INTRODUCTION

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. (Sec.2). It
is being invested by law with a personality separate and distinct from those of the persons composing it,
as well as from that of any other entity to which it may be related. It was evolved to make possible the
aggregation and assembling of huge amounts of capital upon which big business depends. It also has
the advantage of non-dependence on the lives of those who compose it even as it enjoys certain rights
and conducts activities of natural persons. (Reynoso v. CA, 345 SCRA 355).

A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent on its
will," it is "a creature without any existence until it has received the imprimatur of the state acting
according to law." A corporation will have no rights and privileges of a higher priority than that of its
creator and cannot legitimately refuse to yield obedience to acts of its state organs. (Tanyag v. Benguet
Corporation).
presentation
Attributes of a corporation
1. It is an artificial being a juridical person capable of having rights and obligations with a
personality separate and distinct from its members/stockholders;
2. Created by operation of law - mere consent of the parties to form a corporation is not sufficient.
State must give consent through (a) special law, (b) general enabling act;
3. With right of succession - existence cannot be affected by change in members/stockholders; and
4. Has the powers, attributes, and properties as expressly authorized by law or incident to its
existence.

Advantages of corporate organizations
1) Separate juridical personality - personality separate and distinct from individual stockholders and
members;
2) Limited liability to investors - stockholders are liable only to the extent of their contribution;
3) Free transferability of units of ownership - stockholders hold their shares as personal property
with rights to dispose, assign or encumber them as they may desire; and
4) Centralized Management all corporate powers are vested in the board of directors.

Disadvantages
1. High capital requirement;
2. Takes time to organized;
3. complexity of organization; and
4. Shareholders control is limited.

Kinds of corporations
1. Stock corporations - One which has a capital stock divided into shares and is authorized to
distribute to the holders of such shares dividends or allotments of the surplus profits (Sec. 3).
2. Non-stock corporation All other corporations are non-stock corporations (Sec 3)
3. Corporation de jure - Organized in accordance with the requirements of law.
4. De facto corporation - A corporation with some flaw in its incorporation.
5. Corporation by estoppel - It is a status acquired by persons who assume to act as a corporation
knowing it to be without authority. Such persons shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result thereof (Sec 21)
6. Public corporation - One formed or organized for the government or a particular state. Its
purpose is for the general good and welfare.

7. Private corporation - One formed for some private purpose, benefit, aim or end. Corporation
created under corporation code.
a) Close corporation one whose AOI restricts the numbers of corporator, the transfer of shares and
the listing in stock exchange (Sec. 96).
8. Educational corporation (Sec. 106) - Those corporations which are organized for educational
purposes.
9. Religious sole and aggregate A corporation sole is one formed for the purpose of administering
and managing, as trustee, the affairs, property and temporalities of any religious denomination,
sect, or church, by the chief archbishop, bishop, priest, rabbi, or other presiding elder of such
religious denomination, sect or church. (Sec 110). A corporation aggregate is a religious
corporation incorporated by more than one person.
10. Eleemosynary corporation - One organized for a charitable purpose
11. Domestic corporation - A domestic corporation is one formed, organized, or existing under the
laws of the Philippines.
12. Foreign corporation - One formed, organized or existing under any laws other than those of
the Philippines and whose law allows Filipino citizens and corporations to do business in its own
country and state. (Sec 123)
13. Corporation created by special laws or charter (Sec. 4)

Doctrine of Separate Juridical Personality
A corporation has a personality separate and distinct from that of its stockholders and members and is
not affected by the personal rights, obligations, and transactions of the latter. Since corporate property is
owned by the corporation as a juridical person, the stockholders have no claim on it as owners, but have
merely an expectancy or inchoate right to the same should any of it remain upon dissolution of the
corporation after all corporate creditors have been paid. Such right is limited only to their equity interest.

Corporation and partnership: Distinguished
Corporation Partnership
1. Created by law Created by agreement
2. Managed by board managed by partners
3. limited life no definite lifetime
4. Powers those expressly granted powers not contrary to law, morals,
5. Formed by persons 5-15 at least two persons

Stock Corporation is one which have capital stock divided into shares and are authorized to distribute to
the holders of such shares dividend or allotment of surplus profits on the basis of shares held. Non-
stock corporations are allprivate corporation other than stock corporations.

Piercing the Corporate Veil
It is a rule that allows the state to disregard for certain justifiable reasons the fiction of juridical personality
for the corporation, separate and distinct from the persons composing it.

Three 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 corporate entity is merely a farce since the corporation is an alter
ego, business conduit or instrumentality of a person or another corporation; and
3. Equity cases when piercing the corporate fiction is necessary to achieve justice or equity

Instrumentality Rule
Where one corporation is so organized 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 of the instrumentality may
be disregarded. The control necessary to invoke the rule is not mere majority or even complete stock
control but such domination of finances, policies, practices that the controlled corporation has, so to
speak, no separate mind, will or existence of its own, and is, but a conduit for its principal.

Nationality of the corporation
The corporation is a national of the country under whose laws it is organized or incorporated: the place of
incorporation test.
1. Domestic corporations organized and governed by the Philippine law.
2. Foreign corporations organized under laws other than those of the Philippines

Grandfather Rule
Used to determine the nationality of a corporation by which the percentage of Filipino equity in
corporations engaged in nationalized and/or partly nationalized areas of activities, provided for under the
constitution and other nationalization laws, is computed, in cases where corporate shareholders are
present in the situation, by attributing the nationality of the second or even subsequent tier of ownership
to determine the nationality of the corporate stockholder.

Stock and Non-stock Corporation: distinguished
Stock non-stock
1. For profit -for Religious, charitable, education, scientific etc.
2.Profit distributed to shareholders - profit is used for furtherance of the purpose
3. stockholders - members
4. right to vote according to no. of shares, each member entitle to only one vote
5. voting right may be denied - voting right cannot be denied
6. voting by proxy may be denied - voting by proxy cannot be denied
7. voting by mail possible - not possible
8. Board of directors control - members of the corporation
9. Board of directors - board of trustees
10. Term 1 year - three years
11. Officers appointed by board - officers elected by members
1.Rights transferable - rights not transferable


FORMATION AND ORGANIZATION OF CORPORATIONS

Definition of Terms

1. Incorporators Those stockholders or members mentioned in the AOI as originally forming and
composing the corporation who are signatories thereof.
2. Corporator Those who compose the corporation, whether as stockholders or members.
3. Stockholders Corporator in a stock corporation; they are also known as shareholders.
4. Members Corporators in a non-stock corporation.
5. Promoters Person who bring about the formation and organization of a corporation by
bringing in together the incorporators.
6. Subscriber Persons who have agreed to take and pay for original unissued shares of
a corporation formed or to be formed.
7. Underwriter Person usually an investment bankers, who has agreed to buy or to sell the
securities or stock of the corporation.
8. Capital Stock It is the money value assigned to a corporations issued shares, constituting
generally the legal capital of the corporation.
9. Authorized Stock Refers to the amount of capital stock as specified in the AOI, synonymous
to capital stock in a stock corporation that have par value. If shares of stock are non par value,
corporation has no authorized stock.
10. Subscribed Stock amount of capital stock originally acquired by a subscriber of an unissued
shares in a corporation.
11. Outstanding Capital Stock portion of the capital stock which is issued and held by persons
other than the corporation itself.
12. Paid Up Capital Stock - portion of the subscribed or outstanding capital stock that is actually
paid.
13. Unissued Capital Stock that portion of the capital stock that is not issued or subscribed.
14. Capital the entire property or assets of the corporation.
15. Shares Of Stock unit into which the capital stock is divided. It represents the interest or right
which the owner has in the corporation. It merely represents a distinct undivided share or interest
in the common property of the corporation.
16. Certificate Of Stock is a written acknowledgment by the corporation of the interest, right and
participation of a person in the management, profits, and assets of a corporation.
17. Par Value Share one with specific money value fixed in the AOI and appearing in the
certificate of stock. It does not change regardless the market value of the stock.
18. Watered Stock shares issued less than the par value of the stock. (see section 65)

The first step in the formation of corporation is filing to SEC the AOI with corresponding treasurers
affidavit indicating that 25 percent of the capital stock has been subscribed and 25 percent of such
subscribed stock has been actually paid and is in his possession. In case of banks, banking institution,
insurance corporation etc. (see last par of Sec. 17), favorable recommendation of the government agency
is necessary before such corporation may be formed. After payment of appropriate fees, SEC shall issue
a certificate of incorporation which commence the corporate existence of the corporation (Sec. 19).

