Corporation Law

VI. Control and Management of Corporations

D. Devices Affecting Control

1. the

Corporate powers and the power to bind the corporation are vested exclusively in the board of
directors, except only in the instances where the law otherwise provides
Whoever (stockholder or group) is able to elect a majority of the directors would in effect control
the policies of the corporation
General rule: the extent of control would be proportional to the number of shares a stockholder
owns (the more shares one has, the greater the possibility of control)
o Exception: use of devices affecting control
It is possible for a person or a group of persons owning only a minority of the shares
in a corporation to obtain control of a corporation by successfully electing the
majority of the directors
Devices are exclusive to avoid circumvention of the law
o Some of the devices (pooling agreements, greater than majority voting requirements,
restrictiong on transfers of stocks) are the products of the special problems of the close
corporation and its desire to achieve partnership advantages
Problem common to devices
o The effect of the transfer of some or all of his stocks by one of the parties to the agreement
In close corporations, this problem is minimized by contractual restrictions on
transfer
If the control arrangement is embodied in the by-laws or AOI transferee may be
held bound by it
will not be bound if private agreement only among stockholders, unless
transferee is given notice thereof
complications arise if embodied in by-laws because these must comply with
statutory standards
stockholders may waive statutory rights in private agreements among
themselves
another problem: may the by-laws, though void because not in accordance
with statutory norm, be held valid as a private agreement among the
stockholders who approved it?
proxy device

Section 58. Proxies. Stockholders and members may vote in person or by proxy in all meetings of
stockholders or members. Proxies shall in writing, signed by the stockholder or member and filed before
the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be
valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer
than five (5) years at any one time.

proxy may refer to two things

o person duly authorized by a stockholder to vote in his behalf
an agent for a special purpose thus the general rules of agency applies
o the document which evidences the authority
Corporation Code expressly allows voting by proxy in all stockholders and members meeting
In most cases useful only in a widely-held corporation where many stockholders are residing in
places far from the principal office
Incumbent management usually solicits proxies from stockholders who are indifferent of
management and are mainly interested in getting dividends
o To perpetuate existing control
o The existing management who may own only a small portion of the corporations shares can
retain its control over corporate affairs for as long as they can obtain the necessary number
of proxies from absentee stockholders

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VI. Control and Management of Corporations

Usual practice is to send a proxy form with the notice of the annual stockholders meeting
o Prxy usually returned without the blank for proxy name being filled in
Proxy committee
o Persons suggested as proxies by the management/incumbent directors
Form
o Proxies may be appointed orally
o Written notice shall be filed with the corporate secretary before the meeting
o Failure to comply proxy void and ineffective
Effect: a vote or presence in a meeting which is counted on the basis of such a void
proxy may result in the invalidation of any action decided in such meeting
Exception: the number of shares required for quorum or voting is otherwise present
May the by-laws prohibit the use of proxies No in stock corporations
o When the rigt is given by statute, a stockholder cannot be deprived of it
o In non-stock corporations, the Code allows a waiver of such right provided this is made in
the AOI or in the by-laws
o But by-laws may impose reasonable conditions as to the form and manner of voting by proxy
Ex: notary requirement, submission of roxy form before the meeting
But a by-law which limits the appointment of a proxy to stockholders of the same
corporation has been held to be unduly restrictive of the freedom to choose ones
representative, and therefore invalid
Kinds: general and limited
o General proxy
A general proxy to attend the annual stockholders metting gives the power to vote
for directors and on all ordinary matters which may properly be taken in the meeting
Does not include power to vote for an amendment to AOI or other unusual
transactions
o Limited proxy
Restricts the authority to vote to specified matters only and may direct the vote to be
case in a certain way
Period
o Proxy may fix the period during which it may be used
o Cannot exceed 5 years
o Renewable for not more than 5 years for each renewal
o Where proxy does not fix any period, proxy expires after the meeting for which it was given;
cannot be used for subsequent meeting unless renewed
Revocability
o Ratio: special form of agency
o It is revocable even before the period fixed therein has expired and even where it expressly
provides for irrevocability
o Exception (when irrevocable): when coupled with interest
o Revocation may be made orally, in writing, or implied from the acts of the stockholder
Example of implied acts: appearance of stockholder at the meeting, death of
stockholder
Proxy is the weakest or least reliable device
o Ratio: because of the inherent revocability of the proxy coupled with the 5-year limitation on
its effectivity
Irrevocable when coupled with interest
o Where the proxy is coupled with an interest, it is irrevocable, at least for the period fixed
therein
o End of 5 years, WON with interest proxy automatically ceases to be effective
Proxy contest
o When group of stockholders feel dissatisfied with the management

