of the OTHER CORPORATE OFFICERS
board
Regarded as the principal agent of the corporation He By-laws may sanction the appointment of other
shall manage the corporation and perform such duties corporate officers, who have special roles in running
as may be provided in the by-laws and/or resolved by the affairs of the corporation
the board of directors Normally, they assist the president in managing the
He is primarily authorized to initiate meetings, and in corporation
the absence of a Chairman, to preside them They are agents of the corporation relative to their
He is the main signatory of the stock certificates, and in authority stipulated in the by-laws
exceptional cases, the financial statements
What is the significance of distinguishing between a
VICE PRESIDENT corporate and non-corporate officer?
A: Only corporate officers may bind the corporation,
The law does not require the board to elect a vice provided he acts within the scope of his authority. He may
president He/She ensures succession to the be terminated at will, whereas a non-corporate officer may
presidency only be terminated for just or authorized causes.
It is not provided by law that a vice-president should
own at least one share of stock. However, for him to Further, dispute over the separation from office of a
succeed the president, he must own 1 share of stock corporate officer is considered an intra-corporate dispute,
at the time of ascending into the office of the president. which falls under the jurisdiction of the regular courts.

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**TERM OF CORPORATE OFFICERS (1) BOD – 1 year
 (2) Officers – generally coterminous with the Board, ▪ The secretary shall still submit a report and reasons therefor
but the by-laws may provide that they have a to the SEC within 30 days from the date of the scheduled
longer term. election.
▪ The report shall specify the new date for the election, which
Note: Unlike regular employees or subordinate officers who shall not be later than 60 days from the scheduled date.
enjoy security of tenure, purely corporate officers and/or
executive directors enjoy protection from their respective (C) NO QUORUM ON SECOND DATE
contracts with the corporation ▪ The Commission shall have the power to issue a summary
order that an election be held. The SEC shall have to
**VACANCIES IN THE POSITION OF THE OFFICERS power such orders as may be appropriate, including
orders directing the issuance of a notice stating the time
They are filled a vote of majority of the board of directors, and and place of the election, designated presiding officer, and
the elected replacement officer has a term of only the unexpired the record date or dates for the determination of
portion of his predecessor. stockholders or members entitled to vote.

SEC. 25. REPORTORIAL REQUIREMENTS Reason for SEC calling the election:
Atty. Espedido: There are new relationships created. While in
Section 25. Report of Election of Directors, Trustees and
the Old Code, the objective of the SEC was more focused on
Officers, Non-holding of Election and Cessation from
stockholders. In the New Code, it does not only focus on
Office. - Within thirty (30) days after the election of the
stockholders but to stakeholders as well.
directors, trustees and officers of the corporation, the
secretary, or any other officer of the corporation, the
secretary, or any other officer of the corporation, shall The stakeholders include creditors, customers, clients,
submit to the Commission, the names, nationalities, employees. These are now relationships that the corporation
shareholdings, and residence addresses of the directors, will have to establish. It is no longer focused within the
trustees and officers elected. corporation. The law now seems to protect all the stakeholders.
They are involved insofar as the existence of the corporation is
concerned, and the manner in which the corporation is being
The non-holding of elections and the reasons therefor shall
managed and operated.
be reported to the Commission within thirty (30) days from
the date of the scheduled election. The report shall specify a
new date for the election, which shall not be later than sixty If there seems to be a problem, the SEC seems to assume.
(60) days from the scheduled date.
Who calls the meeting?
If no new date has been designated, or if the rescheduled A: The President orders the Secretary to send notices to the
election is likewise not held, the Commission may, upon the stockholder.
application of a stockholder, member, director or trustee, and
after verification of the unjustifiable non-holding of the However, if one of the agenda is the removal of the
election, summarily order that an election be held. The president, is the corporation and stakeholders helpless? A:
Commission shall have the power to issue such orders as No, not anymore. Under the Old Code, there was what is
may be appropriate, including other directing the issuance of called HOLDOVER CAPACITY. The old provision says, “until
a notice stating the time and place of the election, the successor is elected and assumed office.”
designated presiding officer, and the record date or dates for
the determination of stockholders or members entitled to In the New Code, however, it cannot be done. Now, how could
vote. they be elected if there is no election? So now, the law now has
a compulsory intervention by the SEC.
Notwithstanding any provision of the articles of incorporation
or by laws to the contrary, the shares of stock or HOLDOVER CAPACITY
membership represented at such meeting and entitled to
vote shall constitute a quorum for purposes of conducting an Illustration 1.
election under this section.
In a situation where there is no President, the Vice President
Should a director, trustee or officer die, resign or in any succeeds. However, if the VP cannot succeed, a special
manner case to hold office, the secretary or the director, election will be called.
trustee or officer of the corporation, shall, within seven (7)
days form knowledge thereof, report in writing such fact to Illustration 2.
the Commission. President refuses to call a meeting for his removal

A meeting is scheduled for the removal of the President.

However, the president himself will not call the meeting.
(A) AFTER ELECTION
In such a case, the usual provision in any organization in case
▪ After the election of the Members of the Board, the corporate
an election of new officers cannot be held is that the old set of
secretary shall submit a report to the SEC for the results of
officers will continue – there will be a hold-over. The hold-over
the election within 30 days after the election of directors, capacity is the abuse that the law wants to resolve.
trustees, and officers of the corporation.
In order to resolve such scenario, the New Code now provides
(B) IF NO ELECTION that the SEC will summarily order an election to be held.
 Page 41 of 88 | EH403 2019-2020 Corporation Law
SEC. 26. DISQUALIFICATION OF DIRECTORS, TRUSTEES, (2/3) of the outstanding capital stock, or in a nonstock
OR OFFICERS corporation, by a vote of at least two-thirds (2/3) of the member
entitled to vote: Provided, That such removal shall take place
Section 26. Disqualification of Directors, Trustees or either at a regular meeting of the corporation or at a special
Officers. - A person shall be disqualified from being a meeting called for the purpose, and in either case, after
director, trustee or officer of any corporation if, within five (5) previous notice to stockholders or members of the corporation
years prior to the election or appointment as such, the of the intention to propose such removal at the meeting. A
person was: special
meeting of the stockholders or members for the purpose of
(a) Convicted by final judgment: removing any director or trustee must be called by the secretary
on order of the president, or upon written demand of
(1) Of an offense punishable by imprisonment for a period stockholders representing or holding at least a majority of the
exceeding six (6) years; outstanding capital stock, or a majority of the members entitled
to vote. If there is no secretary, or the secretary, despite
(2) For violating this Code; and demand, fails or refuses to call the special meeting or to give
notice thereof, the stockholder or member of the corporation
(3) For violating Republic Act No. 8799, otherwise known as signing the demand may call the special meeting or to give
"The Securities Regulation Code"; notice thereof, the stockholder or member of the corporation
signing the demand may call for the meeting by directly
(b) Found administratively liable for any offense addressing the stockholders or members. Notice of the time
involving fraudulent acts; and and place of such meeting, as well as of the intention to
propose such removal, must be given by publication or by
(c) By a foreign court or equivalent foreign regulatory written notice prescribed in this Code. Removal may be with or
authority for acts, violations or misconduct similar to without cause: Provided, That removal without cause may not
those enumerated in paragraphs (a) and (b) above. be used to deprive minority stockholders or members of the
right representation to which they may be entitled under
The foregoing is without prejudice to qualifications or other Section 23 of this Code.
disqualifications, which the Commission, the primary
regulatory agency, or Philippine Competition Commission The Commission shall, motu propio or upon verified complaint,
may impose in its promotion of good corporate governance and after due notice and hearing, order the removal of a
or as a sanction in its administrative proceedings. director or trustee elected despite the disqualification, or whose
disqualification arose or is discovered subsequent to an
election. The removal of a disqualified director shall be without
prejudice to other sanctions that the Commission may impose
on the board of directors or trustees who, with knowledge of the
GROUNDS FOR DISQUALIFICATION disqualification, failed to remove such director or trustee.
If within five (5) years PRIOR to the election or appointment as
such, the person was: SEC. 28. VACANCIES IN THE BOARD
(3) Convicted by final judgment:
a. Of an offense punishable by imprisonment for a Section 28. Vacancies in the Office of Director or Trustee;
period exceeding six (6) years; Emergency Board. - Any vacancy occurring in the board of
b. For violating this Code; and directors or trustees other that by removal or expiration of term
c. For violating Republic Act No. 8799, otherwise may be filled by the vote of at least a majority of the remaining
known as "The Securities Regulation Code"; directors or trustees, if still constituting a quorum; otherwise,
(4) Found administratively liable for any offense involving said vacancies must be filled by the stockholders or members
fraudulent acts; and in a regular or special meeting called for that purpose.
(5) By a foreign court or equivalent foreign regulatory
authority for acts, violations or misconduct similar to When the vacancy is due to term expiration, the election shall
those enumerated in paragraphs (a) and (b) above. be held no later than the day of such expiration at a meeting
called for that purpose. When the vacancy arises as a result of
Atty. Espedido: The SRC simply controls, manages, and removal by the stockholders or members, the election may be
monitors the activities of the stock market. The stock market is held on the same day of the meeting authorizing the removal
a market where only shares of stocks are being sold. If you and this fact must be so stated in the agenda and notice of said
want to share your shares of stock, all you have to do is meeting. In all other cases, the election must be held no later
register with the stock market. Before you could register, you than forty-five (45) days from the time the vacancy arose. A
would have to undergo the process of registering as an IPO. director or trustee elected to fill vacancy shall be referred to as
Once you comply with all the requisites, then you could already replacement director or trustee elected to fill a vacancy shall be
sell your shares to the public. referred to as replacement director or trustee and shall serve
only for the unexpired term of the predecessor in office.
SEC. 27. REMOVAL OF DIRECTORS/TRUSTEES
However, when the vacancy prevents the remaining directors
from constituting a quorum and emergency action is required to
Section 27. Removal of Director or Trustees. - Any director prevent grave, substantial, and irreparable loss or damage to
or trustee of a corporation may be removed from office by vote the corporation, the vacancy may be temporarily filled from
of the stockholders holding or representing at least two-thirds among the officers of the corporation by unanimous vote of the
 remaining directors or trustees. The action by the designated from the creation of the emergency board, stating therein the
director or trustee shall be limited to the emergency action reason for its creation.
necessary, and the term shall cease within a reasonable time
form the termination of the emergency or upon election of the Any directorship or trusteeship to be filled by a reason of an
replacement director or trustee, whichever comes earlier. The increase in the number of directors or trustees shall be filled
corporation must notify the Commission within three (3) days only
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by an election at a regular or at a special meeting of
stockholders or members duly called for the purpose, or in the Increase in the (1) At a regular or at a special
same meeting authorizing the increase of directors or trustees if number of meeting of
so stated in the notice of the meeting. directors or stockholders/members duly
trustees called for such purpose, or
In all elections to fill vacancies under this section, the (2) in the same meeting authorizing
procedure set forth in Section 23 and 25 of this Code shall the increase of directors or
apply. trustees if so stated in the notice
of the meeting.
Cause of Vacancies: DARI-DREI ➢ Meeting must be held no later
All other reasons
(1) Death than 45 days from the time the
(2) Abandonment vacancy arose
(3) Resignation
(4) Incapacity
(5) Disqualification
(6) Removal
(7) Expiration of Term EMERGENCY BOARD
(8) Increase in the number of Directors/Trustees
Rule: When the vacancy prevents the remaining directors from
RULES IN FILLING UP VACANCIES constituting a quorum and emergency action is required to
prevent grave, substantial, and irreparable loss or damage to
(A) For Removal the corporation, the vacancy may be temporarily filled from
Filled up by the stockholders or members in a regular or among the officers of the corporation by unanimous vote of the
special meeting called for that purpose remaining directors or trustees.
When – same day of the meeting authorizing the removal
Illustration.
(B) For Expiration of Term
Filled up by the stockholders or members in a regular or If there were 5 members of the board and we have removed
special meeting called for that purpose 3, how do we fill this up?
When – not later than the day of such expiration at a A: Since there are only 2 members of the board left, the
meeting called for that purpose either through a special or vacancy may be temporarily filled from among the officers of
regular meeting the corporation by unanimous vote of the remaining directors
or trustees.
(C) For Increase in the Number of Directors or
Trustees Filled up by the stockholders or members in a The emergency board can now proceed to act on the
(a) regular or special meeting called for that purpose or in emergency. The action by the designated director or trustee
the same meeting shall be limited to the emergency action necessary.
(b) When – in the same meeting authorizing the increase
of directors or trustees if so stated in the notice of the So if the emergency is to borrow 10M, the Emergency Board
meeting has the power and authority to borrow 10M. After such, the
term shall cease within a reasonable time from the termination
(D) For other causes (DARID; death, abandonment, of the emergency or upon election of the replacement director
resignation, incapacity, disqualification) or trustee, whichever comes earlier.
Filled up by at least the majority of the remaining directors
or trustees if still constituting a quorum – existing board will We still have a vacancy again. What do we do now? A: We
fill the vacancy now go to the regular route – calling for a regular stockholder’s
When – not later than 45 days from the time the vacancy meeting.
arose
**REMOVAL
Term expiration ➢ Meeting should be called no later
than the day of expiration at a WHO MAY REMOVE
meeting called for that purpose
(1) Stock corporation
Removal by ➢ Meeting may be held on the Vote of the stockholders holding or representing at
stockholders or same day as the meeting least 2/3 of the outstanding capital stock
members authorizing the removal,
provided it must be stated in (2) Non-stock corporation
the agenda and notice of the Vote of at least 2/3 of the members entitled to
meeting
vote HOW REMOVAL IS DONE

By the stockholders through a regular or special meeting. If

in a special meeting, the special meeting shall be called
 for the purpose of removing the director. demand may call for the meeting by directly addressing
o It must be called by the secretary on order of the president, the stockholders or members.
or upon written demand of the stockholders representing or Notice of the time and place of such meeting, as well as
holding at least a majority of the outstanding the information to propose such removal, must be given
capital stock, or a majority of the members by publication or by written notice prescribed in this Code
entitled to vote. by SEC
If there is no secretary, or if the secretary, despite demand, fails Upon verified complaint, and after due notice and hearing,
or refuses to call the special meeting or to give notice thereof, order the removal of a director or trustee elected despite
the stockholder or member of the corporation signing the the disqualification, or whose disqualification arose or is
discovered subsequent to an election.

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Atty. Gaviola: If there is an emergency situation, in order to
prevent grave, substantial or irreparable loss or damage to Section 29. Compensation of Directors or Trustees. - In
the corporation, the vacancy must be temporarily filled the absence of any provision in the bylaws fixing their
from the officers of the corporation. Temporary only. After the compensation, the directors or trustees shall not receive any
emergency, the Stockholders would have to fill in the vacancy, compensation in their capacity as such, except for
because the Board does not form a quorum anymore. reasonable per diems: Provided, however, That the
stockholders representing at least a majority of the
outstanding capital stock or majority of the members may
Note that in emergency situations, the Board, even if they do
grant directors or trustees with compensation and approve
not constitute a quorum, may temporarily fill-in the vacancy
the amount thereof at a regular or special meeting.
from the officers of the corporation.
In no case shall the total yearly compensation of directors
Rationale: The reason why the law allows the directors to fill-in
exceed ten percent (10%) of the net income before income
the vacancies is for convenience because it’s very hard to call a
tax of the corporation during the preceding year.
stockholder’s meeting, especially if you have a lot of
stockholders. It will be difficult to get quorum, and it’s also the
directors who manage the corporation. So, if the BOD cannot Directors or trustees shall not participate in the determination
act because they’re missing a member, then that is not good for of their own per diems or compensation.
the corporation.
So, the law allows the directors to fill in a vacancy. But only in Corporations vested with public interest shall submit to their
certain instances. However, if the stockholders really insist on shareholders and the Commission, an annual report of the
holding a meeting to fill a vacancy, then that is their prerogative. total compensation of each of their directors or trustees.
Because the power of the Board to fill in a vacancy is merely a
delegated power coming from the stockholders. It’s inherent in
the stockholders to fill in or elect members of the Board. (Valle
Verde Country Club, Inc. vs. Africa, G.R. No. 151969, 4
September 2009) GEN: The directors or trustees shall not receive any
compensation in their capacity as such.
EXPIRATION
XPN:
How should this be filled up? (1) Reasonable per diems
A: Filled up by the majority of the stockholders representing 2/3 (2) As stipulated in their by-laws fixing their
of the outstanding capital stock in a regular or special meeting compensation
called for that purpose (3) Voted upon by the stockholders representing the
majority of the outstanding capital stocks
When shall it be filled up?
A: Not later than the day of such expiration at a meeting called XPN to XPN: A vote of at least of the majority of the
for that purpose. outstanding capital stock or majority of the members entitled to
vote grants the directors compensation in a meeting
SEC. 29 COMPENSATION OF DIRECTORS OR TRUSTEES specifically called for that purpose.

If they are given compensation, is there a limit? A: Yes.

They should not receive more than 10% of the net income
before tax of the preceding year.

Why are they not paid?

A: Being shareholders, they also receive a share in the
dividends.

Herbosa: Appointment to the board is a consequence of

corporate ownership. An owner or member is ordinarily
expected to assume the post of director or trustee, and manage
the corporation for his ultimate benefit. Thus, the law does not
generally authorize the payment of compensation to a
shareholder/member as a director or trustee.

Illustration.
 Director A owns 75% of the shares. It is not mentioned in the Atty. Espedido: This provision is probably intended for publicly
bylaws that the directors shall receive compensation. Thus, the listed corporations where rarely someone owns a share that is
other directors move that they be given compensation per 50% or more. That might be the intention there.
month. All of the stockholders (including A) agreed that they
shall be compensated for 30K per month. SEC. 30. LIABILITY OF DIRECTORS, TRUSTEES OR
OFFICERS
Is it valid?
A: It is an invalid approval because the director cannot vote on Section 30. Liability of Directors, Trustees or Officers. -
the same meeting. As provided by law, the directors cannot Directors or trustees who willfully and knowingly vote for or
participate in the determination of their own per diems or assent to patently unlawful acts of the corporation or who are
compensation. guilty of gross negligence or bad faith in directing the affairs of
the corporation or acquire any personal or pecuniary interest in
Absurdity of the provision (as observed by Atty. Espedido): conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom
(a) If the remaining directors vote (excluding Director A suffered by the corporation, its stockholders or members and
who owns 75%) – the remaining directors cannot approve other persons.
because the law requires a vote of at least a majority of the
outstanding capital stock A director, trustee or officer shall not attempt to acquire, or any
interest adverse to the corporation in respect of any matter
(b) If Director A participates – it cannot be approved because which has been reposed in them in confidence, and upon which,
the law also prohibits his participation equity imposes a disability upon themselves to deal in their own
Page 44 of 88 | EH403 2019-2020 Corporation Law
behalf; otherwise, the said director, trustee or officer shall be board because of the principle of the Best Judgment Rule. In
liable as a trustee for the corporation and must account for the this case, the Board may invoke the Best Judgment Rule and
profits which otherwise would have accrued to the corporation. argue that said sale was fair and reasonable. Provided that
there is no defect in the contract of sale, it is perfectly valid.
LIABILITY OF DIRECTORS
HOWEVER, in situations wherein the corporation suffers great
The directors/trustees are liable to the corporation for the loss due to their gross negligence, we can say that although the
commission of the following: sale is valid, the BOD may still be held liable provided that they
were grossly negligent.
(1) Knowingly and willfully vote or assent to patently unlawful
acts In our illustration, what is their liability?
(2) Guilty of gross negligence or bad faith A: They are solidarily liable for all damages suffered by the
(3) Acquire any personal or pecuniary interest in conflict of duty corporation and must account for the 10M difference of the
in conducting the affairs of the corporation price – they have to pay for whatever losses the Corporation
may have realized because of the transaction.
NATURE OF LIABILITY
Business Judgment Rule vs. Patently Unlawful Acts
As such, directors or trustees shall be liable solidarily for all
damages suffered by the corporation, the stockholders, or SUMMARY: Directors who assented to the patently unlawful
members and other persons. act cannot be liable if such act is drawn from a justifiable
reason such as the business judgment rule.
In the case of acquiring conflict of interest – the director, trustee What is important is that after weighing the pros and cons, the
or officer shall be liable as a trustee for the corporation and benefit of the corporation outweighs the negative, as a BOD,
must account for the profits which otherwise would have opt for what is more beneficial to the corporation, in this case
accrued to the corporation. the patently unlawful act. In short, the Business Judgment Rule
prevails.
Illustration 1.
Corporation’s property was sold for 5Mn while an adjacent Business Judgment Rule vs. Gross Negligence
property was sold for 15Mn
SUMMARY: Based on the BJR, the acts of the BOD bind the
The Board in a meeting decided to sell one of the corporation’s corporation. As such, it cannot be questioned or reviewed by
properties for 5M. All of the Board except one approved the the stockholders or the courts.
sale.
Insofar as the BOD exercises their powers under the BJR, the
The following day, a property owned by somebody else which is contract is valid but due to gross negligence they can be held
adjacent to the property recently sold by the Corporation was liable.
able to sell it for 15M.
Following the BJR, when the Board enters into transactions
The director who did not approve the earlier sale now with the third parties, the sale is perfectly valid. However,
questioned the sale approved by the Board. The Board argued because of their negligence, then the BOD can be held liable
that the said sale was fair and reasonable. for damages the corporation suffered.

