Law 2 Module

Module 5: OPERATION OF A CORPORATION

Introduction

Once incorporated, the corporation can proceed with its operation. During its
existence, a corporation needs to follow certain rules regarding the relationship among
its members or stockholders, its officers and its directors or trustees. For that purpose, a
corporation’s by-laws is necessary. Communication among members and directors are
effected through meetings which are govern by the provisions of the law and the the
corporation’s by-laws. If in the course of its operations, the corporation finds itself unable
to sustain its existence as it is, it may opt to undergo corporate reorganization such as
merger or consolidation. Ultimately, if its continuous operation is no longer feasible as
determined by its members, stockholders, directors or trustees, or through the initiative
of third parties, a corporation may be dissolved and undergo liquidation.

Module Objectives
1. To understand the purpose of a by-laws in a corporation.
2. To analyze the requirements for holding a valid meeting.
3. To differentiate the different modes of corporate reorganization.
4. To distinguish non-stock corporations and foreign corporations from domestic
stock corporations.
5. To analyze the different modes of dissolution and liquidation of a corporation.

Discussion

 By-laws

By-laws signifies the rules and regulations or private laws enacted by the corporation
to regulate, govern and control its own actions, affairs and concerns and its stockholders
or members and directors and officers with relation thereto and among themselves and
in their relation to it. (China Banking Corporation vs. Court of Appeals, G.R. No. 117604,
March 1997.)
Requisites of valid by-laws
1. Must be general and uniform in its effect or applicable to all alike or those similarly
situated.
2. Must be reasonable and not arbitrary.
3. Must be consistent with the Articles of Incorporation.
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4. Must not be contrary to law, morals and public policy.

5. Must not impair obligations and contracts and vested rights.
Amendments of by-laws
The by-laws may be amended by a majority vote of the directors or trustees as
approved by a majority vote of the owners of outstanding capital stock or members in a
non-stock corporation at a regular or special meeting called for the purpose. Note that the
amendment of the by-laws must be clearly stated as an agenda of such meeting.
But the 2/3 of the outstanding capital stocks or 2/3 of the members in a non-stock
corporation may delegate such power to amend the by-laws to the Board of Directors or
Board of Trustees. In which case, the Board of Directors or Board of Trustees may amend
the by-laws without the subsequent approval of the stockholders or members.
Section 47. Amendment to Bylaws. - A majority of the board of directors or trustees,
and the owners of at least a majority of the outstanding capital stock, or at least a
majority of the members of a nonstock corporation, at a regular or special meeting
duly called for the purpose, may amend or repeal the bylaws or adopt new bylaws.
The owner of two-thirds (2/3) of the outstanding capital stock or two-third (2/3) of
the members in a nonstock corporation mat delegate to the board of directors or
trustees the power to amend or repeal the bylaws or adopt new bylaws: Provided,
That any power delegated to the board of directors or trustee to amend or repeal
the bylaws or adopt new bylaws shall be considered as revoke whenever
stockholders owning or representing a majority of the outstanding capital stock or
majority of the members shall so vote at a regular or special meeting.
Whenever the bylaws are amended or new bylaws are adopted, the corporation
shall file with the Commission such amended or new bylaws and, if applicable, the
stockholders' or members' resolution authorizing the delegation of the power to
amend and/or adopt new bylaws, duly certified under oath by the corporate
secretary and majority of the directors or trustees.
The amended or new bylaws shall only be effective upon the issuance by the
Commission of certification that the same is in accordance with this Code and other
relevant laws.