Thereupon the incorporators, stockholders/members and their successors shall constitute a body politic
and corporate under the name stated in the AOI for the period of time mentioned therein, unless said
period is extended or the corporation is sooner dissolved in accordance with law (Ibid).

In case SEC failed to act on a valid application, mandamus may be filed to compel SEC to issue such
certificate; in case of rejection, petition for review under Rule 43 is applicable.

Articles of Incorporation: Contents
1. Corporate name;
2. Primary and secondary purposes;
3. Principal office;
4. Term of the corporation (Sec. 11 and 14);
5. Names, nationalities and residences of incorporators;
6. Number of directors or trustees, 5-15;
7. Names, nationalities and residence of the Incorporating Directors;
8. Capital stock, number of which it is divided and par value and NNR of original subscriber and
amount paid by each: in non-stock corporation, the capita and NNR of contributors and the
amount contributed;
9. Treasurers Affidavit of subscription;
10. Favorable recommendation of government agency (if necessary, Sec. 17); and
11. Other matter not inconsistent with law.

Amendment of AOI
Procedure
1. Majority vote of the BOD concerning the amendment of AOI(Sec. 16);
2. Notice to the stockholder together with the proposed amendment (Sec. 50);
3. Affirmative votes of the stockholders representing 2/3 of the outstanding shares;
4. Filing of the original and amended AOI, under oath (corporate secretary and majority of the
BOD), to SEC;
5. in case of banks, banking institution (see last par of Sec. 17), favorable recommendation of the
government agencies is necessary; and
6. Approval of SEC or non-action within six months from the date of filing for causes not attributable
to corporation will commence the effectivity of the amendment.

Grounds for Disapproval of AOI
1. AOI or amendment is not substantially with the form prescribed;
2. Purpose is patently unconstitutional, illegal, immoral, contrary to government rules and
regulations;
3. Treasurers affidavit is false; and
4. Percentage requirement of ownership as required by law was not complied with (Sec. 17).

De Facto Corporations
A de facto corporation is one which actually exists for all practical purposes as a corporation but has
defect in the compliance with the mandatory legal requirements while de jure corporation has legal right
as a corporation and has complied with all the requirements of the law.
Section 20 of the code provides that question of the corporate existence cannot be attacked collaterally in
any private suit; however, such immunity is not available against the State, which may file quo warranto
proceedings to question the legality of the existence a corporation.

Requisites of a de facto corporation
1. Valid statute under which a corporation might be incorporated;
2. Bona fide attempt to organize a corporation under such law: colorable compliance with the law;
and
3. Actual use of the corporate powers as provided for by the law.

Corporation by Estoppel
When group of persons assume to act as corporation, knowing it to be without authority, such persons
shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result
thereof (Sec 21). In case of action against such group of person, they cannot resist the performance on
their obligation or raise the defense of lack of corporate personality to escape their liability (ibid).

Non-use of Charter / Continuous Inoperation
When corporation does not formally organize and commence the transaction of its business or the
construction of its works within two years from the date of its incorporation, the corporation is deemed
dissolved. When the corporation has commenced its business transaction, but becomes continuously
inoperative for a period of five years, the same is ground for suspension or revocation of its certificate of
incorporation (Sec. 22). In the former, there is automatic dissolution of corporation while in the latter,
proper notice and hearing is required.

Commencement of business may take the form of contracting for lease or sale of properties to be used as
business site of the corporation and other preparatory acts geared towards fulfillment of the purpose for
which the corporation was established

However, when the causes, non-use or non-operation of the corporation was due to causes beyond the
control of the corporation as determined by SEC, e.g., mineral lands to be developed by the corporation
as per its purpose are the object of court litigation and a court injunction against the corporate activities
has been issued, said periods is not the point of recon but it shall from the point where such cause
ceased.

BOARD OF DIRECTORS

All corporate powers, business conducted and all property of corporations are exercised by the BOD/T
(Sec. 23). BOD/T are selected thru an election and they shall hold office for one year and until their
successors are elected and qualified (ibid). Stockholders cannot interfere with the boards exercise of its
powers and functions except when the law expressly gives them the authority.

Directors owe their duties to corporation rather than to individual shareholders. The directors or trustees
shall not act individually nor separately but as a body in a lawful meeting. Contracts entered into without a
formal board resolution does not bind the corporation except when majority of the board has knowledge
of the contract and the contract benefited the corporation.

Qualification of Directors/Trustees
Every director must own at least one (1) share of the capital stock of the corporation, 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 (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a
director. Majority of BOD/T should be resident of the Philippines (ibid).



Disqualifications: grounds
1. Conviction by final judgment of an offense punishable by imprisonment for a period exceeding
six (6) years; or
2. Violation of corporation code committed within five (5) years prior to the date of his election or
appointment (Sec. 27).

Election of BOD/T
4. Notice to the stockholder/members of the election as provided in AOI;
5. Presence of, in person or by proxy, majority of the outstanding capital stock / member entitled to
vote;
6. Election by ballot;
7. Candidate receiving highest number of votes shall be declared elected; and
8. Report to the SEC, within 30 days, the names, nationality and residences of the elected officers
and directors/trustees. Deaths and resignation must likewise be reported.

In a stock corporation, stockholders may exercise cumulative voting or straight voting. Cumulative voting
is done by casting as many votes as he has number of shares multiplied by the number of directors up for
election. This provides the minority an opportunity to elect a representative to the board of directors.

Straight voting is done by casting votes as he has number of shares multiplied by the number of directors
to a single candidate. The total number of votes cast by a stockholder 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.

Members of a non-stock corporation may cast as many votes as there are trustees to be elected but may
not cast more than one vote for one candidate (Sec. 24 and 89). Cumulative voting is not specifically
allowed in a non stock corporation; however, its by-laws or AOI may be broadened as to give that right to
the members (Sec. 89). Take note that delinquent stock has no voting rights (Sec. 24 &71).

Corporate officers
The officers execute polices laid down by the board and perform the duties enjoined by them by the AOI
and by-laws. Immediately after the election of BOD/T, the directors of a corporation must formally
organize the election of:
1. A president, who shall be a director;
2. A treasurer who may or may not be a director;
3. A secretary who shall be a resident and citizen of the Philippines, and
4. Such other officers as may be provided for in the by-laws (Sec. 25)

Any two or more positions may be held concurrently by the same person, except that no one shall act as
president and secretary or as president and treasurer at the same time. Directors and trustees cannot
attend or vote by proxy in a board meeting (ibid) compared to stockholders which can attend and vote by
proxy in a stockholders meeting( Sec. 58).

The Corporation Code does not require that one elected or appointed as vice-president of a corporation
should be the owner of shares of stock of the corporation (Baguio vs. CA, 226 SCRA 366, 1993)

Executive Committee
The by-laws of a corporation may create an executive committee, composed of not less than three
members of the board, to be appointed by the board (Sec. 35). Such committee may act on specific
matter within the competence of the board as may be delegated by the by-laws or majority vote of the
board, except the following:
1. Approval of any action for which shareholders' approval is also required;
2. Filing of vacancies in the board;
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 so
amendable or repealable; and
5. Distribution of cash dividends to the shareholders.

Quorum
Majority of the number of director/trustees shall constitute the quorum for the transaction of the business
unless the AOI or by-provide otherwise. Majority of the directors/trustees constituting the quorum shall be
valid as corporate act except the election of officer which requires majority of all the members of the
board (Sec. 23).

Compensation of Directors
1. Reasonable per diem;
2. Provision in the by-laws fixing their compensation; and
3. Compensation granted by majority of the stockholders.

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 (Sec. 30). The said compensation
is applicable only to directors; thus, when the director is an officer as well, the BOD/T may grant
compensation to them because the prohibition in Sec. 30 does not apply [Western Institute of Technology
v Salas].

