Corporation Notes - Law3A

8/22/2019 Corporation Notes - Law3A

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LAW ON PRIVATE CORPORATIONS

Corporation Code of the Philippines BP Blg. 68

TITLE I - GENERAL PROVISIONS

SCOPE OF THE CODEThe Corporation Code is an act which:

1. Provides for the incorporation, organization and regulation of private corporations;

2. Defines their powers and provides for their dissolution;

3. Fixes the duties and liabilities of directors or trustees and other officers thereof;

4. Declares the rights and liabilities of stockholders or members;

5. Prescribes the conditions under which corporations including foreign corporations may transact business;

6. Provides penalties for violations of the Code; and

7. Repeals all laws and parts of laws in conflict and inconsistent with the Code.

THEORIES ON FORMATION OF A CORPORATION

1. Concession theory A corporation is an artificial creature without any existence until it has received the imprimatur of the stateaccording to law, through SEC

2. Theory of corporate enterprise or economic unit The corporation is not merely an artificial being, but more of an

aggregation of persons doing business, or an underlying business unit

STATUTORY DEFINITION (Section 2) A corporation is an artificial being created by operation of law, having the right of

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

Doctrine of ultra vires acts a corporation, being a mere creation of law, can exercise only those powers which are conferred by law.

(Sec. 45)

ATTRIBUTES OF A CORPORATION:1. It is an artificial being;

2. It is created by operation of law;

3. It has the right of succession; and

4. It has only the powers, attributes and properties expressly authorized by law or incident to its existence.

DISTINCTIONS BETWEEN A PARTNERSHIP AND A CORPORATION:

PARTNERSHIP CORPORATION

1. CreationMere agreement of the parties By law or by operation of law

Law3 Private Corporations Atty. Jonathan B. Tambol


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2.No. of incorporators

At least 2 persons 5-15 incorporators (except corporation sole)

3.Commencement of juridical personality

From the moment of execution of the contract From the date of issuance of the Cert. of Inc. by the SEC

4.PowersMay exercise any power authorized by the partners (provided it is

not contrary to law, morals, good customs, public order, public

policy)

Can exercise only the powers expressly granted by law or implied

from those granted or incident to its existence

5.Management

When management is not agreed upon, every partner is an agent

of the partnership

Vested in the board of directors or trustees

6.Effect of mismanagement

A partner as such can sue a partner who mismanages Suit against a member of the BOD/T who mismanages must be in

the name of the corporation

7.Right of SuccessionNo right Has right of succession

8.Extent of liability to third persons

Partners are liable personally & subsidiarily (sometimes solidary)

for partnership debts to 3rd persons

SHs are liable only to the extent of the shares subscribed by them

(limited liability feature)

9.Transferability of interest

Partner cannot transfer his interest in the partnership so as to

make the transferee a partner w/o the unanimous consent of all

the existing partners because partnership is based on the principle

of delectus personae

SH has generally the right to transfer his shares w/o prior consent of

the other SHs because corporation is not based on this principle

10.Term of existenceAny period of time stipulated by the partners May not be formed for a term in excess of 50 years extendible to

not more than 50 years in any 1 instance

11.Firm nameLimited partnership is required by law to add the word Ltd. to its

name

Any name provided it is not the same as or similar to any reg. firm

name

12.DissolutionMay be dissolved at any time by any or all of the partners Can only be dissolved with the consent of the State

13.Governing lawNew Civil Code Corporation Code

SIMILARITIES BETWEEN A PARTNERSHIP AND A CORPORATION:

1. Juridical personality separate and distinct from that of the individuals composing it;

2. Can act only through agents;



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3. Composed of an aggregate of individuals (except corporation sole);

4. Distributes its profits to those who contribute capital;

5. Can be organized only where there is a law authorizing its organization;

6. A partnership is taxable as a corporation.

FOUR BASIC ADVANTAGES OF CORPORATE ORGANIZATIONS:

1. Strong separate juridical personalityCase: If A, Inc. buys the share of J, Inc., which later turns out to be insolvent; will A, Inc. answer for the debts of J, Inc.? (Edward J.

Nell vs. Pacific Farms, 15 SCRA 415)

GR: Where a corporation buys all the shares of another corporation, this will not operate to dissolve the other corporation

and as the two corporations still maintain their separate corporate entities, one will not answer for the debts of the other.

Exceptions:

a.) If there is an express assumption of liabilities;

b.) There is consolidation or merger;

c.) If the purchase was in fraud of creditors;

d.) If the purchaser becomes a continuation of the seller.

N.B. Unlike a partnership which may be dissolved by many causes, either by the withdrawal, death, insolvency, etc. of a partner,

the right of succession of a corporation allows it to maintain its separate juridical personality in spite of what happens to the

stockholders or members who constitute it.

2. Limited Liability to Investors

- Stockholders are personally liable for corporate debts and liabilities only to the extent of what they have invested (paid-up

capital) and what they have promised to invest in the corporation (unpaid subscription)

3. Free Transferability of Units of Ownership

- Doctrine of delectus personae in partnership is not applicable and that stockholders hold their shares as personal property

with rights to dispose, assign or encumber them as they may desire

4. Centralized Management

- All corporate powers are vested in the Board of Directors or Trustees

- Stockholders or members no management powers, only to elect directors or trustees

DOCTRINE OF CORPORATE PERSONALITY

- A corporation is a legal or juridical person with a personality separate and apart from its individual stockholders or members

composing it and from other corporations to which it may be connected.



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- Rudimentary is the rule that a corporation is invested by law with a personality distinct and separate from its stockholders or

members by legal fiction and convenience, it is shielded by a protective mantel and imbued by law with a character alien to the

persons comprising it. (Lim vs. CA, 323 SCRA 102)

Certificate of Registration/Incorporation by the SEC issuance thereof is the operative act for the existence of a

corporation

- Once Certificate of Registration is issued, the corporation acquires a personality distinct and separate from that of itsstockholders or members.

Effects of Doctrine of Separate Personality:

1. The corporation may not be held liable for acts or liabilities of shareholders;

2. May acquire and possess properties as well as bring legal action in its name;

3. Properties so acquired or conveyed to the corporation is the property of the corporation, vice versa

4. No personality to bring action for recovery of property belonging to individual shareholders or members

5. Not entitled to moral damages (except: when it has established a good reputation that is debased, resulting in its humiliation

in the business realm)

Note: It was held that a juridical person such as a corporation can validly complain for libel or any form of defamation and

claim for moral damages because Art. 2219 (7) of the Civil Code does not qualify whether the plaintiff is a natural or a juridical

person. (Filipinas Broadcasting vs. Ago Med., GRN 141994, June 17, 2005)

Some cases on separate juridical personality:

1. Walter Smith vs. Ford (GRN 42420, Nov. 20, 1936) obligation of the President of a corporation incurred in his personal

capacity cannot be collected from the corporation where he is an officer

2. Business day Information Systems vs. NLRC (221 SCRA 9) President/manager cannot be held personally liable for the money

claims of discharged corporate employees unless he acted with evident bad faith in terminating their employment.

DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY

- Under this doctrine, a corporation will be looked upon as a separate legal entity as a general rule, and until sufficient reason to

the contrary appears; but when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud,

defend crime, or when used as a mere alter ego, the law will regard the corporation as an association of persons (the corporation

and the persons who compose it are treated as identical).

- To do this, the courts must be sure that the corporate fiction was misused, to such an extent that injustice, fraud or crime was

committed upon another. It is the protection of the interests of innocent third persons dealing with the corporate entity which the

law aims to protect by this doctrine. (Traders Royal Bank vs. CA, 269 SCRA 15)

- There must be clear and convincing evidence. The wrongdoing must be clearly and convincingly established. It cannot be

presumed.