That director was mad because he was the lone dissenter and Personal and Pecuniary Interest
now he wants to vindicate himself.
SUMMARY: A certain type of trust is expected of a director of a
What could happen? If you were the one who approved, corporation similar to that of the degree of trust among partners
how would you answer the dissenting stockholder? A: in a partnership. A director needs to fully disclose whatever
Generally, the stockholders cannot question the decision of the benefits he may have received by virtue of his position as a
director in the corporation and he will have to remit such
 benefits to the corporation. (b) The vote of such director or trustee was not necessary for
the approval of the contract;
While there is no fiduciary trust among stockholders, there lies
a certain degree of trust to be had among the board and the (c) The contract is fair and reasonable under the circumstances;
corporation.
(d) In case of corporations vested with public interest, material
SEC. 31. DEALINGS OF DIRECTORS, TRUSTEES OR contracts are approved by at least a majority of the independent
OFFICERS directors voting to approved the material contract; and

Section 31. Dealings of Directors, Trustees or Officers with (e) In case of an officer, the contract has been previously
the Corporation. - A contract of the corporation with one (1) or authorized by the board of directors.
more of its directors, trustees, officers or their spouses and
relatives within the fourth civil degree of consanguinity or affinity Where any of the first three (3) conditions set forth in the
is voidable, at the option of such corporation, unless all the preceding paragraph is absent, in the case of a contract with a
following conditions are present: director or trustee, such contract may be ratified by the vote of
the stockholders representing at least two-thirds (2/3) of the
(a) The presence of such director or trustee in the board outstanding capital stock or of at least two-thirds (2/3) of the
meeting in which the contract was approved was not members in a meeting called for the purpose: Provided, That
necessary to constitute a quorum for such meeting; full disclosure of the adverse interest of the directors or
trustees

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involved is made at such meeting and the contract is fair and business of selling lechon.
reasonable under the circumstances.
Can you deal with your corporation?
Summary: In the case of self-dealing directors, it is not A: Yes.
considered wrong in itself. However, if any of the conditions
under the law is lacking, the contract entered into can be voided Is there a problem?
at the option of the corporation. A: There is no problem for as long as the conditions for a
contract with a self-dealing director are complied with, namely:
GEN: A contract of the Corporation with 1 or more of its (1) That the presence of the director is not necessary to
directors, trustees, officers, or their spouses and relatives within constitute a quorum for such meeting,
the 4th civil degree of consanguinity or affinity is VOIDABLE, at (2) The vote of the director is not necessary to approve the
the option of the corporation contract
(3) Contract is fair and reasonable
XPN: The contract is held valid provided that the following
conditions are present: Otherwise, absence of any of the conditions, the contract may
(1) Presence of the director or trustee in the BOD be deemed VOIDABLE, at the option of the corporation.
meeting in which contract is approved was not In the absence of the conditions, what could happen to the
necessary to constitute a quorum for such contract of lechon. Do you think you can be paid? A: Yes,
meeting; provided that it is ratified by a vote of 2/3 of stockholders
(2) Vote of such director or trustee was not necessary representing the outstanding capital stock (OCS)
for the approval of the contract
(3) The contract is fair and reasonable under the Illustration 2.
circumstances Quorum attained even without the presence of the Self
(4) In case of corporations vested with public interest, Dealing Director
material contracts are approved by at least two
thirds (2/3) of the entire membership of the board, Let us assume that all of the 5 Directors are present to approve
with at least a majority of the independent the contract.
directors voting to approve the material contract;
and Do you think there is a problem?
(5) In case of an officer, the contract has been A: There is no problem. Even if the self-dealing director is
previously authorized by the board of directors. present, his presence will not be necessary to constitute a
quorum.
Note: Only conditions 1-3 were mentioned during the Illustration 3.
Quorum cannot be attained without the presence of the
recits RATIFICATION BY A VOTE OF 2/3 Self-Dealing Director

Although the contract is VOIDABLE, the contract may be Only 3 of the Directors appeared, including the self-dealing
ratified by the vote of the stockholders representing at least 2/3 director. Do we have a problem?
of the outstanding capital stock. Provided, that full disclosure of A: Yes. Because without the presence of the self-dealing
the director or trustee’s adverse interest is made at such director, there would be no quorum and the votes to be cast in
meeting and the contract is fair and reasonable. approving the contract cannot take place. In this case, the vote
of the self-dealing director is necessary to approve the contract.
Illustration 1.
Self-Dealing Director owns a business of selling lechon The contract may be voided at the option of the corporation.
and contracts with the corporation HOWEVER, although it is voidable, it can be ratified by a vote
of 2/3 of the stockholders representing the outstanding capital
You are Director of a corporation and the corporation planned stock.
to hold a big party. At the same time, you have your own
 If you were the holder of 75% of the shares, do we have a
problem?
A: No problem, provided that it is fair and reasonable.
INTERLOCKING DIRECTOR
Nevertheless if it is not fair and reasonable, how can it be
cured? Interlocking director refers to a director of two corporations
A: It can be cured through ratification by a vote of 2/3 of the having a transaction with each other
stockholders representing the outstanding capital stock.
GEN: A contract between two (2) or more corporations having
SEC. 32 INTERLOCKING DIRECTORS interlocking directors shall not be invalidated on that ground
alone.
Section 32. Contracts Between Corporations with
Interlocking Directors. - Except in cases of fraud, and
provided the contract is fair and reasonable under the
circumstances a contract between two (2) or more
corporations having interlocking directors shall not be
invalidated on that ground alone: Provided, That if the
interest of the interlocking director in one (1) corporation is
substantial and the interest in the other corporation or
corporations is merely nominal, the contract shall be subject
to the provisions of the preceding section insofar as the
latter corporation or corporations are concerned.

Stockholding exceeding twenty percent (20%) of the

outstanding capital stock shall be considered substantial for
purposes of interlocking directors.

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XPN: For example, while in the meeting, the Director starts
(1) Cases of fraud; and questioning why the sales were going down. He asked the
(2) Contract is not fair and reasonable Sales Manager about it and asked for the list of the Top 20
Customers of the Corporation. He took photos of the list and
Note: In the case of an interlocking director who has a later went to these big customers and convinced them to buy
substantial interest in one corporation and a nominal interest in instead in the other corporation. THUS, although it may be said
another corporation, the provisions of the Self-Dealing Directors that there is nothing wrong, there is DANGER. This is the evil
shall apply. The following requisites must be present, namely: contemplated by the law.
(1) Presence of the director is not necessary to constitute
a quorum Illustration 2.
(2) Vote is not necessary to approve the contract Merger of two Corporations – No more competition
(3) Contract is fair and reasonable
Currently, the biggest telephone companies right now are PLDT
Atty. Espedido: IOW, the interlocking directorship is perfectly and Globe. If one is a Director in both corporations, he could
valid UNLESS it involves a substantial interest in one just propose that the companies should merge and become
corporation and a nominal interest in the other, in which case, one. Thus, only one corporation will remain which could result
the requirements under the Self-Dealing Director should be in a monopoly and there will be no more competition in the
complied with in order for it to be considered valid. Otherwise, business. They could either eliminate the competition or come
the status of the contract is deemed VOIDABLE. out with a disastrous competition.

Note: Stockholdings exceeding twenty percent (20%) of the In that illustration, how do you think will they prevent? A:
outstanding capital stock shall be considered substantial for A remedy is to amend the bylaws and have a stipulation that if
purposes of interlocking directors. there is a director with substantial interest in a company similar
to their business, he should be disqualified. IOW, that person
Is there something wrong of being an interlocking director? who owns the 90% will be disqualified.
A: Generally, nothing is wrong. Illustration 3
The Interlocking Director argues that the remedy is
DISADVANTAGE OF HAVING AN INTERLOCKING discriminatory on his part
DIRECTOR
The director argues that this is discriminatory on his part and he
Atty. Espedido: However, even if it is valid, the law recognizes will be deprived of his right to exercise his right to vote and be
the disadvantages of an interlocking directorship – it is prone to voted upon.
DANGER.
How do you think would the SC will resolve that? A: SC will
Illustration 1. rule in favor of the stakeholders because it will be a disaster if
Getting the list of the Top 20 Customers we allow this type of directorship to continue.

In a case where the director owns 90% of a beer company and Atty. Espedido: To allow him – there will be a conflict of interest.
10% in another company – there is NOTHING WRONG but the If we were to tolerate these things, the other corporation will be
law recognizes some evils. destroyed. And if the other corporation is destroyed, it will be
the bigger corporation that will alone survive. So there is no
more competition and so it gets all the market. That will be a
 disaster! So the Court shall allow the amendment of the By- DISTINCTION
Laws for the protection and preservation of the other
corporation. Competition must be promoted. Liabilities Disloyalty

SEC. 33. DISLOYALTY OF A DIRECTOR Grounds (1) Willfully and By virtue of his
knowingly office,
Section 33. Disloyalty of a Director. - Where a director, by assent ACQUISITION OF
virtue of such office, acquires a business opportunity which or vote to patently A BUSINESS
should belong to the corporation, thereby obtaining profits to unlawful acts OPPORTUNITY
the prejudice of such corporation, the director must account (2) Gross belonging to the
for and refund to the latter all such profits, unless the act has negligence or corporation and
been ratified by a vote of the stockholders owning or bad faith in OBTAINING
representing at least two-thirds (2/3) of the outstanding directing the PROFITS to the
capital stock. This provision shall be applicable, affairs of the prejudice of the
notwithstanding the fact that the director risked one's own corporation
corporation; or
funds in the venture.
(3) Acquiring any
personal or
pecuniary interest
in conflict with
DISLOYAL DIRECTOR their duty as a
director or trustee
GEN: A director, by virtue of such office, ACQUIRES A
BUSINESS OPPORTUNITY belonging to the corporation, (that Liability Liable as a trustee ACCOUNT for
should have benefitted the corporation itself), thereby obtaining and must account and REFUND to
profits to the prejudice of the corporation, must ACCOUNT FOR for the profits the corporation
AND REFUND the corporation for ALL PROFITS. which otherwise ALL PROFITS
would have
XPN: Ratification by the stockholders owning at least 2/3 of the accrued to the
outstanding capital stock . corporation

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appointed by the board.
Solidarily liable T/N: The board can delegate, except matters which are
discretionary. However, the intention of creating the committee
is for purposes of expediency so that the board doesn’t have to
Damages Liable for ALL ACTUAL meet at all times to ake a decision, because it can be difficult to
damages resulting DAMAGES convent the board sometimes.
therefrom suffered
(unrealized profit) Matters which cannot be delegated to the Executive
Committee (SVB – EC)
(1) Approval of any action for which shareholders’
approval is also required;
SEC. 34. EXECUTIVE COMMITTEE (2) Filling of vacancies within the board;
(3) Amendment or repeal of bylaws, or adoption of new
Section 34. Executive Management, and Other Special bylaws;
Committees. - If the bylaws so provide, the board may (4) The amendment or repeal of any resolution of the
create an executive committee composed of at least three board which by its express terms is not so amendable
(3) directors. Said committee may act, by majority of vote of or repealable;
all its members, on such specific matters within the (5) A distribution of cash dividends to the shareholders.
competence of the board, as may be delegated to it in the
bylaws or by majority vote of the board, except with respect **NOTES
to the: (a) approval of any action for which shareholders'
approval is also required; (b) filing of vacancies in the board; Executive Committee
(c) amendment or repeal of bylaws or the adoption of new Committee which exercises powers within the competence of
bylaws; (d) amendment or term is not amendable or the Board that requires authority under the by-laws. The
repealable; and (e) distribution of cash dividends to the Board cannot just create their own executive
shareholders. committee if such committee will be exercising the
powers of the Board.
The board of directors may create special committees of
temporary or permanent nature and determine the members' Special Committee
term, composition, compensation, powers, and Can be created by the Board even without the authority
responsibilities. under the by-laws.
Any other committee exercising a mere recommendatory
power whose actions require ratification and confirmation by
the board. It cannot approve resolutions on its own.
EXECUTIVE COMMITTEE The reason here is that the Board is the corporation’s
governing body, clearly upholding the power to
A smaller committee given delegated powers by the board. It is exercise the corporation’s
composed of not less than three (3) members, who are to be prerogatives in managing the corporation’s business
 affairs.

TITLE IV. POWERS OF THE CORPORATION

SPECIFIC POWERS OF A CORPORATION
SEC. 35. CORPORATE POWERS AND CAPACITY
(1) To sue and be sued in its corporate name
Section 35. Corporate Powers and Capacity. - Every (2) To have perpetual existence unless the certificate of
corporation incorporated under this Code has the power and incorporation provides otherwise
capacity: (3) Adopt and use a corporeal seal
(4) Amend its Articles of Incorporation
(a) To sue and be sued in its corporate name; (5) Adopt, amend, or repeal bylaws
(6) Stock corporations – issue or sell stocks to subscribers
(b) To have perpetual existence unless the certificate of and sell treasury stocks
incorporation provides otherwise; a. Nonstock corporation – admit members to the
corporation
(c) To adopt and use a corporate seal; (7) Deal with real and personal property, including
securities and bonds of other corporations
(d) To amend its articles of incorporation in accordance with
the provisions of this Code;

(e) To adopt bylaws, not contrary to law, morals or public

policy, and to amend or repeal the same in accordance with
this Code;

(f) In case of stock corporations, to issue or sell stocks to

subscribers and to sell treasury stocks in accordance with
the provisions of this Code; and to admit members to the
corporation if it be a nonstock corporation;

(g) To purchase, receive, take or grant, hold, convey, sell,

lease, pledge, mortgage, and otherwise deal with such real
and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business
of the corporation may reasonably and necessarily require,
subject to the limitations prescribed by law and the
constitution;

(h) To enter into a partnership, joint venture, merger,

consolidation, or any other commercial agreement with
natural and juridical persons;

(i) To make reasonable donations, including those for the

public welfare or for hospital, charitable, cultural, scientific,
civic, or similar purposes: Provided, That no foreign
corporation shall give donations in aid of any political party
or candidate or for purpose s of partisan political activity;

(j) To establish pension, retirement, and other plans for the

benefit of its directors, trustees, officers, and employees; and

(k) To exercise such other powers as may be essential or

necessary to carry out its purpose or purposes as stated in
the articles of incorporation.

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(8) Enter into commercial agreeements with natural and buy lotto – thereafter, they won.
juridical persons
(9) Make reasonable donations When they won the lotto, they put up a business of their own.
(10) Establish pension, retirement, and other plans for the They will deal in the buying and selling of second hand cars. In
benefit of its directors, trustees, officers, and one instance, the second hand car that they sold did not
employees function well. The buyer sued XYZ Corporation.
(11) Other powers essential or necessary to carry out its
purpose What would happen? Will the case prosper?
A: No, XYZ Corporation has a separate personality of its own,
Illustration. so it cannot be sued by the acts of the stockholders doing
Stockholders winning the lotto and engaging in the buy personal acts.
and sell of second-hand cars
Although they are stockholders, the money they used were not
There are 5 stockholders of XYZ Corporation. After receiving the funds of the corporation. Moreover, the business that the
their dividend, they decided to use their dividend and use it to stockholders were engaged in was not the business of the
corporation. fact of it being a corporation; or
- This refers to powers which are necessary to the
**NOTES corporate existence and are, therefore, impliedly
granted. Being powers inherent in the corporation as a
KINDS OF POWERS OF THE CORPORATION legal entity, these powers exist independently of the
express powers.
(1) Express powers
- Those expressly stipulated in the AOI and in the by- Atty. Gaviola: These are the powers which are there by
laws virtue of your being a corporation, so your ability to sue and
- **This refers to the power expressly conferred upon be sued, to buy and sell properties, everything that is
the corporation by law. These powers can be enumerated under Sec. 35 basically. Regardless of the
ascertained from the special law creating the [primary] purpose [of the corporation], incidental powers
corporation, or from the general incorporation law exist.
under which it was created, the general laws of
the land applicable to the corporation (i.e. the There was a problem before on the secondary purpose
Revised Corporation Code), and its AOI. [clause of the AOI] because people just enumerated the
secondary purpose[s], and among the secondary
Atty. Gaviola: Ordinarily, the express powers are provided [purposes they listed was subparagraph (g), which is] to
in the primary purpose clause of the AOI. In the primary sell or lease property. A few years back, BIR came up with
purpose clause of the AOI, the powers contained in Sec. a rule which they strictly enforced, which is that if a
35 are not actually enumerated there. If you think about it, property was classified as an ordinary asset, then VAT
the powers under Sec. 35 are incidental powers – they and income tax will be imposed on it, but if it was
exist by virtue of the juridical personality of the corporation. classified as capital asset, then it will be meted with capital
gains tax.
To be strict about it, express powers will only exist if they
are expressly provided in the primary purpose in the AOI. Ordinarily, you can say that a certain item or property is an
ordinary asset of the corporation if it is related to the
(2) Implied powers corporation’s primary purpose. Thus, real estate is
- Powers that are necessary to carry out the express considered an ordinary asset if the corporation owning it is
powers engaged in the real estate business. [On the other hand], if
- **Those powers which are reasonably necessary to the corporation is engaged in retail, then a parcel of land it
exercise the express powers and to owns will be considered a capital asset unless it is used for
accomplish/carry out the purposes for which the business.
corporation was formed.
The problem with the BIR is that, if they see “to purchase,
Atty. Gaviola: The implied power of the corporation is one receive, take or grant real and personal property” [under a
which is related or exist by virtue of the express power of corporation’s secondary purposes, then they will consider
the corporation, even if they are not expressly provided. the corporation to be a real estate company].
They need not be expressly laid out in the AOI, but exist
by virtue of the express powers. Thus, there is a disconnect between the SEC and BIR.
Corporations who copied the incidental powers in their
Examples: secondary purposes clause [will be assessed with VAT
a. Acts in the usual course of business plus the 30% income tax as against the 6% capital gains
tax whenever it sells land, even though it is actually not a
b. Acts to protect debts owing to a corporation
real estate company].
c. Embarking on a different business
d. Acts in part or wholly to protect or aid employees e.
POWER TO SUE AND BE SUED IN ITS CORPORATE NAME
Acts to increase business
As a juridical entity, the corporation can directly pursue all
(3) Incidental/Inherent powers
actions to enforce its rights. It does not have to go through its
- Powers that are necessary to the existence and
stockholders in order to bring a suit. At the same time, a
operation of the corporation;
corporation can directly be held liable for its obligations. The
- **Powers which a corporation can exercise by the mere
creditor does not have to go through the stockholders.

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SEC. 36. POWER TO EXTEND OR SHORTEN CORPORATE
TERM
 (b) The amount of the increase or decrease of the capital stock;
Section 36. Power to Extend or Shorten Corporate Term.
— A private corporation may extend or shorten its term as
(c) In case of an increase of the capital stock, the amount of
stated in the articles of incorporation when approved by a
capital stock or number of shares of no-par stock thereof
majority vote of the board of directors or trustees, and
actually subscribed, the names, nationalities and addresses of
ratified at a meeting by the stockholders or members
the persons subscribing, the amount of capital stock or number
representing at least two-thirds (2/3) of the outstanding
of no-par stock subscribed by each, and the amount paid by
capital stock or of its members. Written notice of the
each on the subscription in cash or property, or the amount of
proposed action and the time and place of the meeting shall
capital stock or number of shares of no-par stock allotted to
be sent to stockholders or members at their respective place
each stockholder if such increase is for the purpose of making
of residence as shown in the books of the corporation, and
effective stock dividend therefor authorized;
must be deposited to the addressee in the post office with
postage prepaid, served personally, or when allowed in the
(d) Any bonded indebtedness to be incurred, created or
bylaws or done with the consent of the stockholder, sent
increased;
electronically in accordance with the rules and regulations of
the Commission on the use of electronic data messages. In
case of extension of corporate term, a dissenting (e) The amount of stock represented at the meeting; and
stockholder may exercise the right of appraisal under the
conditions provided in this Code. (f) The vote authorizing the increase or decrease of the capital
stock, or the incurring, creating or increasing of any bonded
indebtedness.

