Chapter 8: By-Laws

Sections 46 all the way to Section 48 speaks of the By laws. All corporations registered
under the provisions of the Corporation Code must (the word used in Sec. 46 is “must”) adopt
and file its by-laws with the SEC within a period of 1 month from the date of its registration.
That is, of course, if it is not filed simultaneously with the articles of incorporation. Because the
by-laws may be adopted simultaneously with the articles and filed also simultaneously with the
articles of incorporation with the SEC. Provided, of course, that if it is adopted prior to
incorporation it must be dated at least at the same time that the articles of incorporation was
executed or signed by the incorporators.

The law uses the word “must” in Sec. 46 – must adopt and file their by-laws with the SEC
within the period of 1 month from the date of its registration. So what would be the effect of
non-filing or non-adoption of the corporate by-laws within the time frame provided by the law?
Will it result to the automatic dissolution of the corporation? Ruling of the Court in Loyola
Grand Villas Homeowners Association, Inc. v. CA – No. The word “must,” ruled [by] the Court in
that case, is not always imperative. The tendency is to interpret the word as a reasonable
construction of the statute in which it is used will demand or require. And in the deliberation of
the legislature in BP Blg. 68 for the Corporation Code would show that it was not their intention
to make it imperative. Taken as a whole and under the principle that the best interpreter is the
statute itself, Sec. 46 reveals that the intent of the legislature is to attach a directory and not a
mandatory meaning to the word “must.” That decision was penned by my professor in
Statutory Construction.

Although the Corporation Code requires the filing of By-laws, it does not expressly
provides for the consequences of non-filing of the said By-laws within the period provided for
under Sec. 46. However, such an omission has been rectified by the advent of PD 902-A which
granted the SEC the power to suspend or revoke after proper notice and hearing, among others
of course, for failure to file the By-laws within the required period. The failure to file or adopt
the By-laws would not thus result to the automatic dissolution of the corporation. The
Corporation Code and PD 902-A are statutes in pari materia and should thus be interpreted,
construed and harmonized with one another. Failure to file the By-laws is merely a ground for
suspension or revocation of the corporate franchise.

The By-laws will become effective only upon the approval of the SEC to the effect that it
is not contrary to law. Of course, the By-laws, just like the articles of incorporation, will
normally be endorsed by the SEC to the government agencies which may have supervision or
control over the business activities of the particular corporation even before the SEC will start
turning the pages of the said By-laws. Because there may be provisions in the By-laws that
would be contrary to government rules and regulations being enforced by the concerned
government agencies. Like for instance Insurance Commission, insurance companies. Baka
naman yung mga provisions nila dun eh contrary to the rules of the Insurance Commission. So it
has to be referred to the government agencies concerned. The enumeration in Sec. 17 to the
effect that the SEC will endorsed articles of incorporation or By-laws to certain government
agencies is not exclusive. Nilalagay lang nila dyan Banking, Insurance, etc. Any business activity
which is under the supervision of another government agency, the SEC will endorse the articles
or By-laws to these concerned government agencies, i.e., Food and Drug Administration –
manufacture, processing and canning of foods, drugs and cosmetics; POEA – in cases, of course,
of placement of workers abroad; even cockfighting – the Philippine Game Fowl Commission.
And any and all government agencies that may have supervision over the affairs of the
particular corporation, the SEC will endorse the same to them before they will even take a look
of the pages of your articles and/or By-laws.

Of course, there are certain elements of a valid By-law.

First, it must not be contrary to law, morals, public order or public policy. You have for
instance Fleischer v. Botica Nolasco and Barreto v. La Previsora. Barreto involves compensation
granted to the Board of Directors even after their terms already expired – it is contrary to law.
As we were saying, directors are not generally not entitled to compensation eh nag expire na
nga yung term binabayaran pa sila ng compensation. Grace Christian High School v. CA, on the
election of a director who is not a member of the corporation. In the case of stock corporation,
he must be a stockholder owning at least one share standing in his name in the corporation. In
case of non-stock, he must be a member of the corporation. Nag elect ba naman sila ng
director na hindi member ng corporation. That is by virtue of a By-law provision. That is not
valid. First of the element is that it must not be contrary to law, morals, public order or public
policy. Any provision in the By-laws that runs counter to this statement is considered or
deemed as not written at all.

Second, it must not be inconsistent with the articles of incorporation – Loyola Grand
Villas. The articles of incorporation is a three-fold contract. First, between and among the
stockholders, members, directors and officers themselves; second, between them and the
corporation; and third, between the corporation and the state. The By-laws are mere internal
rules of the corporation for the government of the particular entity concerned. It is not
contractual in nature. So, if there is a discrepancy between the provisions in the articles and the
By-laws, the articles of incorporation will govern.

Third, it must be general and uniform in its effect or applicable to all alike or similarly
situated. Kung non-voting ka, eh di non-voting ka. Meron bang non-voting preferred shares?
Wala. Or no par value na preferred shares, of course none.

Fourth, of course, is that it must not impair obligations and contracts or vested rights,
the case of Gokongwei v. SEC; and

Fifth, it must be reasonable. I'm again looking at the case of Gokongwei v. SEC where the
By-laws of San Miguel Corporation (SMC) were amended to disqualify a stockholder who
happens to have a substantial interest in another corporation which is directly in competition
with SMC. The high court ruled that it is a reasonable provision as it prevents the uniting of
incompatible interest in one particular business enterprise. Syempre, pag si John Gokongwei
nakaupo sana sa Board of Directors ng SMC, as we all know, the BOD has unbridled right to all
books, data and information as to how the corporation is being operated. He may have gained
access even to marketing strategies, proposed expansion programs, and of course apply it in
favor of his own corporation like Robina Farms for instance to the damage and prejudice of
SMC. Since it is reasonable, the Court upheld the validity of the amendment of the By-laws of
SMC.

And speaking of amendment of the By-laws, Sec. 48 provides for two modes. Any
corporate act, as we may have observed earlier on, any corporate act emanates from the Board
of Directors. There is always a Board Resolution through a majority vote of the Board of
Directors subject to the approval of the stockholders owning or representing at least a majority
(majority lang ang amendment of the By-laws) of the stockholders or members. In cases of
amendment of the articles, it is two-thirds (hindi majority) or by the Board of Directors
themselves if authorized by the stockholders. That was what happened in the case of SMC –
the stockholders authorized the BOD to amend the By-laws and they did amend the By-laws to
disqualify a stockholder from being elected as a director if he happens to own or hold also a
substantial interest in another corporation directly in competition with SMC.