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3 Classes of Piercing:

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

2. Alter ego cases when the corporation is merely a farce since the corporation is an alter ego, business conduit or

instrumentality of a person or another corporation

3. Equity cases to achieve justice or equity

Control Test used in determining the applicability of the doctrine (Alter ego cases)

1. Control must be complete domination, not only of finances but of policy and business practice in respect to the transaction

attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or

other positive duty, or dishonest and unjust acts in contravention of plaintiffs legal right; and

3. The aforesaid control and breach of duty must approximately cause the injury or unjust loss complained of.

Cases where piercing applied:

1. The corporate entity is being merely used as an alter-ego of the controlling officers or stockholders, such as when the officers

and directors of two corporations are practically the same and both corporations hold office in the same room;2. When the corporate officers do fraudulent or illegal acts in the name of the corporation, such as illegal dismissal or unfair

labor practices;

3. When one tries to evade civil liability by incorporating the properties or the business;

4. Where the corporate fiction was used as a means to perpetrate a social injustice or as a vehicle to evade obligations or

confuse the legitimate issues;

5. Where it was used to avoid a judgment credit, to avoid inclusion of corporate assets as part of the estate of a decedent, to

avoid liability arising from debt;

6. When used to avoid a contractual commitment by the main stockholders or officers against his contracted non-competition

commitment.

When piercing not applicable:

1. When other remedies are still available because piercing is a remedy of last resort, e.g. when the corporation employed fraud

in the foreclosure proceedings where the remedy of annulment based on vice of consent is available (Umali vs. CA, 189 SCRA

529);

2. Not allowed in fraud cases unless the remedy sought is to make the officer or another corporation pecuniary liable for

corporate debts;

3. Cannot be allowed when there is no wrong committed;

4. Where there is no allegation, much less even a scintilla of substantiation that the parties interest in the corporation are so

considerable as to merit a declaration of unity of their civil personalities;



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5. Cannot be employed to allow fraud, e.g. where seller of real property wishes to avoid the consequences of a sale to a

corporate entity by claiming that the broker through whom the seller transacted sale was also the President of the corporate

buyer, when such fact was known to her from the beginning (Araneta Inc. vs. Tuazon de Paterno, 91 Phil 786).

CLASSIFICATION OF CORPORATIONS (Sec. 3):

1. StockCorporation one whose capital stock is divided into shares and which is authorized to distribute to shareholdersdividends or allotments of the surplus profits on the basis of the share held; created and operated for the purpose of making a

profit

2. Non-stockCorporation does not issue stocks nor distribute dividends to its members; not created for profit but for the public

good and welfare

OTHER CLASSIFICATIONS:

1. As to number of persons who compose them

a.) Corporation aggregate more than one member or corporator

b.) Corporation sole composed of one member or corporator only and his successors, such as a bishop

2. As to whether for religious purposes or not

a.) Ecclesiastical organized for religious purposes

b.) Lay organized for a purpose other than for religion

3. As to whether they are for charitable purposes or not

a.) Eleemosynary for charitable purposes

b.) Civil for business or profit

4. As to State or by whose laws they have been created

a.) Domestic incorporated under the laws of the Philippines

b.) Foreign formed, organized, or existing under any laws other than those of the Philippines

5. As to their legal right to corporate existence

a.) De jure existing in fact and in law

b.) De facto (Sec 20) existing in fact but not in law; there exists a flaw in its incorporation (Note: illustrate case whereA,B,C,D,E formed a corporation but D and E failed to sign by omission in good faith)

-One which has not complied with all the requirements necessary to be a de jure corporation but has complied sufficiently

to be accorded corporate status as against third parties although not against the state.

Examples:

1.) AOI fails to state all matters required by law;

2.) Name of the corp. closely resembles that of a pre-existing corp. that it will tend to deceive the public;

3.) Incorporators or certain number of them are not residents of the Philippines;

4.) Acknowledgement of the AOI or certificate of incorporation is insufficient or defective in form or acknowledged before the

wrong officer;



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5.) Violation of Filipino ownership;

6.) Minimum paid-up capital stock has not been paid to and received by the corporate treasurer contrary to his affidavit

The only way to question its corporate existence is in a direct proceeding by the state (quo warranto) through the Solicitor

General. Private individuals cannot raise the objection in such a case either directly or indirectly, and nobody can raise the

objection collaterally.

6. As to whether they are open to the public or not

a.) Close limited to selected persons or members of a familyb.) Open open to any person who may wish to become a stockholder or member thereto

7. As to their relation to another corporation

a.) Parent or Holding one which is so related to another corporation that it has the power either, directly or indirectly to, elect

the majority of the directors of such other corporation

b.) Subsidiary one which is so related to another corporation that the majority of its directors can be elected either, directly or

indirectly, by such other corporation

8. As to whether they are corporations in a true sense or only in a limited sense

a.) True one which exists by statutory authority

b.) Quasi-corporation exists without formal legislative grant, exception to the rule that a corporation can exist only by

authority of law

1.) Corporation by prescription one which has exercised corporate powers for an indefinite period without interference

on the part of the sovereign power and which, by fiction of law, is given the status of a corporation, e.g The Roman

Catholic Church

2.) Corporation by estoppel(Sec 21) one which in reality is not a corporation, either de jure or de facto, because it is so

defectively formed, but is considered a corporation in relation to those only who, by reason of their acts or admissions, are

precluded from asserting that it is not a corporation

9. As to whether public or private

a.) Public formed or organized for the government of a portion of the State

b.) Private formed for some private purpose, benefit or end; it may either be a stock or non-stock, government-owned or

controlled or quasi-public

IMPORTANT CLASSES OF PERSONS (Sec 5)

1. Promoter one who by contract of lease or services or agency, initiates and undertakes the pre-incorporation steps until the

actual formation of the corporation; lays the groundwork for corporate existence

2. Corporators those who compose the corporation, whether stockholders or members; includes incorporators, stockholders or

members

3. Incorporators those corporators mentioned in the articles of incorporation as originally forming and composing the corporation

and who executed and signed the articles of incorporation as such

4. Stockholders owners of shares of stock in a stock corporation; also called shareholders



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5. Members corporators of a corporation which has no capital stock

6. Subscribers persons who have agreed to take and pay for original unissued shares of a corporation formed or to be formed

7. Underwriter a person who guarantees on a firm commitment and/or declared best effort basis the distribution and sale of

securities of any kind by another company

Components of a corporation: Incorporators, Corporators, Stockholders/Members, Promoter, Board of Directors/Trustees, Executive

Committee, Officers of the corporation

CLASSIFICATION OF SHARES (Sec 6)

General Rule: The shares of stock in a corporation may be divided into classes or series of shares, or both, any of which classes of

series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation.

Exceptions:

1.) No share may be deprived of voting rights except those classified and issued as preferred or redeemable shares.

2.) There shall always be a class or series of shares which have complete voting rights.

3.) Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of

incorporation, except that banks, public utilities, insurance companies, trust companies, and building and loan associations

(BPI-TB) shall not be permitted to issue no par value shares of stock.

N.B. There can be no privilege or restriction on any share other than what is provided for in the articles of incorporation.

WHO CAN CLASSIFY SHARES:

1. Incorporators The classes and number of shares which a corporation shall issue are first determined by the incorporators as

stated in the AOI filed with the SEC.

2. BOD and SHs After the corporation comes into existence, they may be altered by the BOD and the SHs by amending the AOI

pursuant to Sec. 16

Doctrine of Equality of Shares Under the law, except as otherwise provided by the AOI and stated in the certificate of stock, each share

shall be in all respects equal to every other share. (Sec. 6, par. 5)

CAPITAL STRUCTURE

1. Capital stock amount fixed in the corporate charter to be subscribed and paid in cash, in kind or in property at the

organization of the corporation or afterwards and upon which the corporation is to conduct its operation

2. Capital value of the actual property of the corporation whether in money or property

3. Authorized capital stock capital stock divided into shares of par values as specified in the AOI

4. Subscribed capital stock amount of the capital stock subscribed whether fully paid or not

5. Outstanding capital stock portion of the capital stock issued to subscribers except treasury shares

6. Paid-up capital stock portion of the subscribed or outstanding capital stock that is paid

7. Unissued capital stock portion of the capital stock that is not issued or subscribed; does not vote and draws no dividends



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8. Legal capital amount equal to the aggregate par value and/or issued value of the outstanding capital stock.

CLASSES OF SHARES

1. Common shares basic class which is ordinarily and usually issued without extraordinary rights and privileges and the owners

thereof are entitled to a pro-rata share in the profits of the corporation and in its assets

A stockholder who owns at least one common share has the following rights:

a.) Right to vote at meetings;b.) Right to dividends;

c.) Right to examine corporate books.