Any increase or decrease in the capital stock or the incurring,

POWER TO EXTEND OR SHORTEN CORPORATE LIFE creating or increasing of any bonded indebtedness shall require
prior approval of the Commission, and where appropriate, of
How do we extend or shorten the corporate life? A: The law the Philippine Competition Commission. The application with
now presupposes that their term will be perpetual. However, the Commission shall be made within six (6) months from the
there is still use of this provision because the corporation has date of approval of the board of directors and stockholders,
the option to avail of corporate existence or not. It may choose which period may be extended for justifiable reasons.
to shorten the term.
Copies of the certificate shall be kept on file in the office of the
Rules: corporation and led with the Commission and attached to the
1. If issued prior to the effectivity of the New Code – original articles of incorporation. After approval by the
deemed perpetual UNLESS elects to retain original Commission and the issuance by the Commission of its
corporate term certificate of filing, the capital stock shall be deemed increased
2. If issued under the New Code – perpetual existence or decreased and the incurring, creating or increasing of any
UNLESS otherwise specified in the Articles of bonded indebtedness authorized, as the certificate of filing may
Incorporation declare: Provided, That the Commission shall not accept for
filing any certificate of increase of capital stock unless
RIGHT TO SUCCESSION accompanied by a sworn statement of the treasurer of the
corporation lawfully holding office at the time of the filing of the
Do we still have the right to succession? Is there a need to certificate, showing that at least twenty-five percent (25%) of
have right of succession? the increase in capital stock has been subscribed and that at
A: Yes. Because there is a difference between succession and least twenty-five percent (25%) of the amount subscribed has
perpetual existence. been paid in actual cash to the corporation or that property, the
valuation of which is equal to twenty-five percent (25%) of the
SEC. 37 POWER TO INCREASE OR DECREASE CAPITAL subscription, has been transferred to the corporation: Provided,
STOCK further, That no decrease in capital stock shall be approved by
the Commission if its effect shall prejudice the rights of
Section 37. Power to Increase or Decrease Capital Stock; corporate creditors.
Incur, Create or Increase Bonded Indebtedness. — No
corporation shall increase or decrease its capital stock or incur, Nonstock corporations may incur, create or increase bonded
create or increase any bonded indebtedness unless approved indebtedness when approved by a majority of the board of
by a majority vote of the board of directors and by two-thirds trustees and of at least two-thirds (2/3) of the members in a
(2/3) of the outstanding capital stock at a stockholders' meeting meeting duly called for the purpose.
duly called for the purpose. Written notice of the time and place
of the stockholders' meeting and the purpose for said meeting Bonds issued by a corporation shall be registered with the
must be sent to the stockholders at their places of residence as Commission, which shall have the authority to determine the
shown in the books of the corporation and served on the sufficiency of the terms thereof.
stockholders personally, or through electronic means
recognized in the corporation's bylaws and/or the Commission's REQUISITES FOR AN INCREASE OR DECREASE OF
rules as a valid mode for service of notices. CAPITAL STOCK:

A certificate must be signed by a majority of the directors of the 1. Done in a stockholder’s meeting duly called for the purpose
corporation and countersigned by the chairperson and 2. There must be a written notice of the proposed increase or
secretary of the stockholders' meeting, setting forth: diminution of the capital stock
3. Majority vote of the board of directors.
(a) That the requirements of this section have been complied 4. 2/3 vote of the stockholders representing the outstanding
with; capital stock
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5. A certificate signed by a majority of the directors and stockholders’ meeting
countersigned by the chairman and the secretary of the 6. Accompanied by the sworn statement of the treasurer
 showing that at least 25% of such increased capital stock XPN: Stockholders are denied their pre-emptive right in the
has been subscribed and that at least 25% of the amount following instances:
subscribed has been paid
7. Submitted to and approved by the SEC. (1) When it is expressly prohibited under the Articles of
8. Approval by the Philippine Competition Commission Incorporation

LIMITATION IN THE DECREASE OF CAPITAL (2) Shares issued in compliance with the laws requiring
stock offerings or minimum ownership by the
STOCK public
a. When the corporation decides to go
Up to what extent do you think can you increase or public, the SEC requires the corporation
decrease capital stock? to earmark some shares for the
A: employees (salary deduction, easy
(a) For the increase – no problem, as long as they follow instalment payment)
the subscribed capital stock, and the paid-up capital b. Under existing laws – earmark existing
stock shares to the public

(b) For the decrease – to the extent that it will not prejudice Atty. Espedido: At least 20% must be
creditors sold to the public

What could be the problem if we decrease the capital stock? (3) Shares to be issued in exchange of properties to retire
A: Subscribed capital stock is already part of capital. Thus, if existing debts
we decrease the capital, we are trying to return some part of
the capital – thus in effect, violating the Trust Fund Doctrine. It Illustration 1.
will prejudice the rights of the corporate creditors. Corporation sells the unsubscribed 20M shares to a
stranger
**NOTES
Corporation has 100M ACS and 100M shares. There are 5
INCREASE IN BONDED INDEBTEDNESS stockholders.

Bonded indebtedness is an indebtedness that is evidenced by One of them, Mr. A, takes 60% or 60 million. The other four
a bond. It is a debt instrument that is long-term in nature which subscribed 5M each. There is a total of 80M subscribed capital
is issued by a corporation. stocks with a remaining 20 million unsubscribed.

It is different from a promissory note. A promissory note is more The board then decided to sell the remaining 20 million
of a short or medium-term, and it is normally issued to a because somebody else was interested to buy. The board said,
particular person (payee) which is not the case in a bond. “Let’s sell it to Mr. Stranger.”

SEC. 38. POWER TO DENY PRE-EMPTIVE RIGHT A who subscribed for 60M opposed and argued that he has a
Section 38. Power to Deny Preemptive Right. - All pre-emptive right over the 20M.
stockholders of a stock corporation shall enjoy preemptive
right to subscribe to all issues or disposition of shares of any The board countered that A was already given hischance to
class, in proportion to their respective shareholdings, unless subscribe, yet he did not. Thus, they are selling it to others.
such right is denied by the articles of incorporation or an
amendment thereto: Provided, That such preemptive right Is stockholder A entitled to use his preemptive right? A:
shall not extend to shares issued in compliance with laws Yes. The purpose of this right is for the stockholder to maintain
requiring stock offerings or minimum stock ownership by the its power or influence. Moreover, the language of the law is not
public; or to shares issued in good faith with the approval of limited to issuances, it includes disposition as well.
the stockholders representing two-thirds (2/3) of the
outstanding capital stock in exchange for property needed Illustration 2.
for corporate purposes or in payment of previously Corporation decided to increase its authorized capital
contracted debt. stock

If you were Mr. A who owned 60 million, and the corporation

decided to increase its authorized stock for another 100 million
because many are interested.
POWER TO DENY PRE-EMTPIVE RIGHT
How much will you be able to subscribe for the second 100
GEN: Pre-emptive right is a preferential right granted to the million?
existing stockholders to subscribe to the newly issued stocks A: Another 60 million.
before it is being offered to the public.
Can the corporation say, “Somebody is already going to
Reason: In order for the existing stockholders to subscribed 80 million shares. You can subscribe 20
protect their interest in the corporation and the shares million.” Is this allowed?
that they hold representing their ownership. A: No, because this will reduce Mr. A’s influence or dilute his
share – instead of 60% influence, he will only have 40%
It is to allow the stockholders to retain the extent of influence.
their power.

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Can the subscriber say, “I will subscribe shares (pay the of its remaining business.
delinquent shares), but I will pay them when I have my
share of the profit.”? GEN: A corporation can dispose its assets by a majority vote of
A: It depends. We have to distinguish if the cash dividends are its board of directors or trustees.
already due and demandable or not.
XPN: If the disposition of all or substantially all assets of the
If the cash dividends are due and demandable, then corporation, the following requisites must be present: (1) Vote
compensation is allowed. But if the dividends are not due and of the majority of the board
demandable, compensation is not allowed. (2) Authorized by the stockholders representing 2/3 of the
outstanding capital stock
SEC. 39. SALE OR OTHER DISPOSITION OF ASSETS ⮡ XPN to the ratification of the stockholders:
a. Necessary in the usual and regular
Section 39. Sale or Other Disposition of Assets. - Subject to course of business of the corporation; or
the provisions of Republic Act No. 10667, otherwise known as b. Proceeds of the sale or other disposition
the "Philippine Competition Act", and other related laws a of property and assets shall be
corporation may, by a majority vote of its board of directors or appropriated for the conduct of its
trustees, sell, lease, exchange, mortgage, pledge, or otherwise remaining business.
dispose of its property and assets, upon such terms and
conditions and for such consideration, which may be money, TEST FOR DETERMINING WON 2/3 VOTES IS REQUIRED:
stock, bonds, or other instruments for the payment of money or
other property or consideration, as its board of directors or If it will render the corporation incapable of continuing its
trustees may deem expedient. business – based on jurisprudence, this refers to disposition of
at least 80% of its assets.
A sale of all or substantially all of the corporation's properties Illustration.
and assets, including its goodwill, must be authorized by the Transportation company sells 20 buses out of 100 buses
vote of stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or at least two-thirds (2/3) of the
A transportation company operating 100 passenger buses
members, meeting duly called for the purpose. decides to sell only 20 buses.
In nonstock corporations where there are no members with
What vote is required?
voting rights, the vote of at least a majority of the trustees in
A: It only needs to be approved by a majority vote of the Board
office will be sufficient authorization for the corporation to enter
of Directors. Selling 20 out of 100 buses cannot be considered
into any transaction authorized by this section.
substantial to make the company incapable of continuing the
business or incapable of performing its stated purpose.
The determination of whether or not the sale involves all or
substantially all of the corporation's properties and assets must
be computed based on its net asset value, as shown in its latest If it sells 80 buses out of 100?
financial statemments. A sale or other disposition shall be A: It needs the approval of the stockholders representing 2/3 of
deemed to cover substantially all the corporate property and the outstanding capital stock as it can already be considered as
assets if thereby the corporation would be rendered incapable all or substantially all of the corporate property and assets.
of continuing the business or accomplishing the purpose of
which it was incorporated. Illustrations on the exceptions to ratification:
Exception 1 – necessary in the usual course of business
Written notice of the proposed action and of the time and place of the corporation
for the meeting shall be addressed to stockholders or members
at their places of residence as shown in the books of the The corporation is selling subdivision lots.
corporation and deposited to the addressee in the post office
with postage prepaid, served personally, or when allowed by Do you think every time they sell 80% of the subdivision
the bylaws or done with the consent of the stockholder, sent lots available for sale, they have to secure the ratification
electronically: Provided, That any dissenting stockholder may of the shareholders?
exercise the right of appraisal under the conditions provided in A: No, because this is in the usual course of business of the
this Code. corporation.

After such authorization or approval by the stockholders or Exception 2 – if the proceeds of the sale would be plowed
members, the board of directors or trustees may, nevertheless, back to the business of the corporation
in its discretion, abandon such sale, lease, exchange, mortgage,
pledge, or other disposition of property and assets, subject to There is no need of approval. Whatever proceeds, the
the rights of third parties under any contract relating thereto, corporation can use it back.
without further action or approval by the stockholders or
members. SEC. 40. POWER TO ACQUIRE OWN SHARES

Nothing in this section is intended to restrict the power of any Section 40. Power to Acquire Own Shares. - Provided, That
corporation, without the authorization by the stockholders or the corporation has unrestricted retained earnings in its books
members, to sell, lease, exchange, mortgage, pledge, or to cover the shares to be purchased or acquired, a stock
otherwise dispose of any of its property and assets if the same corporation shall have the power to purchased or acquired, a
is necessary in the usual and regular course of business of the stock corporation shall have the power to purchase or acquire
corporation or if the proceeds of the sale or other disposition of its own shares for a legitimate corporate purpose or purposes,
such property and assets shall be appropriated for the conduct including the following cases:
Page 52 of 88 | EH403 2019-2020 Corporation Law
(a) To eliminate fractional shares arising out of stock dividends; (b) To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a delinquency
sale, and to purchase delinquent shares sold during said sale;
and Section 41. Power to Invest Corporate Funds in Another
Corporation or Business or for Any Other Purpose. -
Subject to the provisions of this Code, a private corporation
(c) To pay dissenting or withdrawing stockholders entitled to
may invest its funds in any other corporation, business, or
payment for their shares under the provisions of this Code.
for any purpose other than the primary purpose for which it
was organized, when approved by a majority of the board of
GEN: A corporation is not allowed to acquire its shares. directors or trustees and ratified by the stockholders
representing at least two-thirds (2/3) of the outstanding
Reason: Because it is in effect liquidating, to the capital stock, or by at least two-thirds (2/3) of the
damage and prejudice of its creditors. If the outstanding capital stock, or by at least two-thirds (2/3) of
corporation buy out the shares of the stockholders, the members in the case of nonstock corporations at a
we are trying to liquidate which is a violation of the meeting duly called for the purpose. Notice of the proposed
Trust Fund Doctrine. Sooner or later, there will be no investment and the time place of residence as shown in the
more stockholders since the corporation is buying out books of the corporation and deposited to the addressee in
the shares. If all the stockholders get back all their the post office with the postage prepaid. Served personally,
investment – there will no longer be any investments or sent electronically in accordance with the rules and
for the corporation to continue to operate. regulations of the Commission on the use of electronic data
message, when allowed by the bylaws or done with the
XPN: consent of the stockholders: Provided, That any dissenting
(1) Prevent fractional shares arising from stock dividends stockholder shall have appraisal right as provided in this
⮡ In distributing stock dividends based on the amount, Code: Provided, however, That where the investment by the
there will be an instance where 1/2 or 1/4 share is given. corporation is reasonably necessary to accomplish its
Instead of giving fractional shares, the corporation will just primary purpose as stated in the articles of incorporation, the
buy it back. approval of the stockholders or members shall not be
(2) Satisfy delinquent shares necessary.
(3) Pay dissenting stockholders – in the exercise of their
appraisal right, which means that when the
stockholder does not agree with the decision of the
board, it may exercise such right and the corporation
shall be compelled to buy-back the shares Requisites:
(1) Vote of the majority of the Board of Directors
Condition for the exceptions to apply: There must be (2) Vote of the stockholders representing 2/3 of the
outstanding capital stock
unrestricted retained earnings.

Why would these exceptions not violate the trust fund Illustration.
doctrine? Airline Corporation buys 60% of a Shipping Company
A: Because it can only be exercised when it has unrestricted
retained earnings which simply means that such retained A corporation is engaged in an airline business – operating
earnings are not earmarked for any purpose – SURPLUS OF aircrafts. Since it has a lot of aircrafts, they noticed that their
PROFITS. idle funds in the bank are not earning much.

HOWEVER, if there are no surplus profits or URE – this will The corporation decided to buy 60% of a shipping company.
already affect the creditors. The Trust Fund Doctrine will be
violated. If the corporation buys 60% of the shipping company, what
would be required?
ADVANTAGES AND DISADVANTAGES A: A vote of the majority of the Board of Directors and a vote of
the stockholders representing 2/3 of the outstanding capital
If the corporation reacquires the shares and you are one of stock
the remaining stockholders whose shares were not
reacquired, will you be happy? Can the corporation say that there is no need of the
A: It depends. ratification since the shipping company is still a
transportation company?
Advantageous A: No. It is already a deviation of its principal purpose.
If the company is expected to earn profits, then they would
have bigger dividends because of the fewer stockholders who What if we have 10 stockholders. How many stockholders
will be dividing the profits. will have to approve the decision of the board? A: It
depends on the stockholders representing 2/3 of the
outstanding capital stock. It may even be just one stockholder
Disadvantageous
because the Code talks about 2/3 of the outstanding shares. It
If the company expecting losses, then only a few stockholders
is not on the number of directors but on the number of shares.
will be sharing the losses, which is prejudicial on their part.
Atty. Espedido: Our TEST is the PRINCIPAL PURPOSE. A
Also, if shares were bought back using other shares, then the
company may invest so long as it is within the bounds of the
shares used as payment could have been used as stock
primary purpose. Otherwise, it requires a vote of the
dividends.
MAJORITY OF THE BOARD AND 2/3 vote of the stockholders
SEC. 41. POWER TO INVEST CORPORATE FUNDS IN
representing the OUTSTANDING CAPITAL STOCK.
OTHER CORPORATIONS/BUSINESSES
 Page 53 of 88 | EH403 2019-2020 Corporation Law
Note: Other than the primary purpose, THERE IS NO NEED in the following instances:
FOR RATIFICATION IF THE NEW BUSINESS WILL BE: (1) (1) When justified by definite corporate expansion projects
Necessary accomplish its primary purpose or programs approved by the board of directors
(2) It falls under the express, implied, inherent, and (2) When the corporation is prohibited under any loan
apparent powers of the corporation agreement with financial institutions or creditors,
(3) There is a logical relationship to the primary business whether local or foreign, from declaring dividends
or if it is in furtherance of the business without their consent, and such consent has not yet
been secured
Atty. Espedido: This is the test in determining WON it (3) When it can be clearly shown that such retention is
is express, implied, inherent, or an incidental power. necessary under special circumstances obtaining in
the corporation, such as when there is need for special
Otherwise, without the ratification of the stockholders, reserve for probable contingencies.
it becomes an ultra vires act which is an
unenforceable act. How are dividends payable?
A: It depends. There are several ways that dividends can be
SEC. 42. POWER TO DECLARE DIVIDENDS paid: whether in cash, property, stock or a combination of any
of the three.
Section 42. Power to Declare Dividends. - The board of
directors of a stock corporation may declare dividends out of Can the stockholders demand for the declaration of
the unrestricted retained earnings which shall be payable in dividends?
cash, property, or in stock to all stockholders on the basis of A: No. The decision to declare dividends lies with the Board.
outstanding stock held by them: Provided, That any cash The Board has the power to manage the corporation. Hence,
dividends due on delinquent stock shall be first be applied to when the corporation has profits, it is the Board who decides
the unpaid balance on the subscription plus costs and what to do with it. The Board, using its discretion, may not
expenses, while stock holders until their unpaid subscription declare dividends but rather use it for business expansion
is fully paid: Provided, further, That no stock dividend shall projects.
be issued without the approval of stockholders representing
at least two-thirds (2/3)of the outstanding capital stock at a Exception: When there is improper accumulation of profits.
regular or special meeting duly called for the purpose. This happens when the corporation retains surplus profits in
excess of 100% of its paid-in capital stock. In such case, the
Stock corporations are prohibited from restraining surplus shareholders may demand for the declaration of dividends.
profits in excess of one hundred percent (100%} of their
paid-in capital stock, except: (a) when justified by the Illustration. You are a shareholder, and in April of a taxable
definite corporate expansion projects or programs approved
year, you heard that the BOD intends to declare dividends.
by the board of directors; or (b) when the corporation is
Per your computation, your tax for the year would be high,
prohibited under any loan agreement with financial
not yet including the taxes you will incur upon receiving
institutions or creditors, whether local or foreign, from
the dividends. Would you be happy that the BOD will
declaring dividends without their consent, and such consent
declare dividends?
has not yet been secured; or (c) when it can be clearly
A: No. You would tell the BOD not to declare dividends
shown that such retention is necessary under special
because of the additional taxes you will incur from it.
circumstances obtaining in the corporation, such as when
there is need for special reserve for probable contingencies.
Can you however compel the corporation to declare
dividends if the retained earnings has not reached more
than 100% of the paid-in capital?
A: No.
DIVIDENDS
CORPORATE PRACTICE OF ACCUMULATING EARNINGS
What are dividends?
A: These are part of the PROFITS distributed as shares to the When the corporation acquires income, it will be subject to the
stockholders. If there are no profits, there are no dividends. corporate income tax. Then, when it distributes cash dividends
to the shareholders, such dividends will become the income of
GEN: The Board has the sole authority to declared dividends. said shareholders, and thus will be subject to individual income
The declaration of dividends is the sole prerogative of the board. tax. In effect, there is double taxation. This makes the BOD
hesitant to declare dividends, and so even though the
XPN: The Board may be compelled to issue dividends when corporation has cash, it will find ways to make it appear that the
the retained earnings of the corporation EXCEED 100% of “dividends” of the corporation were “expenses” to avoid paying
their paid-in capital stock. taxes on them.

Note: If they still do not declared dividends, they will be charged Illustration. The shareholders will attend a seminar abroad to
with Improperly Accumulated Earnings Tax (IAET) – in which observe the latest trends of the business, and all expenses will
case the corporation is prone to penalties under the NIRC for be paid by the corporation.
undue accumulation.
The amount to be spent is equal to what should have been the
XPN to XPN: A corporation may not be compelled to declare dividends to the shareholders, but instead of declaring said
dividends even if the profits exceed 100% of the paid-in capital amount as dividends, the amount will now be made to appear
as an expense of the company to finance the shareholders’
 seminar abroad. It will not be considered as income on the part of the shareholder, and thus will not be subjected to income tax.

Page 54 of 88 | EH403 2019-2020 Corporation Law

IMPROPERLY ACCUMULATED EARNINGS TAX demandable of the shareholder – OFFSET.

However, the BIR discovered this scheme. They came up with Note: Issuing cash dividends requires a vote of majority of the
an amendment to the NIRC to impose improperly Board of Directors without need of ratification from the
accumulated earnings tax (IAET) as a penalty for erring stockholders
corporations. Atty. Espedido: As much as possible, corporations do not
declare cash dividends because it is taxable twice: (1) when
GEN: The corporation will be liable for IAET when its declared as income by the corporation and (2) when declared
undistributed profits exceed 100% of the paid-up capital. income by the stockholders upon distribution.

XPN: When accumulated earnings are allowed, such as when: (B) STOCK DIVIDENDS
1. When justified by definite corporate expansion projects
or programs; Rule: It shall be withheld from the delinquent stockholders
2. When the corporation is prohibited under any loan UNTIL their unpaid subscription is fully paid.
agreement with any financial institution or creditor from
declaring cash dividends without securing its/his/her Offsetting in cash dividends does not apply in stock dividends.
consent; or You cannot issue any stock dividends UNTIL the unpaid stock
3. When it can be clearly shown that such retention is are fully paid.
necessary under special circumstances, such as when
there is a need for special reserves for possible Note: Issuing stock dividends requires a majority vote of the
contingencies (e.g. typhoons). BOD and a ratification of 2/3 vote of the stockholders
representing the outstanding capital stock
When will dividends be taxed on the side of the
shareholder? Illustration. If your subscription has not yet been paid and
A: It depends on the type of dividend that will be received: declared due by the Board, can you say “just charge my
unpaid subscription to future dividends”? Can a
1. Cash dividend → the stockholder is liable for tax since shareholder refuse to pay by saying that?
it is income already. A: No, because there is no assurance whether indeed
2. Stock dividend → it is not yet taxable, even though dividends will be declared in the future, or how soon. If the
they already have value. It is not considered income subscription becomes due, it has to be paid. Otherwise, the
because there is no transfer of cash. subscriber will be declared as a delinquent shareholder.

