Commercial Law Review Corporation Code PDF
Commercial Law Review Corporation Code PDF
Corporation Code
Maria Zarah Villanueva - Castro
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Corporation Code
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and to that branch of the purchasing public, As a rule, no extension can be made earlier
the word or phrase has come to mean that than 5 years prior to the expiration of the
the article was his product. term.
Requisites: *No limitations regarding number of
1. Period of use; extension can apply.
2. The use must be exclusive. Reason: To compel the stockholders to
Case: Lyceum of the Philippines meet the corporation’s term.
*The exclusivity requirement was not Exception: If for compelling reasons, earlier
satisfied by Lyceum of the Philippines. extension will be allowed.
*In case of change of name, the corporation *During the three year winding up period,
is not dissolve nor create a new the corporation still has personality but
corporation; it also does not extinguish the activities are limited to the liquidation of
corporate liability. the corporation affairs and not to transact
*Change of name can be done by amending further business.
the Articles of Incorporation. As a rule, after the term has expired, no
Procedure: more extensions be allowed or entertained
1. Obtain approval of majority of the Board by the SEC.
and 2/3 stockholders; Reason: No more period to extend.
2. Submission to the SEC for approval. Exception: Doctrine of Relation – The filing
Purpose Clause and recording of a certificate of extension
*Only one primary purpose. Primary after the term cannot relate back to the
purpose defines the business activities of date of the passage of the resolution of the
the corporation. It is the ordinary course of stockholders to extend the life of the
business of the corporation. corporation. However, the doctrine of
*Secondary Purpose is for future expansion. relations applies if the failure to file the
There is no limit on the secondary purpose. application for existence within the term of
*In case the primary purpose is not viable the corporation is due to neglect of the
then secondary purpose may be used. officer with whom the certificate is required
Principal Office to be filed or to wrongful refusal on is part
*The principal place of business may to receive it.
determine the venue of court cases *The delay in submitting the application for
involving corporations. It may also extension is justifiable.
determine if service of summons and Keywords:
notices was properly made. It is also 1. Excusable delay;
important for tax purposes (local taxation). 2. Beyond the control of the corporation
*The SEC requires the exact address to be (insuperable intervening causes)
indicated in the Articles of Incorporation. Incorporators
*It is the residence of the corporation. It is *Once an incorporator always an
where the corporation maintains its books incorporator. (Fait accompli – an
and records and where normally the bulk of accomplished fact which cannot be altered)
its business is being conducted or *They are the signatories to the Articles of
undertaken. Incorporation.
*For personal action, venue is the *They are originally forming the corporation
residence. Q: What is the reason behind the phrase
Term of Existence that an incorporator is not always a
*A corporation has a maximum term of 50 corporator?
years. It may be extended for a period not A: To be an incorporator it is not necessary
exceeding 50 years in any single instance. to own a share unlike as a corporator.
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*If the Treasurer’s affidavit is false such act Sec. 19 of the Corporation Code states that “ A
is tantamount to fraud. (PD 902-A) private corporation formed or organized under
*Fraud on the part of the corporation is a this Code commences to have corporate
ground for revocation or suspension of existence and juridical personality and is
license depending upon the extent of the deemed incorporated from the date the SEC
violation committed. issues a certificate of incorporation under its
*If there’s no Treasurer’s Affidavit, the first official seal; and thereupon the incorporators,
ground shall apply, i. e., noncompliance stockholders/members and their successors
with the minimum requirement. shall constitute a body politic and corporate
General Rule: 25% must be subscribed and under the name stated in the articles of
25% must be paid. incorporation for the period of time mentioned
Exception: If the law provides otherwise, therein, unless said period is extended or the
i.e., special laws. corporation is sooner dissolved in accordance
with law.”
C. Grounds for rejection of the Articles of *For purposes of determining whether a
Incorporation corporation enjoys the status of a de facto
1. The articles of incorporation or any corporation, it must have been at least issued a
amendment thereto is not substantially in certificate of registration.
accordance with the form prescribed
herein; E. Amendment of the Articles of Incorporation
2. The purpose or purposes of the corporation Sec. 16 of the Corporation Code states that:
are patently unconstitutional, illegal, “Unless otherwise prescribed by this Code or by
immoral, or contrary to government rules special law, and for legitimate purposes, any
and regulations; provision or matter stated in the articles of
3. The Treasurer’s Affidavit concerning the incorporation may be amended by a majority
amount of capital stock subscribed and/or vote of the board of directors or trustees and
paid is false; the vote or written assent of the stockholders
4. The percentage of ownership of the capital representing at least 2/3 of the outstanding
stock to be owned by citizens of the capital stock, without prejudice to the appraisal
Philippines has not been complied with as right of dissenting stockholders in accordance
required by existing laws or the with the provisions of this Code, or the vote or
Constitution. written assent of at least 2/3 of the members if
it be a non-stock corporation.”
