notes in corporation law

8/13/2019 notes in corporation law

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Commercial Law Review

Corporation Code

Maria Zarah Villanueva - Castro

1

CORPORATION CODE (BP BLG 68)

*Corporation Code is the general law on PrivateCorporation regarding to its creation, formation and

powers.

INTRODUCTION:

A. Historical BackgroundEffectivity:May 1, 1980

Article XII Section 16 of the 1987 Constitution:

The Congress shall not, except by general law,

provide for the formation, organization, or

regulation of private corporations.

Government-owned or controlled corporations

may be created or established by special

charters in the interest of the common good

and subject to the test of economic viability.

*Congress has limited powers in the formation,

creation and regulation of a private

corporation.

Purposes:

1. Uniformity2. To avoid corruptionGeneral Rule:Congress is prohibited to enact a

law directly forming a private corporation.

Exception:GOCC may be created by special

charter.

*GOCC is a private corporation with regard to

function and in the meantime a public

corporation with regard to ownership.

Twin Conditions must be present in forming a

GOCC:

1. Interest in the common good2. Subject to the test of economic viability

- Means can survive alone in the market;can generate income which they can

use for their operating expenses

CONCEPT AND ATTRIBUTES OF A CORPORATION:

A. Statutory definition of a CorporationSection 2 of the Corporation Code: 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.

B. Attributes of a Corporation Artificial Being

- It exist by fiction of law only, hence it is

subject to limitations that are inherent

because of its nature

- A corporation is a juridical person which

exists by process of legal fiction

Doctrine of Corporate Entity/Doctrine

of Separate Personality- A corporation

is a legal or juridical person with a

personality separate and apart from its

individual stockholders or members and

from any other legal entities to which it

may be connected

Consequences/Implications of

Separate Personality:

1. It is entitled to own properties in itsown name and its properties are

not the properties of its

stockholders, directors and officers.

Cases: Magsaysay-Labrador v CA;

Sulo ng Bayan v Araneta

*The interest of the stockholders

over the properties of the

corporation is merely inchoate.

*Merely inchoate because there are

still condition precedents before

the shareholders get their share,

viz, in Asset, there are dissolution

and satisfaction of claims; in profit-

sharing, there are unrestricted

retained earnings and declarationby the Board of Directors.

2. It can incur obligations and itsobligations are not the obligations

of its stockholders, directors and

officers.

Case: Francisco v CA

3. The rights belonging to thecorporation cannot be invoked by

the stockholders, directors and

officers and vice versa.4. Corporations are entitled to certain

constitutional rights, i.e., right

against unreasonable searches and

seizure, due process clause.

*It is not entitled to certain

constitutional right, i.e., right


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against self-incrimination

particularly production of corporate

documents.

*Right against self-incrimination is

applicable only to natural persons.

General Rule: Constitutional

guarantees are applicable to

corporations.

Exceptions:

1. Right against self-incrimination2. Freedom to travelCase: Bataan Shipyard v PCGG

5. It is liable for tort. It is liable whenthe act was committed by the

officer or agent under express

direction or authority from the

stockholders or members acting as

a body or generally from the

directors as the governing body.

6. Generally, the corporation isconsidered a national of the

country where it was incorporated

(Place of incorporation test)

*Exceptions: 1. In times of war, the

nationality of a corporation is

determined by the nationality of

the controlling stockholders; 2.

Under the Foreign Investment Act

of 1991

7. Corporations are incapable ofintent, hence, they cannot commit

felonies that are punishable under

the RPC. They cannot commit

crimes that are punishable under

special laws because crimes are

personal in nature requiring

personal performance of overt acts.

In addition, the penalty of

imprisonment cannot be imposed.

*Criminal liability falls upon to

responsible officers.

*Responsible officers cannot invokethe doctrine of separate

personality.

*Corporations cannot be

incarcerated.

8. Moral damages cannot be awardedin favor of corporations because

they do not have feelings and

mental state.

*Corporations can claim damages

such as actual, compensatory,

exemplary, loss of earning capacity.

General Rule: Corporation cannot

claim moral damages.

Exception: If the corporation has a

good reputation and such

reputation was destroyed.

Case: Coastal Pacific Trading v

Southern Rolling Mills, Co.

*In Filipinas Broadcasting Network

Inc. v. Ago Medical and Educational

Center, the SC ruled that a

corporation can recover moral

damages under Article 2219(7) if it

was the victim of defamation.

Doctrine of Piercing the Veil of Corporate Entity The

doctrine that a corporation is a legal entity distinct from

the persons composing it. It is a theory introduced for

the purposes of convenience and to serve the ends of

justice. But when the veil of corporate fiction is used as

a shield to perpetuate fraud, to defeat public

convenience, justify wrong, or defend crime, this fiction

shall be disregarded and the individuals composing it

will be treated identically.

Cases: Times Transportation Co. v Santos Sotelo;

Concept Builders v NLRC

*The doctrine of piercing the veil of corporate entity is

the exception to the doctrine of corporate entity.

*The users of this doctrine are: 1. Stockholder; 2. Group

of stockholders; 3. Another corporation.

Effects: 1. Stockholders, officers and corporation are in

effect jointly liable; 2. In case of two corporations, they

will be treated as one wherein they will be both

solidarily liable. (Instrumentality rule)

*There is no effect on the existence of each corporation

as long as their separate entity is used for legitimate

purposes.

Instrumentality Rule When one corporation is soorganized and controlled and its affairs are conducted

so that it is in fact a mere instrumentality or adjunct of

the other, the fiction of the corporate entity to the

instrumentality may be disregarded.

*The user is another corporation.

Keyword: CONTROL


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Requisites: 1. Control, not mere majority or

complete stock control, but complete dominion, not

only of finances but of policy and business 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 in

contravention of plaintiffs legal rights; 3. The

aforesaid control and breach of duty must

proximately cause the injury or unjust loss

complained of.

Three cases of piercing the veil:

1. Fraud Cases when a corporation is used as a

cloak to cover fraud, or to do wrong;

2. Alter Ego Cases when the corporate entity is

merely a farce since the corporation is an alter ego,

business conduit or instrumentality of a person or

another corporation;

3. Equity cases when piercing the corporate

fiction is necessary to achieve justice or equity.

Probative Factors of Identity:

1. Identical shareholders;

2. Same set of officers, directors, or trustees;

3. Use of same premises, properties, tools and

equipments;

4. Engage practically in the same business; 5. The

same manner of keeping books and records.

*The probative factors of identity are not conclusive

but may be considered as strong evidence.

Creature of LawArticle XII Section 16 of the 1987

Constitution: The Congress shall not,

except by general law, provide for the

formation, organization, or regulation of

private corporations. Government-owned

or controlled corporations may be created

or established by special charters in the

interest of the common good and subject to

the test of economic viability.

Concession Theory It is a principle in the

creation of corporations, under which acorporation is an artificial creature without

any existence until it has received the

imprimatur of the State acting according to

law, through the SEC. The life of the

corporation is a concession made by the

State.

Right of Succession- Capacity to have continuity of existence

despite the changes on the persons

who compose it. Thus, the personality

continues despite the change of

stockholders, members, board

members or officers; death or disability.

- Also known as Principle of Perpetual

Succession

Reason: To make the corporation more

stable

Creature of enumerated powers, attributesand properties

Doctrine of Limited Capacity No

corporation under the Corporation Code,

shall possess or exercise any corporate

powers, except those conferred by law, its

Articles of Incorporation, those implied

from express powers and those as are

necessary or incidental to the exercise of

the powers so conferred. The corporationscapacity is limited to such express, implied

and incidental powers.