Important: Until the shareholder is able to encash stock However, if dividends were declared, and the shareholder
dividends, the shareholder is not considered to have still has unpaid subscriptions?
earned an income. Stock dividends are not subject to A: The dividend will first have to be applied to the unpaid
income tax because it is not yet cash. This is so because subscription.
the value of the shares of stock may fluctuate depending
on the market value, book value or par value of said share. EFFECT OF DELINQUENCY ON
Because their value fluctuates, they are not taxable THE RIGHT TO DIVIDENDS
because still being unrealized gain, the shareholder would
not know their actual value. What are delinquent stocks?
A: These are unpaid subscriptions that have become due and
Recall: demandable, and yet no payment is made.

1. Book value → Net assets ÷ no. of outstanding shares 2. When do unpaid subscriptions become due and
Market value → The value that buyers in the market are demandable?
willing to buy and the value that shareholders are willing to A:
sell. It generally increases if the business of the 1. Upon the arrival of the specified date or period for
corporation is doing well, and decreases if the business is payment; or
doing bad. It may be higher or lower than the par value. 2. Upon the call of board (considered as a demand to pay).
3. Par value → A pre-determined value
RULES ON DELINQUENT STOCKS
TYPES OF DIVIDENDS
(1) Cash dividends When cash dividends are declared, and there is still an
(2) Property dividends unpaid subscription, will the shareholder still receive his
(3) Stock dividends or her dividends? If yes, how?
(4) Combination of the different kinds of dividends A: Cash dividends due on delinquent stock shall first be applied
to the unpaid balance of the subscription. If there is an excess
(A) CASH DIVIDENDS amount, then it will go to the shareholder.

Rule: If there are delinquent shares, the cash dividends shall Atty. Espedido: Apply first the receivable declared cash
be applied to the unpaid subscription which is due and dividends to the unpaid subscription of the stockholder, then
 the excess will be given to him. Offsetting will apply. On one hand, the corporation is a creditor with regards to the
unpaid subscription, but a debtor with regards to the declared
Here, there is a debtor-creditor relationship between the cash dividends.
corporation and the stockholder.

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On the other hand, the stockholder is a creditor with regards to Atty. Espedido: If the authorized capital stock of the corporation
the declared cash dividends, but a debtor with regards to the has all been subscribed, and additional capital is needed, the
unpaid subscription. corporation has the option to increase the authorized capital
stock.
When stock dividends are declared and there is still an Illustration. If the original authorized capital stock (ACS) of the
unpaid subscription, would the shareholder still receive corporation is 1Mn, and is fully subscribed, and they increased
dividends? If yes, how? it by another 1Mn, the SCS should be 250k of the increased
A: Stock dividends will be withheld from the delinquent ACS, and the paid-up capital should be 62.5k (remember,
shareholder until his unpaid subscription is fully paid. increase in paid-up capital has a 25%-25% requirement: 25% of
the increase must be subscribed, and 25% of such subscription
Atty. Espedido: We are assuming that the unpaid subscriptions must be paid up).
are now delinquent because they are due and demandable for
payment. However, there are Unrestrained Retained Earnings of the
corporation which the corporation wanted to declare as
If it is not yet due, no offsetting/withholding will apply. Even if dividends, just enough to pay the minimum requirement for
there are unpaid subscriptions, and there are cash dividends subscriptions.
declared and to be distributed, if these unpaid subscriptions are
not yet due and demandable, no offsetting or withholding will Therefore, there is enough money from the corporation. The
occur. The corporation cannot compel the shareholder to first money, if declared as cash dividends, may be used by the
pay the unpaid subscriptions. There can be offsetting only when shareholders to pay for their new subscriptions. However, once
both debts are due and demandable. declared as dividends, the corporation cannot be sure whether
or not the SH will really invest in the new stocks, since the
CONVERSION OF EARNINGS INTO CAPITAL THROUGH shareholders cannot be compelled to invest back.
DECLARATION OF STOCK DIVIDENDS
KTG (medyo libog, so here is an attempt to clarify the
Important: The law permits the corporation to convert its illustration): If a corporation increases its ACS, it is required to
earnings into capital, through the declaration of stock dividends. fulfill two requirements:
1. 25% must be subscribed; and
In this manner, the board may use such earnings for the 2. Of the subscriptions, 25% must be paid up.
general or specific corporate purpose. It becomes part of the
corporate trust fund and may no longer be used for dividend In this case, the corporation needs to put up 25% x 25% x
distribution. This is an effective way to retain earnings without P1Mn (which is equals to 62.5k). The corporation has such
having to explain to SEC/BIR. money in the form of its unrestricted retained earnings (URE).
However, the corporation wants to declare the URE as
INCREASING THE AUTHORIZED CAPITAL STOCK dividends.

If there are no more stocks, can we still distribute stock So the corporation now has a problem: should it use the
dividends? amount of URE as the paid-up capital, or should it declare the
A: Yes. We can increase the authorized capital stock which is same as dividends?
done by amending the Articles of Incorporation. This is done
through the following processes: If the corporation declares it as cash dividends, it gives the
1. A stockholder’s meeting duly called for the purpose 2. A existing stockholders enough money to possibly purchase or
written notice of the proposed increase or diminution of the pay-up the new ACS (remember, existing stockholders have a
capital stock pre-emptive right to shares). However, the corporation is not
3. Majority vote of the Board of Directors assured if the existing shareholders will really buy the new ACS,
4. A vote of 2/3 of the stockholders representing the since they cannot be compelled to invest in the corporation.
outstanding capital stock
5. A certificate signed by a majority of the directors and To make sure that the money will remain with the
countersigned by the chairman and the secretary of corporation, what kind of dividends should the corporation
the stockholder’s meeting declare instead?
6. Accompanied by the sworn statement of the treasurer A: The corporation should declare stock dividends by
showing that at least 25% of such increased capital transferring the URE to capital asset.
stock has been subscribed and that at least 25% of
the amount subscribed has been paid In effect, the capital stock is increased without any
7. Submitted to and approved by the SEC corresponding increase in the corporate assets.
8. Approval by the Philippine Competition Commission
De Leon: If the actual capital is increased by accumulated
Note: In this case, we are now increasing the capital stock and profits and such profits are distributed to the stockholders in
the it is the corporation who will pay because instead of paying the form of stock dividends, the capital stock is increased, for
cash, the shareholders will no longer need to pay since the the profits are reinvested in the corporation by transferring the
corporation will use the profits that they already have. same from
surplus account to a capital account. The amount
**Tanya Notes corresponding to the stock dividends declared may be used to
cover the required 25% subscription to increase the authorized
 capital stock and, if sufficient, will obviate the necessity of NON-TAXABILITY OF STOCK DIVIDENDS
taking in new subscription.
Stock dividends are NOT TAXABLE because these are not
realized income but are considered investments.

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STOCK SPLITS
E 25,000 P25,000 P1.00
Stock Split
This is an increase in the number of shares, but no increase in F 25,000 P25,000 P1.00
the capital value of such shares.
Illustration. There are occasions where the par value of the
share appears to be expensive, and fractional shares
cannot be issued, so to attract investors, what must the A/N:
corporation do? For example, the value of each share was (3) A stock split is a corporate action in which a company
10, 000 and somebody was willing to invest only 5, 000. divides its existing shares into multiple shares to boost
Since the corporation cannot issue only one half, what the liquidity of the shares.
must they do instead? (4) The primary motive is to make shares seem more
A: Do a stock split since issuance of fractional shares is neither affordable to small investors even though the
allowed nor encouraged. In fact, the corporation should underlying value of the company has not changed.
eliminate the fractional shares by buying them. So, instead of (5) The most common split ratios are 2-for-1 or 3-for-1,
selling it a share at a value of 10, 000 per share, if only to which means that the stockholder will have two or
attract more investors, the corporation may split said share. three shares, respectively, for every share held earlier.
We now have 2 shares with 5, 000 per share. (6) Reverse stock splits are the opposite transaction,
where a company divides, instead of multiplies, the
**Illustration. number of shares that stockholders own, raising the
ABC Corporation currently has 300,000 outstanding shares of market price accordingly.
stock with a par value of P1. It issues a 2-for-1 stock split as REVERSE STOCK SPLIT
dividends.
Decreases the number of shares held by each stockholder.
The effect will be as follows: However, it will still retain the same capital value.
Before stock split: **Illustration:
No. of Shares Capital Value per
Share ABC Corporation currently has 300,000 outstanding shares of
stock with a par value of P1. It issues a 1-for-5 stock split as
dividends.
A 100,000 P200,000 P2.00
Before reverse stock split:
B 100,000 P200,000 P2.00
No. of Shares Capital Value per
C 50,000 P100,000 P2.00 Share

D 25,000 P50,000 P2.00 A 100,000 P200,000 P2.00

E 12,500 P25,000 P2.00 B 100,000 P200,000 P2.00

F 12,500 P25,000 P2.00 C 50,000 P100,000 P2.00

D 25,000 P50,000 P2.00

After stock split: E 12,500 P25,000 P2.00

In a 2-for-1 stock split, each stockholder will receive an F 12,500 P25,000 P2.00
additional share of stock for each share he/she holds.
No. of Shares Capital Value per
Share
After reverse stock split:
A 200,000 P200,000 P1.00 No. of Shares Capital Value per
Share
B 200,000 P200,000 P1.00
A 20,000 P200,000 P10.00
C 100,000 P100,000 P1.00
B 20,000 P200,000 P10.00
D 50,000 P50,000 P1.00
 reasons for corporations to pursue this strategy.
C 10,000 P100,000 P10.00
CONFLICTING VIEWS ON ISSUANCE OF CASH
D 5,000 P50,000 P10.00 DIVIDENDS WHEN THERE ARE NO PROFITS
(UNLAWFUL DECLARATION OF DIVIDENDS)
E 2,500 P25,000 P10.00
If it was discovered later that there were no profits at all
F 2,500 P25,000 P10.00 but the Board has already declared and distributed cash
dividends and somebody complained, should we now
require the stockholders to return?
A: There are conflicting views among authorities:
A/N: (1) If solvent corporation:
1. A reverse stock split reduces the number of shares held
by each shareholder but with proportionally more View 1 – No need to return since creditors are
valuable shares.
still protected. They will not be prejudiced since
2. A reverse stock split does not directly impact a the corporation still has capital
company's value.
3. A reverse stock split, however, often signals a company
View 2 – Must still be returned as it violates the
in distress since it raises the value of otherwise low-
Trust Fund Doctrine
priced shares.
4. The desire to increase share prices to remain relevant
and to avoid being delisted are the most common (2) If insolvent corporation – it needs to be returned

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Atty. E’s opinion: If the corporation is still solvent, the Trust declare dividends out of a certain amount of its
Fund Doctrine is not violated since capital remains intact. Thus, retained earnings. That portion that is restricted under
there is no need to return. the covenant becomes restricted retained earnings.

**NOTES 3. Required to be retained under special circumstances

obtaining in the corporation, such as when there is a need
RETAINED EARNINGS for special reserves for probably contingencies.

Accumulated profits of a corporation in its previous operations. Example: When a corporation acquires treasury
It includes all income accumulated throughout the years during shares, it is required to restrict a portion of its retained
which the corporation was operating. earnings in the same amount as the treasury shares
that they acquired. That portion becomes restricted
So, if the corporation has been experiencing losses, there will retained earnings, and cannot be available for
be no retained earnings. Rather, there will be deficits. Retained dividend
earnings can only exist if the corporation has been operating at declaration.
a profit.
If the corporation has been experiencing losses, such
TYPES OF RETAINED EARNINGS that it has zero or negative retained earnings, then it
cannot declare dividends at all. So there has to be
(1) Restricted Retained Earnings unrestricted retained earnings for a corporation to
- In general, retained earnings are restricted if they declare dividends.
are not available for dividend declaration DECLARING DIVIDENDS FROM THE CAPITAL: PAID-UP
CAPITAL
(2) Unrestricted Retained Earnings
- If available for dividend declaration. GEN: Dividends cannot be distributed out of the capital. It
violates the trust fund doctrine. Under such doctrine, the
RESTRICTING RETAINED EARNINGS corporation cannot return capital to the stockholders unless all
the creditors have been paid first.
1. Appropriated by the Board of Directors for corporate XPN (exclusive exceptions):
expansion projects or programs.
1. If the dividend is a liquidating dividend – dividends
Example: If the Board of Directors say that out of the that are distributed during the liquidation of a
P50Mn retained earnings, they are going to allocate corporation.
P15Mn for a future expansion, then that P15Mn will be Here, the trust fund doctrine no longer applies
considered restricted retained earnings. Therefore, out because the corporation is already being liquidated.
of the P50Mn, P15Mn cannot be declared as This means that before the corporation can even
dividends. distribute the liquidating dividends, it has to pay its
creditors. The remainder is what will be distributed as
liquidating dividends.
2. Covered by a restriction for dividend declaration under a
loan agreement.
2. When the corporation is a wasting asset corporation.
Contractual Covenants
If, for example, there is a loan agreement, and the Wasting Asset Corporation
creditor expressly provides that the corporation cannot A type of corporation which has a limited life because
its assets are consumed during its operations and
 cannot be replenished. obliged to declare dividends even if it has unrestricted
Example: retained earnings. The BOD cannot be compelled to
- Mining – If a corporation is created to mine only a declare dividends. Dividends only become a liability of
certain area, then once the minerals in that area the corporation once they are declared. The moment
has been fully depleted, the corporation’s purpose of declaration is the time the corporation recognizes
ceases to exist. So slowly, as the area’s minerals such liability.
are consumed, the assets of the corporation are
also slowly being depleted. (2) Record Date
- This refers to the date when the corporation determines
In that sense, the corporation is allowed to return who among its stockholders are entitled to receive
capital to its stockholder because the idea is that dividends. The stockholders on record in the stock
the corporation will exist only for a limited period – and transfer book as of the record date are the
the period that its assets still exists. Once the stockholders who will receive dividends.
assets are depleted, then the corporation can - Before the record date, the stocks are considered sold
return its capital to its stockholders. dividends on. This means that before the record date,
stocks are sold with the right to receive dividends on it.
RELEVANT DATES IN DIVIDEND DECLARATION In effect, it means that there is actually a premium on
the price of those shares because they carry the right
(1) Declaration Date to receive dividends.
- Before the declaration date, the dividends are not a - When stocks are sold after the record date, the stocks
liability of the corporation. In fact, the corporation is not are commonly referred to as being sold dividends off,
because even if they are sold or transferred, the one

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who will be receiving dividends on them is the person
who was the owner of such as of the record date. Section 43. Power to Enter into Management Contract. -
No corporation shall conclude a management contract with
another corporation unless such contract is approved by the
Illustration.
board of directors and by the stockholders owning at least
the majority of the outstanding capital stock, or by at least a
Declaration Date March 10 majority of the members in the case of a nonstock
Record Date March 30 corporation, or both the managing and the managed
corporation, at a meeting duly called for the purpose:
A is the holder of the share on declaration date. On March Provided, That (a) where a stockholder or stockholders
15, A sells the shares to B. Those shares are considered representing the same interest of both the managing and the
sold dividends on. managed corporations own or control more than one-third
(1/3) of the total outstanding capital stock entitled to vote of
If B sells the shares to C on March 25, those shares are the managing corporation; or (b) where a majority if the
still considered sold dividends on. members of the board of directors of the managing
On March 30, or the record date, if C is still the owner of corporation also constitute a majority of the members of the
those stocks, then C is the one entitled to receive board of directors of the managed corporation, then the
dividends on the shares. management contract must be approved by the stockholders
of the managed corporation owning at least two-thirds (2/3)
If on April 5, C sells the shares to D, then it is still C who is of the total outstanding capital stock entitled to vote, or by at
entitled to receive dividends on them. On this date, the least two thirds (2/3) of the members in the case of a
shares are considered sold dividends off. nonstock corporation.

(3) Payment Date These shall apply to any contract whereby a corporation
- Date when the dividends are actually paid by the undertakes to manage or operate all or substantially all of the
corporation. When a corporation declares dividends, it called services contracts, operating agreements or
will normally say when the record and the payment otherwise: Provided, however, That such service contracts
dates are. or operating agreements which relate to the exploration,
- If the corporation’s resolution for the declaration of development exploitation or utilization of natural resources
dividends is silent as to the record date, then the may entered into such periods as may be provided by the
record date is considered the same as the declaration pertinent laws or regulations.
date.
No management contracts shall be entered into for period
SEC. 43. POWER TO ENTER INTO MANAGEMENT longer that five (5) years for any one term.
CONTRACT

MANAGEMENT CONTRACT

An agreement under which a corporation delegates the

management of its affairs to another corporation for a certain
period. Two corporations are involved: (1) the managing
corporation and the (2) managed corporation

GEN: Management contract is entered into by a MAJORITY

vote of the Board of Directors and stockholders of both the
 managing and managed corporation Examples: ship management corporation, audit

XPN: Approved by the stockholders of the managed managers SEC. 44. ULTRA VIRES ACTS
corporation owning at least 2/3 of the outstanding capital stock
or of members in two instances:
Section 44. Ultra Vires Acts of the Corporations. - No
(1) The stockholder representing the same interest of both
corporation shall possess or exercise corporate powers other
managing and managed corporation owns or control
than those conferred by this Code or by its articles of
MORE THAN 1/3 of the outstanding capital stock
incorporation and except as necessary or incidental to the
entitled to vote of the managing corporation; and
exercise of the powers conferred.
(2) Majority of the members of the BOD of the managing
corporation also constitutes majority of the members
of the BOD of the managed corporation .

STATUS OF THE BOD OF What is the effect of an ultra vires act?

THE MANAGED CORPORATION A: An ultra vires act is an unenforceable act. Since it is not
enforceable, the contract is not binding to the corporation.
What could this mean, what happens to the Board of the
managed corporation, do they still function as a board? A: The State looks ultra vires acts with disfavor. It will create more
Yes, this is not an abandonment. The BOD of the managed problems than solutions. If we strictly enforce the concept of
corporation still retains the control of how the corporation ultra vires act, the entire business community will be affected.
should exist.
Atty. Espedido: Imagine the inconvenience and discomfort of
The only thing is that, on the operational side of the managed trying to review AOI of every stockholder for every transaction
corporation is now given to the managing corporation. There that we do. Trying to analyze: “Is this inherent, apparent,
are companies whose business is just to manage certain necessary?” If we do this, we would lose a lot of time before we
portions or operations of other corporations. The board of the could enter into business transactions.
managed corporation still functions as to the remaining
operations.
So, the authorities came out with solutions on how this could be
resolved.

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RESOLVING ULTRA VIRES ACTS RATIFICATION OF ULTRA VIRES ACTS

How do we resolve ultra vires acts? RULES:

GEN: It is not binding. (A) Illegal ultra vires acts – cannot be ratified

XPN: (B) Unauthorized ultra vires act – can be cured through a

ratification by a vote of 2/3 of the stockholders
INSTANCE SOLUTION representing the outstanding capital stock so long as it
DOES NOT AFFECT THIRD PARTIES.
i. Contract is completely Leave them as they are –
performed or fulfilled we do not have to dig up **NOTES
by both parties what happened
(parties are Ultra Vires Act
estopped) One not within the express, implied and incidental powers of
the corporation, conferred by the RCC or the AOI.
ii. Only one party has Return what has been
been benefited (one received Consequence of an Ultra Vires Act
of the parties already Merely voidable, which may be enforced by performance,
executed the ratification, or estoppel. (De Leon)
contract; partial
fulfillment) Note: According to Atty. E, an ultra vires act is unenforceable
rather than voidable.
iii. Contract is not yet Do not perform or proceed
acted upon TITLE V. BYLAWS

SEC. 45. ADOPTION OF BY LAWS

TRUE OR FALSE Section 45. Adoption of Bylaws. - For the adoption of bylaws
by the corporation, the affirmative vote of the stockholders
1. All illegal acts are ultra vires acts – TRUE representing at least a majority of the outstanding capital stock,
or of at least a majority of the members in case on nonstock
2. All ultra vires acts are illegal acts – FALSE, because corporations, shall be necessary. The bylaws shall be signed by
they may also be unauthorized acts. the stockholders or members voting for them and shall be kept
in the principal office of the corporation, subject to the
inspection of the stockholders or members during office hours. What are the requisites for the adoption of by-laws? 1.
A copy thereof, duly certified by a majority of the directors or Vote of the stockholders representing at least a majority of the
trustees and countersigned by the secretary of the corporation, OCS in case of stock corporations or members in case of non-
shall be filed with the Commission and attached to the original stock corporations;
articles of incorporation. 2. Approved and signed by all incorporators; and 3.
Notwithstanding the provisions of the preceding paragraph, Submitted to the SEC.
bylaws maybe adopted and filed prior to incorporation; in such
case, such bylaws shall be approved and signed by all What is the binding effect of bylaws to the public?
incorporators and submitted to the Commission, together with GEN: It does not bind the public.
the articles of incorporation. XPN: A third person may be bound by the bylaws where has
knowledge about it, either actual or constructive.
In all cases, bylaws shall be effective only upon the issuance by
the Commission of a certification that the bylaws are in **NOTES
accordance with this Code.
TIME AND PROCEDURE FOR THE ADOPTION OF BYLAWS
The Commission shall not accept for filing the bylaws or any
amendment thereto of any bank, banking institution, building 1) PRE-INCORPORATION
and loan association, trust company, insurance company, Submitted or filed before the SEC together with the AOI.
public utility, educational institution, or any other corporations (This is the one now required in practice; you cannot
governed by special laws, unless accompanied by a certificate incorporate without it.)
of the appropriate government agency to the effect that such by
laws or amendments are in accordance with law. Requirements:
1. Approved and signed by all incorporators; and
What are bylaws? 2. Submitted to the SEC together with the AOI.
A: They are the internal rules and regulations of a corporation.
Additional requirements for banks and other special
When should a corporation file its bylaws? corporations:
A: Accompanied by a certificate of the appropriate
1. Within one (1) month after the receipt of the official government agency to the effect that such bylaws or
notice of the issuance of its certificate of incorporation amendments are in accordance with law.
from the SEC, or
2. They may be adopted and filed prior to incorporation, 2) POST-INCORPORATION
together with the AOI. Basically, everything that you need to do post-
incorporation in order to commence the transacting of
Note: You can already submit your by-laws even if you business.
have not yet been given the authority to exist.