 Meetings
The main modality for a corporation to make a decision is through meetings. For
important matters, a corporation needs to hold a meeting of the Board of Directors or
Trustees or a meeting of the stockholders or members.
Meeting of the Board
Section 52. Regular and Special Meetings of Directors or Trustees; Quorum. -
Unless the articles of incorporation or the bylaws provides for a greater majority, a
majority of the directors or trustees as stated in the articles of incorporation shall
constitute a quorum to transact corporate business, and every decision reached
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by at least a majority of the directors or trustees constituting a quorum, except for

the election of officers which shall require the vote of a majority of all the members
of the board, shall be valid as a corporate act.
Regular meetings of the board of directors or trustees of every corporation shall
be held monthly, unless the bylaws provide otherwise.
Special meetings of the board of directors or trustees may be held at any time upon
the call of the president or as provided in the bylaws.
Meetings of directors or trustees of corporations may be held anywhere in or
outside the Philippines, unless the bylaws provide otherwise. Notice of regular or
special meetings 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 scheduled meeting, unless
a longer time is provided in the bylaws. A director or trustee may waive this
requirement, either expressly or impliedly.
Directors or trustees who cannot physically attend or vote at board meetings can
participate and vote through remote communication such as videoconferencing,
teleconferencing, or other alternative modes of communication that allow them
reasonable opportunities to participate. Directors or trustees 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 compliance with the requirements of Section 31 of this Code.

Meetings of the Board of Directors or Trustees can either be regular or special. For
regular meetings, it is usually held every month unless the by-laws provide otherwise.
On the other hand, special meetings are held at any time upon the call of the president
or as provided in the by-laws.
Meetings of the Board of Directors or Trustees can be held anywhere in or outside the
Philippines unless the by-laws provides otherwise.
Teleconferencing is allowed as an alternative mode of holding a meeting when the
directors or trustees cannot physically attend or vote at board meetings.
Notice Requirement
For regular and special meetings of the Board, a notice stating the date, time and
place of the meeting should be given to each director or trustee two (2) days prior to the
schedules meeting unless the by-laws provides otherwise.
Presiding Officer
The president shall preside in meetings either in Board meetings or
stockholder/members meetings unless otherwise provided in the by-laws.
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Section 53. Who Shall Preside at Meetings. - The chairman or, in his absence, the
president shall preside at all meetings of the directors or trustees as well as of the
stockholders or members, unless the bylaws provide otherwise.

Quorum
As a general rule, the quorum for a meeting is the majority of all the members of the
Board of Directors or trustees unless the articles of incorporation or the by-laws provide
for a greater majority.
Meeting of Stockholders and Members
Similar to meetings of the Board of Directors or Trustees, meetings of the stockholders
or members can be classified as regular or special.
For regular meetings, it is generally held annually on a date fixed in the by-laws.
However, if the by-laws did not specify the date, it shall be on any date after April 15 of
every year.
Special meetings may called at any time when deemed necessary or as provided in
the by-laws.
Stockholder or members meeting, whether regular or special, shall be held in the city
or municipality where the principal place of business or office of the corporation is located
and if practicable, in the principal office of the corporation. For non-stock corporations,
meetings can be held anywhere in the Philippines as provided in the by-laws.
Section 50. Place and Time of Meetings of Stockholders or Members. -
Stockholders' or members' meetings, whether regular or special, shall be held in
the principal office of the corporation as set forth in the articles of incorporation, or
if not practicable, in the city or municipality where the principal office of the
corporation is located: Provided, That any city of municipality in Metro Manila,
Metro Cebu, Metro Davao, and other Metropolitan areas shall, for purposes of this
section, be considered a city or municipality.
Notice of meetings shall be sent through the means of communication provided in
the bylaws, which notice shall state the time, place and purpose of the meetings.

Notice Requirement
For regular stockholders or members meeting, notice stating the date, time and place
of the meeting shall be given to each stockholder or member two (2) weeks prior the
scheduled meeting unless otherwise provided in the by-laws.
For special meeting, the notice should be given to the stockholders or members one
(1) week prior to the date of the special meeting.
Quorum
As a general rule, the quorum for a meeting is the stockholders representing the
majority of the outstanding capital stock or majority of the members of a non-stock
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corporation unless the articles of incorporation or the by-laws provide for a greater
majority
Section 51. Quorum in Meetings. - Unless otherwise 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 non-stock
corporations.