*Corporation may be restrained from

engaging a particular transaction because it

is beyond their powers.

*General Capacity a corporation can

perform any act for as long as it is lawful,

moral and not contrary to public policy or

order.

Ultra Vires Doctrine Even if the act islawful, moral and not contrary to public

order or policy but such act is not within the

express, implied and incidental powers of

the corporation such act shall be void for

being ultra vires.

*These doctrines are based on Section 2

and Section 45 of the Corporation Code.

C. Classification of Private Corporations:1. As to existence of Stocks:Stock Corporation Corporations which have

capital stock divided into shares and are

authorized to distribute to the holders of such

shares dividends or allotments of the surplus

profits on the basis of the shares held. (Sec. 3)


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Non-stock Corporation A corporation where

no part of its income is distributable as

dividends to its members, trustees, or officers,

subject to the provisions of this Code on

dissolution. (Sec. 87)

Q: Is it correct to say that a Non-stock

corporation cannot generate income on their

own?

A: NO

2. As to function/organizers:Public Corporation for public purpose and

organized by the State.

Private Corporation for profit making

functions and organized by private persons

alone or with the State

3. As to laws of Incorporation (Place ofIncorporation) :

Domestic Corporation corporation formed,

organized or existing under the Philippine Laws.

Foreign Corporation corporation formed,

organized or existing under any laws other than

those of the Philippines and whose laws allow

Filipino citizens and corporations to do business

in its own country or state. (Sec. 123)

*License is necessary for; 1. Regulation

purposes and 2. Access to local courts.

4. As to legal status:

De Jure Corporation corporation created in

strict or substantial compliance with the

mandatory requirements for incorporation and

the right of which to exist as a corporation

cannot be successfully attacked or questioned

by any party even in a direct proceeding for that

purpose by the state.

De Facto Corporation the due incorporation

of any corporation claiming in good faith to be a

corporation under the Corporation Code, and

its right to exercise corporate powers, shall not

be inquired into collaterally in any private suit

to which such corporation may be a party. Such

inquiry may be made by Solicitor General in a

quo warranto proceeding. (Sec. 20)- organized with a colourable compliance

with the requirements of a valid law

and its existence cannot be inquired

collaterally.

- There is an irregularity or defect in the

constitution or organization.

Can be compared to a voidable contract,

i.e., valid until annulled.

*Can be challenged by the State later on.

Cases: Hall v Piccio; Seventh Adventist v

Northeastern Mindanao Mission

*The filing of the Articles of Incorporation

and the issuance of the certificate of

registration are the essential requisites for

the existence of a de facto corporation.

Requisites:

1. The existence of a valid law under which

it may be incorporated;

2. An attempt in good faith to incorporate;

3. Use of corporate powers;

4. Filing of the Articles of Incorporation;

5. Subsequent compliance with the

requirement of law.

*In both corporations, there must be a

certificate of registration issued.

Doctrine of Corporation by Estoppel All persons

who assume to act as a corporation knowing it to be

without authority to do so shall be liable as general

partners for all debts, liabilities and damages

incurred or arising as an result thereof: Provided,

however, that when any such ostensible

corporation is sued on any transaction entered into

by it as a corporation or on any tort committed by it

as such, it shall not be allowed to use as a defense

its lack or corporate personality. (Sec. 21)

- Group of persons which holds itself out

as a corporation and enters into a

contract with a third person on the

strength of such appearance cannot be

permitted to deny its existence in an

action under said contract.

Case: Lim Tong Lim v CA

*Lim is stopped because he benefited from

the transaction.

Remedy: To ran after those persons

responsible for the representations

Essence: They are precluded from denying

their existence by their previous act or

conduct

Holding Corporation it is one which controls another

as a subsidiary by the power to elect management. It is

one that holds stocks in other companies for purposes

of control rather than for mere investment.


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Affiliate one related to another by owning or being

owned by common management or by a long-term

lease of its properties or other control device. It may be

the controlled or controlling corporation, or under

common control.

Subsidiary Corporation 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. It is always controlled.

Open Corporation one which is open to any person

who may wish to become a stockholder or memberthereto.

Close Corporation those whose shares of stock are

held by limited number of persons like the family or

other closely knit group. (Sec. 96)

FORMATION AND ORGANIZATION OF A PRIVATE

CORPORATION:

A. Submission of Articles of Incorporation;contractual significance*The life of a corporation commences from the

issuance of the Certificate of Registration by the

SEC upon filing of the Articles of Incorporation

and other documents.

Article of Incorporation is the charter of the

corporation, and the contractual relationships

between the State and the corporation, the

stockholder and the State, and between the

corporation and its stockholders.

Contractual Significance:1. The issuance of a certificate of incorporation

signals the birth of the corporations juridical

personality;

2. It is an essential requirement for the

existence of a corporation, even a de facto one.

B. Contents and Form of the Articles ofIncorporation (Secs. 14 and 15)

Contents of Articles of Incorporation:

1. Corporate Name;2. Purpose Clause;

3. Principal office;

4. Term of existence;

5. Incorporators;

6. Directors or trustees;

7. Capitalization;

8. Shares of stock;

9. Treasurers Affidavit.

Corporate NamePurpose:Identification

*Corporation can not adopt any name or

group of words at its pleasure because of

statutory limitation, viz., Sec. 18 of the

Corporation Codewhich provides that: No

corporate name may be allowed by the SEC

if the proposed name is identical or

deceptively or confusingly similar to that of

any existing corporation or to any other

name already protected by law or is

patently deceptive, confusing or contrary

to existing laws. When a change in the

corporate name is approved, the

Commission shall issue an amended

certificate of incorporation under the

amended name.

SEC Guideline x x x b. In order to prevent

confusion and difficulties of administration,

supervision and control, if the proposed

name contains a word already use as a part

of the firm name or style of a registered

entity, the proposed name must contain

two other words different and distinct from

the name of the company already

registered or protected by law. x x x

Case: Ang Mga Kaanib Ni Jesus Cristo

*The phrase Ang Mga Kaanib are words

merely descriptive of membership while the

phrase Sa Bansang Pilipinas are merely

descriptive of the place.

*Both parties are religious institutions

*Both use the acronym H.S.K.

As a rule, generic name or descriptive word

may be used as a corporate name.

Reason: public domain; can be used by

anyone; public use.

Exception:Doctrine of Secondary Meaning

a word or phrase originally incapable ofexclusive appropriation with reference to

an article on the market, because

geographically or otherwise descriptive,

might nevertheless have been used so long

and so exclusively by one producer with

reference to his article that in that trade


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and to that branch of the purchasing public,

the word or phrase has come to mean that

the article was his product.

Requisites:

1. Period of use;

2. The use must be exclusive.

Case: Lyceum of the Philippines

*The exclusivity requirement was not

satisfied by Lyceum of the Philippines.

*In case of change of name, the corporation

is not dissolve nor create a new

corporation; it also does not extinguish the

corporate liability.

*Change of name can be done by amending

the Articles of Incorporation.

Procedure:

1. Obtain approval of majority of the Board

and 2/3 stockholders;

2. Submission to the SEC for approval.

Purpose Clause*Only one primary purpose. Primary

purpose defines the business activities of

the corporation. It is the ordinary course of

business of the corporation.

*Secondary Purpose is for future expansion.

There is no limit on the secondary purpose.

*In case the primary purpose is not viable

then secondary purpose may be used.

Principal Office*The principal place of business may

determine the venue of court cases

involving corporations. It may alsodetermine if service of summons and

notices was properly made. It is also

important for tax purposes (local taxation).

*The SEC requires the exact address to be

indicated in the Articles of Incorporation.