Liability of Board of Directors
BOD/Ts are jointly and severally liable in the following instances:
1. If they willfully/ knowingly vote for or assent to patently unlawful acts of the corporation;
2. They are guilty of gross negligence or bad faith in directing the affairs of the corporation;
3. They acquire any personal or pecuniary interest in conflict with their duty as such directors or
trustees (Sec. 31);
4. Issuance of watered stock (Sec. 65);
5. Disloyalty of directors (sec. 34);
6. He agrees to hold himself personally and solidarily liable with the corporation; and
7. He is made, by a specific provision of law, to personally answer for his corporate action (Tramat
Mercantile, Inc. vs. CA).

The director is liable when he takes advantage of information by virtue of his office to the disadvantage of
the corporation (Special Fact Doctrine).

BOD/T has authority to modify the proposed terms of the contracts of the corporation for the purpose of
making the terms more acceptable to the other contracting parties. The test to be applied is whether the
act in question is the direct and immediate furtherance of the corporations business, fairly incidental to
the express powers and reasonably necessary to their exercise. If so, the corporation has the power to
do it; otherwise it is not [BusinessJudgment Rule] [Montelibano v. Bacolod Murcia Milling Co.].

Self-Dealing Directors
Directors/Trustees and officer may enter into contract with the corporation in which he is a
directors. However, this agreement is being frown upon by law because there can be no real bargaining
where the same is acting on both sides of the trade. In fact, all contracts entered into by directors/trustees
and officer is considered voidable unless the following requisites are present:

1. The presence of the director/trustee in the board meeting approving the contract was not
necessary for constituting a quorum for such meeting;
2. The vote of such director/trustee in the board meeting approving the contract was not necessary
for the approval of the contract;
3. The contract is fair and reasonable under the circumstances; and
4. In the case of an officer, there was previous authorization by the board of directors (Sec. 32).

Although the following requisite was not followed, such contract may be ratified by 2/3 affirmative vote of
the outstanding capital stock/members, provided that there is full disclosure of the adverse interest of the
director/ trustee involved is made at such meeting, and that the contract is fair and reasonable (ibid)

Interlocking Directors
Interlocking directors are those who sit in the boards of two or more
corporations that contract with one other, whether on isolated or regular basis. Contracts between two or
more corporations having interlocking directors cannot be invalidated on that ground alone, except cases
of [1] fraud and [2] the contract is fair and reasonable(Sec. 33). If the interest of the interlocking director in
one corporation is merely nominal, the condition set in self-dealing directors will be imposed, thus, the
contract voidable.

Stockholdings exceeding 20 percent of the outstanding capital stock shall be considered substantial for
purposes of interlocking directors (ibid). Hence, nominal interest means stockholdings of not exceeding
20 percent of the outstanding capital stock.

Disloyalty of Directors
Where a director, 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, he must account to the
latter for all such profits by refunding the same (Sec. 34). However, the same act may be ratified by a vote
of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. The
same is true notwithstanding the fact that the director risked his own funds in the venture (ibid).

Doctrine of Corporate Opportunity
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 liability 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 (Sec.
31 and 34).

Special Facts Doctrine
Granting the absence of a fiduciary relationship with the stockholders, when special circumstances or
facts are present which make it inequitable for the director to withhold information from the stockholder,
the duty to disclose arises and concealment is fraud.

Removal of BOD/T
Procedure
1. Call for meeting for the purpose of removing the BOD, by BOD or majority of stockholders;
2. Notice, by publication or registered mail, to the stockholder by the officer or by majority of the
outstanding stock;
3. Election; and
4. Affirmative vote of 2/3 of the outstanding capital stock/members;

Removal of BOD may be with cause or without cause, however, removal without cause may not be used
to deprive minority stockholder of the right of representation (sec. 28.) The board cannot remove a
director or trustee as member of the board.

Vacancy
Any vacancy occurring in the BOD or BOT terms may be filled by the vote of at least majority of the
remaining directors or trustees, if still constituting quorum.

If quorum cannot be obtained, vacancies must be filled by the stockholders/members in a regular or
special meeting for that purpose. Same rule applies if the vacancy is due to removal by the stockholder or
by expiration of the directors term, or there is increase of number of directors in a corporation. A director
or trustee filling the vacancy shall serve only for the unexpired term of his predecessor (Sec. 29).

POWERS OF CORPORATIONS
General Powers
1. To sue and be sued in its corporate name;
2. Succession;
3. To adopt and use a corporate seal;
4. To amend its AOI;
5. To adopt by-laws;
6. to issue or sell stocks and admit members;
7. To acquire and encumber properties;
8. To enter into merger or consolidation;
9. To make reasonable donations except in political parties;
10. To establish pensions and benefits for the employees and officers; and
11. Essential and necessary powers to promote its purpose.

Specific Powers

To Extend or Shorten Corporate Term
Procedure
1. Majority vote of BOD/T;
2. Notice of the proposed action to the stockholders/members;
3. Affirmative vote of at least 2/3 of the outstanding capital stock/members(Sec. 37);
4. Amended and original AOI copy, certified under oath by the corporate secretary and
majority of BOD/T shall be filed to SEC (Sec. 16); and
5. Shall take effect upon approval of SEC or upon 6 months of inaction (ibid).

In case of extension of corporate term, any dissenting stockholder may exercise his appraisal right.
Appraisal right is also available in case of shortening the corporate term under Section 81.

To Increase or Decrease Capital Stock
Procedure
1. Majority vote of BOD;
2. Written notice to the stockholder;
3. Affirmative vote of (2/3) of the outstanding capital stock favoring the increase of decrease of
capital stock;
4. Certificate in duplicate must be signed by majority BOD and countersigned by the chairman and
secretary of the stockholders meeting;
5. Filing of the certificate with the original AOI to the SEC and Treasurers affidavit indicating that at
least 25% of the increased capital stock has been subscribed and at least 25% of such
subscribed stock has been actually paid;
6. Keeping of copy in the office of the corporation;
7. Approval of the SEC (Sec. 38).

Any increase or decrease in the capital stock bonded indebtedness shall require prior approval of the
Securities and Exchange Commission. From and after approval SEC and the issuance of certificate, the
capital stock shall stand increased or decreased. Decrease of capital stock shall not be approved if it will
prejudice the creditors of the corporation (ibid).

To Incur, Create or Increase Bonded Indebtedness
Procedure
1. Follow step 1,2,3,4, 5 (certificate only) and 6 of procedure to increase/decrease capital
stock;
2. Bonds issued by a corporation shall be registered with the SEC, which shall have the
authority to determine the sufficiency of the terms thereof.


Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the
approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a
meeting duly called for the purpose. Any incurring, creating or increasing of any bonded indebtedness
shall require prior approval of the Securities and Exchange Commission (supra).

To deny pre-emptive rights
Pre-emptive right is the right to subscribe to all issues or disposition of shares of any class, in proportion
to their respective shareholdings, including subsequently issued shares, treasury shares or unissued
stocks before it can be disposed of in favor of the others. The purpose of which is to enable the
shareholder to retain his proportionate control in the corporation and retain equity to the surplus profit.

This right may be denied by the AOI or by its amendment 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 two-thirds (2/3) of the
outstanding capital stock, in exchange for property needed for corporate purpose (Sec. 39).

To sell or dispose of corporate assets
Sale by the corporation is considered a sale of all or substantially all of the corporate assets if thereby
the corporation would be rendered incapable of continuing the business or accomplishing its purpose
(Sec. 40); such sale may be made by a majority vote of the BOD, sending notice to the stockholder and
obtaining 2/3 affirmative votes of the stockholders/members (ibid). Take note that stockholders vote is
not necessary when the disposition is necessary in the usual and regular business of the corporation or
the proceeds of such sales was appropriated for its regular business (ibid)

In non-stock corporations where there are no members with voting rights, the vote of at least a majority of
the trustees in office is sufficient for the corporation to proceed in the disposition (ibid).
Dissenting stockholder may exercise his appraisal right in relation to section 81.

The BOD has authority to abandon the said disposition after the approval of the stockholders (ibid).

To Acquire Own Shares
A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate
purposes provided it has unrestricted retained earnings to cover the shares to be acquired (Sec. 41). This
includes but not limited to the following:
1. To eliminate fractional shares;
2. To collect or compromise an indebtedness to the corporation:; and
3. To pay dissenting or withdrawing stockholders exercising appraisal rights (ibid).

The subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation
which the creditors have the right to look up to satisfy their credits. Corporation may not dissipate this and
the creditors may sue stockholders directly for the unpaid subscription (Trust Fund doctrine).
.
Invest corporate funds in another corporation or business
A private corporation may invest its funds in any other corporation or business or for any purpose other
than the primary purpose for which it was organized (Sec. 42). When the investment is reasonably
necessary to accomplish the primary purpose of the corporation, stockholders voting requirement is not
required and only the majority approval of the BOD is necessary. Any dissenting stockholder may
exercise his appraisal rights (ibid).

Procedure
1. Approval of majority of BOD/T;
2. Written notice of the proposed investment to the stockholder; and
3. Affirmative votes of two-thirds (2/3) of the outstanding capital stock/members.

If an act of investing corporate fund is done pursuance of the corporate purpose, it does not need the
approval of the stockholders but when the purchase of shares of another corporation is done solely for
investment and not to accomplish the purpose of its incorporation, the vote of approval of the
stockholders is necessary. When the purposes are stated in its AOI, the approval of the stockholders is
not necessary (De la Rama vs Ma-ao 27 SCRA 247)

To declare dividends
Dividends are unrestricted retained earnings set apart from the general mass of funds of the corporation
and distributed among the stockholders, in proportion to their shares or interest in the corporation, in the
form of cash, property or stocks.

The BOD of a stock corporation may declare dividends out of the unrestricted retained earnings which
shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held
by stockholder (Sec. 43). If the stockholder is a delinquent stockholder, his cash dividend shall be
applied to the unpaid balance on the subscription plus costs and expenses. If it be a stock dividend, it
shall be withheld from them until his unpaid subscription is fully paid (ibid). Take note that the approval of
the stockholders is not necessary in the approval of cash dividend but such affirmative vote is necessary
for declaring stock dividend (ibid).

Stock corporations are prohibited from retaining surplus profits in excess of 100 percent of their paid-in
capital stock, except:
1. When justified by definite corporate expansion programs;; or
2. When the corporation is prohibited under any loan agreement with any creditors from declaring
dividends without its consent; or
3. When the retention is necessary under special circumstances.

To enter into management contract
Management contract is one where a corporation undertakes to manage or operate all or substantially all
of the business of another corporation, whether such contracts are called service contracts, operating
agreements or otherwise (Sec. 44). No management contract shall be entered into longer than five years
for any one term (ibid).

Procedure
1. Meeting duly called for the purpose;
2. Approval of the majority of the BOD and stockholders/members of both the managing and the
managed corporation;
3. If the interest of the stockholder of one of the corporation is more than 1/3 of the total
outstanding stock, or majority of the BOD of the managed corporation is also the members of the
majority of the managing corporation, then 2/3 affirmative votes of the outstanding stockholders
of the managed corporation is required.


Ultra Vires Acts

Ultra vires literally means beyond granted powers. These are acts which a corporation is not
empowered to do or perform because they are not based on the powers conferred by its AOI or by the
Corporation Code on corporations in general, or because they are not necessary or incidental to the
exercise of the powers so conferred.


Ultra vires act and Illegal Act: Distinguished
An ultra vires act is voidable which may be enforced by performance, ratification, or estoppel, while
the illegal act is void and cannot be validated. (Atrium v. CA) Ultra vires act is not necessarily illegal but
an illegal act is necessarily ultra vires.



Wasting Asset Doctrine
It permits corporations solely or principally engaged in the exploitation of wasting assets to distribute the
net proceeds derived from exploitation of their holdings such as mines, oil wells, patents and leaseholds,
without allowance or deduction for depletion. The justification of such rule is that as the business of
Wasting Asset Corporation is to exploit and exhaust its assets, no one can expect that its capital would be
kept intact. Hence, that dividend cannot be paid out of the capital but only from the profits must not be
applied as a rule.

Effects of Ultra Vires
1. Executed contract courts will not set aside or interfere with such contracts;
2. Executory contracts no enforcement even at the suit of either party (void and unenforceable);
3. Partly executed and partly executory principle of no unjust enrichment at expense of another
shall apply; and
4. Executory contracts apparently authorized but ultra vires the principle of estoppel shall apply.

BY-LAWS

By-laws are regulations, ordinances, rules or laws adopted by an association or corporation or the like for
its internal governance. By laws define the rights and obligations of various officers, persons or groups
within the corporate structure and provide rules for routine matters such as calling meetings.

Within one month after receipt of the certificate of incorporation, corporations must adopt by-laws not
inconsistent with the corporation code (Sec. 46). Affirmative vote and signature of at least majority of the
outstanding stockholders/member is required and a copy of the by-laws shall be kept in the principal
place of the corporation. A duly certified copy signed by the majority of BOD/T shall be filed with SEC for
approval and shall be effective upon issuance of a certificate indicating that the by-laws is not inconsistent
with the law (ibid).

However, the same may be filed with SEC simultaneously with the AOI prior to incorporation. The by-laws
should be signed and approved by all the incorporators (ibid). In case of bank, banking institution (and
others) a certificate of the government agencies is an additional requirement (supra).

Although the Corporation Code requires the filing of by-laws within one month after the issuance of the
Certificate of Incorporation, it does not expressly provide for the consequences of non-filing within the
said period. There is no automatic dissolution for failure to file by-laws within the required
period. (Loyola Grand Villas Homeowners Ass v. CA)

Amendment of By-Laws
1. Majority vote of BOD/T for the purpose of amending the by-laws;
2. Meeting;
3. Affirmative vote of majority of the stockholders/members; and
4. Filing of the certified copy, attached with the original by-laws, by the corporate secretary and
majority of BOD/T, to SEC for approval.
5. Issuance of certification by Sec that the amended by-laws are not inconsistent with law.

The owners of two-thirds (2/3) of the outstanding capital stock, members may delegate to BOD/T the
power to amend or repeal any by-laws or adopt new by-laws. However, the same may be revoked by the
majority vote of the stockholders/members withdrawing the delegated authority (Sec. 48).

Revocation of the delegation of power to amend: Any power delegated to the board of directors or
trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever
stockholders owning or representing a majority of the outstanding capital stock or a majority of the
members in non-stock corporations, shall so vote at a regular or special meeting
MEETINGS

Meetings of directors/trustees or stockholders/members may be regular or special (Sec. 49). Regular
meetings of stockholders/members are those held annually on the date fixed in the by laws or on any
date of April on the absence of which (Sec. 50.) Regular meeting of BOD is conducted monthly (Sec. 53)
unless provided by the by-laws otherwise. Special meetings of stockholders/members are those called for
good cause, as ordered by SEC, upon petition of stockholders/members (ibid). Notice in writing,
indicating the time and place, is required before a meeting can be held (Sec. 51). Special meetings of
BOD/BOT are those called by the President or as provided in the by-laws.

Meetings of stockholders shall be held in the city/municipality where the principal office of the corporation
is located (Sec. 51). In a non-stock corporation, the by-laws may allow the meeting of its members to be
held anywhere in the Philippines (Sec. 93). Meetings of BOD/BOT may be held in or outside of
the Philippines unless the by-laws provide otherwise (Section 53).

Quorum in a stockholders meeting consists of the stockholders representing the majority of the
outstanding capital stock/members except the by-laws provide for a greater number (Sec. 52). Quorum in
the BOD/Ts meeting consists of majority of numbers of director fixed in AOI unless the AOI or by-laws
provides for higher number (Sec. 25)

The president shall preside at all meetings of the directors or trustee as well as of the stockholders or
members, unless the by-laws provide otherwise (sec. 54).

Right to Vote
A mortgaged/pledge shares of stock does not give the authority to the pledgee or mortgagee the right to
vote unless expressly given such right in writing and was recorded in the corporate book (Sec. 55). On
the other hand, administrator, executor and other legal representative appointed by court may attend and
vote in behalf of the stockholder without the need of any written proxy (ibid). In case of co-ownership of
stocks, consent of all the co-owners is necessary in order to vote for the said stocks unless there is a
written proxy signed by all the co-owners (Sec. 56). If the shares are owned in an and/or capacity,
anyone can vote or appoint a proxy (ibid).