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Requirements: associations, upon any of the grounds
1. Affirmative vote and signature of stockholders provided by law, including the following:
representing the majority of the OCS or members
in case of nonstock corporation; xxx
2. Duly certified by the majority of the BOD/BOT; and
3. Filed with SEC, to be attached to the original AOI. 5. Failure to file by-laws within the required
period;
CONSEQUENCES OF FAILURE TO ADOPT BYLAWS There must, first of all, be a hearing to determine the existence
of the ground, and assuming such finding, the penalty is not
Note: This may not be applicable to the Revised Corporation necessarily dissolution, but may only be revocation.
Code. But this was not discussed by Atty. [Gaviola] after the
revision. Under the rules and regulations of the Commission, the failure
may merely by the imposition of a fine.
Non-filing of the bylaws on time will not result in the automatic
dissolution of the corporation. Such consequence is not PERSONS BOUND & NOT BOUND BY THE BYLAWS
provided under the Corporation Code.
1. Persons bound by the bylaws:
However, pursuant to Sec. 6 (i) (5) of P.D. No. 902-A (see Sec. a. Corporation
19), the failure to file the bylaws within one (1) month from the b. Directors or trustees
date of incorporation with the SEC shall render the corporation c. Stockholders
liable to the revocation of its registration, to wit:
2. Persons not bound by the bylaws:
Section 6. In order to effectively exercise such a. Any person who has no actual knowledge of
jurisdiction, the Commission shall possess the bylaws of the corporation;
the following powers: b. Employees of the corporation
xxx SEC. 46. CONTENTS OF BYLAWS
i) To suspend, or revoke, after proper notice Section 46. Contents of Bylaws. – A private corporation may
and hearing, the franchise or certificate of provide the following in its bylaws:
registration of corporations, partnerships or
(a) The time, place and manner of calling and conducting
regular or special meetings of the directors or trustees; (b) Section 47. Amendment to Bylaws. – A majority of the
The time and manner of calling and conducting regular or board of directors or trustees, and the owners of at least a
special meetings and mode of notifying the stockholders or majority of the outstanding capital stock, or at least a
members thereof; majority of the members of a nonstock corporation, at a
(c) The required quorum in meetings of stockholders or regular or special meeting duly called for the purpose, may
members and the manner of voting therein; amend or repeal the bylaws or adopt new bylaws. The
(d) The modes by which a stockholder, member, director, or owners of two-thirds (2/3) of the outstanding capital stock or
trustee may attend meetings and cast their votes; (e) The two-thirds (2/3) of the members in a nonstock corporation
form for proxies of stockholders and members and the manner may delegate to the board of directors or trustees the power
of voting them; to amend or repeal the bylaws or adopt new bylaws:
(f) The directors’ or trustees’ qualifications, duties and Provided, That any power delegated to the board of
responsibilities, the guidelines for setting the compensation directors or trustees to amend or repeal the bylaws or adopt
new bylaws shall be considered as revoked whenever
of directors or trustees and officers, and the maximum
number of other board representations that an independent stockholders owning or representing a majority of the
outstanding capital stock or majority of the members shall so
director or trustee may have which shall, in no case, be
vote at a regular or special meeting.
more than the number prescribed by the Commission;
(g) The time for holding the annual election of directors or
trustees and the mode or manner of giving notice thereof; (h) Whenever the bylaws are amended or new bylaws are
The manner of election or appointment and the term of adopted, the corporation shall file with the Commission such
office of all officers other than directors or trustees; (i) The amended or new bylaws and, if applicable, the stockholders’
penalties for violation of the bylaws; or members’ resolution authorizing the delegation of the
(j) In the case of stock corporations, the manner of issuing power to amend and/or adopt new bylaws, duly certified
stock certificates; and under oath by the corporate secretary and a majority of the
directors or trustees.
(k) Such other matters as may be necessary for the proper
or convenient transaction of its corporate affairs for the
promotion of good governance and anti-graft and The amended or new bylaws shall only be effective upon the
corruption measures. issuance by the Commission of a certification that the same
is in accordance with this Code and other relevant laws.
An arbitration agreement may be provided in the bylaws
pursuant to Sec. 181 of this Code.

SEC. 47. AMENDMENT TO BYLAWS PROCESS OF ADOPTION, AMENDMENT OR

REPEALING OF BYLAWS

1. Required votes are met:

a. Approved by a majority of the BOD/BOT; and b.
Approved by a majority of the OCS in case of
stock corporations, or a majority of the
members in the case of nonstock
corporations.
2. File with SEC for approval.
3. SEC issues Certificate of Approval.

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T/N: Once approved (as evidenced by the certification person holding at least 10% of shares in another
from SEC), the amended by-laws become the new by competing company shall be allowed to be elected for the
laws of the corporation. board.” Was this amendment discriminatory? Can the
director complain?
A/N: The power to adopt, amend or repeal bylaws can be
delegated by 2/3 of the OCS or members to the BOD or BOT. A: No, he cannot complain. The amendment disqualifying a
However, this delegated power is immediately revoked director in a corporation whose business is in competition with
whenever majority of the OCS or members vote at a special or or is antagonistic to another corporation from election to the
regular meeting for the adoption, amendment or repealing of board of directors of the latter corporation is valid.
bylaws.
Secondly, it is not discriminatory as the terms of the amended
What must be done if new bylaws are amended or adopted? by-laws provides that, “No person shall be allowed to be
1. File with SEC the new bylaws or amended bylaws; 2. If elected who is also a director of another corporation who is in
applicable, the stockholders’ resolution authorizing competition or antagonistic to thereto.” This provision is general
the delegation of the power to amend and/or adopt in nature it does not single out a particular individual such as
new bylaws, which must be duly certified under oath the party involved herein.
by the corporate secretary + majority of the BOD/BOT.
Third, it does not also run counter to the prospective application
Illustration. of the amendment as the party involved has yet to be elected.
Gokongwei Case
Atty. Espedido: This is a case involving Gokongwei and San
A director and owner of a beer company A, was also a SH Miguel. The lawyers of Gokongwei said it is discriminatory
of another beer company B. He wanted to become a because no one else in the Philippines owns so much in Asia
director of the beer company B so he bought more shares Brewery and at the same time own stocks in San Miguel; thus,
so that he can be elected for the board next year. So Beer it should be an invalid amendment and should not be approved.
Company B amended there by laws stating that “no
But the keyword here is ANTAGONISTIC. In other words, the fixed, on any date after April 15 of every year as determined by
Supreme Court did not only look at the prospective or the board of directors or trustees: Provided, That written notice
retroactive effect but more on its being antagonistic, fierce of regular meetings shall be sent to all stockholders or
competition, or direct clash between two corporations involved members of record at least twenty-one (21) days prior to the
in the same market. The SC is just trying to prevent a situation meeting, unless a different period is required in the bylaws, law,
whereby one could take advantage over the other. or regulation: Provided, further, That written notice of regular
meetings may be sent to all stockholders or members of record
Because imagine if Gokongwei in one meeting of San Miguel through electronic mail or such other manner as the
says “I understand that the sales of our corporation are going Commission shall allow under its guidelines.
down, maybe there is problem with the formula, it no longer
tastes the way it should taste.” Most probably, the brew master At each regular meeting of stockholders or members, the board
might be compelled to present themselves to the board and of directors or trustees shall endeavor to present to
explain what happened, and be required to present the formula. stockholders or members the following:
Once he gets his own copy of the formula, he will give it to the
rival company. We have copied the bottle; we will now copy the a) The minutes of the most recent regular meeting which shall
formula.SC said we do not want that situation. include, among others:
TITLE VI. MEETINGS
(1) A description of the voting and vote tabulation
SEC. 48. KINDS OF MEETINGS procedures used in the previous meeting;
Section 48. Kinds of Meetings. – Meetings of directors,
(2) A description of the opportunity given to
trustees, stockholders, or members may be regular or
stockholders or members to ask questions and a record of the
special.
questions asked and answers given;

(3) The matters discussed and resolutions reached;

How many types of meetings do we have? (4) A record of the voting results for each agenda item;
A: There are 4 kinds of meetings, namely:
1. Meetings of Directors (5) A list of the directors or trustees, officers and
2. Meetings of Trustees stockholders or members who attended the meeting; and
3. Meetings of Stockholders
4. Meetings of Members (6) Such other items that the Commission may require
in the interest of good corporate governance and the protection
Which may either be: of minority stockholders.
1. Regular, or
2. Special b) A members’ list for nonstock corporations and, for stock
corporations, material information on the current
SEC. 49. REGULAR & SPECIAL MEETINGS OF stockholders, and their voting rights;
STOCKHOLDERS OR MEMBERS
c) A detailed, descriptive, balanced and comprehensible
Section 49. Regular and Special Meetings of Stockholders assessment of the corporation’s performance, which shall
or Members. – Regular meetings of stockholders or members include information on any material change in the
shall be held annually on a date fixed in the bylaws, or if not so corporation’s business, strategy, and other affairs;

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d) A financial report for the preceding year, which shall include i) A director or trustee compensation report prepared in
financial statements duly signed and certified in accordance with this Code and the rules the Commission
accordance with this Code and the rules the Commission may prescribe;
may prescribe, a statement on the adequacy of the
corporation’s internal controls or risk management j) Director disclosures on self-dealings and related party
systems, and a statement of all external audit and non- transactions; and/or
audit fees;
k) The profiles of directors nominated or seeking election or
e) An explanation of the dividend policy and the fact of reelection.
payment of dividends or the reasons for nonpayment
thereof; A director, trustee, stockholder, or member may propose any
other matter for inclusion in the agenda at any regular meeting
f) Director or trustee profiles which shall include, among others, of stockholders or members.
their qualifications and relevant experience, length of
service in the corporation, trainings and continuing Special meetings of stockholders or members shall be held at
education attended, and their board representations in any time deemed necessary or as provided in the bylaws:
other corporations; Provided, however, That at least one (1) week written notice
shall be sent to all stockholders or members, unless a different
g) A director or trustee attendance report, indicating the period is provided in the bylaws, law or regulation.
attendance of each director or trustee at each of the
meetings of the board and its committees and in regular or A stockholder or member may propose the holding of a special
special stockholder meetings; meeting and items to be included in the agenda.

h) Appraisals and performance reports for the board and the Notice of any meeting may be waived, expressly or impliedly,
criteria and procedure for assessment; by any stockholder or member: Provided, That general waivers
of notice in the articles of incorporation or the bylaws shall not
be allowed: Provided, further, That attendance at a meeting
shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of
objecting to the transaction of any business because the Why are regular meetings held only after April 15? A: For
meeting is not lawfully called or convened. purposes of filing income tax return. By that time, the financial
statements are already done. All the data, information, figures
Whenever for any cause, there is no person authorized or the are already available.
person authorized unjustly refuses to call a meeting, the
Commission, upon petition of a stockholder or member on a NOTICE OF MEETING
showing of good cause therefor, may issue an order directing
the petitioning stockholder or member to call a meeting of the WHEN GIVEN
corporation by giving proper notice required by this Code or the
bylaws. The petitioning stockholder or member shall preside REGULAR MEETING SPECIAL MEETING
thereat until at least a majority of the stockholders or members
present have chosen from among themselves, a presiding Sent to all stockholders of At least one week prior to
officer. record at least 21 days the meeting, a written
Unless the bylaws provide for a longer period, the stock and prior to the meeting notice shall be sent to all
transfer book or membership book shall be closed at least unless a different period stockholders, unless a
twenty (20) days for regular meetings and seven (7) days for is required in the bylaws, different period is provided
special meetings before the scheduled date of the meeting. law or regulation. for in the bylaws, law or
regulation.
In case of postponement of stockholders’ or members’ regular
meetings, written notice thereof and the reason therefor shall
be sent to all stockholders or members of record at least two (2)
weeks prior to the date of the meeting, unless a different period
is required under the bylaws, law or regulation. CONTENTS OF A NOTICE OF MEETING

The right to vote of stockholders or members may be exercised In order to be a proper notice of meeting, the following must be
in person, through a proxy, or when so authorized in the bylaws, contained:
through remote communication or in absentia. The Commission
shall issue the rules and regulations governing participation and 1. Shall state the time and place of the meeting;
voting through remote communication or in absentia, taking into 2. The agenda for the meeting;
account the company’s scale, number of shareholders or 3. A proxy form which shall be submitted to the corporate
members, structure, and other factors consistent with the secretary within a reasonable time prior to the meeting; 4.
protection and promotion of shareholders’ or member’s When attendance, participation, and voting are allowed by
meetings. remote communication or in absentia, the requirements
and procedures to be followed when a stockholder or
WHEN MEETINGS ARE CONDUCTED member elects either option; and
5. When the meeting is for the election of directors or
REGULAR MEETING SPECIAL MEETING trustees, the requirements and procedure for
nomination and election.
(1) Held annually on a At any time deemed 6. The minutes of the most recent regular meeting which
date fixed in the bylaws; necessary by the shall include, among others:
or BOD/BOT or as provided
(2) On any date after for in the bylaws.
April 15 of every
year, as determined
by the BOD/BOT.

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(a) A description of the voting and vote tabulation require the approval.
procedures used in the previous meeting;
(b) A description of the opportunity given to Atty. Espedido: If there is any dissenting stockholder who
stockholders or members to ask questions objects, then it could be discussed again in the new meeting.
and a record of the questions asked and
answers given; This is important because should there be conflict in the future,
(c) The matters discussed and resolutions they could always refer back to the minutes. These will be in
reached; the custody of the secretary. The secretary among others shall
(d) A record of the voting results for each agenda take hold of the AOI, bylaws, all resolutions approved, minutes
item; of the meeting approved.
(e) A list of the directors or trustees, officers and
stockholders or members who attended the HOW NOTICE OF MEETINGS ARE SENT
meeting; and
(f) Such other items that the Commission may Notice of meetings shall be sent through the means of
require in the interest of good corporate communication provided in the bylaws. It can be through: (1)
governance and the protection of minority Electronic Mail
stockholders; (2) Other means allowed by the Commission

Reason for including the minutes of the previous meeting: Atty. Espedido: Because of the E-Commerce Act, the electronic
The minutes of the previous meeting must be attached and records can now be presented in court.
must be accompanied by the notices because these will
 CLOSING OF STOCK OR TRANSFER BOOK GEN: Written notice and reason thereof shall be sent to ALL
stockholders at least 2 weeks prior to the date of meeting.
Important: Unless the bylaws provide for a longer period, the
stock and transfer book or membership book shall be closed at XPN: A different period is required under the bylaws, law, or
least twenty (20) days for regular meetings and seven (7) regulation.
days for special meetings BEFORE the scheduled date of the
meeting. UNJUST REFUSAL TO CALL A MEETING
REGULAR MEETING SPECIAL MEETING
HOWEVER, when there is unjust refusal to call a meeting, a
stockholder can petition the Commission to order the conduct
Closed at least 20 days Closed at least 7 days of a meeting.
before the schedule date before the schedule date
of the meeting. of the meeting. • The petitioning stockholder shall preside thereat UNTIL
at least a majority of the stockholders or members
present have chosen from among themselves, a
presiding officer.
**Stock and transfer book • In case where the Commission will order the conduct of
A stock and transfer book (STB) contains the records of all the meeting, ANY NUMBER OF THE
stocks in the names of the stockholders alphabetically arranged; STOCKHOLDERS PRESENT shall already be
the installment paid and unpaid on all stock for which considered as a quorum. Such that, when out of the
subscription has been made, and the date of payment of any 100 stockholders, 5 only came, it shall be constitute a
installment; a statement of every alienation, sale or transfer of quorum.
stock made, the date thereof, and by and to whom made; and
such other entries as the by-laws may prescribe. **NOTES

The STB shall be kept in the principal office of the corporation IMPROPERLY CALLED MEETINGS
or in the office of its stock transfer agent and shall be open for
inspection by any director or stockholder of the corporation at Improperly called meetings can be considered valid, provided:
reasonable hours on business days. In Torres Jr. vs. Court of 3. All the stockholders attend or are duly represented
Appeals1, the Court ruled that it is the Corporate Secretary who during the meetings;
is responsible to serve as custodian of all the records of the 4. Not one of those stockholders attended just for the
corporation, to keep the stock and transfer books, and the only purpose of objecting to the calling or holding of such
person authorized to make the entries therein. meeting.

Illustration. An individual purchased shares of stock on T/N: Even if the meeting is improperly held or improperly called,
March 10 and there is a meeting on March 15. Could he all transactions or resolutions approved during the said meeting
already vote? can still be considered valid provided that ALL the stockholders
A: No, he is still not qualified to vote because there is a attend or are duly represented in that meeting.
requirement under the law that for regular meetings, the
transfer of book shall be closed for at least 20 days PRIOR to The new amendment added a new caveat: “Provided, that not
the scheduled meeting. anyone of those stockholders attended just for the purpose of
objecting to the calling or holding of the meeting.”
On the other hand, for special meetings, the transfer books
shall be closed for at least 7 days PRIOR to the scheduled So even if the stockholders are duly represented or are present,
date of meeting. The notice shall include this information on but one of them was there just to object the calling or holding of
the closing of the transfer book. such meeting, then you cannot apply the exception that the
meeting is valid even if it’s improperly called or held.
POSTPONEMENT OF REGULAR MEETINGS

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SEC. 50. PLACE & TIME OF MEETINGS OF
STOCKHOLDERS OR MEMBERS
 In a non-stock corporation, the dead members cannot be
Section 50. Place and Time of Meetings of Stockholders represented.
or Members. – Stockholders’ or members’ meetings,
whether regular or special, shall be held in the principal
Note: In so far as non-stock corporation is concerned, quorum
office of the corporation as set forth in the articles of
is based on the majority of the living members.
incorporation, or, if not practicable, in the city or municipality
where the principal office of the corporation is located:
SEC. 52. REGULAR & SPECIAL MEETINGS OF
Provided, That any city or municipality in Metro Manila,
DIRECTORS/TRUSTEES; QUORUM
Metro Cebu, Metro Davao, and other Metropolitan areas
shall, for purposes of this section, be considered a city or Section 52. Regular and Special Meetings of Directors or
municipality. Trustees; Quorum. – Unless the articles of incorporation or
the bylaws provides for a greater majority, a majority of the
Notice of meetings shall be sent through the means of directors or trustees as stated in the articles of incorporation
communication provided in the bylaws, which notice shall shall constitute a quorum to transact corporate business,
state the time, place and purpose of the meetings. and every decision reached by at least a majority of the
directors or trustees constituting a quorum, except for the
Each notice of meeting shall further be accompanied by the election of officers which shall require the vote of a majority
following: of all the members of the board, shall be valid as a corporate
act.
(a) The agenda for the meeting;
Regular meetings of the board of directors or trustees of
(b) A proxy form which shall be submitted to the corporate every corporation shall be held monthly, unless the bylaws
secretary within a reasonable time prior to the meeting; provide otherwise.

(c) When attendance, participation, and voting are allowed Special meetings of the board of directors or trustees may be
by remote communication or in absentia, the requirements held at any time upon the call of the president or as provided
and procedures to be followed when a stockholder or in the bylaws.
member elects either option; and
Meetings of directors or trustees of corporations may be held
(d) When the meeting is for the election of directors or anywhere in or outside of the Philippines, unless the bylaws
trustees, the requirements and procedure for nomination provide otherwise. Notice of regular or special meetings
and election. stating the date, time and place of the meeting must be sent
to every director or trustee at least two (2) days prior to the
All proceedings and any business transacted at a meeting of scheduled meeting, unless a longer time is provided in the
the stockholders or members, if within the powers or bylaws. A director or trustee may waive this requirement,
authority of the corporation, shall be valid even if the either expressly or impliedly.
meeting is improperly held or called: Provided, That all the
stockholders or members of the corporation are present or Directors or trustees who cannot physically attend or vote at
duly represented at the meeting and not one of them board meetings can participate and vote through remote
expressly states at the beginning of the meeting that the communication such as videoconferencing, teleconferencing,
purpose of their attendance is to object to the transaction of or other alternative modes of communication that allow them
any business because the meeting is not lawfully called or reasonable opportunities to participate. Directors or trustees
convened. cannot attend or vote by proxy at board meetings.