*It is the residence of the corporation. It is

where the corporation maintains its books

and records and where normally the bulk of

its business is being conducted or

undertaken.*For personal action, venue is the

residence.

Term of Existence*A corporation has a maximum term of 50

years. It may be extended for a period not

exceeding 50 years in any single instance.

As a rule, no extension can be made earlier

than 5 years prior to the expiration of the

term.

*No limitations regarding number of

extension can apply.

Reason: To compel the stockholders to

meet the corporations term.

Exception: If for compelling reasons, earlier

extension will be allowed.

*During the three year winding up period,

the corporation still has personality but

activities are limited to the liquidation of

the corporation affairs and not to transact

further business.

As a rule, after the term has expired, no

more extensions be allowed or entertained

by the SEC.

Reason: No more period to extend.

Exception: Doctrine of RelationThe 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

relations applies if the failure to file the

application for existence within the term of

the corporation is due to neglect of the

officer with whom the certificate is required

to be filed or to wrongful refusal on is part

to receive it.

*The delay in submitting the application for

extension is justifiable.

Keywords:

1. Excusable delay;

2. Beyond the control of the corporation

(insuperable intervening causes)

Incorporators*Once an incorporator always an

incorporator. (Fait accompli an

accomplished fact which cannot be altered)

*They are the signatories to the Articles of

Incorporation.*They are originally forming the corporation

Q: What is the reason behind the phrase

that an incorporator is not always a

corporator?

A:To be an incorporator it is not necessary

to own a share unlike as a corporator.


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*Number is limited to 5 to 15.

*They must have a contractual capacity.

*Juridical person cannot create another

juridical person.

*There is no citizen requirement but special

laws may require otherwise.

*Majority must be a resident of the

Philippines.

Directors and trustees*The Board of Directors is the governing

body in a stock corporation while Board of

Trustees is the governing body in a non-

stock corporation.

*They exercise the powers of the

corporation.

Qualifications:

1. Every director must own at least one (1)

share of the capital stock;

2. Majority of the directors or trustees must

be residents of the Philippines.

*Any director who ceases to be the owner

of at least one share of the capital stock of

the corporation of which he is a director

shall thereby cease to be a director.

*Trustees of non-stock corporations must

be members thereof.

*Initial directors/trustees shall hold office

for one year until their successors are

elected and qualified.

CapitalizationSection 14(8) states that: If it be a stock

corporation, the amount of its authorizedcapital stock in lawful money of the

Philippines, the number of shares into

which it is divided, and in case the share are

par value shares, the par value of each, the

names, nationalities and residences of the

original subscribers, and the amount

subscribed and paid by each on his

subscription, and if some or all of the shares

are without par value, such fact must be

stated.*It is required that at least 25% of the

subscribed capital must be paid and in no

case may be paid-up capital be less than

P5,000.

Authorized Capital Stock the amount

fixed in the articles of incorporation to be

subscribed and paid by the stockholders of

the corporation.

*Shows the total number of shares

Subscribed Capital that portion of the

authorized capital stock that is covered by

subscription agreements whether fully paid

or not.

Paid-Up Capital the portion of the

authorized capital stock which has been

subscribed and actually paid.

Outstanding Capital Stock the total

shares of stock issued to subscribers or

stockholders, whether or not fully or

partially paid except treasury shares so long

as there is a binding subscription

agreement.

Shares of stockQ: Why shares of stock?

A: Because there is a share on the

capitalization.

Economic Value:

1. expectancy on the share in the profits

2. expectancy on the share of assets in case

of dissolution/liquidation.

Political Value:

1. vote

2. control in the management of the

corporation.

Doctrine of Equality of SharesExcept as

otherwise provided in the articles of

incorporation and stated in the certificate

of stock, each share shall be equal in all

respects to every other share.

- Provides that where the Article of

Incorporation do not provide for any

distinction of the shares of stock, all shares

issued by the corporation are presumed to

be equal and enjoy the same rights and

privileges and are also subject to the same

liabilities.

Classes of Shares:

1.

Par Value Share shares that have anominal value in the certificate of stock.

Contractual Significance:The minimum

price at which the shares are to be

issued.

*The price is fixed. It is stated in the

Articles of Incorporation.


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2. No Par Value Share those shareswhich do not have nominal value.

However, they have issued value stated

in the certificate or articles of

incorporation.

*There is flexibility in the price.

*The price is determined by the Board.

Limitations:

1. No par value shares cannot have an

issued price of less than P5.00;

2. The entire consideration for its

issuance constitutes capital so that no

part of it should be distributed as

dividends;

3. They cannot be used as preferred

stocks;

4. They cannot be issued by banks, trust

companies, insurance companies,

public utilities and building and loan

association (Reason: imbued with

public interest);

5. The articles of incorporation must

state the fact that it issued no par value

shares as well as the number of said

shares;

6. Once issued, they are deemed fully

paid and non-assessable.

3. Voting Sharesshares with the right tovote. They have the right to participate

in the management of the corporation

through the exercise of such right.

4. Non-voting Sharesshares without theright to vote.

*Has only a limited right to vote.

General Rule:Shareholder owning non-

voting shares has no right to vote.

Exceptions:

1. Amendment of the articles of

incorporation;

2. Adoption and amendment of by-

laws;

3. Sale, lease, exchange, mortgage,pledge or other disposition of all or

substantially all of the corporate

property;

4. Incurring, creating or increasing

bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the

corporation with another corporation

or other corporations;

7. Investment of corporate funds in

another corporation or business in

accordance with the Corporation Code;

8. Dissolution of the corporation.

*The exceptions are exclusive; the list is

a closed list

Statutory Constraint: Sec. 6 of the

Corporation Code

*The corporation cannot provide for

shares with no voting right

General Rule: Only redeemable and

preferred shares are deprived of voting

right.

Exception: Common shares may be

denied of its voting right in the

following instances: 1. Delinquent in

paying the subscription; 2. If there was

a founders share where it was given

the right to vote exclusively for 5 years

(Sec. 7).

5. Common Shares the most commontype of shares which enjoy no

preference.

*The basic class of stock 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 upon dissolution and,

likewise, in the management of its

affairs without preference or advantage

whatsoever.

6. Preferred Shares- shares which enjoypreference as to dividends or assets

upon dissolution as stated in the

Articles of Incorporation.

Reason:To attract investors.

*Preference does not give them a lienupon the property nor make them

creditors of the corporation.

*Characterized as redeemable shares.

Kinds:

1. Preferred shares as to assetsshare

which gives the holder thereof


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preference in the distribution of the

assets of the corporation in case of

liquidation;

2. Preferred shares as to dividends

share which gives the holder thereof

preference in the distribution of the

dividends to the extent agreed upon

before any dividends at all are paid to

the holders of common shares;

3. Participating preferred shares the

holders thereof are still given the right

to participate with the common

stockholders in dividends beyond their

stated preference;

4. Non-participating preferred shares

where there is no such participation;

5. Cumulative preferred shares the

shareholder is entitled to recover

dividends in arrears. While dividend

declaration may not be compelled, once

it is declared, the shareholder is

entitled to the said arrears;

6. Non-cumulative preferred shares

not entitled to arrears only to present

dividends.

7. Redeemable Shares are those whichpermit the issuing corporation to

redeem or purchase its own shares.

Limitations:

1. Redeemable shares may be issued

only when expressly provided for in the

Articles of Incorporation;

2. The terms and conditions affecting

said shares must be stated both in the

certificate of stock representing such

share;

3. Redeemable shares may be deprived

of voting rights in the Articles of

Incorporation, unless otherwise

provided in the Corporation Code;

4. The corporation is required to

maintain a sinking fund to answer forredemption price if the corporation is

required to redeem;

5. The redeemable shares are deemed

retired upon redemption unless

otherwise provided in the Articles of

Incorporation;

6. Unrestricted retained earnings is not

necessary before shares can be

redeemed but there must be sufficient

assets to pay the creditors and to

answer for operations.