2. Preferred Shares those which entitle the shareholder to some priority on dividends and asset distribution; always with par

value and enjoy preferences in dividends, voting, and corporate property upon dissolution (Sec. 6)

Preferences may be:

a.) Stated in the AOI; or

b.) Fixed by BOD when authorized by AOI, provided such terms and conditions shall be effective upon filing of a SEC certificate

Kinds of Preferred Shares:

a.) Preferred shares as to assets preference in distribution of assets after liquidation

b.) Preferred shares as to dividends to receive dividends at fixed rates before any dividends at all are paid to commonstockholders

1.) Cumulative preferred share payment of current dividends + dividends in arrears

2.) Non-cumulative preferred share current dividends only

3.) Participating preferred share stipulated dividends at the preferred rate + right to participate in the remaining profits

4.) Non-participating preferred share stipulated dividends only

5.) Cumulative-participating preferred share combination of the cumulative & participating

3. Redeemable shares (callable) those which permit the issuing corporation to redeem or purchase its own shares (Sec. 8);

redeemable at a fixed date or at the option of either the corporation or SH or both at a redemption price; may be issued only

when expressly so provided in the AOI

4. Treasury shares earlier issued as fully paid and have thereafter been acquired by the corporation by purchase, donation,

redemption, or through some lawful means (Sec. 9); only surplus earnings may be used for its purchase; may again be disposed

for a reasonable price; no voting right, no right to dividends while they remain in the treasury

Delinquent shares the corporation may bid at a public sale

5. Founders shares issued to organizers and promoters of a corporation in consideration of some supposed right or property

(Sec. 7)

6. Par value share one with a specific money value fixed in the AOI and appearing in the certificate of stock for each share of

stock of the same issue; primary purpose is to fix the minimum subscription or issue price of the shares, thus, assuring creditors

that the corporation would receive a minimum amount for its stocks

7. No par value share one without any stated or par value appearing on the face of the certificate of stock; has always an

issued value; same rights with holders of par value stock



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Limitations:

a.) Cannot have an issued price of less than P5.00;

b.) Entire consideration for its issuance constitutes capital so that no part of it should be distributed as dividends;

c.) Cannot be issued as preferred stocks;

d.) Cannot be issued by BPI-TB;

e.) AOI must state the fact that it issued no par value shares as well as the number of said shares;

f.) Once issued, deemed fully paid and non-assessable8. Voting share with right to vote; given to common stock, withheld from preferred

N.B. The rule is not one stockholder, one vote but one share, one vote because representation in a

corporation is commensurate to extent of ownership.

9. Non-voting share without right to vote; preferred or redeemable shares

* Matters where non-voting shares can vote upon (MAIDS)

a.) Merger or Consolidation

b.) Amendment of AOI

c.) Adoption & amendment of by-laws

d.) Incurring, creating or increasing bonded indebtedness

e.) Increase/decrease of capital stock

f.) Investment of corporate funds

g.) Dissolution

h.) Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property

Note: election of directors or trustees (Sec. 24) not included

10. Promotion share issued to promoters, or those in some way interested in the company, for incorporating the company, or for

services rendered in launching or promoting the welfare of the company, such as advancing fees for incorporating, advertising,

attorneys fees, surveying

11. Share in escrow subject to an agreement wherein share is deposited by the grantor with a third person to be kept by the

depositary until the performance of a certain condition or the happening of a certain event contained in the agreement

12. Watered stock issued not in exchange for its equivalent value either in cash, property, share, stock dividends, or services

- includes stocks:a.) issued without consideration (bonus share)

b.) issued as fully paid when the corporation has received a lesser sum of money than its par or issued value

c.) issued for a consideration other than actual cash such as property or services, the fair valuation of which is less than its par or

issued value

d.) issued as stock dividend when there are no sufficient retained earnings to justify it



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TITLE II - INCORPORATION & ORGANIZATION OF PRIVATE CORPORATIONS

NUMBER & QUALIFICATIONS OF INCORPORATORS (Sec 10)

1. natural persons;

2. not less than 5 but not more than 15;

3. of legal age;

4. majority must be resident of the Philippines (not necessarily citizens of the Philippines except when the law requires minimumFilipino participation);

Nota Bene: Filipino Citizenship requirement

a.) 100% Filipino owned

1.) Mass media;

2.) Retail trade (less than US$ 2,500,000);

3.) Small-scale mining;

4.) Private security agencies;

b.) 80% Filipino owned private radio communications network

c.) 70% Filipino owned

1.) Pawnshop;

2.) Advertising

d.) 60% Filipino owned

1.) Utilization, exploration, development of natural resources

2.) Public utilities

3.) Banking

e.) 40% Filipino owned

1.) Financing companies regulated by the SEC;

2.) Investment houses regulated by the SEC

5. each must own or subscribe to at least one share

There must be at least five (5) stockholders in a stock corporation.

STEPS IN THE CREATION OF A CORPORATION

1. Promotion a promoter is a person who, acting alone or with others, takes initiative in founding and organizing the business or

enterprise of the issuer and receives consideration therefore.

a.) Discovery

b.) Investigation

c.) Assembly

2. Incorporation

a.) Drafting and execution of AOI by the incorporators and other documents required for registration of the corp.;

b.) Filing with the SEC of the AOI;



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c.) Payment of filing and publication fees; and

d.) Issuance by the SEC of the certificate of incorporation.

3. Formal organization and commencement of the transaction of the business

a.) Adoption of By-Laws and filing of the same with the SEC;

b.) Election of BOD/T and officers;

c.) Establishment of principal office;

d.) Providing for subscription & payment of capital stock.

Incorporators vs. Corporators:

INCORPORATORS CORPORATORSsignatory to articles of incorporation stockholder of stock corporation or member of

non-stock corporationdo not cease to be such (Once an incorporator,

forever an incorporator)

cease to be such if they are no longer

stockholdersnumber is limited to 5-15 no restriction as to numbermust have contractual capacity may be such through a guardian

CORPORATE TERM (Sec 11)- 50 years maximum, extendible to not more than 50 years at any single instance

- May be shortened or extended

- Any number of extensions, no limits, perpetual life

- Can only be extended before it expires and within the last 5 years of its existence

Exception: unless there are justifiable reasons for an earlier extension as may be determined by SEC

- If there is an extension, the AOI must be amended; requires the 2/3 votes of the OCS (Sec. 16); those opposing stockholders can

exercise their appraisal right (Sec. 37) Remember: 50-50-5 Rule

Doctrine of Relation The filing and recording of a certificate of extension after the term cannot relate back to the date of the

passage of the resolution of the stockholders to extend the life of the corporation. However, the doctrine of relation applies if the

failure to file the application for extension within the term of the corporation is due to the neglect of the officer with whom the

certificate is required to be filed or to a wrongful refusal on his part to receive it.

MINIMUM CAPITAL STOCK REQUIRED OF STOCK CORPORATIONS (Sec 12 & 13)

Capital stock no minimum requirement as long as the paid up capital is not less than P5, 000.00

at least 25% of authorized capital stock must be subscribed by the stockholders at the time of incorporation

at least 25% of the total subscription must be paid at the time of subscription Remember: 25-25 Rule + P5,000 rule

N.B.These are mandatory requirements.



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CONTENTS/FORMS OF AOI (Sec 14, 15)

Articles of Incorporation (AOI) the document prepared by the persons establishing a corporation and filed with the SEC containing

the matters required by the code

CONTENTS OF ARTICLES OF INCORPORATION:

1. Name of corporation;

2. Purpose/s, indicating the primary and secondary purposes;3. Place of principal office;

4. Term/duration;

5. Names, citizenship, and residences of incorporators;

6. Number, names, citizenship and residences of directors/trustees

7. If stock corporation, amount of capital stock, number of share and in case of par value stock corporation, the par value of each

share;

8. Names, residences, number of shares and amounts of subscription of subscribers which shall not be less than 25% of authorized

capital stock;

9. Names, residences and amount paid by each subscriber on their subscription, which shall not be less than 25% of total

subscription;

10. Name of treasurer elected by subscribers; and

11. If a corporation engages in a nationalized industry, a statement than no transfer of stock will be allowed if it will reduce the stock

ownership of Filipinos to a percentage below the required legal minimum.