 Corporate Reorganization
Two or more corporations may merge into a single corporation which shall be one of
the constituent corporations or may consolidate into a new single corporation which shall
be the consolidated corporation.
Section 75. Plan of Merger or Consolidation. - Two (2) or more corporations may
merge into a single corporation which shall be one of the constituents corporations
or may consolidate into a new single corporation which shall be the consolidated
corporation.
The board of directors or trustees of each corporation, party to the merger or
consolidation, shall approved a plan of merger or consolidation, shall approved a
plan of merger or consolidation, shall approve a plan of merger or consolidation
setting forth the following:
(a) The names of the corporations proposing to merge or consolidate
hereinafter referred to as the constituent corporations;
(b) The terms of the merger or consolidation and the mode of carrying the
same into effect;
(c) A statement of the changes, if any, in the articles of incorporation of the
surviving corporation in case of merger; and, in case of consolidation, all
the statements required to be set forth in the articles of incorporation for
corporations organized under this Code; and
(d) Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable.

Mergers
When two corporations combines with each other which results to one corporation
being absorbed by the other. The absorbing corporation shall retain its personality while
the other is dissolved and subsumed in the other.
Consolidations
In consolidations, two or more corporations unites to a single corporation. The juridical
personality of all the uniting corporations are dissolved and a new entity is created.
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Procedure in Merger or Consolidation

a. Approval by a majority vote of each of the board of directors or trustees of the
constituent corporations of the plan of merger or consolidation

b. Approval by the stockholders representing at least two-thirds (2/3) of the

outstanding capital stock of each corporation in the case of stock corporations or
at least two-thirds (2/3) of the members in the case of nonstock corporations at
separate corporate meetings duly called for the purpose.

c. Notice of such meetings shall be given to all stockholders or members of the

respective corporations in the same manner as giving notice of regular or special
meetings under Section 49 of this Code.

d. Execution of the Articles of Merger or Consolidation.

e. Submission of the Articles or Merger or Consolidation to the SEC.

f. Issuance of the Certificate of Merger or Consolidation by the SEC.

Section 76. Stockholders' or Members' Approval. - Upon approval by a majority
vote of each of the board of directors or trustees of the constituent corporations of
the plan of merger or consolidation, the same shall be submitted for approval by
the stockholders or members of each of such corporations at separate corporate
meetings duly called for the purpose. Notice of such meetings shall be given to all
stockholders or members of the respective corporations in the same manner as
giving notice of regular or special meetings under Section 49 of this Code. The
notice shall state the purpose of the meeting and include a copy or a summary of
the plan of merger or consolidation.
The affirmative vote of stockholders representing at least two-thirds (2/3) of the
outstanding capital stock of each corporation in the case of stock corporations or
at least two-thirds (2/3) of the members in the case of nonstock corporations shall
be necessary for the approval of such plan. Any dissenting stockholder may
exercise the right of appraisal in accordance with this Code: Provided, That if after
the approval by the stockholders of such plan, the board of directors decides to
abandon the plan, the right of appraisal shall be extinguished.
Any amendment to the plan of merger or consolidation may be made: Provided,
That such amendment is approved by a majority vote of the respective boards of
directors or trustees of all the constituents corporations and ratified by the
affirmative vote of stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of two-thirds (2/3) of the members of each of the
constituents corporations. Such plan, together with any amendment, shall be
considered as the agreement of merger or consolidation.
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 Non-stock corporation

A nonstock corporation is one where no part of its income is distributable as dividends

to its members, trustees, or officers: Provided, That any profit which a nonstock
corporation may obtain incidental to its operations shall, whenever necessary or proper,
be used for the furtherance of the purpose of purposes for which the corporation was
organized, subject to the provisions of the Revised Corporation Code on dissolution.
(Section 86, Revised Corporation Code)
Purposes of Nonstock Corporations
Nonstock corporations may be formed or organized for the following purposes:
1. charitable
2. religious
3. educational
4. professional
5. cultural
6. fraternal
7. literary
8. scientific
9. social
10. civic service
11. similar purposes like trade industry, agricultural and like chambers,
12. any combination thereof