Dual Franchise Requirement: No articles of *It is effective upon the approval of the SEC.
incorporation or amendment to articles of *There may be an amendment by inaction.
incorporation of banks, banking and quasi- Amendment by Inaction – Upon filing with the
banking institutions, building and loan SEC of the amendment and the Commission
associations, trust companies and other failed to act on it within 6 months from the date
financial intermediaries, insurance companies, of filing for a cause not attributable to the
public utilities, educational institutions, and corporation.
other corporations governed by special laws
shall be accepted or approved by the F. Effects of Non-Use of Corporate Charter
Commission unless accompanied by a Sec. 22 of the Corporation Code states that: “If
favourable recommendation of the appropriate a corporation does not formally organize and
government agency to the effect that such commence the transaction of its business or the
articles or amendment is in accordance with construction of its work within 2 years from the
law. date of its incorporation, its corporate powers
D. Commencement of Corporate Existence cease and the corporation shall be deemed
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is a director shall thereby cease to be a shares for as many persons as there are
director. Trustees of non-stock corporations directors to be elected or he may cumulate
must be members thereof. A majority of the said shares and give one candidate as many
directors or trustees of all corporations votes as the number of directors to be
organized under this Code must be elected multiplied by the number of his
residents of the Philippines.” shares shall equal, or he may distribute
*In order to be eligible as director, what is them on the same principle among as many
material is the legal title to and not candidates as he shall see fit: Provided, that
beneficial title or ownership of the stocks the total number of votes cast by him shall
appearing on the books of the corporation. not exceed the number of shares owned by
*The directors/trustees must be natural him as shown in the books of the
persons. corporation multiplied by the whole
*They must also be of legal age. number of directors to be elected:
*He must possess other qualifications as Provided, however, that no delinquent
may be prescribed in the by-laws of the stock shall be voted. Unless otherwise
corporation. provided in the articles of incorporation or
*Under Sec. 27 of the Corporation Code: in the by-laws, members of the
“No person convicted by final judgment of corporations which have no capital stock
an offense punishable by imprisonment for may cast as many votes as there are
a period exceeding 6 years, or a violation of trustees to be elected but may not cast
this Code committed within 5 years prior to more than one vote for one candidate.
the date of his election or appointment, Candidates receiving the highest number of
shall qualify as a director, trustee or officer votes shall be declared elected. Any
of any corporation.” meeting of the stockholders or members
Reason: The position is based on trust and called for an election may adjourn from day
confidence. to day or from time to time but not sine die
*No citizenship requirement. or indefinitely if, for any reason, no election
*The By-Laws may provide additional is held, or if there not present or
qualifications/disqualifications. represented by proxy, at the meeting, the
Election of the Board Members owners of a majority of the outstanding
Sec. 24 of the Corporation Code provides capital stock, or if there be no capital stock,
that: “At all elections of directors or a majority of the member entitled to vote.”
trustees, there must be present, either in *It is the stockholders or corporators who
person or by representative authorized to elect members of the Board of Directors.
act by written proxy, the owners of a *The only procedure required by the Code
majority of the outstanding capital stock, or is through Election. There can be no other
if there be no capital stock, a majority of modes.
the members entitled to vote. The election *The election must be by ballot if requested
must be by ballot if requested by any voting by any voting member or stockholder.
stockholder or member. In stock *A stockholder cannot be deprived in the
corporations, every stockholder entitled to articles of incorporation or in the by-laws of
vote shall have the right to vote in person his statutory right to use any of the
or by proxy the number of shares of stock methods of voting in the election of
standing, at the time fixed in the by-laws, in directors.
his own name on the stock books of the *No delinquent stock shall be voted.
corporation, or where the by-laws are silent *It is not required that the candidate
at the time of the election; and said received the majority vote, what the law
stockholder may vote such number of provides is only plurality of votes.