8. Treasury Shares shares which havebeen earlier issued as fully paid and

have thereafter been acquired by the

corporation by purchase, donation,

redemption or through some lawful

means.

-Shares which are previously issued by

the corporation but subsequently

reacquired by the corporation.

*Retired thus can no longer be re-

issued.

*They are not entitled to dividends.

*They are not entitled to voting rights.

Rationale: to prevent abuse by the

management.

*These shares may again be disposed of

for a reasonable price fixed by the

Board of Directors.

9. FoundersShares classified as such inthe articles of incorporation may be

given certain rights and privileges not

enjoyed by the owners of other stocks,

provided that where the exclusive right

to vote and be voted for in the election

of directors is granted, it must be for

the limited period not to exceed 5 years

subject to the approval of the SEC. The

5 year period shall commence from the

date of the approval by the SEC.

Treasurers affidavit*The SEC shall not accept the Articles of

Incorporation of any stock corporation

unless accompanied by a sworn statement

of the Treasurer elected by the subscribers

showing that at least 25% of the authorized

capital stock of the corporation has been

subscribed, and at least 25% of the totalsubscription has been fully paid to him in

actual cash and/or in property the fair

valuation of which is equal to at least 25%

of the said subscription, such paid up capital

being not less than P5,000.


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*If the Treasurers affidavit is false such act

is tantamount to fraud. (PD 902-A)

*Fraud on the part of the corporation is a

ground for revocation or suspension of

license depending upon the extent of the

violation committed.

*If theres no Treasurers Affidavit, the first

ground shall apply, i. e., noncompliance

with the minimum requirement.

General Rule:25% must be subscribed and

25% must be paid.

Exception: If the law provides otherwise,

i.e., special laws.

C. Grounds for rejection of the Articles ofIncorporation

1. The articles of incorporation or anyamendment thereto is not substantially in

accordance with the form prescribed

herein;

2. The purpose or purposes of the corporationare patently unconstitutional, illegal,

immoral, or contrary to government rules

and regulations;

3. The Treasurers Affidavit concerning theamount of capital stock subscribed and/or

paid is false;

4. The percentage of ownership of the capitalstock to be owned by citizens of the

Philippines has not been complied with as

required by existing laws or the

Constitution.

Dual Franchise Requirement: No articles of

incorporation or amendment to articles of

incorporation of banks, banking and quasi-

banking institutions, building and loan

associations, trust companies and other

financial intermediaries, insurance companies,

public utilities, educational institutions, and

other corporations governed by special laws

shall be accepted or approved by the

Commission unless accompanied by a

favourable recommendation of the appropriate

government agency to the effect that such

articles or amendment is in accordance with

law.

D. Commencement of Corporate Existence

Sec. 19 of the Corporation Codestates that A

private corporation formed or organized under

this Code commences to have corporate

existence and juridical personality and is

deemed incorporated from the date the SEC

issues a certificate of incorporation under its

official seal; and thereupon the incorporators,

stockholders/members and their successors

shall constitute a body politic and corporate

under the name stated in the articles of

incorporation for the period of time mentioned

therein, unless said period is extended or the

corporation is sooner dissolved in accordance

with law.

*For purposes of determining whether a

corporation enjoys the status of a de facto

corporation, it must have been at least issued a

certificate of registration.

E. Amendment of the Articles of IncorporationSec. 16 of the Corporation Code states that:

Unless otherwise prescribed by this Code or by

special law, and for legitimate purposes, any

provision or matter stated in the articles of

incorporation may be amended by a majority

vote of the board of directors or trustees and

the vote or written assent of the stockholders

representing at least 2/3 of the outstanding

capital stock, without prejudice to the appraisal

right of dissenting stockholders in accordance

with the provisions of this Code, or the vote or

written assent of at least 2/3 of the members if

it be a non-stock corporation.

*It is effective upon the approval of the SEC.

*There may be an amendment by inaction.

Amendment by InactionUpon filing with the

SEC of the amendment and the Commission

failed to act on it within 6 months from the date

of filing for a cause not attributable to the

corporation.

F.

Effects of Non-Use of Corporate CharterSec. 22 of the Corporation Codestates that: If

a corporation does not formally organize and

commence the transaction of its business or the

construction of its work within 2 years from the

date of its incorporation, its corporate powers

cease and the corporation shall be deemed


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dissolved. However, if the corporation has

commenced the transaction of its business but

subsequently becomes continuously inoperative

for a period of at least 5 years, the same shall

be a ground for the suspension or revocation of

its corporate franchise or certificate of

incorporation. This provision shall not apply if

the failure to organize, commence the

transaction of its businesses or the construction

of its works, or to continuously operate is due

to causes beyond the control of the corporation

as may be determined by the SEC.

*The period must be counted from the issuance

of the Certificate of Incorporation.

*Automatic dissolution is not contemplated

under Section 22. (SEC Opinion).

*Section 22 must be read in conjunction with

Sec 6(1) of PD 902-A which requires that the

corporation must be given the opportunity to

be heard in compliance with the requirement of

due process before the revocation of its license.

CONTROL AND MANAGEMENT OF A CORPORATION:

A. Levels of Corporate Control1. By Stockholders/Shareholders;

2. By Corporate Officers;

3. By Directors/Trustees

B. Board of Directors/Trustees General Powers of the Board

Sec. 23 of the Corporation Codestates that:Unless otherwise provided in this Code,

the corporate powers of all corporations

formed under this Code shall be exercised,

all business conducted and all property of

such corporations controlled and held by

the board of directors or trustees to be

elected from among the holders of stocks,

or where there is no stock, from among the

members of the corporation, who shall hold

office for one year until their successors areelected and qualified.

Powers of the Board of Directors:

1. Corporate Powers;

2. Manage the Corporation; and

3. Control over and hold the properties of

the Corporation.

*Board of Directors/Trustees is the

statutory representative of the corporation.

General Rule: All corporate powers

emanate from the Board of

Directors/Trustees.

Exception: Unless otherwise provided in

this Code. (Limiting Clause)

The limiting clause means that there are

certain corporate matters that cannot be

done by the Board by reason that such

matters fall upon the shareholders; or

corporate matters that cannot be resolved

by the Board alone, i.e., it must be done

with the approval of the shareholders.

Business Judgment RuleBusiness Judgment Rule questions of

policy or management are left solely to the

honest decision of officers and directors of

a corporation and the courts are without

authority to substitute their judgment for

the judgment of the board of directors; 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 or the SEC.

- A resolution or transaction pursued within

the corporate powers and business

operations of the corporation, and passed

in good faith by the board of

directors/trustee, is valid and binding, and

generally the courts have no authority to

review the same and substitute their own

judgment, even when the exercise of such

power may cause losses to the corporation

or decrease the profits of a department.

*Great respect is accorded to the decisions

of the Board of Directors/Trustees.

*The directors are not liable to the

stockholders in performing such acts.

Qualifications of the Board MembersSec. 23 of the Corporation Codestates that:

Every director must have at least oneshare of the capital stock of the corporation

of which he is a director, which share shall

stand in his name on the books of the

corporation. Any director who ceases to be

the owner of at least one share of the

capital stock of the corporation of which he


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is a director shall thereby cease to be a

director. Trustees of non-stock corporations

must be members thereof. A majority of the

directors or trustees of all corporations

organized under this Code must be

residents of the Philippines.