A director or trustee who has a potential interest in any

related party transaction must recuse from voting on the
approval of the related party transaction without prejudice to
SEC. 51. QUORUM IN MEETINGS compliance with the requirements of Section 31 of this
Section 51. Quorum in Meetings. – Unless otherwise Code.
provided in this Code or in the bylaws, a quorum shall
consist of the stockholders representing a majority of the
outstanding capital stock or a majority of the members in the
case of nonstock corporations.
Regular Meeting Special Meeting

When Held monthly Held anytime

unless the bylaws upon: (a) The
Quorum is the number of shareholders needed in order to
provide otherwise. call of the
validly conduct a meeting.
president; or
(b) As provided for
2 KINDS OF QUORUM in the bylaws.
(1) Simple quorum – 50% + 1
(2) Qualified Quorum – any number greater than the
Notice of GEN: Notice of regular or special meetings
simple quorum
Meeting stating the date, time and place of the
Illustration
meeting must be sent to every director or
Quorum in a non-stock corporation trustee at least two (2) days prior to the
scheduled meeting
10 members in a non-stock corporation in order to hold a
meeting. Before the meeting, 3 already died. What will be
XPN: A longer time is provided in the bylaws.
our quorum?
A: The quorum is 4 because the remaining members are only 7.
 Page 65 of 88 | EH403 2019-2020 Corporation Law
Pledgee takes possession The mortgagee does not
How May be done electronically or other means of the certificate take possession of the
conducted as allowed by the Commission. certificate

T/N: Teleconferencing is now very

common and is now the standard way. There is a transfer of There is no transfer of
possession BUT no possession and
transfer of ownership ownership

Reasons why SEC allows teleconferencing:

1. In order to take advantage of the advances of
technology;
2. To save time of the busy members of the board. As long RIGHT TO VOTE OF SECURED CREDITORS
as the minutes will reflect the true and accurate
information, the BOD or BOT don’t have to conduct a GEN: In case a stockholder grants security interest in his or her
physical meeting. shares in stock corporations, the stockholder-grantor shall have
the right to attend and vote at meetings of stockholders.
NO REPRESENTATION ALLOWED
IN A BOARD MEETING XPN: UNLESS the secured creditor is expressly given by the
stockholder-grantor such right in writing which is recorded in
Directors or trustees cannot attend or vote by proxy at board the appropriate corporate books.
meetings. This is because a director’s presence is personal due
to his qualification and expertise. Atty. Espedido: It is still the pledgor who has the right to
participate. Even if the pledgee has the possession of the
SEC. 53. WHO SHALL PRESIDE AT MEETINGS certificate, there is no ownership that is being transferred,
UNLESS the pledgor grants the pledgee the right to vote.
Section 53. Who Shall Preside at Meetings. – The
chairman or, in his absence, the president shall preside at all
In which case, the pledgee may demand from the pledgor the
meetings of the directors or trustees as well as of the
right to vote to be contained in a PROXY.
stockholders or members, unless the bylaws provide
otherwise. (1) Demand right to vote
(2) Demand for a proxy

WHEN STOCKHOLDER IS DEAD

SEC. 54. RIGHT TO VOTE OF SECURED CREDITORS & Note: Executors, administrators, receivers, and other legal
ADMINISTRATORS representatives duly appointed by the court may attend and
Section 54. Right to Vote of Secured Creditors and vote in behalf of the stockholders or members WITHOUT
Administrators. – In case a stockholder grants security NEED OF ANY WRITTEN PROXY.
interest in his or her shares in stock corporations, the
stockholder grantor shall have the right to attend and vote at SEC. 55. VOTING IN CASE OF JOINT OWNERSHIP OF
meetings of stockholders, unless the secured creditor is STOCK
expressly given by the stockholder-grantor such right in Section 55. Voting in Case of Joint Ownership of Stock.
writing which is recorded in the appropriate corporate books. – The consent of all the co-owners shall be necessary in
voting shares of stock owned jointly by two (2) or more
Executors, administrators, receivers, and other legal persons, unless there is a written proxy, signed by all the co-
representatives duly appointed by the court may attend and owners, authorizing one (1) or some of them or any other
vote in behalf of the stockholders or members without need person to vote such share or shares: Provided, That when
of any written proxy. the shares are owned in an “and/or” capacity by the holders
thereof, any one of the joint owners can vote said shares or
appoint a proxy therefor.

Certificate of Stock
The best evidence of ownership of shares of stocks. GEN: The consent of all the co-owners shall be necessary in
voting shares of stock owned jointly by two (2) or more persons.
IMPORTANT: Shares are personal properties. Being personal
properties, the certificate of stock can be offered as security for When the shares are owned in an "and/or" capacity by the
any liability or loan to guarantee payments of obligations like in holders thereof, any one of the joint owners can vote said
pledge and mortgage. shares or appoint a proxy therefor
Who takes possession of the certificate of stock in a XPN: Unless there is a written proxy, signed by all the co
pledge or mortgage? owners, authorizing one (1) or some of them or any other
A: person to vote such share or shares.
PLEDGE MORTGAGE
SUMMARY:
(A) If there are 2 of them – BOTH of them should consent
to the vote UNLESS one or more of them will
authorize the other to represent them and cast their
 vote in behalf of the other. co-owners could vote

(B) Owned in an “AND/OR” capacity – EITHER of the Example: A and/or B – either A or B could vote

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Illustration.
Two owners with contradicting vote MANNER OF VOTING
There are 2 owners. Both of them were together taking Rule: Stockholder or members in all meetings of stockholders
lunch and there was an issued that required a vote of WON or members may vote:
there must be an increase of capital stock. How will we
qualify the vote?
(1) In person
A: If there are 2 stockholders with contradicting votes – NO
(2) By proxy
VOTE; ZERO VOTE. The best solution: Both should AGREE.
(3) Through remote communication or in absentia when
authorized:
SEC. 56. VOTING RIGHT FOR TREASURY SHARES
(a) in the bylaws or
Section 56. Voting Right for Treasury Shares. – Treasury (b) by a majority vote of the BOD
shares shall have no voting right as long as such shares PROXIES
remain in the Treasury.
An instrument that refers to the authority given by the
stockholder to another to represent the former during meeting

Rule: Proxies shall be in writing, signed, and filed by the

Rule: Treasury shares shall have no voting rights. stockholder in any form authorized in the bylaws.

Reason: If they were given voting powers, the directors would (A/N: See discussion on proxies under Sec. 23.)
vote for themselves, thereby perpetuating their position in the
board. VALIDITY AND EFFECTIVITY OF A PROXY

A/N: See Sec. 9. It shall be valid only for the meeting for which it is intended
UNLESS otherwise provided in the proxy form. However, no
SEC. 57. MANNER OF VOTING; PROXIES proxy shall be valid and effective for a period longer than 5
Section 57. Manner of Voting; Proxies. – Stockholders and years.
members may vote in person or by proxy in all meetings of
stockholders or members. Illustration. If you have a proxy for the year 2020, you cannot
use it for 2021 because it is only intended for that particular
When so authorized in the bylaws or by a majority of the meeting unless it is extended but in no case shall it be longer
board of directors, the stockholders or members of than 5 years.
corporations may also vote through remote communication
or in absentia: Provided, That the votes are received before A PROXY CANNOT BE SUBSTITUTED
the corporation finishes the tally of votes.
A proxy cannot be substituted by reason of the trust and
A stockholder or member who participates through remote confidence reposed upon the person given the authority to
communication or in absentia, shall be deemed present for represent the other. The authority cannot be delegated.
purposes of quorum.
Illustration 1. Jin is given a proxy for a particular meeting.
The corporation shall establish the appropriate requirements It was scheduled on the same day that she has a date and
and procedures for voting through remote communication she preferred to go on that date instead.
and in absentia, taking into account the company’s scale, She cannot delegate her authority to attend said meeting to her
number of shareholders or members, structure and other sister. Her sister cannot attend the meeting because a proxy
factors consistent with the basic right of corporate suffrage. cannot be substituted or delegated.

Proxies shall be in writing, signed and filed, by the Illustration 2. On the other hand, Jin is given a proxy all
stockholder or member, in any form authorized in the bylaws compliant with the requirements. However, at the meeting,
and received by the corporate secretary within a reasonable she was told that she cannot participate for no reason. Can
time before the scheduled meeting. Unless otherwise it be done?
provided in the proxy form, it shall be valid only for the A: No, it cannot be done because she has a vested right as an
meeting for which it is intended. No proxy shall be valid and owner.
effective for a period longer than five (5) years at any one
time. PROXY GIVEN TO TWO OR MORE PERSONS

(A) IF TWO PROXY HOLDERS

If two persons were given a proxy by the same person,
 both of them cannot vote at the same time in the meeting. (B) IF THREE PROXY HOLDERS
Where a proxy is given to three persons in one instrument,
Between two proxy holders, who is entitled to vote? the three of them must agree upon the vote and in case of
A: RULES: conflict, the rule of the majority of the three governs. [See
1. Proxy whose proxy instrument bears the latest date De Leon, Page 512]
2. If same date – Proxy holder whose proxy
instrument bear the later time Atty. Espedido: The most practical approach is to AGREE
3. If same time – proxy holder who presents it first 4. upon the vote and majority shall prevail.
All things being equal (same date, same time, and
present at the same time) – proxy committee decides

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REVOCATION OF PROXY
Section 58. Voting Trusts. – One or more stockholders of a
Illustration. A proxy was declared and recognized as the stock corporation may create a voting trust for the purpose of
conferring upon a trustee or trustees the right to vote and
appropriate proxy holder. However, when he went to the
other rights pertaining to the shares for a period not
meeting, the stockholder who gave him the proxy was also
exceeding five (5) years at any time: Provided, That in the
there. Who is entitled to vote?
case of a voting trust specifically required as a condition in a
A: The Stockholder votes. It would constitute a revocation of
loan agreement, said voting trust may be for a period
proxy because the rule says that proxies are generally
exceeding five (5) years but shall automatically expire upon
revocable – expressly or impliedly.
full payment of the loan. A voting trust agreement must be in
writing and notarized, and shall specify the terms and
Important: The presence of the stockholder in the meeting is conditions thereof. A certified copy of such agreement shall
an implied revocation. be filed with the corporation and with the Commission;
otherwise, the agreement is ineffective and unenforceable.
SEC. 58. VOTING TRUSTS The certificate or certificates of stock covered by the voting
trust agreement shall be cancelled and new ones shall be
issued in the name of the trustee or trustees, stating that they
are issued pursuant to said agreement. The books of the
corporation shall state that the transfer in the name of the
trustee or trustees is made pursuant to the voting trust
agreement.

The trustee or trustees shall execute and deliver to the

transferors, voting trust certificates, which shall be
transferable in the same manner and with the same effect as
certificates of stock.

The voting trust agreement filed with the corporation shall be

subject to examination by any stockholder of the corporation
in the same manner as any other corporate book or record:
Provided, That both the trustor and the trustee or trustees
may exercise the right of inspection of all corporate books
and records in accordance with the provisions of this Code.

Any other stockholder may transfer the shares to the same

trustee or trustees upon the terms and conditions stated in
the voting trust agreement, and thereupon shall be bound by
all the provisions of said agreement.

No voting trust agreement shall be entered into for purposes

of circumventing the laws against anti-competitive
agreements, abuse of dominant position, anti-competitive
mergers and acquisitions, violation of nationality and capital
requirements, or for the perpetuation of fraud.

Unless expressly renewed, all rights granted in a voting trust

agreement shall automatically expire at the end of the
agreed period. The voting trust certificates as well as the
certificates of stock in the name of the trustee or trustees
shall thereby be deemed cancelled and new certificates of
stock shall be reissued in the name of the trustors.

The voting trustee or trustees may vote by proxy or in any

manner authorized under the bylaws unless the agreement
provides otherwise.
 MANAGEMENT CONTROL DEVICES What happens to these voting rights?
A: The stockholder transfers his voting rights to another
Management Control Devices (trustee).
These are devices that are used to attain the particular result
that the management wants. They will be able to control the Illustration. Charles was designated as proxy of a certain
results or predetermine the outcome of their acts. They will stockholder. He was already recognized as proxy in the
guarantee the accomplishment of the objective of the meeting. However, while socializing with the other stockholders,
management. he met someone holding a Voting Trust Agreement bearing the
name of the same stockholder who granted him the proxy. In
Kinds: effect, the person holding the VTA and Charles will be voting in
1. Management Contract behalf of the same stockholder.
2. Proxy
3. Voting Trust Agreement The VTA was executed in February 1, 2017 while the proxy
4. Trust Agreement was executed in February 5, 2017. Who is now entitled to
vote in the stockholder’s meeting?
VOTING TRUST AGREEMENT A: The Voting Trust Agreement prevails. It is the voting trustee
who will be entitled to vote because the voting trustee has the
It is an agreement in writing whereby one or more stockholders legal title and the Voting Trust Agreement is irrevocable despite
of a stock corporation transfer his or their shares upon a trustee the subsequent execution of proxy.
or trustees for the purpose of conferring to the latter the right to
vote and other rights pertaining to the shares for a period not What if the proxy was executed in February 1, 2017 while
exceeding five years at any time. the VTA was executed in February 5, 2017. Who is now
entitled to vote in the stockholder’s meeting? A: The voting
Management may influence a group of stockholders, telling trustee, because the Voting Trust Agreement operates to
them that “this is how you should vote”. In order to ensure that revoke the proxy.
they will abide by the agreement on how to vote, they may
execute a voting agreement. They could designate any or some RIGHTS OF A TRUSTEE IN A VOTING TRUST AGREEMENT
to cast their vote in behalf of all the other signatories to that
voting agreement. (1) The right to vote
(2) The right to be voted upon
If the management could have this, more or less they can (3) The right to be represented
predetermine the outcome of the results/vote. This is a way of (4) Right of inspection of all corporation books and
PREDICTING the outcome of the results of any issue that may records
require approval during a stockholders meeting.
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Important: Basically, all the rights of the stockholders because
he has the legal title except the right to dividends because the An agreement in A written agreement
beneficial ownership is retained by the trustor. writing whereby one among a group of
or more shareholders, not a joint
stockholders of a stock ownership, wherein they
In contrast, the proxy holder has limited rights in attending the
corporation transfers their agree among
meeting (e.g. right to vote) because the proxy holder has no
legal title of the shares of stock. shares to any person/s or themselves on how they
to a corporation having will vote when a certain
authority to act as trustee issue arises.
TERM OF VTA
for the purpose of vesting
in such person/s or
Voting Trust Agreement is valid for a period not exceeding five
corporation (as trustee/s)
(5) years at any one time. Once expired, everything will be
voting or other rights
returned to the real and lawful stockholder (trustor).
pertaining to the
shares for a certain period
VOTING TRUST AGREEMENT VS. not exceeding the term
VOTING AGREEMENT fixed by the Code and
Voting Trust Agreement Voting Agreement upon the terms and
conditions stated in the
agreement.

PROXY vs VOTING TRUST AGREEMENT

Proxy Voting Trust Agreement

No legal title to the shares Acquires legal title to the

of the stockholder shares of the stockholder

Revocable at any time Irrevocable for a definite

unless coupled with and limited period of time
interest
 because he had something else to do. He told his son to
Can only act at the Not limited to any represent him (trustee) in the meeting. When the son went
specified SH’s meeting particular meeting there, the stockholder was also there.

Whose vote will prevail? Can the trustee transfer this right
Votes only in the absence Can vote and exercise all to someone else? Is this the intention of the law? A: The
of the owner of stock the rights of the proxy’s right will prevail. Section 58, last paragraph provides:
transferring SH even “The voting trustee or trustees may vote by proxy or in any
when the SH is present manner authorized under the bylaws unless the agreement
provides otherwise.”
Shorter duration Longer duration
Atty Espedido: That is a very dangerous provision. It is basic
that delegated power cannot be further delegated. But it is the
Need not be notarized nor Notarized and filed with SEC law.
a copy be filed with the
SEC The stockholder precisely executed the trust agreement and
even transferred title to the trustee basically because of trust.
The proxy of the trustee might not be trusted by the stockholder.
No right of inspection of Has such right It will be very dangerous if we allow the proxy to represent.
corporate books
A delegated power cannot be delegated. BUT it is the law. It is
provided by law.

**PROHIBITION AGAINST THE USE OF MANAGEMENT

Illustration 1. DEVICES
Stockholder attends the meeting – proxy is revoked
Nationalized Corporations
You were given the proxy and attended the meeting. These are corporations which must be either be:
However, in the meeting, you saw the stockholder who you (a) Wholly owned by Filipinos
are representing. When an issue was about to be resolved, (b) 60% is owned by Filipinos, 40% is of foreign ownership
the SH voted. What do you think will happen?
A: The stockholder’s vote prevails because the presence of the Purpose of 60% requirement
stockholder revokes the proxy. To make sure that the control shall be in the hands of the
Filipino stockholders, so that our natural resources will not be
Illustration 2. exploited by foreigners.
Trustor attends the meeting – trustee’s vote prevails; no
revocation of VTA Illustration. Koreans gave bonuses to the Filipino Shareholders,
in exchange, they asked that the shareholders execute proxies
On the other hand, a voting trustee attended the meeting in their favor. Thus, 60% of the Filipinos executed the proxy in
and the trustor also appeared. Which vote should prevail? favor of the Koreans. As a result, anything that will be decided
A: The trustee’s vote shall prevail. in the Stockholders’ meeting will be controlled by the Koreans.

Illustration 3. Is there a problem with this?

Trustee delegates authority to a proxy A: Yes. This violates the nationalization law. Although they
were not forced to sign the proxy, the execution of the proxy is
The trustee authorized somebody else to appear in the meeting considered invalid on the ground of being against public policy.

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TN: Although in the books, there are 60% Filipino Subscription Contract
stockholders/owners, but they have surrendered the power The agreement entered into when subscribing for shares.
which accompanies ownership. The intention of the law, to
maintain the exclusive control with the Filipinos to certain Important: Like any other contract, it must have the elements
industries as enshrined in the Constitution, is violated. of a contract, namely:

Important: These management control devices cannot be used 1. Consent – consent of the parties (meeting of the minds)
to circumvent or violate existing laws against monopoly, 2. Object or subject matter – in the subscription contract,
restraint of trade, and other similar laws. it pertains to the newly-issued stocks
3. Consideration – in the subscription contract, it shall not
TITLE VII. STOCKS AND STOCKHOLDERS be less than the par value or issue value of the
shares. It can be paid through the following means: a.
SEC. 59. SUBSCRIPTION CONTRACT Cash
b. Property
Section 59. Subscription Contract. – Any contract for the c. Labor or services actually rendered
acquisition of unissued stock in an existing corporation or a
d. Amount transferred from URE to capital
corporation still to be formed shall be deemed a subscription
e. Shares which are reclassified
within the meaning of this Title, notwithstanding the fact that
the parties refer to it as a purchase or some other contract.
How can you become a stockholder?
A:
(1) Subscription of an unissued shares of the corporation
(2) Direct purchase of existing shares from another
 stockholder
(3) Purchases stock from publicly listed corporations No maximum amount. The stockholder has the
(4) By exercising stock option Depends on the right to buy newly-issued
agreement between the shares in an amount in
corporation and the proportion to him
When would you subscribe?
person given the
(a) Pre-incorporation subscription – before incorporation
(b) Post-incorporation subscription – after subscription options.

STOCK OPTIONS

Stock Options SEC. 60. PRE-INCORPORATION SUBSCRIPTION

It is a privilege given by a corporation to persons not
necessarily stockholders, giving them a period within which to Section 60. Pre-incorporation Subscription. – A
decide whether or not to buy shares in a company at a subscription of shares in a corporation still to be formed shall
specified price. be irrevocable for a period of at least six (6) months from the
date of subscription, unless all of the other subscribers
consent to the revocation, or the corporation fails to
Do stock options have value?
incorporate within the same period or within a longer period
A: Yes. They are valuable because they give a person the right stipulated in the contract of subscription. No pre-
to buy shares of stock at a specific price. (A/N: Remember,
incorporation subscription may be revoked after the articles
stock prices fluctuate, so you may have an opportunity to buy of incorporation is submitted to the Commission.
shares of stock at a lower price).

Illustration. Stock option gives person A, the right to buy shares

of stock of Corp. ABC for a price of P10. Later on, because of
the good performance of the corporation, the stocks of the
corporation from P10 already increased to P15. There is value PRE-INCORPORATION SUBSCRIPTION
to stock option because here, person A can already purchase
the stock at P10 instead of P15. GEN: The individual agrees to subscribe prior to incorporation
and said contract is IRREVOCABLE for at least 6 months
Atty. Espedido: Do not underestimate when you are given an
option. The moment the price will increase, you can sell it to XPN: Revocable in the following instances:
someone interested to buy it even at a higher price. You may (1) ALL of the other subscribers consent to the
make profit out of the option. revocation;
(2) The Corporation fails to incorporate within the
PRE-EMPTIVE RIGHT same period or
(3) Within a longer period stipulated in the contract of
It is not a privilege but a right of existing stockholders to subscription.
subscribe to new unissued shares of the corporation in
proportion to their existing shareholdings, so that they can **XPN to XPN: Irrevocable after the AOI have been submitted
maintain their “hold” or existing % of holdings in the corporation. to the Commission (post-incorporation subscription).

STOCK OPTION PRE-EMPTIVE RIGHT What is the purpose of the irrevocability?

A: To ensure the creation of the corporation. It gives the
Privilege given by the A right given to organizers the chance to organize.
corporation stockholders by law
Atty. Espedido: If revocation is allowed within the 6 months, the
Can be given to 3rd parties Only given to existing organization of the corporation will be highly jeopardized, and
stockholders nobody might be able to start at all if the subscribers keep on
withdrawing. The timetable and the filing of the articles might be
unduly affected.