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VI. Control and Management of Corporations

o
o

SEC
o
o

Each block will seek the proxies of absentee stockholders who are not identified with either
group
Management block usually in a more favorable position
Management has the right to defend its present policies, then it may use corporate
funds and facilities in its solicitation
As long as in good faith and reasonable
Conflicting view on whether the other group would be entitled to reimbursement of
even reasonable expenses in their solicitation
But strong view in favor of reimbursing reasonable expenses of an opposition
group, if they succeed in electing their candidates as directors
Given power to pass upon the validity of the issuance and use of proxies and voting trust
agreements for absent stockholders or members
The Revised Securities Act empowers the SEC to issue rules and regulations relating to
proxies issued by any broker or dealer of shares of stock belonging to others, to the end that
the interest of the investing public will be protected from negligent or fraudulent acts of
such brokers or dealers

2. Voting Trust
Section 59. Voting trusts. One or more stockholders of a stock corporation may create a voting trust for
the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at any time: Provided, That in the case of a voting trust
specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding
five (5) years but shall automatically expire upon full payment of the loan. A voting trust agreement must
be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such
agreement shall be filed with the corporation and with the Securities and Exchange Commission;
otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock covered
by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee
or trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall
be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust
agreement.
The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be
transferable in the same manner and with the same effect as certificates of stock.
The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of
the corporation in the same manner as any other corporate book or record: Provided, That both the
transferor and the trustee or trustees may exercise the right of inspection of all corporate books and
records in accordance with the provisions of this Code.
Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and
conditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions of said
agreement.
No voting trust agreement shall be entered into for the purpose of circumventing the law against
monopolies and illegal combinations in restraint of trade or used for purposes of fraud.
Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the
end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of
the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in
the name of the transferors.

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VI. Control and Management of Corporations

The voting trustee or trustees may vote by proxy unless the agreement provides otherwise.

In order to achieve irrevocable proxies

Proxy sometimes unreliable
o Irrevocable when coupled with interest
o But what constitutes sufficient interest depends on each case
o Hence, a proxy device may be unreliable
A trust agreement whereby a stockholder transfers his shares to a trustee who will exercise his
voting rights
o the stockholder remains the beneficial or equitable owner of the shares
o legal ownership transferred to the trustee
essence of voting trust
o that the real ownership of the shares is separated from the voting rights
o usual aim to insure the retention of incumbent directors and remove from the stockholders
the power to change the management for the duration of the trust
irrevocable as long as the trustee has not violated the trust by his misconduct or fraud
requisites of a voting trust agreement (Sec. 59)
o must be in writing and notarized
o a certified copy must be filed with the corporation as well as with SEC
o must not be for a longer period than 5 years, although it may be renewed each time for not
more than 5 years
o the certificates of stock must be cancelled, and new ones issued to the trustee stating
therein that they were issued in pursuance of the voting trust agreement
o the transfer must be entered on the corporate books with a similar statement
o the trustee should issue voting trust certificates in favor of the transferring stockholders
o the voting trust should not be for an illegal purpose
ex: not be entered into for the purpose of circumventing the law against monopolies
and illegal combinations of trade or for fraudulent purposes
SEC has the power to pass upon the validity of voting trust agreements for absent stockholders or
members
Maximum period same with proxy (5 years)
o Difference: in case of a voting trust agreement, the Code makes an exception where the
voting trust is a condition of a loan agreement, in which case it may be for a period longer
than 5 years but not beyond the time when the loan is fully paid
Should have a legitimate business purpose to promote the best interests of the corporation, or to
protect the legitimate interests of others in the corporation
o Not valid
If it exists only for the benefit of the trustee without any obligation to perform any
useful service for the protection of the stockholders or creditors of the corporation
The purpose is to restrict the powers of directors
o Some valid purposes according to Ballantine
To assist financing, to procure loans, and to protect bondholders and preferred
shareholders
To aid in reorganization plans and adjustments with creditors in times of great
financical stress
To accomplish some definite plan or policy for the benefit of the corporation and for
this purpose, to assure stability and continuity of management
Transferring stokholders receive voting trust certificates as evidence of their rights certificates
are transferable like certificates of stock
o But the stockholder, in law, ceases to be such and his rights are against the trustee in
accordance with their agreement