CORPORATE NAME (Sec 18)

The corporation acquires juridical personality under the name stated in the certificate of incorporation. It is the name of the

corporation which identifies and distinguishes it from other corporation, firms, or entities.

Limitations:

1. Names which are identical, deceptively similar to that of any existing corporation;

2. A name already protected by law;

3. A name which is patently deceptive, confusing or contrary to existing laws State can no longer be used as the first word of a corporate name (SEC Circular)

deceptively similar there is tendency that the ordinary person will be misled into thinking that such name is the same with

another one

Case: Converse vs. Universal Rubber Products (147 SCRA 154) Universal Converse is confusingly similar to Converse

Requisites:

a.) Complainant corporation acquired prior right over the use of the name

b.) Proposed name is either identical, deceptively or confusingly similar to that of any existing corporation or patently deceptive,

confusing or contrary to existing laws



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Change of name must comply with the formalities prescribed by law

1. Amendment of the AOI

2. Filing of the amendment with the SEC

3. Once approved, SEC issues an amended certificate of incorporation under the amended name

PURPOSES OF CORPORATION

- Must be lawful; if purpose is patently unconstitutional, illegal, immoral, or contrary to government rules and regulations, the sameis a ground for the rejection or disapproval by the SEC of the AOI; cannot be formed for the practice of a profession, e.g., law,

medicine, etc.

- Must be definitely stated

- Primary purpose must be stated

- Secondary purposes must be compatible with the primary purpose and with one another

PRINCIPAL OFFICE

- Must be the exact complete address (SEC requirement); must be the city or town, not merely the province

- Metro Manila can no longer be stated as principal office

- Change of address

a.) Change of city or municipality amendment of the AOI to be filed with the SEC

b.) If located within the same city or municipality notice only regarding the change of address

COMMENCEMENT OF CORPORATE EXISTENCE

- A corporation commences to have juridical personality and legal existence only from the moment the SEC issues to the

incorporators a certificate of incorporation under its official seal. Once issued, the certificate becomes the charter or corporate

franchise from which the authority of the corporation to operate as such flows.

Religious corporations from and after the filing with the SEC of the AOI, the chief archbishop, etc. shall become a corporation

sole

Cooperatives upon registration with the Cooperatives Development Authority (RA 6938, Sec. 16)

AMENDMENT OF AOI (Sec 16)

Corporate Charter an instrument or authority from the sovereign power bestowing the right or privilege to be and act as a

corporation.

PROCEDURE FOR AMENDMENT OF AOI

1. resolution by at least a majority vote of the Board; and

2. vote in a meeting or mere assent of 2/3 of the OCS, or in case of non-stock, by the members

subject to the appraisal right of dissenting stockholders



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Appraisal Right right of a stockholder to demand the fair value of his share after dissenting from a proposed corporate action

involving a fundamental change in the corporation in the cases provided by law; Sec 81-86

Corporations Governed by Special Law (banks, banking & quasi-banking institutions, building & loan associations, trust companies &

other financial intermediaries, insurance companies, public utilities, educational institutions) AOI or amendment thereto must be

accompanied by a favorable recommendation of the appropriate government agency, to the effect that such AOI or amendment is in

accordance with law.

GROUNDS FOR REJECTION/DISAPPROVAL OF AOI or AMENDMENT (Sec 17)

1. No substantial compliance with the required form

2. Purpose/s are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations

3. Treasurers affidavit is false

4. Citizenship requirement has not been complied with

Keyword: NUT-C

WHAT CANNOT BE AMENDED IN THE AOI:

- Those matters referring to facts existing as of the date of the incorporation, such as:

1. Name of incorporators;

2. Names of original subscribers to the capital stock of the corporation and their subscribed and paid up capital;

3. Treasurer elected by the original subscribers;

4. Members who contributed to the initial capital of a non-stock corporation;

5. Date and place of execution of the AOI;

6. Witnesses to and acknowledgment of the articles.

ARTICLES OF INCORPORATION vs. BY-LAWS:

Articles of Incorporation By-Laws

Essentially a contract between the corporation

and the stockholders/members; between the

stockholders/members inter se; and betweenthe corporation and the State (must be

notarized)

Rule for the internal government of the

corporation but has the force of a contract

between the corporation and thestockholders/members and between the

stockholder and members themselvesExecuted before incorporation Usually executed after the incorporation

although Sec. 46 allows simultaneous filing of

the twoA condition precedent in the acquisition of

corporate existence

A condition subsequent

Amended by a majority of the directors/trustees

and stockholders representing 2/3 of the

May be amended by a majority vote of the BOD

and majority vote of OCS or a majority of the



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outstanding capital stock or 2/3 of the members

in case of non-stock corporations

members in non-stock corporations

Power to amend/repeal articles cannot be

delegated by the stockholders/members to the

BOD/BOT

Power to amend/repeal by-laws or adopt new

by-laws may be delegated by the 2/3 of the OCS

or 2/3 of the members in case of non-stock

corporation

NON-USE OF CORPORATE CHARTER & CONTINUOUS INOPERATION (Sec 22)

1. Non-user for 2 years when the corporation does not formally organize and commence the transaction of its business or the

construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be

deemed dissolved (automatic).

2. Non-user for 5 years when the corporation has commenced the transaction of its business but subsequently becomes

continuously inoperative for a period of at least five years, the same shall be a ground for the suspension or revocation of its corporate

franchise or certificate of incorporation; not automatic, requires notice and hearing.

TITLE III BOARD OF DIRECTORS/TRUSTEES/OFFICERS

BOARD OF DIRECTORS & TRUSTEES (Sec 23)

QUALIFICATIONS:1. For a stock corporation, ownership of at least one share of the capital stock of the corporation in his own name, and if he ceases

to own at least one share in his own name, he automatically ceases to be a director. For a non-stock corporation, only members

of the corporation can be elected to the BOT.

What is material is the legal title to, not beneficial ownership of the stocks appearing on the books of the corporation.

A person who does not own a stock at the time of his election or appointment does not disqualify him as a director if he becomes

a shareholder before assuming the duties of his office.

2. A majority of the directors/trustees must be residents of the Philippines.

3. Must not have been convicted by final judgment of an offense, punishable by imprisonment for a period exceeding 6 years, or a

violation of the Corporation Code committed within 5 years prior to the date of his election or appointment. (Sec 27)

4. Must be of legal age.5. Only natural persons can be elected directors/trustees.

6. Other qualifications as may be prescribed in the by-laws of the corporation or in special laws or regulations.

TERM OF OFFICE

- Hold office for one (1) year until their successors are elected and qualified

Holdover Principle If no election is conducted or no qualified candidate is elected, the directors or trustees shall continue to

act as such in a hold-over capacity until an election is held and a qualified candidate is so elected.



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GENERAL RULE Unless otherwise provided in the Code, all corporate powers and prerogatives are vested directly in the Board of

Directors or Trustees.

Exceptions:

1. In case of an Executive Committee authorized in the by-laws;

2. Contracted manager which may be an individual, a partnership or another corporation (Note Sec. 44 if contracted manager is

another corporation);

3. Close corporations stockholders may directly manage the business of the corporation instead, if the AOI so provide. Principle on delegation of board power the Board may validly delegate some of its functions and powers to officers,

committees or agents

N.B. The power to purchase real property is vested in the board. While a corporation may appoint agents to negotiate for the purchase

of real property needed by the corporation, the final say will have to be with the board, whose approval will finalize the transaction. A

corporation can only exercise its powers and transact its business through its board of directors and through its officers and agents when

authorized by a board resolution or by its by-laws. (Sps. Firme vs. Bukal Enterprises, GRN 146608, Oct. 23, 2003)

ELECTION OF DIRECTORS OR TRUSTEES (Sec 24)

STOCK CORPORATION NON-STOCK Presence during election

Owners of a majority of the

OCS, in person or by proxy,

must be present at the election

of the directors.