Treasury shares have no voting right (Sec. 57). In a BOD/BOT meeting, no proxy is allowed to vote for
the director or trustee.

Proxy and Voting trust: Distinguished
5. The proxy votes as agent: the trustee votes as owner;
6. The proxy must vote in person: the trustee may vote by person or by proxy;
7. Principal does not cease to become stockholder: the ownership is transferred to the trustee;
8. Agreement need not notarized: notarized;
9. Agreement revocable: irrevocable; and
10. Limited to a particular meeting: includes rights and all meetings within 5 years (Secs. 58 &59).

STOCKS AND STOCKHOLDERS

Subscription is an offer to acquire a specified number of unissued shares of an existing corporation or
one still to be formed. It is an entire and indivisible whole contract; it cannot be divided into
portions (Doctrine of Indivisibility of Subscription Contract). Any contract for the acquisition of
the unissued stock is considered subscription notwithstanding the fact that the parties considered it as a
purchase or any other contract (Sec. 60). However, sale of treasury stock by the corporation is a contract
of sale because the stock referred was already issued and was reacquired by the corporation.

Subscription of shares of stock of a corporation still to be formed shall be irrevocable at least six months
from date of subscription, unless all of the other subscribers consent to the revocation or the
incorporation of said corporation fails to materialize within six months or within a longer period as
stipulated in the contract. If AOI was submitted to SEC, pre-incorporation subscription cannot be
revoked (Sec.61).

Considerations in Subscription Agreement
1. Cash;
2. Property;
3. Labor or services actually rendered to the corporation;
4. Prior corporate obligations;
5. Amounts transferred from unrestricted retained earning to stated capital; and
6. Outstanding shares in exchange for stocks in the event of reclassification or conversion (Sec.
62).

Shares of stock shall not be issued in exchange for promissory notes or future services. After payment of
such shares, a certificate of stock, signed by the president or VP and corporate secretary or asst.
secretary, shall be issued to the stockholder (Sec. 63). However, no certificate of stock shall be issued
until the full amount of his subscription, including interest, has been paid (Sec. 64 and 66).

Shares of stock are considered personal property and may be transferred by delivery of the certificate of
stock. The transfer will be valid to the contracting parties but not to the corporation unless said transfer is
recorded to the book of corporation (ibid). However, if the corporation has an unpaid claim to that stock,
the corporation may refuse to record such transfer (ibid).

The purpose of registration is to enable the transferee to exercise all the rights of a stockholder and to
inform the corporation of any changes in share ownership so that the latter may ascertain the persons
entitled to the rights and liabilities of shareholders. Until the transfer has not been recorded to the book of
the corporation, the transferee cannot vote or voted for; has inferior rights over attaching creditor; is not
entitled to dividends; and cannot participate in the meeting.

Watered Stocks
Watered stocks are those issued less than the par value of the stock. Water in the stock refers to the
difference between the fair market value at the time of the issuance of the stock and the par value of the
said stock. The existence of such water is determined at the time of the issuance of stock. Section 65
held the consenting director or officer for the Water in the stock with the stockholder who inadequately
paid the stock.

Payment of delinquent stock
Payment of stock becomes due and payable in the following manner:
1. The term prescribed in the subscription contract; and
2. In the absence of the provision contract, at any time specified by BOD.

Failure to pay on such period shall render the entire balance due and payable and renders the
stockholder liable to interest. If no payment was made within 30 days after such period, the stock shall be
considered delinquent stock(see article 43), which is subject to delinquency sale.

Take note that unpaid subscriber (Sec. 72) is different from delinquent stockholder. The former has all the
rights of a stockholder while delinquent stockholder is subject to section 43 and 71.

Delinquency Sale
Procedure
1. BODs resolution indicating the time and place of sale which shall be not less than 30 days nor
more than 60 days from the date of the stock became delinquent;
2. Notice of sale and resolution shall be sent to the delinquent stockholder;
3. Publication for two consecutive weeks in newspaper generally circulating in the province where
the principal office of the corporation. Is located;
4. Public auction on the specified date;
5. Transfer of stock to the purchaser and issuance of certificate of stock to the highest bidder; and
6. Remaining shall be credited in favor of the delinquent stockholder.


If the delinquent stockholder pays the balance before the public auction, said sale shall not commence
and the certificate of stock shall be issued to him. In case there is no bidder at the public auction who
pays the full amount of the balance, the total amount shall be credited as paid and its title to all the shares
of stock shall be vested in the corporation as treasury shares which may be disposed by the corporation
(Sec. 68).


Actions questioning the delinquency sale should be commenced within six months from the date of sale,
otherwise, it shall be barred forever. Also, the complainant should pay or tender to buyer of the stock the
sum for which the stock was sold. Ground for irregularity or defect in the notice of sale or the sale itself is
also unavailing for the complainant (Sec. 69).

Delinquency sale does not bar the corporation to file a judicial action for the collection of the unpaid
subscription (sec. 70).

Effects OF Delinquency
1. Stockholder have no right to vote or be voted upon; and
2. Not entitled to any right except dividends (see section 43)


Lost or destroyed certificates
Procedure
1. Owner shall file an affidavit on how the certificate is lost, number of shares and certificate
number;
2. Publication for three consecutive weeks;
3. If no contest was filed within one year, the corporation will cancel in its books the certificate of
stock and issue in lieu thereof new certificates of stock.
4. If a contest was filed or there is pending suit regarding such stocks, the issuance of new
certificate shall be suspended until the final decision of the court.

After the said procedure was followed, no action may be brought against the
corporation who issued the certificates of stock in lieu of those lost, stolen or destroyed unless there
is fraud, bad faith, or negligence on the part of the corporation and its officers (Sec. 73),

BOOKS AND RECORDS

Books and Records to be kept
1. Record of all business transactions;
2. Minutes of all meetings of stockholders or members;
3. Minutes of all meetings of BOD; and
4. Stock and transfer book (Sec. 74)
This right of inspection or examination cannot be denied on the mere pretext that the shareholder is at
loggerheads with the officers of the corporation (Veraguth vs. Isabela Sugars, 52 Phil 266). A wrongful
denial of the right to inspect corporate books and records may be enforced by mandamus.

The stock and transfer book shall be kept in the principal office of the corporation or in the office of its
stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at
reasonable hours on business days.

Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or
member of the corporation to examine and copy excerpts from its records or minutes, shall be liable to
such director, trustee, stockholder or member for damages and shall be guilty of an offense which shall
be punishable under Sec. 144. If such refusal is made pursuant to a resolution or order of the board of
directors or trustees, the liability for such action shall be imposed upon the directors or trustees who voted
for such refusal.

Right to Financial Statements
Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall
furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the
last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its
assets and liabilities and the result of its operations
At the regular meeting of stockholders or members, the board of directors or trustees shall present to
such stockholders or members a financial report of the operations of the corporation for the preceding
year, which shall include financial statements, duly signed and certified by an independent certified public
accountant. However, if the paid-up capital of the corporation is less than P50,000.00, the financial
statements may be certified under oath by the treasurer or any responsible officer of the corporation.

MERGERS AND CONSOLIDATION

Two or more corporations may merge into a single corporation which shall be one of the constituent
corporations or may consolidate into a new single corporation which shall be the consolidated
corporation (Sec. 76).

In merger, one of the constituent corporations remains as an existing juridical person, the surviving
corporation, whereas the other corporations shall be absorbed by the former. The
constituent corporation will acquire all assets, rights of action, and assume all the liabilities
of dissolved corporation. Although there is dissolution of the latter corporation, there is no winding up
because the constituent corporation automatically acquires all their assets, privileges, powers as well as
their liabilities. The merger is deemed instituted from the time the SEC issues a certificate of merger (Sec.
79).

In consolidation, the constituent corporations shall be dissolved and a new consolidated corporation will
emerge into new corporate entity which shall obtain all the assets of the disappearing corporations, as
well as all their liabilities.