**RULE ON POST-INCORPORATION SUBSCRIPTION

Under post-incorporation, the law is silent as to the revocability

or irrevocability of the subscription, but actually it is irrevocable.
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The moment a subscriber subscribes after the incorporation of Atty. Gaviola: There is a rule in Oblicon that generally, a
a company, he becomes a stockholder and cannot anymore contract is revocable when it is not consummated. We apply
revoke his subscription. the same logic here in the sense that when a subscriber pays
for his subscription pre-incorporation, [the shares are issued]
And since he is already a stockholder, he can now enjoy the with the condition that [the proceeds coming from them] will be
rights of a stockholder. The basis for this is Sec. 71 of this used for the formation of the corporation.
Code.
The failure of such event to happen would allow the subscriber
Rights of stockholder: to revoke his subscription as provided in Sec. 60, which states
1. He may check the corporate books; that the corporation has 6 months to comply with said obligation.
2. He has the right to vote on shares if he has a
voting share; However, once the corporation files its AOI, then it is as if the
3. He has the right to dividends when the corporation corporation has already complied with its obligation, thus
declares said dividends. making the subscription irrevocable (the contract is already
consummated).
Meanwhile, for post-incorporation subscription, it is akin to a majority of the outstanding capital stock at a meeting duly
valid and binding contract that is already perfected called for the purpose.
(consummated), hence, it is irrevocable. The subscription now
becomes part of the capital stock of the corporation. Hence, the How do you pay for subscriptions?
corporation cannot allow the subscriptions to be revoked A:
without prejudicing its interests and that of its stockholders. (1) Actual cash paid to the corporation;
The corporation must now comply with its obligations to its (2) Property, tangible or intangible, actually received by
stockholders, like the distribution of dividends and allowing the corporation and necessary or convenient for its
them to exercise their rights as stockholders. use and lawful purposes
➢ at a fair valuation equal to the par or issued value
SEC. 61. CONSIDERATION FOR STOCKS of the stock issued;
(3) Labor performed for or services actually rendered to
Section 61. Consideration for Stocks. – Stocks shall not be the corporation;
issued for a consideration less than the par or issued price (4) Previously incurred indebtedness of the corporation; (5)
thereof. Consideration for the issuance of stock may be: Amounts transferred from unrestricted retained earnings
to stated capital;
(a) Actual cash paid to the corporation; (6) Outstanding shares exchanged for stocks in the event
of reclassification or conversion;
(b) Property, tangible or intangible, actually received by the (7) Shares of stock in another corporation; and/or
corporation and necessary or convenient for its use and lawful (8) Other generally accepted form of consideration
purposes at a fair valuation equal to the par or issued value of
the stock issued; ACTUAL CASH

(c) Labor performed for or services actually rendered to the GEN: Shares of stock shall not be issued in exchanged for
corporation; promissory notes.

(d) Previously incurred indebtedness of the corporation; XPN: Except if the corporation is the one indebted to the
person. If the corporation has debts against the person, then
(e) Amounts transferred from unrestricted retained earnings to the corporation may allow this by issuing shares of stocks.
stated capital;
PROPERTY (TANGIBLE/INTANGIBLE)
(f) Outstanding shares exchanged for stocks in the event of
reclassification or conversion; When property is used for the payment of subscription, the
property value must be equal to the amount subscribed.
(g) Shares of stock in another corporation; and/or (h)
This is measured through the fair market value of the property.
Other generally accepted form of consideration. And to be sure that the property has been evaluated properly,
or assigned with the proper valuation, the SEC will examine
Where the consideration is other than actual cash, or consists the property.
of intangible property such as patents or copyrights, the
valuation thereof shall initially be determined by the LABOR OR SERVICES ACTUALLY RENDERED
stockholders or the board of directors, subject to the approval of
the Commission. Rule: Services here do not refer to future services but pertains
to ACTUAL services rendered.
Shares of stock shall not be issued in exchange for promissory
notes or future service. The same considerations provided in Illustration. The person planned to join the corporation as a
this section, insofar as applicable, may be used for the Vice President. Later on, he was eventually appointed as
issuance of bonds by the corporation. VP. Can he be given shares of stocks by telling the
corporation, “I am paying my shares of stock out of my
The issued price of no-par value shares may be fixed in the salary for the first month.” Is that allowed?
articles of incorporation or by the board of directors pursuant to A: No, that is not allowed because services here do not refer to
authority conferred by the articles of incorporation or the bylaws, future services.
or if not so fixed, by the stockholders representing at least a

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Why are future services not allowed? dividends, the corporation will issue stock dividends to them.
A: Because of the uncertainty of future services.
Atty. Espedido: A good justification by the corporation in doing
AMOUNTS TRANSFERRED FROM THE UNRESTRICTED this is that such will increase the capital of the corporation
RETAINED EARNINGS TO CAPITAL considering that the unrestricted retained earnings are
ploughed back to the corporation. In the same way, the
Illustration. The authorized capital stock (ACS) was investments of the stockholders are also increased.
increased from 1m to 2m. Five (5) stockholders owned 20%
each of the original 1m ACS. They then wanted to WAIVER OF RIGHT TO UNPAID SUBSCRIPTION
subscribe another 20% each of the 1M increase but they
don’t have cash. However, there are unrestricted retained Illustration. The Corporation wanted to grant bonuses but
earnings. What could be done? has no cash. Hence, it instead declared that all unpaid
A: The 5 stockholders may subscribe, and their subscription will subscriptions are deemed fully paid. Is it valid? A: No, it is
be paid out of the unrestricted retained earnings which should not allowed because this will violate the trust fund doctrine
just be transferred to the capital. Hence, instead of issuing cash since there will be no more capital coming in the corporation. In
the books, it is supposed to show that certain stocks are still
unpaid and therefore, it must be paid. Example: Apply it to the 50 shares. Therefore the 50
shares are fully paid.
Atty. Espedido: Waiving the unpaid subscriptions is no different
from just returning to the stockholders their investment. If the Note: The corporation may issue to the stockholder a
return of stocks is not allowed, then it should not be allowed to Stock Certificate on the appropriate number of shares
waive the payment of unpaid subscriptions. covered.

If you declare all unpaid subscriptions as fully paid, you are GOODWILL
making it appear to the public and to creditors that the capital is
inside already when in fact, no money came in. You are Rule: Goodwill may be used to pay subscription because this is
therefore misleading the public. considered property. To determine the value of a good will, it
shall be appraised by the SEC.
If unpaid subscriptions are not paid when the date for payment
arrives or when the Board makes the call for payment, they **What is goodwill?
become delinquent shares which means that they are due and A: Goodwill is an intangible asset that is associated with the
demandable and can be sold in a delinquent sale. purchase of one company by another. Specifically, goodwill is
the portion of the purchase price that is higher than the sum of
MANNER OF PAYMENT the net fair value of all of the assets purchased in the
acquisition and the liabilities assumed in the process. The
Are you supposed to pay in full? value of a company’s brand name, solid customer base, good
A: The stockholder may either pay in full but this is not required. customer relations, good employee relations, and proprietary
technology represent some reasons why goodwill exists.
When is balance payable?
A: The balance shall be paid on: ISSUED PRICE OF NON-PAR VALUE
(a) The date indicated in the subscription contract;
or (A) It may be fixed in the:
(b) When the BOD calls for payment. 1. Articles of Incorporation; or
2. By the BOD pursuant to authority conferred by
**Atty. Gaviola: The call is only required when there is no date the AOI or the bylaws
fixed for the payment of the shares. It is the BOD who will make
the call by resolutions of the BOD in a meeting where there is a (B) If not fixed by the abovementioned – fixed by the
quorum, approved by majority of the directors present in the stockholders representing at least a majority of the
meeting. OCS at a meeting duly called for the purpose
OPTIONS IN APPLICATION OF PAYMENT
Important: Once the stockholder fully pays, he is given a
In the absence of provisions in the by-laws to the contrary, a Certificate of Stock.
corporation may apply payments made by subscribers either:
SEC. 62. CERTIFICATION OF STOCK & TRANSFER OF
(1) Payment pro rata to each and all the entire number of SHARES
shares subscribed for;
Section 62. Certificate of Stock and Transfer of Shares. –
Example. Apply the 50,000 to all the 100 subscribed The capital stock of corporations shall be divided into shares for
shares. In effect, there is no single share fully paid which certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary, and
Note: If it is a proportional payment or pro rata – the sealed with the seal of the corporation shall be issued in
stockholder cannot be issued a Stock Certificate. accordance with the bylaws. Shares of stock so issued are
personal property and may be transferred by delivery of the
(2) Full payment for corresponding number of shares – certificate or certificates indorsed by the owner, his attorney- in
apply payment to as many shares as may be covered fact, or any other person legally authorized to make the transfer.
by that payment. No transfer, however, shall be valid, except as between the
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parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction, Section 63. Issuance of Stock Certificates. – No certificate
the date of the transfer, the number of the certificate or of stock shall be issued to a subscriber until the full amount
certificates, and the number of shares transferred. The of the subscription together with interest and expenses (in
Commission may require corporations whose securities are case of delinquent shares), if any is due, has been paid.
traded in trading markets and which can reasonably
demonstrate their capability to do so to issue their securities or
shares of stocks in uncertificated or scripless form in
accordance with the rules of the Commission.
**Certificate of Stock
No shares of stock against which the corporation holds any (As defined in the case of Anna Teng vs. SEC)
unpaid claim shall be transferable in the books of the
corporation. A certificate of stock is a written instrument signed by the
proper officer of a corporation stating or acknowledging that
the person named in the document is the owner of a
SEC. 63. ISSUANCE OF STOCK CERTIFICATES designated number of shares of its stocks. It is prima facie
evidence that the holder is a shareholder of a corporation.

A certificate, however, is merely a tangible evidence of

ownership of shares of stock. It is not a stock in the corporation,
and merely expresses the contract between the corporation and
the stockholder. It is not negotiable Stock certificate can
because it does not be transferred from
contain a one
The shares of stock evidenced by said certificates, meanwhile,
are regarded as property and the owner of such shares may, as promise or order to person to another so as
a general rule, dispose of them as he sees fit, unless the pay a sum certain in to constitute the
corporation has been dissolved, or unless the right to do is money transferee as the lawful
properly restricted, or the owner’s privilege of disposing of his owner
shares has been hampered by his own action. thereof.

What are requirements for a certificate of stock?

A:
1. It has to be signed by the president or the VP, Note: Here, it is not negotiable because it does not contain a
countersigned by the corporate secretary or assistant promise or order to pay a sum certain in money. Although it
secretary, and sealed with the corporate seal. may contain an order to deliver a certain number of stocks.
2. It has to state the par value of the share.
3. The name of the shareholder must be indicated. 4. Atty. Espedido: Negotiability presupposes various or many
The number of shares must be indicated. transfers or subsequent transfers. To constitute the transferee
5. The stock number must be indicated. as the lawful holder of the instrument. There are defenses
available, and he could avail of these defenses. But when we
SIGNATURES REQUIRED IN A CERTIFICATE OF STOCK say transferability, it is more on possession.

(1) Signed by the president or vice-president REQUISITES OF A NEGOTIABLE INSTRUMENT

(2) Countersigned by the secretary or assistant secretary
Section 1. Form of Negotiable Instruments. – An instrument to
NATURE OF CERTIFICATE OF STOCKS be negotiable must conform to the following requirements:
WUPOD
(1) It is a personal property (a) It must be in writing and signed by the maker or drawer
(2) It is transferrable (b) Must contain an unconditional promise or order to pay
(3) It is NOT a negotiable instrument a sum certain in money
1 CERTIFICATE OF STOCK CAN BE OFFERED AS (c) Must be payable on demand, or at a fixed or
COLLATERAL determinable future time
(d) Must be payable to order or to bearer
Note: Shares of stock so issued are personal property. (e) Where the instrument is addressed to a drawee, he
must be named or other indicated therein with
Once a certificate of stock is given, the stockholder may offer it reasonable certainty.
as collateral to the bank or he can exercise his right as an
owner to dispose or sell it. MANNER OF TRANSFERRING
NEGOTIABLE STOCK CERTIFICATE
2 CERTIFICATE OF STOCK IS INSTRUMENT
TRANSFERRABLE It is transferred through
(1) Payable to order indorsement + delivery
indorsement + delivery. indorsement + delivery

(2) Payable to bearer

3 A CERTIFICATE OF STOCK IS NOT A NEGOTIABLE
– delivery
INSTRUMENT

Distinction between non-negotiability and transferability:

NOT NEGOTIABLE TRANSFERRABLE
Note: A Certificate of Stock may be transferred through
indorsement + delivery.

Atty. Espedido: At the back portion of that certificate is an

indorsement portion – it simply states that this certificate
covering a no. of shares is being transferred to xxx. The date
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and place are indicated, and then sign. So, whoever becomes a stockholder will now be recorded in the stock and
transferee becomes the shareholder. transfer book

PROCEDURE EFFECT IF NOT RECORDED IN THE STOCK AND

TRANSFER BOOK
(1) Indorsement + Delivery
(2) Transferee presents it to the corporation Rule: No transfer, however, shall be valid, except as between
(3) It is shown to the Secretary the parties, until the transfer is recorded in the books of the
(4) The Secretary records it in the stock and transfer book corporation
of the corporation. On the other page, it will indicate
the name of the transferee. Thus, if it is not recorded in the stock and transfer book, the
(5) Once the transferee is recorded, the name of the new transfer will only be binding upon the parties.
Atty. Espedido: You should call the corporate secretary and SCRIPLESS TRADING
warn him not to issue it to anyone.
“The Commission may require corporations
If it is not in the books, it will not affect third parties. Thus, the whose securities are traded in trading
stockholder can sell it again. markets and which can reasonably
demonstrate their capability to do so to issue
Summary of effect if not recorded in the stock and transfer their securities or shares of stocks in
book: uncertificated or scripless form in
• Valid and binding as to the parties (corporation and accordance with the rules of the
subscriber) Commission.”
• Not binding to 3rd parties
What is a “scrip”?
PURPOSE OF INDORSEMENT A: A scrip is a duly signed certificate of stock.
The purpose of indorsement is in order to bind third parties. KTG: A scrip is a certificate or receipt that represents
Because of this indorsement, any third party can go to the something of value, but has no intrinsic value in itself. What’s
secretary and have his name registered in the stock and essential is that the issuer and the recipient must agree on
transfer book. the value that the scrip represents. In other words, it is a
substitute or alternative to legal tender that entitles the
Atty. Espedido: But this usually doesn’t happen since the holder bearer to receive something in return.
thereof will just call the secretary and warn the secretary as to
the fact of the loss of the certificate. Applying this to the provision above, a corporation may be
required to issue its shares in the form of scrips. In this case,
REMEDY FOR REFUSAL TO RECORD TRANSFER OF the scrip will represent each share of stock the shareholder
STOCK IN YOUR NAME owns. On or before a specific date, the shareholder could
combine the scrips he has, and convert the value they
What if the secretary refuses to record or transfer the represent into actual shares.
stock in your name?
A: You have the right to go to court and FILE A MANDAMUS What happens in scripless trading?
case. You have the right to be recognized – have that right to A: There is transfer of ownership of shares without actually
register the transfer in your name delivering the stock certificates. Instead, the transfer of
ownership is done through book entries.
Note: The secretary only has a ministerial duty to comply with
the indorsement. Atty. Gaviola: This kind of trading is usually done when the
stocks are listed in the stock exchange.
**NOTES
What is the rationale for this provision on scripless trading?
TWO WAYS TO TRANSFER SHARES A: For convenience in the buying and selling of securities. If we
strictly follow the traditional way of transferring shares (which
1. Deliver the stock certificate with an intention to transfer involves delivery of actual certificates), the stock market will not
ownership duly indorsed; or survive because the transactions will take days to months.
2. Execute a Deed of Assignment for the shares.
EFFECT How is scripless trading done?
A: A corporation that intends to trade shares in the stock
It merely transfers the ownership of the shares to the transferee exchange must:
or assignee, the latter now being the owner of the shares.
There is already a valid transfer of ownership. However, it does 1. Deliver all their securities or their shares to the
not make the transferee/assignee a stock holder just yet. Philippine Depository and Trust Corporation (PDTC);

So how can the transferee or assignee become the 2. The shares in the books of the PDTC will now be
stockholder? assigned or given to the brokers who purchased the
A: The registration of the transfer in the stock and transfer shares;
book makes one a stockholder, regardless of the issuance or
non issuance of a new certificate of stock.

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3. The corporation’s stock and transfer agent records in intention to trade them, the shares can be uplifted by:
the stocks in the Stock and Transfer Book, and issues
the certificates of stock of the corporation. 1. Requesting the PDTC to take out the shares from their
custody, and record them in the Stock and Transfer
T/N: The entity recorded in the Stock and Transfer Book under the name of a specific purchaser (who
Book will be the PDTC, the holder of the shares. could be the corporation or an actual shareholder).
2. The Stock and Transfer Agent will then issue the
4. In turn, the PDTC will make entries in their own records certificates of stock to the purchaser.
(book entries).
If later on, the purchaser/shareholder decides to sell the shares,
Uplifting of Shares the stock certificates he or she has must be returned to the
If the shares are desired to be kept for a long time without Stock and Transfer Agent, which will take time.
Atty. Gaviola: Note, this is the delay and complication that 1. When the value of the thing that you used in paying the
scripless trading avoids. stocks is lower than the par value of the share–
discounted stocks
Key Points on Scripless Trading: 2. Did not pay anything at all – bonus stocks
1. There is only one owner, the PDTC, who is listed as the 3. Consideration is valued in excess of its fair value
stockholder in the books of the corporation.
2. The PDTC will have its own list of brokers who hold the What is the effect of watered shares?
shares for their clients. A: Watered stocks are not merely ultra vires, but they are illegal
3. Brokers will have their own list of clients as well. per se, and they cannot be ratified by any vote of the
shareholders, or by resolution of the BOD. However, if they are
Who has ownership of the shares of stock in scripless sold to a third party, then it should be honored by the
trading then? corporation as a valued stock if the third parties acquired it in
A: The legal owner is the PDTC, but the beneficial owner/s are good faith.
the client/s of the brokers.
** Why would the law allow a stock certificate which has
If that is the case, then who can vote on such shares not been fully paid to be transferred?
during elections? A: To maintain economic relations among corporations and the
A: The beneficial owner should ask for a certification from the public. If we do not allow that, every time a person buys shares
broker that he is the owner of the specific number of shares that of stocks, the buyer will always ask if it was sold with proper
he bought. That certification, which is not a stock certificate, consideration and it will lead to the suffering of the economy.
should be brought by the beneficial owner to the election. It is That is why certificates are made transferrable even if it is not
akin to a proxy allowing the holder to vote on shares. fully paid.

SEC. 64. LIABILITY OF DIRECTORS FOR WATERED The transferability of the certificates would not mean anything if
STOCKS we have to examine them every time we buy a share of stock
because it would cause great inconvenience.
Section 64. Liability of Directors for Watered Stocks. – A
director or officer of a corporation who: (a) consents to the T/N: We could no longer trust in the certificate and therefore it
issuance of stocks for a consideration less than its par or loses its credibility. And if no one will trust in them, its
issued value; (b) consents to the issuance of stocks for a transferability is rendered useless.
consideration other than cash, valued in excess of its fair
value; or (c) having knowledge of the insufficient And so here comes now the transferee, he did not know
consideration, does not file a written objection with the this was a watered stock. He went to the corporation and
corporate secretary, shall be liable to the corporation or its
presented the said stock, duly endorsed. Is the corporation
creditors, solidarily with the stockholder concerned for the
obliged to recognize that he is now the stockholder of the
difference between the value received at the time of
certificate?
issuance of the stock and the par or issued value of the
A: The corporation must honor because there is nothing wrong
same.
with the certificate. The mistake or deficiency was in the
consideration. So, so long as the certificate is legitimate then
the corporation is obliged to honor/acknowledge and effect the
transfer.
STORY OF THE WATERED CHICKEN
You go to the market and buy a chicken. When weighed, the PARTIES LIABLE
chicken’s weight is 1.5 kg and then you bought it. However,
when you went home and checked the weight of the chicken, it (1) The directors who consented to the sale of the share at
is already 1.2kg. This is because the chicken was injected with less than par value
water and then placed inside the freezer so the water becomes (2) Shareholder who bought the watered stock
ice. When placed in the weighing scale, the chicken now
weighs heavier. So when the chicken’s weight was already Note: Issuance of watered stock is a valid stock. The issuance
1.2kg, all the water was gone. This is why they call it the is valid BUT the purchase is ILLEGAL.
watered chicken.
Illustration. Such that when the investor subscribed, he can say
WATERED STOCKS that you cannot get back his shares. He is correct because the
Stocks which are sold at less than the par value. You pay less issuance is valid BUT he can be compelled to pay the
for more stocks. If you were able to subscribe to a water stock, difference.
the value paid will not reflect the actual value of the shares.
Atty. Espedido: What is not valid is the consideration. The
How could water stocks exist? issuance is valid.