 Modes of dissolution and liquidation

To terminate the existence of a corporation, it shall be dissolved and its assets
liquidated.
A corporation can be dissolved voluntarily or involuntarily.
Voluntary Dissolution
Voluntary dissolution can be effected under the following circumstances:
a. Where there are no creditors affected
Section 134. Voluntarily Dissolution Where No Creditors are Affected. - If
dissolution of a corporation does not prejudice the rights of any creditor having a
claim against it, the dissolution may be effected by majority vote of the board of
directors or trustees, and by a resolution adopted by the affirmative vote of the
stockholders owning at least majority of the outstanding capital stock or majority
of the members fo a meeting to be held upon the call of the directors or trustees.
At least twenty (20) days prior to the meeting, notice shall be given to each
shareholder or member of record personally, by registered mail, or by any means
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authorized under its bylaws, whether or not entitled to vote at the meeting, in the
manner provided in Section 50 of this Code and shall state that the purpose of the
meeting is to vote on the dissolution of the corporation. Notice of the time, place
and object of th meeting shall be published once prior to the date of the meeting in
a newspaper published in the place where the principal office of said corporation
is located, or if general circulation in the Philipines.
A verified request for dissolution shall be filed with the Commission stating: (a) the
reason for the dissolution; (b) the form, manner, and time when the notices were
given; (c) names of the stockholders and directors or members and trustees who
approved the dissolution; (d) the date, place, and time of the meeting in which the
vote was made; and (e) details of publication.
The corporation shall submit the following to the Commission: (1) a copy of the
resolution authorizing the dissolution, certified by a majority of the board of
directors or trustees and countersigned by the secretary of the corporation; (2)
proof of publication; and (3) favorable recommendation form the appropriate
regulatory agency, when necessary.
Within fifteen (15) days from receipt of the verified request for dissolution, and in
the absence of any withdrawal within said period, the Commission shall approved
the request and issue the certificate of dissolution. The dissolution shall take effect
only upon the issuance by the Commission of certificate of dissolution.
No application for dissolution of banks, banking and quasi-banking institutions,
preneed, insurance and trust companies, NSSLAs, pawnshops, and other financial
intermediaries shall be approved by the Commission unless accompanied by a
favorable recommendation of the appropriate government agency.

b. Where there are creditors affected

Section 135. Voluntary Dissolution Where Creditors are Affected; Procedure and
Contents of Petition. - Where the dissolution of a corporation may prejudice the
rights of any creditor; a verified petition for dissolution shall be filed with the
Commission. The petition shall be signed by a majority of the corporation's board
of directors or trustees, verified by its president or secretary or one of its director
or trustees, and shall set forth all claims and demands against it, and that its
dissolution was resolved upon by the affirmative vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or at least
two-thirds (2/3) of the member at a meeting of its stockholder or members called
for that purpose. The petition shall likewise state: (a) the reason for the dissolution;
(b) the form, manner, and time when the notices where given; and (c) the date,
place and time of the meeting in which vote was made. The corporation shall
submit to the Commission the following: (1) a copy of the resolution authorizing the
dissolution, certified by a majority of the board of directors or trustees and
countersigned by the secretary of the corporation; and (2) a list of all its creditors.
If the petition is sufficient in form and substance, the Commission shall by an order
reciting the purpose of the petition, fix a deadline for filing objections to the petition
which date shall not be less than thirty (30) days nor more than sixty (60) days
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after the entry of the order. Before such date, a copy of the order shall be published
at lease one week for three (3) consecutive weeks in a newspaper of general
circulation published in the municipality or city where the principal office of the
corporation is situated, or if there be no such newspaper, then in a newspaper of
general circulation in the Philippines, and a similar copy shall be posted for three
(3) consecutive weeks in three (3) public places in such municipality or city.
Upon five (5) days' notice given after the date on which the right to file objections
as fixed in the order has expired, the Commission shall proceed to hear the petition
and try any issue raised in the objections filed; and if no such obejection is
sufficient, and the material allegations of the petition are true, it shall render
judgment dissolving the corporation and directing such disposition of its assets as
justice requires, and may appoint a receiver to collect such assets and pay the
debts of the corporation.
The dissolution shall take effect only upon the issuance by the Commission of a
certificate of dissolution.