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VI. Control and Management of Corporations

Except for right to inspect corporate books and records (right remains with the
transferring stockholder)
trustee becomes qualified to be a director
o ratio: since he is a registered owner, he fulfills the qualification of the Code that he own at
least one share which shall stand in his name on the books of the corporation
rights other than voting rights may be transferred to the trustee
no voting trust agreement may be kept secret among the parties thereto
o a copy must be given to SEC and to the Corporation
o must be open to examination by any stockholder
o agreement cannot be exclusive
ratio: law gives the right to any other stockholder to transfer his shares to the trustee
upon the same terms and conditions in the voting trust agreement
abuses/disadvantages
o if collectively the transferring stockholders hold the controlling interest, the control of
management will pass to the voting trustee, who need not even be a stockholder and is
often a complete stranger to the corporation
o abuses/violations of agreement even before the stockholder knows about it
o suggestion: voting trust be outlawed and instead, the law should recognize irrevocable
proxies to delegate and centralize control for proper purposes
in this way, the purpose of the voting trust is achieved without a transfer of the
shares, which is the fact which gives rise to possible abuses

3. Pooling and voting agreements

Section 100. Agreements by stockholders. 1. Agreements by and among stockholders executed before the formation and organization of a close
corporation, signed by all stockholders, shall survive the incorporation of such corporation and shall
continue to be valid and binding between and among such stockholders, if such be their intent, to the
extent that such agreements are not inconsistent with the articles of incorporation, irrespective of where
the provisions of such agreements are contained, except those required by this Title to be embodied in
said articles of incorporation.
2. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may
provide that in exercising any voting rights, the shares held by them shall be voted as therein provided, or
as they may agree, or as determined in accordance with a procedure agreed upon by them.
3. No provision in any written agreement signed by the stockholders, relating to any phase of the
corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make them
partners among themselves.
4. A written agreement among some or all of the stockholders in a close corporation shall not be
invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as
to restrict or interfere with the discretion or powers of the board of directors: Provided, That such
agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts
imposed by this Code on directors.
5. To the extent that the stockholders are actively engaged in the management or operation of the
business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each
other and among themselves. Said stockholders shall be personally liable for corporate torts unless the
corporation has obtained reasonably adequate liability insurance.

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VI. Control and Management of Corporations

an agreement between two or more stockholders to vote their shares the same way
o may cover a wide range of matters
o usually relate to election of directors
o may either specify the name of directors to be voted for or may simply provide that the
shares will be voted as a unit
o often provide for arbitration in case of disagreement
o example: stockholders who individually own only a minority of the share but together would
represent a majority, can obtain control of the management of the corporation
upheld as valid as long as they do not limit the discretion of the board of directors in the
management of the corporate affairs, or work any fraud against the stockholders not parties to the
contract
invalid an agreement that the directors once elected must vote for certain persons as officers
o ratio: the choice of officers is vested by law in the board of directors
difference from voting trust agreement
o voting agreement does not involve a transfer of stocks but is merely a private agreement
between two or more stockholders to vote the same way in stockholders meetings
o voting agreement is a contract its violation may give rise to liabilities for damages in
proper cases
special provision as regards close corporations (Sec. 100 Agreements by stockholders)
o paragraph 1
refers to stockholders agreements in general, including but not limited to voting and
pooling agreements
are entered into prior to incorporation, when both parties have some bargaining
power
pre-incorporation agreeements among the stockholders remain effective even after
incorporation if so intended, and even if they are not reflected in the AOI, unless the
matters involved are required to appear therein
only limitation agreements should not be inconsistent with AOI
o paragraph 3
the modern trend of giving close corporations the freedom to operate as a
partnership among the stockholders, but remaining a corporation as far as 3 rd parties
are concerned
o paragraph 4
qualifies the general rule that no voting agreement may interfere with the discretion
of the board
in this case, tha parties to th agreement assume the liabilities of directors
o paragraph 2
refers to pooling and voting agreements in particular
does this provisions necessarily imply that these agreements can be valid only in
close corporations?
No reason in denying stockholders of corporations other than close ones the
right to enter into voting or pooling agreements to protect their interest, as
long as they do not intend to commit any wrong or fraud on the other
stokholders not parties to the agreement
Close corporations limited only to those which will fall under the definition
provided in Sec. 96
o But it is entirely possible that a corporation which is in fact a close
corporation will not come withtin the definition in such case, its
stockholders should not be precluded from entering into contracts like
voting agreements if these are otherwise valid
4. Cumulative voting