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Who was at a loss? capital should be Php 100.
A: The corporation because the capital indicated and
determined through the par value no longer reflect the true But since one share was sold at 50% discount, then the capital
capital based on par value. is PHP99.50 when it should have been PHP100 if there was no
watered stock.
Illustration. 100 shares issued at 1 peso par value = Php 100
capital; 1 share was sold at 50% = Php 99.50 capital Because of that watered stock, our capital is now less than
what it should be.
If a share for example was sold at a discounted 50%, and 100
shares were all issued at a par value of PHP1/share – the Who are the parties responsible?
A: The directors who agreed that the sale will be sold at that already increased.
discounted price.
So that, on watered stocks, what is the prayer in the
How do we compel the directors if they do not pay? derivative suit?
A: We have to go to court. A: The difference between the actual price paid and the par
value of the shares against the directors or officers who
Who could authorize the filing of the case in a corporation? consented to/did not object against the issuance of watered
A: Normally, it is the directors. But because the directors shares.
themselves is responsible for the watered stock, they will never
authorize the filing of the case. The remedy is to file a ** Can a creditor file a derivative suit?
derivative suit. A: No, only the stockholders that are stockholders at the time of
the suit can file the derivative suit.
DERIVATIVE SUIT
So we are ready for the derivative suit. Here are
What is a derivative suit? stockholder now who’s filing against the directors
A: A derivative suit is filed by a stockholder in behalf of a because the directors refuse the file necessary case, so in
corporation. the end what would the result of the derivative suit?
A: The BOD will liable for the issuance of the watered stock and
Note: The cause of action belongs to the corporation, but the the non-issuance of the certificate of stock, in that manner the
stockholder files the action on behalf of the corporation. Instead directors shall be solidarily liable.
of the directors filing the suit, it would now be the stockholders.
Is it the same as a representative suit? In the prayer of the derivative suit to be filed by the
A: No. petitioning stockholders prayed that they be awarded with
damages and they suffered sleepless nights because
A derivative suit is not a representative suit because a watered are issued, why the directors did it to them, do you
representative suit is a class suit – a person files in behalf of a think they can recover damages from that?
class who have a common interest or are similarly situated. A: NO. They can’t recover the damages because the purpose
of the derivative it should be in favor of the corporation, and in
On the other hand, a derivative suit is filed on behalf of a the instant case it was not for the benefit of the corporation.
corporation, not on behalf of a person similarly situated to the Such that the cause of action should belong to the corporation.
corporation. It is the corporation that is injured, not the
stockholder. On the other hand, they had not decided to file derivative
suit, but a case on their behalf, an individual case, they
This is allowed by law because the person who is required to trying to recover the unpaid portion belongs to the
act (BOD) refuses to act. corporation, that should be given to them, then the court
should give to them the unpaid balance, do you think they
DERIVATIVE SUIT REPRESENTATIVE SUIT can do that?
A: No. The balance there is considered as a legal capital of the
Filed on behalf of a A class suit where a corporation, such that it is the corporation has the right to
corporation person files in behalf of a recover the balance, moreover if they are allowed to recover
class who have common the unpaid balance and be given to them the it would violate
interest or are similarly the trust fund doctrine, because these are part of the capital of
situated the corporation, and if they allowed to recover the balance then
that would tantamount to liquidation because it is part of the
capital. And it is the corporation is supposed to recover it.

REQUISITES FOR A DERIVATIVE SUIT TO

Note: It cannot compel to return the issued stocks because as PROSPER 1. Injury to the corporation
far as the issuance is concerned, it is VALID. However, it is the 2. The person suing must be a stockholder at the time of
deficient consideration that is ILLEGAL. the injury
Important: If they are given the option to return, the stocks 3. Suing on behalf of the corporation.
being transferrable, it could have already been transferred to
another person already. OTHER INSTANCES IN WHICH A DERIVATIVE SUIT MAY
PROSPER
If the issuance will not be considered valid, the transferee might
be holding something which is not valid even if he has already
1. Disloyalty of directors (See Sec. 33)
paid fully. The transferee may even have paid more because at
2. Self-dealing directors (See Sec. 31)
the time the shares were transferred, the value might have
3. Interlocking directors (See Sec. 32)

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RR’s answers: Illustration. Treasury shares with a par value of Php10/share
1. Directors assent to acts that are patently illegal were sold at Php5/share – not a water stock
2. Grossly negligent There are treasury shares. The BOD needed cash, and they
3. Conflict of interest decided to sell these treasury shares. The par value is at
4. Disloyalty PHP10/share. The board decided to sell it at PHP5/share.

WATERED STOCKS IS APPLICABLE ONLY TO NEWLY Is this a watered stock?

ISSUED SHARES (VIRGIN SHARES) A: No, because watered stocks only applies to freshly issued
shares.
There were watered stocks issued. Fortunately, the 3. That there is no appraisal right available for the act/s
corporation was about to be disowned. The existing assets complained of;
were not enough to pay all the creditors. Would the 4. That the suit is not a nuisance or harassment suit; 5.
creditors, in the presence of watered stocks, would it be That the suit is brought in the name of the corporation.
able to pursue some more other than the existing assets?
A: Yes. This is supposed to be part of the asset. Important:
In derivative suits, the corporation is an unwilling co
Can the transferee be compelled to pay the unpaid portion? plaintiff; the suing stockholder/member is only a
A: No. The stocks are not anymore “virgin” stocks when the nominal party.
transferee bought it since it has been previously issued by the The number of shares owned by the suing stockholder
Corporation to the subscriber. Watered stock only applies to is not material.
“virgin” shares. If we allow the transferee to pay, it defeats the The wrong contemplated in a derivative suit is one
transferability. which injures the corporation directly. But, the
personal injury suffered by the stockholder cannot
Atty. Espedido: We will have to keep asking if it is a watered disqualify him from filing said derivative suit.
stock or not. Thus, insofar as issuance is concerned, it is valid.
What is not valid is with regard to the deficient consideration – SEC. 65. INTEREST ON UNPAID SUBSCRIPTIONS
wherein you paid less for more.
Section 65. Interest on Unpaid Subscriptions. –
**NOTES Subscribers to stocks shall be liable to the corporation for
interest on all unpaid subscriptions from the date of
KINDS OF SUITS subscription, if so required by and at the rate of interest fixed
in the subscription contract. If no rate of interest is fixed in
the subscription contract, the prevailing legal rate shall
1. Individual Suit – a suit brought by the shareholder in
apply.
his own name against the corporation when a wrong is
directly inflicted against him.

2. Representative Suit – a suit brought by the

stockholder in behalf of himself and all the other SEC. 66. PAYMENT OF BALANCE OF SUBSCRIPTION
stockholders similarly situated when a wrong is
committed against a group of stockholders. Section 66. Payment of Balance of Subscription. –
Subject to the provisions of the subscription contract, the
3. Derivative Suit – a suit brought by a stockholder for board of directors may, at any time, declare due and
wrongful acts committed by directors/trustees of a payable to the corporation unpaid subscriptions and may
corporation, when the shareholder finds that he has no collect the same or such percentage thereof, in either case,
redress because the directors/trustees are the ones with accrued interest, if any, as it may deem necessary.
vested by law to decide whether or not to sue.
Payment of unpaid subscription or any percentage thereof,
DERIVATIVE SUITS together with any interest accrued shall be made on the date
specified in the subscription contract or on the date stated in
the call made by the board. Failure to pay on such date shall
It is a suit by a shareholder to enforce a corporate cause of
render the entire balance due and payable and shall make
action. It is a condition sine qua non that the corporation be
the stockholder liable for interest at the legal rate on such
impleaded as a party because not only is the corporation an
balance, unless a different interest rate is provided in the
indispensable party, but it is also the present rule that it must be
subscription contract. The interest shall be computed from
served with process.
the date specified, until full payment of the subscription. If no
payment is made within thirty (30) days from the said date,
The judgment must be made binding upon the corporation in all stocks covered by the subscription shall thereupon
order that the corporation may get the benefit of the suit against become delinquent and shall be subject to sale as
the same defendants for the same cause of action. hereinafter provided, unless the board of directors orders
REQUISITES FOR DERIVATIVE ACTIONS otherwise.
1. That the person instituting the action be a stockholder
or member at the time the act/s or transaction/s
subject of the action occurred and at the time the
action was filed; **NOTES
2. That the stockholder/member exerted all reasonable
efforts, and alleges the same with particularity in the How does the BOD call for the payment of the balance of
complaint, to exhaust all remedies available under the the subscription?
Articles of Incorporation, bylaws, laws or rules A: A call is made by a resolution of the BOD in a meeting
governing the corporation to obtain the relief he where there is a quorum, and approved by majority of the
desires directors present in said meeting.

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What is the effect of the failure to pay after a call, or upon
the lapse of the date specified in the subscription contract?
A: The BOD may issue another board resolution declaring said
subscriptions delinquent.

SEC. 67. DELINQUENCY SALE

 (3) Publication of Notice of Sale
Section 67. Delinquency Sale. – The board of directors (a) once a week for two (2) consecutive weeks (b) in
may, by resolution, order the sale of delinquent stock and a newspaper of general circulation in the province or
shall specifically state the amount due on each subscription city where the principal office of the corporation is
plus all accrued interest, and the date, time and place of the located
sale which shall not be less than thirty (30) days nor more
than sixty (60) days from the date the stocks become
(4) Sale at a public auction to the bidder who shall offer to
delinquent.
pay the full amount of the balance on the subscription
together with accrued interest, costs of advertisements and
Notice of the sale, with a copy of the resolution, shall be sent expenses of sale for the smallest number of shares or
to every delinquent stockholder either personally, by fraction of a share.
registered mail, or through other means provided in the
bylaws. The same shall be published once a week for two
(2) consecutive weeks in a newspaper of general circulation Who is the “highest bidder”?
in the province or city where the principal office of the A: He is the bidder who offers to pay the highest amount for the
corporation is located. least number of shares.

Unless the delinquent stockholder pays to the corporation, Illustration:

on or before the date specified for the sale of the delinquent Their Offer Value per Share
stock, the balance due on the former’s subscription, plus
accrued interest, costs of advertisement and expenses of
sale, or unless the board of directors otherwise orders, said Bidder 1 10k shares for P100k P10/share
delinquent stock shall be sold at a public auction to such
bidder who shall offer to pay the full amount of the balance Bidder 2 5k shares for P75k P15/share
on the subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest
number of shares or fraction of a share. The stock so
purchased shall be transferred to such purchaser in the Who is the highest bidder in this case?
books of the corporation and a certificate for such stock shall A: Bidder 2 is the best bidder. This is because the 2nd bidder
be issued in the purchaser’s favor. The remaining shares, if
bought the least number of shares at the highest price. So if the
any, shall be credited in favor of the delinquent stockholder
corporation goes with the best bidder, they can still sell 5k
who shall likewise be entitled to the issuance of a certificate
shares to someone else at a good price. The law says best
of stock covering such shares. bidder, not highest bidder.
Should there be no bidder at the public auction who offers to
DATE OF SALE AT PUBLIC AUCTION
pay the full amount of the balance on the subscription
together with accrued interest, costs of advertisement, and
The sale must be held not less than 30 days nor more than 60
expenses of sale, for the smallest number of shares or
days FROM the date the stocks become delinquent.
fraction of a share, the corporation may, subject to the
provisions of this Code, bid for the same, and the total
amount due shall be credited as fully paid in the books of the EFFECT OF PAYMENT BY THE SUBSCRIBER BEFORE
corporation. Title to all the shares of stock covered by the THE PERIOD OF SALE (before 30 days)
subscription shall be vested in the corporation as treasury
shares and may be disposed of by said corporation in When the delinquent stockholder pays to the corporation on or
accordance with the provisions of this Code. before the date specified for the sale of the delinquent stock the
balance due on the stockholder’s subscription, the stocks shall
be RETAINED by the stockholder. In which case, he may be
issued the certificate of stock in his favor.

PROCEDURE FOR DELINQUENCY SALE **NOTES

(1) Resolution by the BOD for the order of sale of delinquent Illustration 1
stocks, specifying the following: Delinquent Stock
(a) Amount due on each subscription
(b) Accrued interest Total subscription - 20,000 shares valued at P1Mn Total
(c) Date, time, and place of sale which shall not be paid subs. - 10,000 shares valued at P500k Total unpaid
less than 30 days nor more than 60 days from the subs. - 10,000 shares valued at P500k
date the stocks become delinquent
In this case, the entire subscription of 20,000 shares is
(2) Notice of Sale with a copy of the Resolution shall be sent considered delinquent stock. This is because of the Principle
to every delinquent stockholder either: of Indivisibility of Subscription. Thus, a delinquent stock
(a) Personally shall refer not only to the unpaid subscription, but includes the
(b) By registered mail, or paid subscription.
(c) Through other means provided in the bylaws The winning bidder will be determined by who is willing to pay
the for the most for the least/smallest number of stocks.
 Page 78 of 88 | EH403 2019-2020 Corporation Law
Illustration 2
Section 68. When Sale May be Questioned. – No action to
Delinquent Stock
recover delinquent stock sold can be sustained upon the
ground of irregularity or defect in the notice of sale, or in the
Bidder Bid Value/Sh Bidder A - 2,000 shares valued at
sale itself of the delinquent stock, unless the party seeking
P10k P5.00/share Bidder B - 1,500 shares valued at P10k
to maintain such action first pays or tenders to the party
P6.67/share Bidder C - 1,000 shares valued at P10k
holding the stock the sum for which the same was sold, with
P10.00/share
interest from the date of sale at the legal rate. No such
action shall be maintained unless a complaint is filed within
In this case, Bidder C should be declared the highest bidder six (6) months from the date of sale.
because he is the bidder who is willing to pay the highest
amount for the smallest number of shares or fraction of the
share. This means that the highest bidder must be the bidder
who is willing to pay the highest amount per share.

Upon payment of the highest bidder, the stock purchased shall QUESTIONING OF AUCTION SALE
be transferred to such purchaser in the Stock and Transfer
Book of the corporation, and certificate/s for such stock shall If there is irregularity in the conduct of the sale, the same may
be issued in the purchaser’s favor. be questioned.

The remaining shares, if any, shall be credited in favor of the When can you question the conduct of the auction sale?
delinquent stockholder who shall likewise be entitled to the A: Within 6 months from the date of sale.
issuance of a certificate of stock covering such shares.
SEC. 69. COURT ACTION TO RECOVER UNPAID
SUBSCRIPTION
Illustration 3
Excess Shares & No Bidder Section 69. Court Action to Recover Unpaid
Subscription. – Nothing in this Code shall prevent the
Excess shares corporation from collecting through court action, the amount
due on any unpaid subscription, with accrued interest, costs
Based on the illustration above, 1,000 shares out of the 10,000 and expenses.
shares shall be given to Bidder C. The remaining 9,000 shares
shall be given to the delinquent shareholder.

No bidder SEC. 70. EFFECT OF DELINQUENCY

If there is no bidder, the corporation is authorized to purchase Section 70. Effect of Delinquency. – No delinquent stock
the shares and the same shall form part of the treasury shares. shall be voted for, be entitled to vote, or be represented at
any stockholder’s meeting, nor shall the holder thereof be
Effect entitled to any of the rights of a stockholder except the right
to dividends in accordance with the provisions of this Code,
If the bidder is the corporation, there will be no shares given to until and unless payment is made by the holder of such
the delinquent shareholder. Applying the illustration above, all delinquent stock for the amount due on the subscription with
10,000 shares will pertain to the shareholder. They will form accrued interest, and the costs and expenses of
part of the treasury shares. advertisement, if any.

The corporation may go after the delinquent shareholder in

accordance with Sec. 69 of this Code.
SEC. 71. RIGHTS OF UNPAID SHARES, NONDELINQUENT
Note (Atty. Espedido): The Board may decline any bidder.
Section 71. Rights of Unpaid Shares, Nondelinquent. –
SEC. 68. WHEN SALE MAY BE QUESTIONED Holders of subscribed shares not fully paid which are not
delinquent shall have all the rights of a stockholder.

EFFECTS OF DELINQUENCY

As to the stockholder, he will no longer enjoy the following

rights: (1) Right to vote
(2) Right to be voted for;
 (3) Right of representation at any stockholder's meeting; SUBSCRIBER CANNOT USE FUTURE DIVIDENDS AS
(4) Not entitled to any of the rights of a stockholder ⮡ PAYMENT FOR THE BALANCE
EXCEPT the right to dividends in accordance with the
provisions of this Code Illustration.
(5) Stocks will be considered delinquent and shall be This coming December, the stockholder is sure that there will
subject to delinquency sale be cash dividends. So, the stockholder says: “By the time the
cash dividends are issued on December, these dividends will
UPON DECLARATION OF DELINQUENCY, A be used to pay the unpaid subscribed shares.”
STOCKHOLDER CANNOT RETURN SHARES ALREADY
BOUGHT He further says, “I am already sure that the corporation will
issue the dividends since the profits have increased beyond
Note: After being declared delinquent, the stockholder cannot 100% of the paid-in capital and it is still March. Thus, by
return the shares already bought. December, I am sure that the corporation is required to declare
dividends.”
Reason: He cannot return the shares already bought because
as between the corporation and the subscriber, there is a Is that allowed?
debtor creditor relationship. Thus, the stockholder is obliged to A: No, it is not allowed.
pay the balance. He cannot just simply return the shares he
bought.

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Three Justifications [Summary of Answers] **NOTES
Note: This is based on the answers during the recitation (1)
Declaration of dividends when profits exceed the 100% paid-in EFFECTS OF DELINQUENCY
capital is subject to exceptions
(2) Corporation may still incur losses in the future – no The stockholder will remain a stockholder, but the exercise of
assurance that dividends will be declared the any of the stockholder’s rights is suspended except the right
(3) Corporation NEVER PROMISES that a stockholder will to dividends.
be given dividends and only the Board can determine
as to what type of dividend will be issued (not always The distribution of shares in the dividends by a delinquent
cash dividends) stockholder will be applied in the following manner:

Elaboration: 1. If cash or property dividend – the corporation will

Since it is still not certain that there will be cash dividends that offset the payment of the unpaid subscription from the
will be declared since it is subject to exceptions, namely: (1) stockholder’s share in the dividend.
Expansion projects 2. If stock dividend – the stockholder’s share in the
(2) Loan agreement that contains a condition that the dividends is withheld by the corporation until the
corporation cannot declare dividends UNLESS there is subscription is fully paid.
consent by the creditor SEC. 72. LOST OR DESTROYED CERTIFICATES
(3) Emergency purposes

Assuming that none of the 3 exceptions are present, the future

cash dividends (dividends on December) still cannot be used as
payment for the shares because the corporation may still incur
losses in the future. There is still no assurance that dividends
will be declared.

Moreover, assuming that it does not fall under the exceptions

and sure that there are no losses to be incurred, it is still not
allowed because when you subscribe, you become a debtor to
the corporation because you paid partially. However, for the
balance, you are a debtor to the corporation because you
undertook to pay when it is due and demandable.

On the other hand, the Corporation never promises that a

stockholder will be given dividends. What was agreed upon is
that the subscriber will invest, and in the meantime, he shall
wait WON the Board will distribute dividends.

Even if the corporation has already reached the 100% of its

paid in capital, assuming it is not falling under the exception
and sure that no loss shall be incurred, the subscriber is not
sure if he will be given cash since the Corporation can either
declare cash, stock, or property dividends. Not even the
Internal Revenue Code can dictate declaration of cash
dividends. Only the Board can determine this.

The Internal Revenue Code may only dictate to declare

dividends but not as to what kind of dividends to be issued
since this is the SOLE prerogative of the Board.
Section 72. Lost or Destroyed Certificates. – The following
procedure shall be followed by a corporation in issuing new
certificates of stock in lieu of those which have been lost, LOST CERTIFICATE
stolen or destroyed:
(a) The registered owner of a certificate of stock in a Being transferrable, is there any danger or risk of loss? A:
corporation or such person’s legal representative shall Yes. Since it is transferrable, the finder might just try to copy
file with the corporation an affidavit in triplicate setting the signature and might be able to transfer it to someone. The
forth, if possible, the circumstances as to how the transferee, once he goes to the Corporate Secretary might
certificate was lost, stolen or destroyed, the number of recognize that it was a fraudulent signature and may decline –
shares represented by such certificate, the serial IOW, the buyer is prejudiced.
number of the certificate and the name of the
corporation which issued the same. The owner of such
Remedy: File an Affidavit of Loss to the corporation
certificate of stock shall also submit such other
information and evidence as may be deemed
necessary; and

(b) After verifying the affidavit and other information and

evidence with the books of the corporation, the
corporation shall publish a notice in a newspaper of
general circulation in the place where the corporation
has its principal office, once a week for three (3)
consecutive weeks at the expense of the registered
owner of the certificate of stock which has been lost,
stolen or destroyed. The notice shall state the name of
the corporation, the name of the registered owner, the
serial number of the certificate, the number of shares
represented by such certificate, and shall state that after
the expiration of one (1) year from the date of the last
publication, if no contest has been presented to the
corporation regarding the certificate of stock, the right to
make such contest shall be barred and the corporation
shall cancel the lost, destroyed or stolen certificate of
stock in its books. In lieu thereof, the corporation shall
issue a new certificate of stock, unless the registered
owner files a bond or other security as may be required,
effective for a period of one (1) year, for such amount
and in such form and with such sureties as may be
satisfactory to the board of directors, in which case a
new certificate may be issued even before the
expiration of the one (1) year period provided herein. If
a contest has been presented to the corporation or if an
action is pending in court regarding the ownership of the
certificate of stock which has been lost, stolen or
destroyed, the issuance of the new certificate of stock in
lieu thereof shall be suspended until the court renders a
final decision regarding the ownership of the certificate
of stock which has been lost, stolen or destroyed.

Except in case of fraud, bad faith, or negligence on the part

of the corporation and its officers, no action may be brought
against any corporation which shall have issued certificate of
stock in lieu of those lost, stolen or destroyed pursuant to the
procedure above-described.

Page 80 of 88 | EH403 2019-2020 Corporation Law