*In order to be eligible as director, what is

material is the legal title to and not

beneficial title or ownership of the stocks

appearing on the books of the corporation.

*The directors/trustees must be natural

persons.

*They must also be of legal age.

*He must possess other qualifications as

may be prescribed in the by-laws of the

corporation.

*Under Sec. 27 of the Corporation Code:

No person convicted by final judgment of

an offense punishable by imprisonment for

a period exceeding 6 years, or a violation of

this Code committed within 5 years prior to

the date of his election or appointment,

shall qualify as a director, trustee or officer

of any corporation.

Reason:The position is based on trust and

confidence.

*No citizenship requirement.

*The By-Laws may provide additional

qualifications/disqualifications.

Election of the Board MembersSec. 24 of the Corporation Code provides

that: At all elections of directors or

trustees, there must be present, either in

person or by representative authorized to

act by written proxy, the owners of a

majority of the outstanding capital stock, or

if there be no capital stock, a majority of

the members entitled to vote. The election

must be by ballot if requested by any voting

stockholder or member. In stock

corporations, every stockholder entitled to

vote shall have the right to vote in personor by proxy the number of shares of stock

standing, at the time fixed in the by-laws, in

his own name on the stock books of the

corporation, or where the by-laws are silent

at the time of the election; and said

stockholder may vote such number of

shares for as many persons as there are

directors to be elected or he may cumulate

said shares and give one candidate as many

votes as the number of directors to be

elected multiplied by the number of his

shares shall equal, or he may distribute

them on the same principle among as many

candidates as he shall see fit: Provided, that

the total number of votes cast by him shall

not exceed the number of shares owned by

him as shown in the books of the

corporation multiplied by the whole

number of directors to be elected:

Provided, however, that no delinquent

stock shall be voted. Unless otherwise

provided in the articles of incorporation or

in the by-laws, members of the

corporations which have no capital stock

may cast as many votes as there are

trustees to be elected but may not cast

more than one vote for one candidate.

Candidates receiving the highest number of

votes shall be declared elected. Any

meeting of the stockholders or members

called for an election may adjourn from day

to day or from time to time but not sine die

or indefinitely if, for any reason, no election

is held, or if there not present or

represented by proxy, at the meeting, the

owners of a majority of the outstanding

capital stock, or if there be no capital stock,

a majority of the member entitled to vote.

*It is the stockholders or corporators who

elect members of the Board of Directors.

*The only procedure required by the Code

is through Election. There can be no other

modes.

*The election must be by ballot if requested

by any voting member or stockholder.

*A stockholder cannot be deprived in the

articles of incorporation or in the by-laws of

his statutory right to use any of themethods of voting in the election of

directors.

*No delinquent stock shall be voted.

*It is not required that the candidate

received the majority vote, what the law

provides is only plurality of votes.


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13

*Majority number is required only for the

existence of a quorum.

Not included in outstanding capital stocks:

1. Unissued stocks;

2. Non-voting stocks;

3. Treasury Shares.

Methods of Voting:

1. Straight Votingevery stockholder may

vote such number of shares for as many

persons as there are directors to be elected.

2. Cumulative Voting for One Candidatea

stockholder 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.

*Example: X has 10 shares in his name;

there are 5 numbers of directors to be

elected. X has 50 votes (10x5) available to

him. X may opt to concentrate all his 50

votes to a particular candidate.

3. Cumulative Voting by Distribution a

stockholder 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.

*Example: X has 10 shares in his name;

there are 5 numbers of directors to be

elected. X has 50 votes available to him. X

may opt to distribute the votes to as many

candidates as there are provided that the

total number of votes does not exceed 50.

Purpose of cumulative voting: To protect

the minority stockholders.

*The elected officer must act as a body.

*In a stock corporation, cumulative voting is

a statutory right whereas in a non-stock

corporation, cumulative voting is applicable

if it is provided in the Article of

Incorporation.

Sec. 26 of the Corporation Code providesthat: Within 30 days after the election of

the directors, trustees and officers of the

corporation, the secretary, or any other

officer of the corporation, shall submit to

the SEC, the names, nationalities and

residences of the directors, trustees and

officers elected. Should a director, trustee

or officer die, resign or in any manner cease

to hold office, his heirs in case of his death,

the secretary, or any other officer of the

corporation, or the director, trustee or

officer himself, shall immediately report

such fact to the SEC.

Term of Office*The directors or trustees shall hold office

for one (1) year subject to the hold over

principle, i.e., they continue in office until

their successors are elected and qualified.

*The one year period does not apply to

directors initially elected for purposes of

incorporation.

Quorum Requirement in Board MeetingsSec. 25 of the Corporation Codestates that:

Unless the articles of incorporation or the

by-laws provide for a greater majority, a

majority of the number of directors or

trustees as fixed in the articles of

incorporation shall constitute a quorum for

the transaction of corporate business, and

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 for the election of

officers which shall require the vote of a

majority of all the members of the board.

Q: Is the director allowed to let a proxy

attend a board meeting in behalf for

himself?A:NO.Proxy prohibition.

Reason: Because of their personal

qualifications.

*Quorum requirement should always be

computed based on the number specified in

the Articles of Incorporation regardless of

ensuing vacancies.

*The basis is always the number specified in

the Articles of Incorporation.

*The corporation can modify the number byproviding a different provision in the

articles of incorporation, however, the law

provides that the modification must be for a

number greater than that provided in the

law. It cannot provide for a number less

than the general requirement of the code.


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14

*For voting purposes, majority of the

member present constituting a quorum.

Except: election of directors.

Removal of Board MembersSec. 28 of the Corporation Codestates that:

Any director or trustee of a corporation

may be removed from office by a vote of

the stockholders holding or representing at

least 2/3 of the outstanding capital stock, or

if the corporation be a non-stock

corporation, by a vote of at least 2/3 of the

members entitled to vote: Provided, that

such removal shall take place either at a

regular meeting of the corporation or at a

special meeting called for the purpose, and

in either case, after previous notice to

stockholders or members of the

corporation of the intention to propose

such removal at the meeting. A special

meeting of the stockholders or members of

a corporation for the purpose of removal of

directors or trustees, or any of them, must

be called by the secretary on order of the

president or on the written demand of the

stockholders representing or holding at

least a majority of the outstanding capital

stock, or, if it be a non-stock corporation,

on the written demand of a majority of the

members entitled to vote. Should the

secretary fail or refuse to call the special

meeting upon such demand or fail or refuse

to give the notice, or if there is no

secretary, the call for the meeting may be

addressed directly to the stockholders or

members by any stockholder or member of

the corporation signing the demand. Notice

of the time and place of such meeting, as

well as of the intention to propose such

removal, must be given by publication or by

written notice prescribed in this Code.

Removal may be with or without cause:

Provided, that removal without cause maynot be used to deprive minority

stockholders or members of the right of

representation to which they may be

entitled under Sec. 24 of this Code.

Requisites:

1. It must take place either at a regular

meeting or special meeting of the

stockholders or members called for the

purpose;

2. There must be previous notice to the

stockholders or member of the intention to

remove;

3. The removal must be by a vote of the

stockholders representing 2/3 outstanding

capital stock or 2/3 of members;

4. The director may be removed with or

without cause unless he was elected by the

minority, in which case, it is required that

there is cause for removal.

Reason: The functions of directors are

fiduciary in nature.

Requisites for the removal of minority

directors are:

1. Justifiable cause;

2. Satisfaction of the voting requirements,

i.e., 2/3 of OCS or members.