Majority of the members

entitled to vote in person or by

proxy, if allowed in its AOI or

by-laws, must be present.Manner of voting

Cumulative voting is

mandatory; a matter of right

granted by law to each SH with

voting rights

Cumulative voting is generally

not available unless allowed by

the AOI or by-laws, since each

member is entitled only to one

vote

METHODS OF VOTING

A. Straight Voting every SH may vote such number of shares for as many persons as there are directors to be elected.

To illustrate: If A owns 10 shares of stock in a corporation and there are 5 directors to be elected, he is entitled to 50 votes which

he may give to the 5 candidates he chose by giving 10 votes each. The votes are distributed equally among the 5 candidates of

his choice without preference.

B. Cumulative Voting for one candidate a SH is allowed to concentrate his votes and give one candidate as many votes as the

number of directors to be elected multiplied by the number of his shares shall equal.



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To illustrate: In the above example, A may cast all the 50 votes in favor of any one candidate. Suppose there are 50 shares and

40 of these shares are owned by A while the remaining 10 shares are owned by B, C, D and E. if there are 5 directors to be

elected, A is entitled to 200 votes. The highest number of votes that A can give each of his 4 candidates is 50. So, there is one

remaining slot to complete the 5 directors. B, C, D and E can now cumulate their votes in favor of one candidate and thus secure

representation in the board.

C. Cumulative Voting by distribution a SH may cumulate his shares by multiplying also the number of his shares by the

number of directors to be elected and distribute the same among as many candidates as he shall see fit. To illustrate: If A owns 10 shares, he is entitled to 50 votes if there are 5 directors to be elected. A may distribute his votes to

candidates E, F and G by giving E, 20 votes, F, 15 and G, 15. Any combination may be adopted as long as the total number of

votes cast by him does not exceed 50 votes which is the number of shares owned by him multiplied by the number of directors to

be elected.

Note: Formula for determining the votes needed in cumulative voting:

D = [A x B] / [C + 1] + 1

E = D x C

A Total number of outstanding shares entitled to vote

B Number of directors desired to be elected

C Total number of directors to be elected

D Number of shares necessary to elect desired number of directors

E Number of votes required to elect desired number of directors

Members of non-stock corporations may cast as many votes as there are trustees to be elected but may not cast more than one

vote for one candidate, unless otherwise provided in the AOI.

Limitations:

1. At any meeting of SH/members called for the election of D/T, there must be present either in person or by proxy, the owners

of the majority of the OCS or majority of the members entitled to vote.

2. Election must be by ballot if requested by any voting member/SH.

3. A SH cannot be deprived in the AOI/by-laws of his statutory right to use any of the methods of voting in the election of

directors.

4. No delinquent stock (unpaid subscription) shall be voted.5. The candidates receiving the highest number of votes shall be declared elected. A majority vote is not necessary, only

plurality. However, it is necessary that there is a quorum and in the absence thereof, election shall be

considered invalid.

CORPORATE OFFICERS; QUORUM (Sec 25)

Quorum such number of the membership of a collective body as is competent to transact its business or do any other corporate act

1. As stipulated in the AOI/by-laws (greater majority); or

2. Majority of the number of directors or trustees plus 1



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Every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as

a corporate act, except:

election of officers which shall require the vote of a majority of all the members of the board.

Directors or trustees cannot attend or vote by proxy at board meetings.

CORPORATE OFFICERS

1. President must be a director and may not concurrently be the treasurer or secretary2. Vice-President has the authority to act or to perform any duty of the office in the absence of the president or if the position of

president becomes vacant

3. Treasurer may or may not be a director

4. Secretary need not be a director unless required by the by-laws; must be a resident and citizen of the Philippines

5. Other officers as may be provided in the by-laws

N.B. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as:

a.) President and Secretary, or

b.) President and Treasurer

at the same time.

Authority of officers is generally derived from law; by-laws; or authorization from the board, either expressly or impliedly by habit,

custom or acquiescence in the general course of business.

Doctrine of Apparent Authority If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of

an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against

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

CLASSIFICATION OF POWERS OR AUTHORITY:

1. Inherent authority to act and bind the corporation which the officer has by reason of his office although it may not be

sanctioned by express authority

2. Express every power or authority expressly conferred upon him by law and the by-laws of the corporation3. Implied includes all incidental authority as is necessary, usual and proper to effectuate the main authority expressly conferred

4. Apparent or Ostensible when in the usual course of the business, an officer or agent is held by such corporation or has been

permitted to act for it in such way as to justify third persons who deal with him in assuming that he is doing an act or making a

contract within the scope of his authority.

5. Authority by estoppel when a corporation, by its voluntary act, places an officer or agent in such a position or situation that

persons of ordinary prudence are justified in assuming that he has authority to perform the act in question

REMOVAL OF DIRECTORS/TRUSTEES; VACANCIES (Sec 28, 29)

Requisites:



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1. With or without cause, by a vote of 2/3 of OCS or by 2/3 of the members in a non-stock corporation

Exception: when a director has been elected by virtue of the minoritys exercise of cumulative voting rights, such director may be

removed only for cause. (Sec. 28)

2. Takes place either at a regular/special meeting called for the purpose

3. With previous notice of the time and place of such meeting, as well as of the intention to propose such removal

May be called at the instance of any SH or member:

a.) If officers refuse to call a meeting to consider the removal of the directorb.) With due notice

VACANCIES IN THE OFFICE OF DIRECTOR OR TRUSTEE

A vacancy in the office of director or trustee may be filled as follows:

1. By the Stockholders or Members:

a.) If the vacancy results from the removal by the SHs/members;

b.) Expiration of term;

c.) If the vacancy occurs other than by removal or by expiration of term such as death, abandonment, resignation or

disqualification, if the remaining directors/trustees do not constitute a quorum for the purpose of filling the vacancy;

d.) If the vacancy may be filled by the remaining directors/trustees but the board refers the matter to the SHs/members;

e.) If the vacancy is created by reason of an increase in the number of directors or trustees.

2. By the members of the Board (if still with quorum) at least a majority of them are empowered to fill any vacancy

occurring in the board OTHER than by:

a.) Removal by the SHs/members; or

b.) Expiration of term.

COMPENSATION OF BOARD MEMBERS (Sec 30)

G.R.: Directors are not entitled to receive any compensation except for reasonable per diems.

Exceptions:

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

2. When granted by the vote of stockholders representing at least a majority of the OCS at a regular or special meeting

Limitation: the amount of compensation shall not exceed 10% of the net income before income tax of the corporation during thepreceding year.

LIABILITY OF DIRECTORS/TRUSTEES & OFFICERS (Sec 31)

Three-fold duties of Directors:

1. Duty of Obedience to direct the affairs of the corporation only in accordance with the purposes for which it was organized

Based on Sec. 25 The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the

by-laws.

2. Duty of Diligence directors and officers are required to exercise due care in the performance of their functions.



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Based on Sec. 31 directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation

or who are guilty of gross negligence or bad faith in directing the affairs of the corporation shall be liable jointly and severally for

all damages resulting there from, suffered by the corporation, its stockholders or members and other persons.

3. Duty of Loyalty the director or officer owes loyalty and allegiance to the corporation a loyalty that is undivided and an

allegiance that is influenced by no consideration other than the welfare of the corporation.

Based on Sec. 31 directors or trustees who acquire any pecuniary or personal interest in conflict with their duty as such

directors or trustees shall be liable jointly and severally for all damages resulting there from.

Nature of Powers of Board of Directors or Trustees

1. Theory of original power powers of the board are original and undefeated. The SHs or members do not confer, nor can they

revoke those powers.

2. They are derivative only in the sense of being received from the State in the act of incorporation.

BUSINESS JUDGMENT RULE

- The board is the business manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the

courts. (Montelibano vs. Bacolod-Murcia Milling, GRN 15092, May 18, 1962)

- Courts cannot undertake to control the discretion of the board of directors about administrative matters as to which they have

the legitimate power of action, and contracts intra vires entered into by the board of directors are binding upon the corporation

and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of

the rights of the minority. (Gamboa vs. Victoriano, GRN 40620, May 5, 1979)

Consequences:

a.) Resolution, contracts and transactions of the Board cannot be overturned or set aside by the SH or members and not even by

the courts under the principle that the business of the corporation has been left to the hands of the Board; and

b.) Directors and duly authorized officers cannot be held personally liable for acts or contracts done with the exercise of their

business judgment.