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VI. Control and Management of Corporations

In an election contest, it is vital to both the majority and minority blocks to so cumulate their votes
so that they can get as many seats as possible in the board
Example: majority wants to elect all five directors so they distributed their votes equally among its
five candidates
o But the minority cumulates its votes in favor of only three candidates
o Then it is possible for the majority to lose their control to the minority
Formula
o For determining the minimum number of votes needed to elect one director (Professor Frey
formula)
Number of share required = number of votes outstanding
Number of directors to be elected
Example: there are 400 shares represented in a meeting where 5 directors are
to be elected; M needs 67 4/6 voted to be elected as director
o For determining the number of shares to elect a given number of directors (X)
Y = total number of shares represented
D = number of directors one desires to elect
D = total number of directors to be elected
X=YxD+1
D+1
Example: if M wishes to cotrol the board and aims at electing 3 directors, he
will need 201 shares to do so
Strongest argument against cumulative voting
o It would result in the election of partisans, whose roles would be inconsistent with the
function of a director to represent the corporation as a whole and not just one group of
shareholders
By-laws cannot prohibit cumulative voting
o Ratio: this right is mandated in Sec. 24
o Would it be possible however to do away with cumulative voting by a waiver in a voting
agreement? Would this kind of agreement be covered by Sec. 100, par. 1 with respect to
close corporations?

5. Classification of shares
Allowed by the Code in Sec. 6
Example: shares classified into common voting and preferred non-voting shares
o Management held by whoever owns the majority of the common voting shares, which
majority may in fact be only a minority of the total number of shares, voting and non-voting
o Control would thus depend not on the amount of investment made but on the number of
votin shares acquired
o Preference of non-voting shares over dividends or assets upon liquidation may compensate
for lack of voting rights
If non-voting shares are redeemable, compensating factor is investment may be reacquired anytime even before dissolution
o Non-voting shares may even be both preferred and redeemable
SEC usually requires that where no dividends are declared for 3 consecutive years inspite of
available profits, the preferred stocks will be given the right to vote for directors until dividends are
declared
Shares which may be deprived of the right to vote
o Redeemable
o Preferred
Example: corporation with 5 stockholders owning varying amounts of stock, each with equal voting
rights
o Same number of common stocks with full voting rights may be issued to each
o Any additional investment woule be in the form of preferred non-voting stocks

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VI. Control and Management of Corporations

But may still be allowed to vote in case of major corporate changes

Variations in the voting shares allocated to each can be used to attain the desired proportional
representation in the board
Close corporation
o Allowed to classify its directors into one or more classes, each of whom may be voted for
and elected solely by a particular class of stock
o Example: equality of representation n a 5-man board could be achieved by dividing the stock
into 5 classes
Each class the right to elect one director, regardless of the number of shares in such
class
But not possible in not close corporations
Ratio: number of votes of each stockholder in not close corporations depends
on the number of shares he owns

6. Restriction on transfer of shares

Section 97. Articles of incorporation. The articles of incorporation of a close corporation may provide:
1. For a classification of shares or rights and the qualifications for owning or holding the same and
restrictions on their transfers as may be stated therein, subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of whom may be voted for and elected
solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or directors than those
provided in this Code.
The articles of incorporation of a close corporation may provide that the business of the corporation shall
be managed by the stockholders of the corporation rather than by a board of directors. So long as this
provision continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be
directors for the purpose of applying the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of directors.
The articles of incorporation may likewise provide that all officers or employees or that specified officers or
employees shall be elected or appointed by the stockholders, instead of by the board of directors.
Section 98. Validity of restrictions on transfer of shares. Restrictions on the right to transfer shares must
appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise,
the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall not be more
onerous than granting the existing stockholders or the corporation the option to purchase the shares of the
transferring stockholder with such reasonable terms, conditions or period stated therein. 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.
Section 99. Effects of issuance or transfer of stock in breach of qualifying conditions. -