*It is the secretary of the corporation upon

order of the president or in case there is no

secretary, stockholder representing

majority of the outstanding capital stocks or

member signing the demand who may call a

meeting for the purpose of removal.

Vacancies in the BoardSec. 29 of the Corporation Code provides

that: Any vacancy occurring in the board of

directors or trustees other than by removal

by the stockholders or members or by

expiration of term, may be filled by the vote

of at least a majority of the remaining

directors or trustees, if still constituting a

quorum; otherwise, said vacancies must be

filled by the stockholders in a regular or

special meeting called for that purpose. A

director or trustee so elected to fill a

vacancy shall be elected only or the

unexpired term of his predecessor in office.

A directorship or trusteeship to be filled byreason of an increase in the number of

directors or trustees shall be filled only by

an election at a regular or at a special

meeting of stockholders or members duly

called for the purpose, or in the same

meeting authorizing the increase of


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15

directors or trustees if so stated in the

notice of the meeting.

General Rule: Power to elect directors is

vested in the stockholders

Exception: Vacancy occurring in the board

of directors or trustees other than by

removal by the stockholders or members or

by expiration of term may be filled by the

vote of at least a majority of the remaining

directors or trustees if still constituting a

quorum.

Compensation of Board MembersSec. 30 of the Corporation Code provides

that: In the absence of any provision in the

by-laws fixing their compensation, the

directors shall not receive any

compensation, as such directors, except for

reasonable per diems: Provided, however,

that any such compensation other than per

diems may be granted to directors by the

vote of the stockholders representing at


stock at a regular or special stockholders

meeting. In no case shall the total yearly

compensation of directors, as such

directors, exceed 10% of the net income

before income tax of the corporation during

the preceding year.

General Rule: Directors are not entitled to

receive compensation

Exceptions:

1. When their compensation is fixed in the

by-laws;

2. If compensation is granted to directors by

the vote of the stockholders representing at


stock at a regular or special stockholders

meeting.

Limitation: In no case shall the total yearly

compensation of directors exceed 10% of

the net income before income tax of the

corporation during the preceding year.Reason:In order to avoid temptation on the

part of directors to abuse powers by

appropriating compensation packages since

they are in control of corporate assets.

C. Corporate Officers

Concept of Corporate Officers*Corporate powers reside on the Board of

Directors; decision/policymaking resides on

them. Implementation of rules/policy lies

on the corporate officers

Categories:

1. Statutory Corporate Officers

President (must be a stockholder);

Secretary (must be a resident and citizen of

the Philippines); Treasurer (must be a

resident and citizen of the Philippines).

2. As provided by the By-Lawsmust

be clearly stated in the By-Laws that such

office is a corporate office.

3. Those designated by the Board of

Directors provided the Board of Directors

is authorized to do so by the By-Laws.

Validity and Binding Effect of Acts ofCorporate Officers

General Rule: No one, even corporate

officers can bind the corporation. It is only

the Board of Directors who has the

authority to bind the corporation.

Exceptions:

1. If the By-Laws provides that such act is

part of the function of such office;

2. If authorized by the Board of Directors

Doctrine of Apparent AuthorityDoctrine of Apparent Authority/Doctrine

of Estoppel If a corporation, knowingly

permits one of its officers, or any other

agent, to act within the scope of anapparent 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.

Cases: Peoples Aircargo; Inter-Asia; Lapu-

Lapu

*Requires good faith on the part of third

person.

D. Liability of Directors, Trustees and Officers Instances when Corporate

Officers/Directors are held Solidarily Liable

Sec. 31 of the Corporation Code provides

that: Directors or trustees who wilfully and


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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 or

acquire any personal or pecuniary interest

in conflict with their duty as such directors

or trustees shall be liable jointly and

severally for all damages resulting

therefrom suffered by the corporation, its

stockholders or members and other

persons. When a director, trustee or officer

attempts to acquire or acquires, in violation

of his duty, any interest adverse to the

corporation in respect of any matter which

has been reposed in him in confidence, as

to which equity imposes a disability upon

him to deal in his own behalf, he shall be

liable as a trustee for the corporation and

must account for the profits which

otherwise would have accrued to the

corporation.

General Rule: Directors/Trustees/Officers

are not solidarily liable with the

corporation.

Exceptions:

1. Wilfully and knowingly vote for andassent to patently unlawful acts of

the corporation (Sec. 31).

Case: Carag v NLRC

2. Guilty of gross negligence or badfaith in directing the affairs of the

corporation (Sec. 31).

Case: David v Construction

Industry

3. Acquire any personal or pecuniaryinterest in conflict of their duty

(Sec.31).

4. Consent to the issuance of wateredstocks or having knowledge thereof,

fails to file objections with the

secretary (Sec. 65).

5.

Agree or stipulate in a contract tohold himself personally liable with

the corporation.

6. By virtue of a specific provision oflaw such as BP 22; Trust receipts

Law; RA 7832 (Anti-Electricity

Pilferage Act of 1997); Securities

Regulation Code

*In Carag v NLRC, the Supreme Court held

that not any violative of law, the Code means

that violation must have a corresponding

penalty. Patently unlawful act means that a law

declares an act unlawful and that such law

provides penalty for that unlawful act.

Self-Dealing Directors/OfficersSec. 32 of the Corporation Codestates that:

A contract of the corporation with one ormore of its directors or trustees or officers

is voidable, at the option of such

corporation, unless all of the following

conditions are present: 1. That the presence

of such director or trustee in the board

meeting in which the contract was

approved was not necessary to constitute a

quorum for such meeting; 2. That the vote

of such director or trustee was not

necessary for the approval of the contract;3. That the contract is fair and reasonable

under the circumstances; and 4. That in

case of an officer, the contract has been

previously authorized by the board of

directors. Where any of the first two

conditions set forth in the preceding

paragraph is absent, in the case of a

contract with a director or trustee, such

contract may be ratified by the vote of the

stockholders representing at least 2/3 ofthe outstanding capital stock or of at least

2/3 of the members in a meeting called for

the purpose: Provided, That full disclosure

of the adverse interest of the directors or

trustees involved is made at such meeting:

Provided, however, that the contract is fair

and reasonable under the circumstances.

Example:

In XYZ Corporation, A is a director. The

corporation acts through the Board ofDirectors. XYZ Corporation and A entered

into a lease contract. A as the lessor and

XYZ Corporation as lessee. The contract was

approved by the Board of Directors.

Q: What is the status of the contract?

General Rule:The contract is voidable.


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Exception:If the requisites provided in Sec.

32 are present.

Exception to the Exception: If requirement

number 1 or 2 is absent, in the case of a

contract with a director or trustee, such

contract may be considered valid by the

ratification of at least 2/3 of the

outstanding capital stock or 2/3 of the

members.

Requisites:

1. The presence of such director or trustee

in the board meeting in which the contract

was approved was not necessary to

constitute a quorum for such meeting;

2. The vote of such director or trustee was

not necessary for the approval of the

contract;

3. The contract is fair and reasonable under

the circumstances;

4. In case of an officer, the contract has

been previously authorized by the board of

directors.

Reason: As presence in the board meeting

might affect the status of the contract.

Self-Dealing Directors/Officers

directors/officers who transact business

with their own corporation.

- This is not prohibited by law.

Interlocking Directors those who have

been elected as directors in 2 or more

different corporations.

- May be prohibited by the By-Laws

(Gokongwei case).

-Not prohibited by law however there are

consequences.