Exceptions:

1.) When the Corporation Code expressly provides otherwise;2.) When the Directors or officers acted with fraud, gross negligence or in bad faith;

3.) When Director or officers act against the corporation in conflict-of-interest situation.

LIMITATIONS ON POWERS OF BOD/T

1. Limitations imposed by the Constitution, statutes, AOI or by-laws

2. Cannot perform constituent or those acts which involve fundamental changes in the corporation which require the approval of its

SHs/members.

3. Cannot exercise powers not possessed by the corporation.



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PERSONAL LIABILITY OF DIRECTORS

G.R. Directors and officers are not solidarily liable with the corporation.

Exceptions:

In the following cases, personal liability may be incurred by directors and trustees or the officers in some cases, when they:

1. Willfully and knowingly vote for and assent to patently unlawful acts of the corporation (Sec 31);

2. Are guilty of gross negligence or bad faith in directing the affairs of the corporation (Sec 31);

3. Acquire any personal or pecuniary interest in conflict of their duty (Sec 31);

4. Consent to the issuance of watered stocks, or, having knowledge thereof, fails to file objections with the secretary (Sec 65);

5. Agree or stipulate in a contract to hold himself personally liable with the corporation; or

6. By virtue of a specific provision of law.

Note: A director is not liable for misconduct of co-directors or other officers unless:

1.) He connives or participates in it; or

2.) He is negligent in not discovering or acting to prevent it

REMEDIES IN CASE OF MISMANAGEMENT The remedies of the stockholders in the event of mismanagement or abuse of powers

are the following:

a.) Receivership;

b.) Injunction if the act has not yet been done;c.) Dissolution if abuse amounts to a ground for quo warranto but Solicitor General refuses to act;

d.) Derivative suit or complaint filed with SEC

CONTRACTS OF SELF-DEALING DIRECTORS, TRUSTEES OR OFFICERS (Sec 32)

Self-dealing D/T/O those who personally contract with the corporation in which they are directors, trustees or officers

- Such contracts are VOIDABLE at the option of the corporation

UNLESS:

a.) The presence of such D/T in the board meeting approving the contract was not necessary to constitute a quorum for such

meeting;b.) The vote of such D/T in the board meeting approving the contract was not necessary for the approval of the contract;

c.) The contract is fair and reasonable under the circumstances;

d.) In the case of an officer, there was previous authorization by the BOD.

If conditions a or b is absent, said contract may be ratified by the vote of the SHs representing at least 2/3 of the OCS or 2/3

of the members in a meeting called for the purpose, provided that full disclosure of the adverse interest of the director/trustee

involved is made at such meeting and the contract is fair and reasonable.

CONTRACTS BET. CORPORATIONS WITH INTERLOCKING DIRECTORS (Sec 33)



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Corporation with Interlocking Directors one, some or all of the directors in one corporation is/are also a director in another

corporation.

Interlocking directorship by itself is not prohibited under the Corporation Code. However, the by-laws may contain provisions that

disallow the same.

A contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone. These

contracts are valid provided that:

1.) The contract is not fraudulent; and2.) The contract is fair and reasonable under the circumstances.

But if the interlocking directors interest in one corporation or corporations is substantial (exceeding 20% of the OCS), then all the

conditions prescribed in Sec. 32 on self-dealing directors must be present with respect to the corporation in which he has nominal

interest.

DISLOYALTY OF A DIRECTOR (Sec 34)

Doctrine of Corporate Opportunity A director who, by virtue of his office, acquires for himself a business opportunity which

should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, is guilty of disloyalty and should

therefore account to the latter for all such profits by refunding the same.

Application: Unless his act is ratified, a director shall refund to the corporation all the profits he realizes on a businessopportunity which:

1.) The corporation is financially able to undertake;

2.) From its nature, is in line with corporations business and is of practical advantage to it; and

3.) The corporation has an interest or a reasonable expectancy.

Note: The rule shall apply notwithstanding the fact that the director risked his own funds in the venture.

A business opportunity ceases to be corporate opportunity and transforms to personal opportunity where the corporation refuses

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

EXECUTIVE COMMITTEE (Sec 35)

- A body created by the by-laws and composed of not less than 3 members of the board which, subject to the statutory limitations,

has all the authority of the board to the extent provided in the board resolution or by-laws.

- May act by a majority vote of all of its members.

- Its decisions are not subject to appeal to the board. However, if the resolution of the ExeCom is invalid, i.e., not one of the powers

conferred to it, it may be ratified by the board.

- If the ExeCom is not validly constituted, the members thereof may be considered as de facto officers.

Limitations of the powers of the ExeCom

- It cannot act on the following:

1. Matters needing stockholder approval;

2. Filling up of board vacancies;



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3. Amendment, repeal or adoption of by-laws;

4. Amendment or repeal of any resolution of the board which by its express terms is not amendable or repealable; and

5. Cash dividend declaration

Code of Corporate Governance

Applicability:

The Code of Corporate Governance shall be applicable to:

1. Corporations whose securities are registered or listed;

2. Corporations which are grantees of permits/licenses and secondary franchise from the Commission; and

3. Public companies.

Public Company any corporation with a class of equity securities listed on an exchange or with assets in excess of 50 million

pesos and having 200 or more holders, at least 200 of which are holding at least 100 shares of a class of its equity securities.

Corporate Governance a system whereby shareholders, creditors and other stakeholders of a corporation ensure that

management enhances the value of the corporation as it competes in an increasingly global market place.

Mandatory corporate governance rules are necessary for 2 reasons:

1.) To overcome the collective action problem resulting from the dispersion among stockholders; and

2.) To ensure that the interests of all relevant constituencies are represented.

APPRAISAL RIGHT (Title X, Secs. 81-86)

- Refers to the right of stockholders to demand the fair value of his shares after dissenting from a proposed corporate action

involving a fundamental change in the corporation in cases provided by law

A. When Right of Appraisal may be exercised:

1.) Extend or shorten corporate term (Sec. 11);

2.) Restriction of rights or privileges of shares through amendment of the AOI (Sec. 16);

3.) Sale of all or substantially all corporate assets (Sec. 40);

4.) Equity investment in non-primary purpose business (Sec. 42);

5.) Merger or consolidation (Sec. 77); All the above require the 2/3 votes of the OCS. The appraisal right refers only to stockholders who have actually dissented from

the above transactions.

B. Procedure for the Exercise of the Right:

1.) Written demand must be submitted by the dissenting stockholder on the corporation for the payment of the fair value of the

shares within 30 days from the date the vote was taken. (Failure to do so shall mean waiver of the right.)

Effect: The dissenting stockholder loses all rights as a stockholder including dividend rights; only one right remains and that

is the right to receive payment of the fair value of his shares.

2.) Within 10 days from demand, the dissenting stockholder must submit his certificates of stocks for notation that such

certificates represent dissenting shares. (Failure to do so shall mean waiver of the right.)



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N.B. If such shares are subsequently disposed of and new certificates are issued to the transferee, the right of appraisal is

automatically extinguished, the transferee becomes a regular stockholder of the corporation.

a.) 60 days from the approval of the corporate action, the corporation and the dissenting stockholders shall agree as to the

fair value of the dissenting shares. If no agreement is reached after the 60-day period, it shall be determined and

appraised by 3 disinterested persons: one appointed by the SH; another appointed by the corporation; and the third

person to be chosen by the two thus appointed.

3.) Findings of the majority of the appraisers shall be final and the award shall be payable within 30 days after it is made.

4.) The dissenting stockholder can only be paid if there are unrestricted retained earnings.

Nota Bene: If the dissenting stockholder is not paid within 30 days from after the award, he shall automatically be restored to all

his rights as stockholder.

C. Outline of Instances when Right of Appraisal is Lost:

1.) Failure to make written demand within 30 days after the vote was taken on the corporate act;

2.) Failure to surrender the certificate of stock within 10 days from demand for notation;

3.) Non-existence of unrestricted profits to cover payment of the fair value of dissenting shares within 30 days from date of

award;

4.) Subsequent transfer of the shares which have been annotated when new certificates of stock are issued;

5.) When the corporation consents a demanding stockholder to withdraw the exercise of appraisal right;

6.) Abandonment of corporate action;7.) Disapproval of action by SEC.