Procedure
1. Approval by majority vote of each of the board of directors or trustees of the constituent
corporations of the plan of merger or consolidation (Sec. 76);
2. Notice of such meetings shall be given to all stockholders or members of the respective
corporations, at least two (2) weeks prior to the date of the meeting, either personally or by
registered mail (Sec. 77);
3. Affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital
stock/members of the constituent corporations (Sec. 77);
4. Articles of merger will be executed by the constituent corporations, signed by the
Presidents and Secretaries (Sec, 78); and
5. Articles of merger will be filed in SEC in quadruplicate copy for approval (Section 79).

When SEC is satisfied that the merger/consolidation is not inconsistent with the laws, it shall issue a
certificate of merger/consolidation at which time the merger/consolidation shall become effective (Sec.
79).

Effects of a Merger/Consolidation
1. The constituent corporations shall become a single corporation which shall be the surviving
corporation in merger and the consolidated corporation in consolidation.
2. The separate existence of the constituent corporations shall cease, except that of the surviving or
the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and
powers and shall be subject to all the duties and liabilities of a corporation;
4. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and
franchises of each of the constituent corporations and properties belonging to the constituent
corporation which are deemed transferred without further act or deed;
5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and
obligations of each of the constituent corporations as if the remaining corporations themselves had
incurred the obligation;
6. Any claim against the constituent corporation may be prosecuted by and against the surviving or
consolidated corporation; and
7. The rights of creditors or liens upon the property of any of such constituent corporations shall not be
impaired.

APPRAISAL RIGHT

Appraisal right is a right to demand payment of the fair value of his shares, after dissenting from a
proposed corporate action involving fundamental changes in the corporation.

These fundamental changes in the corporation include the following instances:
1. Amendment of AOI which has an effect of changing or restricting the rights of any
stockholders or authorizing preferences in any respect superior to outstanding shares or
extending or shortening the corporate term;
2. Encumbering all or substantially all of its corporate properties;
3. Merger or consolidation. (Sec. 81);
4. Investing corporate funds in another corporation or business (Sec. 42); and
5. For any reason in close corporation (Sec. 105).

Procedure
1. Written demand on the corporation within thirty (30) days after the date on which the vote was
taken;
2. Surrender of certificate of stock within 10 days for notation (Sec. 86);
3. Payment of fair value; and
4. Shareholder shall transfer his shares to the corporation.(Sec. 82)

If within 60 days after the corporate action was approved and the dissenting (uncooperative) stockholders
and the corporation cannot agree in the fair value of the shares, it shall be determined by three
disinterested person: one chosen by the stockholder, one by the corporation and the other one chosen by
the two. Their determination of the fair value is final and shall be paid within 30 days.

Purpose of Notation
Notation is necessary so as to guide the secretary of the corporation who shall deny to the dissenting
stockholder the right to vote and the right to receive dividends in the proper situation contemplated
under Section 83. Failure to do so shall give right to the corporation to terminate the rights of the
stockholder (Sec. 86).

Transfer of Dissenting Shares
When the shares of a dissenting stockholder are transferred or assigned, the assignee becomes a regular
stockholder and the appraisal right of the dissenting stockholder shall cease (Sec. 86). All dividends
which accrue on such shares shall be paid to the transferee. (ibid)

Conditions for Valid Exercise of Appraisal Rights
1. The demand for payment of shares arise from the instances provided in Corporation Code;
2. Existence of unrestricted retained earnings;
3. The demand was made within 30 days after the corporate action; failure to exercise of such
constitutes waiver of this right (Sec. 82)


Effect of Demand of Payment of Stockholders Share
1. All rights accruing to such shares, including voting and dividend rights, shall be suspended;
2. The stockholder is entitled to payment of his shares;
3. If the dissenting stockholder is not paid within 30 days, his voting and dividend will be
restored. (Sec. 83); and
4. Demand for payment may not be withdrawn unless with consent of the corporation (Sec. 84).

Termination of Right of Appraisal
1. If demand for payment is withdrawn with the consent of the corporation;
2. If the proposed corporate action is abandoned or rescinded by the corporation;
3. If the proposed corporate action disapproved by the SEC; and
4. If the SEC determines that such stockholder is not entitled to the appraisal right

In these cases, the right of appraisal of the stockholder ceases, his status as a stockholder
shall be restored, and all dividend distributions which would have accrued on his shares shall be paid to
him (Sec. 84).

Costs of Appraisal
1. By the corporation:
a. If the value as determined by the appraiser is higher than what was offered by the
corporation; and
b. If the action is filed to recover the fair value of the shares and the stockholders refusal to
receive payment is justified.
2. By the stockholder:
a. If the value is determined by the approximately the same as the price offered by the
corporation; and
b. Where an action to recover is filed and the refusal of such stockholder to receive payment is
unjustified.

NON-STOCK CORPORATIONS

A non-stock corporation is one where no part of its income is distributable as dividends to its members,
trustees, or officers.

Non-Stock and Stock Corporations: Distinguished
11. Income is not distributable to members: may be distributed in form of dividend;
12. For charitable, education, etc: for lawful purposes, usually for profit;
13. Members entitled to one vote; depends on the number of shares acquired;
14. Right to vote by proxy may be denied in AOI; cannot be denied in AOI;
15. Voting by mail may be allowed in AOI: not allowed;
16. Right and interest may not be transferred unless allowed by AOI: can be transferred as a matter
of right;
17. BOT may be more that 15: BOD should not be less than 5 but not more than 15;
18. BOTs term is three years: 1 year;
19. Place of meeting may be outside the principal place: should be in the principal place; and
20. Cannot exercise appraisal rights: can exercise appraisal rights;

Purpose
For charitable, religious, educational, fraternal, social, civic service etc (Sec. 88).

Incidental Profits
A non-stock corporation is not empowered to engage in business with the object of making income,
nonetheless, they are not prohibited to make income as an incident to its operation. However, these
profits should be used in furtherance of its purpose. In this sense, a non-stock corporation is considered a
non-profit corporation.

Non-stock corporations may not lawfully engage in any business for profit unless it is necessary to carry
out the purpose for which it was organized.

Conversion from Non-Stock to Stock Corporation
A non-stock corporation cannot be converted into a stock corporation by mere amendment of the articles
of incorporation (SEC OPINION, February 24, 1989). It can only be dissolved under Sec. 177 to 122 of
the Corporation Code.On the contrary, stock corporations can be converted to non-stock corporations by
amending its AOI.


MEMBERS
Right to Vote
1. Each member is entitled to one vote, unless broadened or denied by AOI and by-laws;
2. May vote by proxy; and
3. May vote by mail if allowed in AOI or by-laws (Sec. 89).

Non-transferability of Membership
All rights arising from the membership are personal and nontransferable unless AOI or by-laws otherwise
provide (Sec. 90).

Effects of Termination
Members may be terminated on the grounds that may be provided for in the AOI or by-laws. All rights of
members in the corporation or in its properties shall be extinguished after such termination unless
otherwise provided in the AOI or by-laws (Sec. 91)

TRUSTEES AND OFFICERS
1. A non-stick corporation may designate their governing board by any name other than board of
trustees. (Sec. 138);
2. Numbers of trustees may be more than 15 as fixed by AOI (Sec. 92) but their incorporating
trustees may not be more than 15 (Sec. 15);
3. The term of the first trustees is staggered, Sec. 24 and 29 should also be followed; and
4. Term of officer is three years except the first directors (Sec. 92)

Place of Meeting
Meetings may be held outside the principal office of the corporation but not outside the Philippines
provided proper notice were given to the members indicating time, place and date of the meeting
(Sec. 93).

CLOSE CORPORATIONS

A close corporation is one whose AOI provide:
a. That its shares shall not be held by a group of more that 20 persons;
b. All the issued stock of all classes is subject to one or more specified restrictions
on transfer; and
c. That the corporation shall not list in any stock exchange or make any public offering of
any of its stock.

If at least 2/3 of the voting stock of the said corporation is owned or controlled by another corporation
which is not a close corporation, then the corporation will not be deemed close corporation.