Contracts involving Inter-locking DirectorsSec. 33 of the Corporation Code provides

that: Except in cases of fraud, and

provided the contract is fair and reasonable

under the circumstances, a contract

between two or more corporations havinginterlocking directors shall not be

invalidated on that ground alone: Provided,

That if the interest of the interlocking

director in one corporation is substantial

and his interest in the other corporation or

corporations is merely nominal, he shall be

subject to the provisions of the preceding

section insofar as the latter corporation or

corporations are concerned. Stockholdings

exceeding 20% of the outstanding capital

stock shall be considered substantial for

purposes of interlocking directors.

Example:

A is a director of two corporation, ABC

Corporation and XYZ Corporation. XYZ

Corporation and ABC Corporation entered

into a lease contract where ABC

Corporation is the lessor and XYZ

Corporation is the lessee.

Q: Can this contract be invalidated on the

ground that there is an interlocking

director?

A: NO.

Q:What is the status of the contract?

A: General Rule:Contracts between two or

more corporations having interlocking

directors are valid.

Exceptions:

1. Contracts are void if contracts arefraudulent or if contracts are unfair

and unreasonable.

2. If the By-Laws prohibits interlockingdirector.

Case:Gokongwei, Jr. v SEC

*The interest is nominal if his interest is

20% or less of the outstanding capital stock.

The interest is substantial if his interest is

more than 20% of the outstanding capital

stock.

*If the interlocking director has a

substantial interest in one corporation and

has a nominal interest in the other

corporation, the director must comply with

the requisites provided in Sec. 32 on self-

dealing directors.

Reason: The case is analogous to that of

transactions involving self-dealing directors

because such director holds substantialinterest with the other company.

Doctrine of Corporate OpportunitySec. 34 of the Corporation Codestates that:

Where a director, by virtue of his office,

acquires for himself a business opportunity

which should belong to the corporation,


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18

thereby obtaining profits to the prejudice of

such corporation, he must account to the

latter for all such profits by refunding the

same, unless his act has been ratified by a

vote of the stockholders owning or


capital stock. This provision shall be

applicable notwithstanding the fact that the

director risked his own funds in the

venture.

General Rule:A director shall refund to the

corporation all the profits he realizes on a

business opportunity 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.

Exception: His act has been ratified by a

vote of the stockholders owning or


capital stock.

*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.

E. Executive CommitteeSec. 35 of the Corporation Code states that:

The by-laws of a corporation may create an

executive committee composed of not less than

3 members of the board to be appointed by the

board. Said committee may act, by majority

vote of all its members, on such specific matters

within the competence of the board, as may be

delegated to it in the by-laws or on a majority

vote of the board, except with respect to: (1)

approval of any action for which shareholders

approval is also required; (2) the filing of

vacancies in the board; (3) the amendment or

repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any

resolution of the board which by its express

terms is not so amendable or repealable; and

(5) a distribution of cash dividends to the

shareholders.

Keyword: BY-LAWS

*It must be stated in the By-Laws.

*Board Resolution is not sufficient if there is no

provision in the By-Laws.

*The decision of the executive committee is

considered a Board Resolution.

*The decision of the executive committee is not

subject to appeal to the board. However, if the

resolution of the Executive Committee is invalid

it may be ratified by the Board.

*The decision of the executive committee

needs no confirmation from the Board.

Case: Filipinas Port, Inc.

*The corporation may create other committees.

Distinction: In executive committee, there is a

statutory restriction on members whereas in

other committee there is no such restriction.

General Rule:The executive committee may act

on specific matters within the competence of

the board as may be delegated to it in the by-

laws or on a majority vote of the board.

Exceptions:

1. Approval of any action for whichshareholders approval is also required;

2. The filing of vacancies in the board;3. The amendment or repeal of by-laws or the

adoption of new by-laws;

4. The amendment or repeal of any resolutionof the board which by its express terms is

not so amendable or repealable;

5. A distribution of cash dividends to theshareholders.

CORPORATE POWERS:

A. Doctrine of Limited Capacity; Concept of UltraVires Act

Sec. 45 of the Corporation Code states that:

No corporation under this Code shall possess

or exercise any corporate powers except those

conferred by this Code or by its articles of

incorporation and except such as are necessary

or incidental to the exercise of powers so

conferred.Ultra Vires Actsan act committed outside the

object for which a corporation is created as

defined by the law of its organization and

therefore beyond the power conferred upon it

by law.

Effects of Ultra Vires Acts:


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1. Executed Contract courts will not setaside or interfere with such contracts.

2. Executory Contractno enforcement evenat the suit of either party.

3. Partly executed and Partly executorycontract principle against unjust

enrichment shall apply.

B. Classes of Corporate Powers1. Express2. Implied3. Incidental Express those expressly authorized by the

Corporation Code and other laws, and its

Articles of Incorporation or Charter.

Impliedthose that can be inferred from ornecessary for the exercise of the express

powers.

Incidentalthose that are incidental to theexistence of the corporation.

Doctrine of Necessary Implicationthose which can be

reasonably inferred from the express powers given

since they are necessary for the corporation to perform

a particular act are deemed part of such powers.

C. Statutory Powers of a Corporation and theLimitations on their Exercise

Sec. 36 of the Corporation Code states that:

Every corporation incorporated under this

Code has the power and capacity: 1. To sue and

be sued in its corporate name; 2. Of succession

by its corporate name for the period of timestated in the articles of incorporation and the

certificate of incorporation; 3. To adopt and use

a corporate seal; 4. To amend its articles of

incorporation in accordance with the provisions

of this Code; 5. To adopt by-laws, not contrary

to law, morals, or public policy, and to amend

or repeal the same in accordance with this

Code; 6. In case of stock corporations, to issue

or sell stocks to subscribers and to sell treasury

stocks in accordance with the provisions of this

Code; and to admit members to the corporation

if it be a non-stock corporation; 7. To purchase,

receive, take or grant, hold, convey, sell, lease,

pledge, mortgage and otherwise deal with such

real and personal property, including securities

and bonds of other corporations, as the

transaction of the lawful business of the

corporation may reasonably and necessarily

require, subject to the limitations prescribed by

law and the Constitution; 8. To enter into

merger or consolidation with other

corporations as provided in this Code; 9. To

make reasonable donations, including those for

the public welfare or for hospital, charitable,

cultural, scientific, civic, or similar purposes:

Provided, That no corporation, domestic or

foreign, shall give donations in aid of any

political party or candidate or for purposes of

partisan political activity; 10. To establish

pension, retirement, and other plans for the

benefit of its directors, trustees, officers and

employees; and 11. To exercise such other

powers as may be essential or necessary to

carry out its purpose or purposes as stated in

the articles of incorporation.

Amendment of Articles of IncorporationSec. 16 of the Corporation Codestates that:

Unless otherwise prescribed by this Code

or by special law, and for legitimate

purposes, any provision or matter stated in

the articles of incorporation may be

amended by a majority vote of the board of

directors or trustees and the vote or written

assent of the stockholders representing at

least 2/3 of the outstanding capital stock,

without prejudice to the appraisal right of

dissenting stockholders in accordance with

the provisions of this Code, or the vote or

written assent of at least 2/3 of the

members if it be a non-stock corporation.

*The following are excluded in counting the

outstanding capital stock: 1. Treasury stock;

2. Unissued shares.

*Aside from the votes of majority of the

board and assent of the 2/3 of the OCS, the

approval of the SEC is necessary for the

amendment of the AOI.

*There is an implied approval of the SEC,i.e., failure to act on the application filed by

the corporation within 6 mos.

Q: How to get the approval of the

stockholders?

A: 1. Call for a meeting; 2. Obtain the

written assent of the stockholders.


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*In Tan v Sycip, the Supreme Court held

that in case of a non-stock corporation,

membership is personal and non-

transferrable unless the by-laws provides

otherwise. The deceased member is not

entitled to vote.