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VI. Control and Management of Corporations

1. If stock of a close corporation is issued or transferred to any person who is not entitled under any
provision of the articles of incorporation to be a holder of record of its stock, and if the certificate for such
stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof, such
person is conclusively presumed to have notice of the fact of his ineligibility to be a stockholder.
2. If the articles of incorporation of a close corporation states the number of persons, not exceeding twenty
(20), who are entitled to be holders of record of its stock, and if the certificate for such stock conspicuously
states such number, and if the issuance or transfer of stock to any person would cause the stock to be held
by more than such number of persons, the person to whom such stock is issued or transferred is
conclusively presumed to have notice of this fact.
3. If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of
the corporation, the transferee of the stock is conclusively presumed to have notice of the fact that he has
acquired stock in violation of the restriction, if such acquisition violates the restriction.
4. Whenever any person to whom stock of a close corporation has been issued or transferred has, or is
conclusively presumed under this section to have, notice either (a) that he is a person not eligible to be a
holder of stock of the corporation, or (b) that transfer of stock to him would cause the stock of the
corporation to be held by more than the number of persons permitted by its articles of incorporation to
hold stock of the corporation, or (c) that the transfer of stock is in violation of a restriction on transfer of
stock, the corporation may, at its option, refuse to register the transfer of stock in the name of the
transferee.
5. The provisions of subsection (4) shall not be applicable if the transfer of stock, though contrary to
subsections (1), (2) or (3), has been consented to by all the stockholders of the close corporation, or if the
close corporation has amended its articles of incorporation in accordance with this Title.
6. The term "transfer", as used in this section, is not limited to a transfer for value.
7. The provisions of this section shall not impair any right which the transferee may have to rescind the
transfer or to recover under any applicable warranty, express or implied.

Most common gives a first option to the other stockholders and/or the corporation to acquire the
shares of a stockholder who wishes to sell them
Device peculiar to close corporations
o Sec. 96 provides that a corporation cannot qualify for the special treatments accorded to
close corporations unless transfer of its stocks is subject to one or more of the restrictions
allowed by law

Right of first refusal, tag-along right, drag-along right

7. Prescribing qualifications for directors; founders shares
Section 7. Founders shares. Founders shares classified as such in the 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 a limited
period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission.
The five-year period shall commence from the date of the aforesaid approval by the Securities and
Exchange Commission.

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VI. Control and Management of Corporations

One of the matters which may be provided for in the by-laws is a definition of the qualifications of
directors or trustees
Possible to prescribe certain qualifications for directors as a device to control the corporation
Valid
o by-law provision that only stockholders with a stated minimum number of shares fully paid
up may be elected as directors
o that only holders of founders shares may qualify for directorship
As long as the qualifications imposed are reasonable and not meant to unjustly or unfairly deprive
the minority of their rightful representation in the board of directors, such provisions are within the
power of the majority of the stocks to provide in the by-laws
Founders shares
o Shares which were originally owned by those who founded the corporation, and which may
be transferred to others without losing their character as founders shares
o An exception to the rule that non-voting shares shall be limited to preferred and redeemable
shares
o Privilege intended to compensate the efforts of the organizers of the corporation
May Sec. 7 be interpreted to cover a provision granting founders shares the exclusive right to
dividends for a periof of 5 years?
o 5 years may not be extended
SEC approval required
o Hence, SEC may disapprove but grounds for disapproval not specified
o Disapprove when manifestly oppressive to other stockholders