D. Who shall bear the Cost of Appraisal

1.) Corporation

a.) where the value as determined by the appraisers is higher than what was offered by the corporation to the dissenting

stockholder; or

b.) if action is filed to recover the fair value of the shares and the stockholders refusal to receive payment is justified.

2.) Dissenting stockholder

a.) if the value determined by appraisers is approximately the same as the price offered by the corporation; or

b.) where an action to recover is filed and the refusal of such stockholder to receive payment is unjustified.

TITLE IV POWERS OF CORPORATIONS

CORPORATE POWERS AND CAPACITY (Sec 36)

Kinds:

1. Express those expressly authorized by the Corporation Code and other laws, and its AOI

2. Incidental those that are incidental to the existence of the corporation

3. Implied those that can be inferred from or necessary for the exercise of the express powers.

Classification of Implied Powers:

a.) Acts in the usual course of business;



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b.) Acts to protect debts owing to the corporation;

c.) Acts which involve embarking in a different business usually to collect debts out of profits;

d.) Acts to protect or aid employees;

e.) Acts to increase business

GENERAL POWERS & CAPACITY

2 Sources of Express Powers:

a.) Those enumerated in Sec. 36, generally;

b.) Purpose clause of the AOI, specifically

1. To sue and be sued;

2. Succession by its corporate name for the term of its existence;

3. Adopt and use a corporate seal;

4. Amend its AOI;

5. Adopt by-laws not contrary to law, morals or public policy and to amend or repeal the same;

6. Issue or sell stocks (stock corporations) or to admit members (non-stock corporations);

7. Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with all types of properties;

8. Enter into merger or consolidation;9. Make reasonable donations;

10. Establish pension, retirement and other plans for the benefit of its directors, trustees, officers and employees; and

11. Such other powers as may be essential or necessary to carry out its purpose/s as stated in the AOI.

OTHER POWERS:

1. Extension or shortening of corporate term (Sec 37);

2. Power to increase or decrease capital stock/Power to incur, create or increase bonded indebtedness (Sec 38);

3. Power to deny pre-emptive right (Sec 39);

4. Sell, dispose, lease, encumber all or substantially all or corporate assets (Sec 40);

5. Power to acquire own shares (Sec 41);6. Invest corporate funds in another corporation or business or for any other purpose other than the primary purpose (Sec 42);

7. Power to declare dividends out of unrestricted retained earnings (Sec 43);

8. Power to enter into management contract (Sec 44).

ULTRA VIRES acts performed by a corporation in excess of its corporate powers and which are generally not binding on the

corporation.

An ultra vires act is merely voidable which may be enforced by performance, ratification, or estoppel, while an illegal act is void

and cannot be validated.

Requisites for valid ratification of an ultra vires act:



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1.) Act or contract must be consummated, not merely executory;

2.) Creditors are not prejudiced, or all of them have given their consent;

3.) Rights of the public or the State are not involved; and

4.) All the stockholders must give their consent.

Rules on the effects of ultra vires acts:

1.) A wholly executor ultra vires contract or act cannot be enforced nor can damages be recovered for its breach;

2.) A wholly executed ultra vires contract or act shall not be interfered with as between the parties or persons whose rights arederived therefrom; but the State can always question said contract or act;

3.) When an ultra vires act is executed on one side but executor contract on the other side who received benefits therefrom,

recovery can be had by the former; and

4.) The title of the corporation to property cannot be questioned on the ground that it acquired the property through an ultra

vires contract of transfer.

POWER TO EXTEND OR SHORTEN CORPORATE TERM (Sec 37)

Requirements:

a.) Majority vote of the BOD/T;

b.) Written notice of the proposed action and the time and place of meeting shall be served to each stockholder or member either by

mail or personal service;c.) Ratification in a meeting by 2/3 of the OCS or 2/3 of the members, as the case may be.

This actually requires the amendment of the AOI; meeting must be duly called for the purpose; dissenting stockholders may

exercise appraisal right.

The extension of corporate life cannot be made within the 3-year liquidation period, because that would constitute new business.

POWER TO INCREASE OR DECREASE CAPITAL STOCK; INCUR, CREATE OR INCREASE BONDED INDEBTEDNESS (Sec 38)

Requirements:

a.) Majority vote of the members of the BOD/T;

b.) 2/3 vote of the OCS or the members, as the case may be, in a meeting duly called for the purpose with notice previously given;

c.) Certificate of said corporate act shall be signed by majority of the members of the Board and the Chairman and Secretary of thestockholders meeting;

Corporate act shall take effect from and after SEC approval.

d.) Certificate must be accompanied by the Treasurers Affidavit certifying compliance with the 25%-25% requirements as to stock

subscription.

No decrease in capital stock shall be approved by SEC if it will prejudiced corporate creditors;

Bonds issued by the corporation shall be registered with SEC which is given the power to determine the sufficiency of the terms

of such bonds.

Note Well:



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a.) When a corporation increases capital stock, stockholders are entitled to a PRE-EMPTIVE RIGHT to subscribe to a sufficient number

of shares in order to maintain their previous relative strong power. The corporation must give the stockholder a reasonable period

within which to exercise such right.

b.) Dissenting stockholders cannot exercise the right of appraisal in this case.

POWER TO DENY PRE-EMPTIVE RIGHT (Sec 39)

Pre-emptive Right the shareholders right to subscribe to all issues or disposition of shares of any class in proportion to his present

stockholdings, the purpose being to enable the shareholder to retain his proportionate control in the corporation and to retain his equity

in the surplus.

Pre-emptive right not available in the following:

1.) Shares to be issued to comply with laws requiring stock offering or minimum stock ownership by the public;

2.) Shares issued in good faith in exchange for property needed for corporate purposes;

3.) Shares issued in payment of previously contracted debts;

4.) In case the right is denied in the AOI.

DISPOSITION OF ALL OR SUBSTANTIALLY ALL CORPORATE ASSETS

Requirements:

a.) Majority vote of the members of the Board;b.) 2/3 votes of the OCS or members, as the case may be, in a meeting called for the purpose.

Dissenting stockholder may exercise their right of appraisal.

Despite approval by the stockholders or members, it is not mandatory for the Board to continue with the disposition.

Note Well:

a.) substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the

business or accomplishing the purpose for which it was incorporated.

b.) Disposition of properties in the regular course of the business does not need approval by or authority of stockholders or

members.

POWER TO ACQUIRE OWN SHARES (Sec. 41)- For legitimate business purposes and subject to the condition that there are unrestricted retained earnings to cover the shares

purchased or acquired.

Instances when corporation may buy its own stocks:

1.) To complete fractional shares;

2.) To collect indebtedness or in case of delinquency sales; and

3.) The exercise of right of appraisal.

TRUST FUND DOCTRINE: The capital stock, property and other assets of the corporation are regarded as equity in trust for the

payment of the corporate creditors.



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Basis of Trust Fund Doctrine

a.) Sec. 43 the corporation can declare dividends only out of unrestricted retained earnings.

b.) Sec. 122 no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all

its debts and liabilities.

POWER TO INVEST FUNDS IN ANOTHER CORPORATION OR BUSINESS FOR NON-PRIMARY PURPOSE (Sec. 42)

Requirements:

a.) Majority vote of the BOD/T;

b.) Ratification by 2/3 of OCS or 2/3 of the members, as the case may be.

Right of appraisal may be exercised by dissenting stockholders.

Note: Where the investment is reasonably necessary to accomplish the primary purpose, a board resolution is sufficient.

POWER TO DECLARE DIVIDENDS (Sec. 43)

GR: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock.

Exceptions:

1.) When justified by definite corporate expansion projects or programs approved by the board;

2.) When the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign,

from declaring dividends without its consent and such consent has not yet been secured; or

3.) When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as

when there is a need for special reserve for probable contingencies.