c. Shortening of corporate term

Section 136. Dissolution by Shortening Corporation Term. - A voluntary dissolution
may be effected by amending the articles of incorporation to shorten the corporate
term pursuant to the provisions of this Code. A copy of the amended articles of
incorporation shall be submitted to the Commission in accordance with this Code.
Upon the expiration of the shortened term, as stated in the approved amended
articles of incorporation, the corporation shall be deemed dissolve without any
further proceedings, subject to the provisions of this Code on liquidation.
In the case of expiration of corporate term, dissolution shall automatically take
effect on the day of the following the last day of the corporate term stated in the
articles of incorporation without the need for the issuance by the Commission of a
certificate of dissolution.

Involuntary Dissolution
Involuntary dissolution may done based on the following grounds:
(a) None-use of corporate charter as provided under Section 21 of his Code;
(b) Continuous inoperation of a corporation as provided under Section 21 of this
Code;
(c) Upon receipt of a lawful court order dissolving the corporation;
(d) Upon finding by the final judgment that the corporation procured its
incorporation through fraud;
(e) Upon finding by final judgment that the corporation:

(1) Was created for the purpose of committing, concealing or aiding the
commission of securities violation, smuggling, tax evasion, money
laundering, or graft and corrupt practices;
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(2) Committed or aided in the commission of securities violations,

smuggling, tax evasion, money laundering, or graft and corrupt practices,
and its stockholders knew of the same; and
(3) Repeatedly and knowingly tolerated the commission of graft and corrupt
practices or other fraudulent or illegal acts by its directors, trustees, officers,
or employees.
Methods of Liquidation
a. By the corporation itself
b. By conveyance to a trustee within a three-year period
c. By Management Committee or Rehabilitation Receiver

Section 139. Corporate Liquidation. - Except for banks, which shall be covered by
the applicable provisions of Republic Act No. 7653, otherwise known as "The New
Central Bank Act", as amended, and Republic Act No. 3591, otherwise known as
the Philippine Deposit Insurance Corporation Charter, as amended, every
corporation whose charter expires pursuant to its article of incorporation is
annulled by forfeiture, or whose corporate existence is terminated in any other
manner, shall nevertheless remain as a body corporate for three (3) years after the
effective date of dissolution, for the purpose of prosecuting and defending suits by
or against it and enabling it to settle and close its affairs, dispose of and convey its
property, and distribute its assets, but not for the purpose of continuing the
business for which it was established.

At any time during said three (3) years, the corporation is authorized and
empowered to convey all of its property to trustees for the benefit of stockholders,
members, creditors, and other persons in interest. After any such conveyance by
the corporation of its property in trust for the benefit of its stockholders, members,
creditors and others in interest, all interest which the corporation had in the
property terminates, the legal interest vests in the trustees, and the beneficial
interest in the stockholders, members, creditors or other persons-in-interest.

Except as otherwise provided for in Section 93 and 94 of this Code, upon the
winding up of corporate affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot be found shall be escheated in
favor of the national government.

Except by decrease of capital stock and as otherwise allowed by this Code, no

corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities.

 Foreign Corporations
A foreign corporation is one formed, organized or existing under laws other than those
of the Philippines' and whose laws allow Filipino citizens and corporations to do business
in its own country or State. It shall have the right to transact business in the Philippines
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after obtaining a license for that purpose in accordance with this Code and certificate of
authority from the appropriate government agency. (Section 140, Revised Corporation
Code)
The code requires that Foreign Corporations which are “doing business in the
Philippines should acquire a license an certificate of authority prior to its operation in the
Philippines.
The Foreign Investments Acts lists the following as indicative of doing business in the
Philippines:
1. Soliciting orders, service contracts, opening offices, whether liaison or branch;
2. Appointing representatives domiciled in the country for 180 days or more;
3. Participating in the management, supervision and control of any domestic
business;
4. Any other acts that imply continuity of commercial dealings or arrangements.