8. Management contracts
Section 44. Power to enter into management contract. No corporation shall conclude a management
contract with another corporation unless such contract shall have been approved by the board of directors
and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority
of the members in the case of a non-stock corporation, of both the managing and the managed
corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder or
stockholders representing the same interest of both the managing and the managed corporations own or
control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing
corporation; or (2) where a majority of the members of the board of directors of the managing corporation
also constitute a majority of the members of the board of directors of the managed corporation, then the
management contract must be approved by the stockholders of the managed corporation owning at least
two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the
members in the case of a non-stock corporation. No management contract shall be entered into for a
period longer than five years for any one term.
The provisions of the next preceding paragraph shall apply to any contract whereby 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: Provided, however, That
such service contracts or operating agreements which relate to the exploration, development, exploitation
or utilization of natural resources may be entered into for such periods as may be provided by the
pertinent laws or regulations. (n)
Section 45. Ultra vires acts of corporations. 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 the powers so conferred.

A contract to manage the day-to-day affairs of the corporation just like a general manager does
The board of directors may decide to enter into a management contract with another corporation

10

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VI. Control and Management of Corporations

Powers of the managing corporation are expressed in the management contract

o Terms should be carefully drafted so that the board of directors of the managed corporation
retains control of the basic corporate policies and the power to recall the contract where the
corporations interest would greatly suffer from its continuance
o Otherwise, management contract would be contrary to Sec. 23 which gives the board the
exclusive right to exercise all corporate powers, except only in instances where the law
expressly grants the stockholders the right of final say
Is the power to enter into management contracts one of the instances referred to in Sec. 23 as
unless otherwise provided in this Code?
o Nothing expressed therein leads to such conclusion
o In the absence of express language, Sec. 44 (Power to enter into management contracts)
should not be interpreted as an exception to Sec. 23 which lays down a fundamental and
well-settled principle that all corporate powers are to be exercised by the board
Board may delegate functions
o But it cannot abdicate its responsibility to act as the governing body by giving absolute
powers to officers or others, by way of a management contract or otherwise
o It must retain its control over such officers or cotracts so that it may recall the delegation of
power whenever interests of the corporation are seriously prejudiced
PNB vs Producers Warehouse Association
o One of the defenses was that the quedans were void because they were issued without
authority of the defendant warehouse corporation
o SC upheld validity of quedans because of the management contract
Management contract vs agency
o Both one of the parties binds himself to render some service to the other party
o Agency
Basis is representation
o Management contract
Cannot be terminated at will but only in accordance with the contract

9. Unusual voting and quorum requirements

Section 97. Articles of incorporation. The articles of incorporation of a close corporation may provide:
1. For a classification of shares or rights and the qualifications for owning or holding the same and
restrictions on their transfers as may be stated therein, subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of whom may be voted for and elected
solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or directors than those
provided in this Code.
The articles of incorporation of a close corporation may provide that the business of the corporation shall
be managed by the stockholders of the corporation rather than by a board of directors. So long as this
provision continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be
directors for the purpose of applying the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of directors.

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The articles of incorporation may likewise provide that all officers or employees or that specified officers or
employees shall be elected or appointed by the stockholders, instead of by the board of directors.

Example where voting requirements are increasedbeyond the minimum required by law
o Increases the veto power of the minority
Legally possible in most instances where stockholders action is required
In exchange for the numerical majority in the board of directors, the minority mught bargain for a
provision in the AOI giving them a strong veto power in major corporate decisions
o Example: the AOI may require the vote of 80% of the subscribed capital stock for the
approval of an amendment to the AOI, which vote is more thatn the 2/3 requirement of Sec.
16
Would it be legally possible to provide in the AOI of a close corporation that a unanimous vote od
the stockholders would be necessaey in certain instances? useless requiremeent
o It will only have the effect of maintaining the status quo
o Stockholder can merely absent himself from a meeting
o If at the outset, the parties started with their desired allocation of board seats, the unanimity
vote requirement would maintain that allocation
o If intention to replace a director, unanimityrequirement will make it possible for them to
block someone elses election
The provision in the AOI of a close corporation requiring a higher quorum or voting requirement
cannot be amended except by the vote of th stockholders representing such higher voting
requirement, whether voting or non-voting
Assuming unanious voting anf presence provisions are valid
o Deadlocks are bound to occur more often in their presence
Except in close corporations, the law did not intend to allow a unanimity requirement as this would
be inconsistent with the theory of corporate democracy

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