Form of Dividends:

a.) Cash Dividend can be declared by the board only

b.) Property Dividend may be payable in bonds or in stock of another corporation

c.) Stock Dividend declared by the board but requires the approval of 2/3 of the OCS at a regular or special meeting duly called for

such purpose; cannot be issued to non-stockholders even for services rendered

POWER TO ENTER INTO MANAGEMENT CONTRACT (Sec 44)

Requirements:a.) Resolution of the board; and

b.) Majority vote of the OCS or members, as the case may be, in a meeting called for the purpose.

DERIVATIVE SUIT

- An action brought about by minority shareholders in the name of the corporation to redress wrongs committed against the

corporation, for which the directors refuse to sue

- A remedy designed by equity and has been the principal defense of the minority shareholders against the abuses of the majority.

Requisites for filing:

a.) Party bringing suit should be a shareholder as of the time of the act or transaction complained of;



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b.) He has extinguished intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but

the latter has failed or refused to heed his plea; and

c.) Cause of action actually devolves on the corporation, the wrongdoing or harm having been caused to the corporation and not to

the particular stockholder bringing the suit.

TITLE V BY-LAWS

BY-LAWS rules of action adopted by a corporation for its internal government and for the regulation of conduct, and prescribe the

rights and duties of its stockholders or members towards itself and among themselves in reference to the management of its affairs.

FUNCTIONS:

1. Supplement the AOI;

2. Provide for details not important enough to be stated in the AOI;

3. Continuing rule for the government of the corporation and the individuals composing it;

4. Define the rights and duties of corporate officers and directors/trustees and of stockholders/members towards the corporation

and among themselves;

5. Source of authority for corporate officers and agents of the corporation.

REQUISITES FOR THE VALIDITY OF THE BY-LAWS:

1. Must not be contrary to law nor with the Corporation Code;

2. Must not be contrary to morals and public policy;

3. Must not impair the obligations of contracts

Amendments to the by-laws cannot impair the obligation of existing contracts or any vested right, e.g., the right of an employee

to security of tenure cannot be adversely affected by any amendment in the by-laws, hence his services can only be terminated

for causes provided for by law.

4. Must be general and uniform;

5. Must be consistent with the charter or AOI; and6. Must be reasonable, not arbitrary or oppressive.

ADOPTION OF BY-LAWS REQUIRED VOTES:

A. If adopted prior to incorporation must be signed and approved by all the incorporators and filed with the SEC together with the

AOI.

B. If adopted and filed after incorporation affirmative vote of the SHs representing at least a majority of the OCS or majority of the

members (non-stock) shall be necessary; it shall be signed by the SHs/members voting for them.

A copy thereof duly certified by a majority of the D/T and countersigned by the secretary of the corporation shall be filed with the

SEC which shall be attached to the original AOI



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Effectivity upon approval of the SEC

Effect of non-filing within the required period Failure to submit the by-laws within 30 days from incorporation does not

automatically dissolve the corporation. It is merely a ground for suspension or revocation of its charter after proper notice and

hearing. The corporation is, at the very least, a de facto corporation whose existence may not be collaterally attacked.

CONTENTS OF BY-LAWS (Sec. 47)

1. Time, place and manner of calling and conducting regular or special meetings of the directors/trustees;2. Time and manner of calling and conducting regular or special meetings of the stockholders/members;

3. Required quorum in meetings of stockholders or members and the manner of voting therein;

4. Form of proxies of stockholders and members and the manner of voting them;

5. Qualifications, duties and compensation of directors, trustees, officers and employees;

6. Time for holding the annual election of directors or trustees and the mode or manner of giving notice;

7. Manner of election of appointment and the term of office of all officers other than directors or trustees;

8. Penalties for violation of the by-laws;

9. In case of stock corporations, the manner of issuing certificates; and

10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business.

AMENDMENT/REPEAL/ADOPTION OF NEW BY-LAWS (Sec. 48)

a.) With SHs/Members approval:

1.) Majority vote of the members of the Board;

2.) Majority of the OCS/members in a meeting duly called for the purpose

b.) By the Board of Directors/Trustees: 2/3 of the OCS/members may delegate to the board the power to amend/repeal/adopt new

by-laws

Such power of the board may be revoked by majority vote of the OCS/members.

The power to adopt the first original by-laws cannot be delegated to the BOD/T; only the power to adopt new by-laws that will

supplant the old by-laws can be validly delegated.

AOI vs. BY-LAWS:AOI BY-LAWS

NatureCondition precedent in theacquisition of corporateexistence

Condition subsequent(absence merely furnishes aground for the revocation ofthe franchise)

PurposeEssentially a contractbetween the corporation andthe SHs/members; between

For the internal governmentof the corporation but hasthe force of a contract



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the SHs/members inter se;and between the corporationand the State

between the corporation andthe SHs/members, andbetween the SHs/members

Time of executionExecuted beforeincorporation

May be executed afterincorporation (may be filedsimultaneously with the AOI)

AmendmentAmendment by a majority ofthe D/T and 2/3 of theOCS/members

May be amended by amajority vote of the BOD andmajority of the OCS/members

TITLE VI MEETINGS

KINDS OF CORPORATE MEETINGS

1. Meetings of stockholders or members:

a.) Regular held annually on a date fixed in the by-laws, or if not fixed, on any date in April as determined by the board

b.) Special held at any time deemed necessary or as provided in the by-laws2. Meetings of directors or trustees:

a.) Regular held by the board monthly, unless the by-laws provide otherwise

b.) Special held by the board at any time upon the call of the president or as provided in the by-laws

Where? anywhere in or out of the Philippines, unless the by-laws provide otherwise.

Note: Whenever there is no person authorized to call a meeting, the SEC, upon petition of a stockholder or member, and on the showing

of good cause, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving

proper notice.

PLACE AND TIME OF MEETINGS OF SHS/MEMBERS (Sec. 51)

- In the city or municipality where the principal office of the corporation is located, and if practicable, in the principal office of thecorporation.

Even if the meeting be improperly held or called, any business transacted at such meeting shall be valid if within the powers or

authority of the corporation, and provided that all the stockholders or members of the corporation are present or duly

represented at the meeting.

QUORUM OF MEETINGS (Sec. 52)

- Unless otherwise provided for in the Code or in the By-Laws, a quorum shall consist of the stockholders representing a majority of

the OCS or a majority of the members in case of non-stock corporations.



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A corporation may prescribe a greater voting requirement in its AOI or by-laws in order to protect the rights of the minority

stockholders or members. Such higher number is also the number necessary to constitute a quorum.

Once a quorum is called and the meeting was called to order, even if some people walked out and the people left are less than

the majority, the proceedings will be valid so long as there is a quorum when the meeting was called to order.

For stock corporations, the quorum referred to in Sec. 52 of the Corporation Code is based on the number of outstanding voting

stocks. For non-stock corporations, only those who are actual, living members with voting rights shall be counted in determining

the existence of a quorum during members meetings. Dead members shall not be counted.

REQUIREMENTS OF A VALID MEETING:

1. Must be held at the proper place;

2. Must be held at the stated date and at the appointed time or at a reasonable time thereafter;

3. Must be called by the proper person:

a.) The person/s designated in the by-laws has authority to call stockholders or members meeting.

b.) In the absence of such provision in the by-laws, it may be called by a director or trustee or by an officer entrusted with the

management of the corporation.

c.) A stockholder or member may make the call or order of the SEC whenever for any cause, there is no person authorized to call

a meeting.

d.) The special meeting for the removal of directors or trustees may be called by the secretary or by a SH/member.

4. There must be previous notice.

Regular meeting written notice must be sent to registered SHs or members at least 2 weeks before the meeting

Special meeting written notice must be sent at least one week

5. There must be a quorum.

Note: The President shall preside at all meetings of the directors or trustees as well as of the stockholders or members, unless the by-

laws provide otherwise.

RULES ON MEETING/VOTING APPLICABLE TO CERTAIN KINDS OF SHARES

1. Delinquent shares shall not be entitled to vote.

2. Treasury shares have no voting rights while they remain in the treasury.3. Fractional shares shall not be entitled to vote.

4. Escrow shares shall not be entitled to vote.

5. Unpaid shares, if not delinquent, are entitled to all the rights of a SH including the right to vote.

MANNER OF VOTING

A SH/member may vote:

1. Directly (in person); or

2. Indirectly, through representative

a.) By means of a proxy;

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