The mere ownership by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself sufficient ground for disregarding their separate personalities. A
narrow distribution of ownership does not, by itself, make a close corporation. (San Juan Structural and
Steel Fabricators vs. CA 296 SCRA 631)

Corporation that cannot be considered close corporations
1. Mining or oil companies;
2. Stock exchanges;
3. Insurance companies;
4. Banks;
5. Public utilities;
6. Education institution; and
7. Corporation declared to be vested with public interest


Close Corporations and Regular Corporations: Distinguished
1. There can be classification of directors into one or more classes, there are no classifications of board of directors;
2. AOI may provide that corporate powers may be exercised by stockholders, only to board of directors;
3. Stockholders subject to liabilities of directors, stockholder not subject to liabilities;
4. AOI may give powers to stockholders to appoint corporate officers, exercised by the Board of directors;
5. There is a restriction on the transfer of rights, there is no restriction;
6. AOI may provide for greater voting quorum, fixed by the corporation code;
7. Preemptive right extends to treasury shares, does not extend to treasury shares; and
8. Stockholder may compel the corporation to purchase his shares; shareholders may not compel the corporation
except in right of appraisal.

Validity of restrictions on transfer of shares
Restrictions on the right to transfer shares must appear in the AOI, by-laws and certificate of
stock, otherwise, the same shall not be binding on any purchaser in good faith. Restriction on the transfer
must not be onerous than granting the existing stockholder or corporation the option to purchase the
shares. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise
the option to purchase, the transferring stockholder may sell his shares to any third person. (Sec. 98)

Effects of issuance or transfer of stock in breach of qualifying conditions
1. A person is conclusively presumed to have notice of the fact of ineligibility to be a stockholder if
issued to any person who is not entitled under any provision of AOI and the certificate of stock
shows the qualifications of the title to be entitled to become holders;
2. A person is conclusively presumed to have notice If the AOI of a close corporation states the
number of persons, not exceeding twenty (20), who are entitled to be holders of record of its
stock, the certificate for such stock conspicuously states such number, and the issuance or
transfer of stock would cause the stock to be held by more than such number of persons;
3. The transferee of the stock is conclusively presumed to have notice that he has acquired stock
in violation of the restriction if a stock certificate of any close corporation conspicuously shows a
restriction on transfer of stock of the corporation;
4. In case of 1,2, and 3 the corporation may refuse to register the transfer of stock in the name of
the transferee;
5. If the all the stockholders consent in the transfer despite the violation, right to refuse to register
of the corporation ceases; and
6. The right of the transferee to rescind the transfer or to recover under any applicable warranty is
not impaired.

Pre-emptive Right of Stockholder
The pre-emptive right shall extend to all stocks to be issued, including re-issuance of treasury share,
whether for money or property or personal services, or in payment or corporate debts, unless the articles
of incorporation provide otherwise (Sec. 102)

Amendment of articles of incorporation
Any amendment to the AOI which seeks to delete or remove any provision required by this Title to be
contained in the AOI or to reduce a quorum or voting requirement stated in said AOI shall not be valid or
effective unless approved by the affirmative vote of at least two-thirds (2/3) of the outstanding capital
stock, whether with or without voting rights, at a meeting duly called for the purpose (Sec. 103).
Deadlocks
A situation in which the directors or stockholders of a close corporation are so divided with regard to
the management of corporate affairs and the votes required for any corporate action cannot be
obtained with the consequence that the business affairs of the corporation can no longer be conducted to
the advantage of the stockholders (Sec. 104).

SECs Powers in Case of Deadlocks
Upon written petition of a stockholder, the SEC may arbitrate the dispute and shall have the following
authority:
1. Canceling/altering any provision contained in AOI, by-laws, or any stockholder's agreement;
2. Canceling, altering or enjoining any resolution or act of the corporation or its board of directors,
stockholders, or officers;
3. Directing or prohibiting any act of the corporation or its board of directors, stockholders, officers,
or other persons part to the action;
4. Requiring the purchase at their fair value of shares of any stockholder, either by the corporation
regardless of the availability of unrestricted retained earnings in its books, or by the other
stockholders;
5. Appointing a provisional director;
6. Dissolving the corporation; or
7. Granting such other relief as the circumstances may warrant.

Provisional Director
An impartial person appointed by the SEC who is not a
stockholder, creditor or receiver of a corporation exercising all the rights and powers of a duly elected
director of the corporation during the pendancy of arbitration proceeding due to deadlock (Sec. 104).

Compulsory Purchase of Shares of Stock
Any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his
share at their fair value, which shall not be less than their par or issued vale, when the corporation has
sufficient asset to cover its debts and liabilities excluding capital stock. (Sec. 105). Said right is not
available in a regular corporation.

Dissolution of a Close Corporation
Upon written petition to SEC, stockholder may compel the dissolution of the corporation whenever any of
the acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest
or oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets
are being misapplied or wasted (Sec. 105).

DISSOLUTION OF CORPORATION

Dissolution of corporation may be voluntary or involuntary (Sec. 117).

Voluntary dissolution with no creditors: Procedure
9. Resolution having majority vote of the board of directors/trustees;
10. Call for meeting of stockholder and publication of the notice on the same once a week for three
consecutive weeks/registered mail at least 30 days prior to meeting;
11. Affirmative vote of the stockholders/members owning at least two-thirds (2/3) of the outstanding
capital stock;
12. Certification of the resolution by majority of the board and countersigned by the secretary and
filing in SEC; and
13. Issuance of certificate of dissolution by SEC. (Sec. 118)

Voluntary dissolution with creditors: Procedure
1. Call for meeting of stockholders for the purpose of dissolving the corporation;
2. Affirmative vote of stockholder holding at least 2/3 of outstanding stock;
3. Petition filed in SEC signed by the majority of the corporation and verified by the president
and secretary;
4. Order setting a date of filing of objections, not less that 30 days but no more than 60 days,
after entry of the order;
5. Publication of the order in a newspaper once a week for three weeks (Municipality)/
newspaper of general circulation (Philippines) plus posting for three consecutive weeks in
three public place;
6. Hearing of petition by the SEC; and
7. Judgment and appointment of receiver.

By Shortening Corporate Terms: Procedure
A voluntary dissolution may be done by amending the AOI to shorten the life, and submitting copy to the
SEC of the amendment (Sec. 120, see Sec. 37). Upon approval of the amended AOI or the expiration o
the shortened term, the corporation is deemed dissolved without any proceedings (ibid).

Mere filing of the Articles of Dissolution with the SEC, without more, is not enough to support the
conclusion that actual dissolution of an entity in fact took place. (Avon vs. NLRC, 246 SCRA 733)

Involuntary Dissolution
SEC may dissolve a corporation upon filing of a verified complaint and after notice and hearing on the
following grounds:
a) Continuous inoperation for a period of at least five years (Sec. 22);
b) Failure to organize and commence business within two years from incorporation (ibid);
c) Commission of ultra vires acts (Sec. 45);
d) Serious dissention in close corporation (Sec. 104);
e) Illegality, fraud and misused of asset of close corporation (Sec. 105)
f) Quo warranto proceedings under rule 66;
g) Issuance of watered stock;
h) Sec. 2 PD 902-A;
i) Sec. 144 BP 168; and
j) Sec. 104 BP 168

Liquidation
Liquidation is the winding up of the affairs of a corporation by converting assets and property to cash,
settling with the creditors and debtors and the apportioning the amount of profit and loss. The company's
liabilities and obligations are paid off and any remaining assets are divided between those persons
authorized to receive them. A liquidation proceeding is a proceeding in rem so that all other interested
persons whether known to the parties or not may be bound by such proceedings.

Period of Liquidation
Corporation shall continue as a body corporate for three (3) years after the time when it would have been
so dissolved for the purpose of prosecuting and defending claims, to settle its affair, dispose its assets
and distribution of assets but not to purpose of continuing the business. However, in case the corporate
assets are conveyed to a trustee or a receiver appointed by the SEC, the three year limitation will not
apply.

Although the three year period may have expired, it does not necessarily follow that a creditor who was
unable to collect his claim before three years would lose his rights. It is still possible for him to sue the
trustee, if there be one, or if the circumstances so warrant, to follow the assets in the hands of the
stockholders who may have received the same as liquidating dividends.

Properties of Unknown Stockholders/Creditors
Properties of unknown creditors or stockholders will be escheated to the city or municipality where such
asset is located (Sec. 122).

Conditions before the distribution of assets
Before corporation may distribute its assets to the stockholders, the following must be present:
3. There should be lawful dissolution; and
4. Payment of liability and debts(ibid)

Exceptions:
1. Decrease in capital stock/s resulting in a surplus which can then be distributed to stockholders
provided no creditors are prejudiced;
2. Appraisal right (Sec. 81);
3. Deadlock in a close corporation; and
4. Shareholder compelling the purchase in close corporation.