Four changes in Articles of Incorporation that require

the approval of the stockholders.

1. Extension of corporate term;

2. Shortening of corporate term;

3. Increase or Decrease of Capital Stock;

4. Increase or Decrease of Bonded indebtedness.*Approval of Stockholders is necessary in these changes

because they are necessary for the corporations

existence.

Extension/Shortening of Corporate TermSec. 37 of the Corporation Codestates that:

A private corporation may extend or

shorten its term as stated in the articles of

incorporation when approved by a majority

vote of the board of directors or trusteesand ratified at a meeting by the

stockholders representing at least 2/3 of

the outstanding capital stock or by at least

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

corporation. Written notice of the proposed

action and of the time and place of the

meeting shall be addressed to each

stockholder or member at his place of

residence as shown on the books of the

corporation and deposited to the addresseein the post office with postage prepaid, or

served personally: Provided, That in case of

extension of corporate term, any dissenting

stockholder may exercise his appraisal right

under the conditions provided in this code.

Increase or Decrease of Capital Stock/Incurrence, Creation or Increase of Bonded

Indebtedness

Sec. 38 of the Corporation Codestates that:

No corporation shall increase or decreaseits capital stock or incur, create or increase

any bonded indebtedness unless approved

by a majority vote of the board of directors

and, at a stockholders meeting duly called

for the purpose, 2/3 of the outstanding

capital stock shall favor the increase or

diminution of the capital stock, or the

incurring, creating or increasing of any

bonded indebtedness. Written notice of the

proposed increase or diminution of the

capital stock or of the incurring, creating, or

increasing of any bonded indebtedness and

of the time and place of the stockholders

meeting at which the proposed increase or

diminution of the capital stock or the

incurring or increasing of any bonded

indebtedness is to be considered , must be

addressed to each stockholder at his place

of residence as shown on the books of the

corporation and deposited to the addressee

in the post office with postage prepaid, or

served personally. xxx.

Q: When the corporation increases its

capital stock, is the 25% requirement

necessary? How can it be computed?

A:YES. The SEC ruled that the 25% applies

to the increase amount.

*The corporation is required to maintain a

sinking fund.

Q: What does bonded indebtedness mean?

A:Requires longer time of payment; special

burden on the corporation; involves the

important assets of the corporation.

Denial of Pre-emptive RightSec. 39 of the Corporation Code states that:

All stockholders of a stock corporation

shall enjoy pre-emptive right to subscribe to

all issues or disposition of shares of any

class, in proportion to their respective

shareholdings, unless such right is denied

by the articles of incorporation or an

amendment thereto: Provided, That such

pre-emptive right shall not extend to shares

to be issued in compliance with laws

requiring stock offerings or minimum stock

ownership by the public; or to shares to be

issued in good faith with the approval of the

stockholders representing 2/3 of theoutstanding capital stock, in exchange for

property needed for corporate purposes or

in payment of a previously contracted

debt.

*Coming from the increased authorized

capital stock.


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* Similar to Right of First Refusal

*It is not a matter of right. It can be denied

by the corporation through denial of such

right in the articles of incorporation.

Purposes:

1. In order that the stockholder may be able

to maintain their relative proportional

voting trend and control in the corporation;

2. To avoid dilution of their proportionate

voting and control in the corporation.

General Rule:Pre-emptive right is available

to stockholders.

Exception: if it is denied in the Articles of

Incorporation or through amendment.

Exception to the Exception: Pre-emptive

right shall not extend to:

1. Shares to be issued in compliance with

laws requiring stock offerings or minimum

stock ownership by the public;

2. Shares to be issued in good faith with the

approval of the stockholders representing

2/3 of the outstanding capital stock, in

exchange for property needed for corporate

purposes; and

3. In payment of a previously contracted

debt.

*Pre-emptive right is satisfied as long as the

corporation gives the stockholder the

opportunity to buy the shares.

*The offer must first be made to the

stockholders.

Sale or Disposition of AssetsSec. 40 of the Corporation Codestates that:

Subject to the provisions of existing laws

on illegal combinations and monopolies, a

corporation may, by a majority vote of its

board of directors or trustees, sell, lease,

exchange, mortgage, pledge or otherwise

dispose of all or substantially all of its

property and assets, including its goodwill,

upon such terms and conditions and for

such consideration, which may be money,stocks, bonds or other instruments for the

payment of money or other property or

consideration, as its board of directors or

trustees may deem expedient, when

authorized by the vote of the stockholders


capital stock, or in case of non-stock

corporation by the vote of at least 2/3 of

the members, in a stockholders or

members meeting duly called for the

purpose. Written notice of the proposed

action and of the time and place of the

meeting shall be addressed to each

stockholder or member at his place of

residence as shown on the books of the

corporation and deposited to the addressee

in the post office with postage prepaid, or

served personally: Provided, That any

dissenting stockholder may exercise his

appraisal right under the conditions

provided in this Code. A sale or other

disposition shall be deemed to cover

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. xxx.

Q: What makes the disposition peculiar?

A:The disposition is of all or substantially all

of the corporations properties and assets.

Q:What kind of disposition involve?

A: 1. Sell; 2. Lease; 3. Exchange; 4.

Mortgage; 5. Pledge.

Requirements:

1. Majority vote of the Board.2. Vote of the Stockholders representing

2/3 of the OCS.

3. The sale does not bring about the illegalcombinations and monopolies.

*No need for the approval of the SEC.

Tests:

1. Quantitative Test no statutory test;pertains to the disposition of all assets

2. Qualitative Test there is a statutorytest; pertains to the disposition of

substantially all of its assets.

*The provision is so strict because the law

wants the corporation will reach itsexpiration term.

Q: With the sale of all the assets of the

corporation, will the same result to its

dissolution?

A: NO.Possession or continued possession

of corporate properties is not a condition


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for the existence of a corporation.

Corporation still exists despite the

disposition of all its properties and assets.

Q: Will the buying corporation be made

answerable for the liabilities of the selling

corporation?

A: NO. The two corporations are two

separate personalities thus they are

separate and distinct from each other

hence the buying corporation cannot be

held liable to the obligations of the selling

corporation.

General Rule:The sale of all or substantially

all of the assets of the corporation does not

make the buyer answerable for the

obligations of the seller.

Exceptions:

1. If the buyer expressly agrees to assumethe obligations of the seller.

2. If sale amounts to merger orconsolidation.

3. If and when application of piercing theveil of corporate entity doctrine is

warranted.

4. If the purchaser becomes acontinuation of the seller.

5. Sale was done in violation of the BulkSales Law.

Case: PNB v Andrada

Acquisition of Corporate SharesSec. 41 of the Corporation Codestates that:

A stock corporation shall have the power

to purchase or acquire its own shares for a

legitimate corporate purpose or purposes,

including but not limited to the following

cases: Provided, That the corporation has

unrestricted retained earnings in its books

to cover the shares to be purchased or

acquired: 1. To eliminate fractional shares

arising out of stock dividends; 2. To collect

or compromise an indebtedness to the

corporation, arising out of unpaidsubscription, in a delinquency sale, and to

purchase delinquent shares sold during said

sale; and 3. To pay dissenting or

withdrawing stockholders entitled to

payment for their shares under the

provisions of this Code.

Requisites:

1. Unrestricted Retained Earnings2. The acquisition must be for legitimate

purpose

Q: What is an unrestricted retained

earnings?

A: Earnings not allocated for any other

purpose.

Q:What happens to reacquired shares?

A: General Rule: They are automatically

deemed retired.

Exception:The AOI provides otherwise.

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 credito

notes in corporation law

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