Liquidating dividends is the share of stockholder in assets upon liquidation of the corporation.

Methods of Liquidation:
1. By the corporation itself through the board of directors The corporation during the winding up may
negotiate and transfer the assets of the dissolved corporation, provided the stockholders give their
consent (Chung vs. AIC 163 SCRA 534);
2. By receivership A trial court has jurisdiction to order a receiver of a corporation under receivership
to do any act so as to protect and preserve its properties, and to that end it may order the secretary of
the corporation to do an act within the internal affairs of the corporation aimed at protecting the interest of
the stockholders (Hodges vs. Lezema 8 SCRA 717); and
3. By trustees (Sec. 122)

Effects of Dissolution, Winding up and Liquidation:
1. loss of juridical personality;
2. Non-continuance of business;
3. Cannot even be considered as a de facto corporation, hence subject to collateral attack
4. cannot enter into new contracts which would have the effect of continuing the business
5. No right or remedy in favor of or against any corporation, (Sec 145)

Extension and Representation in Liquidation of Corporation
If the three year extended life has expired without a trustee or receiver having been expressly designated
by the corporation itself within that period, the board of directors or trustees itself may be permitted to so
continue as Trustees by legal implication to compete the corporate liquidation.

Still in the absence of a board of directors or trustees, those having any pecuniary interest in the assets,
including not only the shareholders but likewise the creditors of the corporation, acting for and in its
behalf, might make proper representations with the SEC, which has primary and sufficiently broad
jurisdiction in matters of this nature, for working out a final settlement of the corporate
concerns. (Clemente vs. CA)

Trustees may commence a suit which can proceed to final judgment even beyond the three-year period.
No reason can be conceived why a suit already commenced by the corporation itself during its existence,
not by a mere trustee who, by fiction, merely continues the legal personality of the dissolved corporation
should not be accorded similar treatment allowed to proceed to final judgment and execution
thereof (Reburiano vs. CA and Pepsi cola Bottling Company).

Distribution of assets of a Non-Stock Corporation
1. All debts and obligation of the corporation should be paid;
2. All assets to be returned upon dissolution of the corporation;
3. All assets held subject to specific use only must be transferred to other corporations, societies,
or organizations having the same purpose as the corporation dissolved;
4. Other assets not included I the above, according to distributive rights provided in the AOI; and
5. Any other remaining assets, according to plan of distribution of asset mentioned in article
95. (Sec. 94)

Plan of distribution of assets: Procedure
A provision in the AOI may include the plan providing for the distribution of assets may be adopted by a
non-stock corporation in case of dissolution:
1. Adoption of a resolution by the majority vote recommending a plan of distribution;
2. Written notice setting forth the proposed plan to the members; and
3. At the date, time and place given, affirmative vote of at least 2/3 of the members having voting
power.

FOREIGN CORPORATION

Foreign Corporation is a corporation formed, organized or existing under any law 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).Once issued the certification, foreign laws is governed by the domestic law except to
the formation organization and dissolution of corporation, and relation, duties and responsibilities of
stockholders/members and BODT to each other or to corporation (Sec. 129).

Doing Business
Implies a community of commercial dealings and arrangements, and contemplates to some extent the
performance of acts or works or the exercise of some functions normally incident to and in progressive
prosecution of, the purpose and object of its organization. (Continuity Test)

Doctrine of Isolated Transaction
Foreign corporations can sue or be sued on a transaction or series of transaction set apart from the
common business of a foreign enterprise in the sense that there is no intention to engage in a progressive
pursuit of the purpose and object of business transaction.

Suability of Foreign Corporations
1. Foreign corporations doing business in the Philippines;
a. With license: may sue and be sued in the Philippines;
b. Without license: cannot sue but may be sued in the Philippines. (Sec. 133)
2. Foreign corporation not doing business in the Philippines: on isolated transaction, it may sue and be
sued.

Application for License
In case of foreign corporation authorized to conduct business in the Philippines prior to effectivity of the
Corporation code, no new license is necessary (Sec. 124) but those subsequent foreign corporation
should apply for license under section 125.

Procedure
A. Documentary requirements:
1. Application, under oath, filed in SEC including AOI and by-laws;
2. Attach certificate that the laws of their incorporation allows Filipino citizens and corporation to
business in their country and that the corporation is in good standing;
3. Certification that the corporation is solvent and in sound financial condition; and
4. Other requirements as provided for by laws and authority from appropriate authority (Sec. 125).
B. Appointment of Resident Agent:
1. SEC shall require the designation of a resident agent of the corporation (Sec. 128). A resident
agent is an individual residing in the corporation or domestic corporation lawfully transacting
business in the Philippines (Sec. 127).
2. File to SEC the contract of agency.

C. Bond requirements:
1. SEC will issue such license after complying with the documentary requirements; and
2. Within 60 days from the issuance of the license, foreign corporation shall deposit bonds at least
P100, 000 (see section 126).

Necessity of obtaining a license to do business:
The reason for the license is to subject the foreign corporation doing business in the Philippines to the
jurisdiction of the courts, otherwise a foreign corporation illegally doing business here may successfully
though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the jurisdiction
of the local courts.


Amendments AOI or By-laws and License of Foreign Corporations
Within sixty (60) days after the amendment becomes effective, file with the SEC, and in the proper cases
with the appropriate government agency, a duly authenticated copy of the articles of incorporation or by-
laws, as amended, indicating clearly in capital letters or by underscoring the change or changes made,
duly certified by the authorized official or officials of the country or state of incorporation. The filing thereof
shall not of itself enlarge or alter the purpose or purposes for which such corporation is authorized to
transact business in the Philippines (Sec. 130).

A foreign corporation authorized to transact business in the Philippines shall obtain an amended license
in the event it changes its corporate name, or desires to pursue in the Philippines other or additional
purposes, by submitting an application therefor to the SEC, favorably endorsed by the appropriate
government agency in the proper cases (Sec. 131).

Merger or consolidation involving a foreign corporation
One or more foreign corporations authorized to transact business in the Philippines may merge or
consolidate with any domestic corporation or corporations if such is permitted under Philippine laws and
by the law of its incorporation and the requirements on merger or consolidation as provided in corporation
code are followed.

Within sixty days after such merger or consolidation, the foreign corporation shall file in SEC and
appropriate government agency the articles of merger or consolidation, duly authenticated by the official
of the state which such merger was effected. If the foreign corporation is the absorbed corporation, the
same shall file a petition for withdrawal of its license (sec. 132).

Revocation of license
Without prejudice to other grounds provided by special laws, the license of a foreign corporation to
transact business in the Philippines may be revoked or suspended by the SEC upon any of the following
grounds:
1. Failure to file its annual report or pay any fees;
2. Failure to appoint and maintain a resident agent in the Philippines;
3. Failure, after change of its resident agent or of his address, to submit to the SEC a statement of
such change;
4. Failure to submit to the SEC an authenticated copy of any amendment to its articles of
incorporation or by-laws or of any articles of merger or consolidation;
5. A misrepresentation of any material matter in any application, report, affidavit or other document
submitted by such corporation;
6. Failure to pay any and all taxes, imposts, assessments or penalties;
7. Transacting business in the Philippines outside of the purpose or purposes for which such
corporation is authorized under its license;
8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign
corporation or entity not duly licensed to do business in the Philippines; or
9. Any other ground as would render it unfit to transact business in the Philippines (Sec. 134).

Upon the revocation of any such license to transact business in the Philippines, SEC shall issue a
corresponding certificate of revocation, furnishing a copy thereof to the appropriate government agency in
the proper cases. The SECshall also mail to the corporation at its registered office in the Philippines a
notice of such revocation accompanied by a copy of the certificate of revocation (Sec. 135).

Withdrawal by a foreign corporation
If a foreign corporation duly licensed to do business desires to withdraw, it must file a petition for
withdrawal, and must meet the following requirements:
1. All claims accrued in the Philippines must be settled;
2. All taxes must be paid; and
3. Petition must be published once a week for three (3) consecutive weeks (Sec. 136)