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*Majority number is required only for the officers elected. Should a director, trustee
existence of a quorum. or officer die, resign or in any manner cease
Not included in outstanding capital stocks: to hold office, his heirs in case of his death,
1. Unissued stocks; the secretary, or any other officer of the
2. Non-voting stocks; corporation, or the director, trustee or
3. Treasury Shares. officer himself, shall immediately report
Methods of Voting: such fact to the SEC.”
1. Straight Voting – every stockholder may Term of Office
vote such number of shares for as many *The directors or trustees shall hold office
persons as there are directors to be elected. for one (1) year subject to the “hold over”
2. Cumulative Voting for One Candidate – a principle, i.e., they continue in office until
stockholder is allowed to concentrate his their successors are elected and qualified.
votes and give one candidate as many votes *The one year period does not apply to
as the number of directors to be elected directors initially elected for purposes of
multiplied by the number of his shares shall incorporation.
equal. Quorum Requirement in Board Meetings
*Example: X has 10 shares in his name; Sec. 25 of the Corporation Code states that:
there are 5 numbers of directors to be “Unless the articles of incorporation or the
elected. X has 50 votes (10x5) available to by-laws provide for a greater majority, a
him. X may opt to concentrate all his 50 majority of the number of directors or
votes to a particular candidate. trustees as fixed in the articles of
3. Cumulative Voting by Distribution – a incorporation shall constitute a quorum for
stockholder may cumulate his shares by the transaction of corporate business, and
multiplying also the number of his shares by every decision of at least a majority of the
the number of directors to be elected and directors or trustees present at a meeting at
distribute the same among as many which there is a quorum shall be valid as a
candidates as he shall see fit. corporate act, except for the election of
*Example: X has 10 shares in his name; officers which shall require the vote of a
there are 5 numbers of directors to be majority of all the members of the board.”
elected. X has 50 votes available to him. X Q: Is the director allowed to let a proxy
may opt to distribute the votes to as many attend a board meeting in behalf for
candidates as there are provided that the himself?
total number of votes does not exceed 50. A: NO. Proxy prohibition.
Purpose of cumulative voting: To protect Reason: Because of their personal
the minority stockholders. qualifications.
*The elected officer must act as a body. *Quorum requirement should always be
*In a stock corporation, cumulative voting is computed based on the number specified in
a statutory right whereas in a non-stock the Articles of Incorporation regardless of
corporation, cumulative voting is applicable ensuing vacancies.
if it is provided in the Article of *The basis is always the number specified in
Incorporation. the Articles of Incorporation.
Sec. 26 of the Corporation Code provides *The corporation can modify the number by
that: Within 30 days after the election of providing a different provision in the
the directors, trustees and officers of the articles of incorporation, however, the law
corporation, the secretary, or any other provides that the modification must be for a
officer of the corporation, shall submit to number greater than that provided in the
the SEC, the names, nationalities and law. It cannot provide for a number less
residences of the directors, trustees and than the general requirement of the code.
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*For voting purposes, majority of the 1. It must take place either at a regular
member present constituting a quorum. meeting or special meeting of the
Except: election of directors. stockholders or members called for the
Removal of Board Members purpose;
Sec. 28 of the Corporation Code states that: 2. There must be previous notice to the
“Any director or trustee of a corporation stockholders or member of the intention to
may be removed from office by a vote of remove;
the stockholders holding or representing at 3. The removal must be by a vote of the
least 2/3 of the outstanding capital stock, or stockholders representing 2/3 outstanding
if the corporation be a non-stock capital stock or 2/3 of members;
corporation, by a vote of at least 2/3 of the 4. The director may be removed with or
members entitled to vote: Provided, that without cause unless he was elected by the
such removal shall take place either at a minority, in which case, it is required that
regular meeting of the corporation or at a there is cause for removal.
special meeting called for the purpose, and Reason: The functions of directors are
in either case, after previous notice to fiduciary in nature.
stockholders or members of the Requisites for the removal of minority
corporation of the intention to propose directors are:
such removal at the meeting. A special 1. Justifiable cause;
meeting of the stockholders or members of 2. Satisfaction of the voting requirements,
a corporation for the purpose of removal of i.e., 2/3 of OCS or members.
directors or trustees, or any of them, must *It is the secretary of the corporation upon
be called by the secretary on order of the order of the president or in case there is no
president or on the written demand of the secretary, stockholder representing
stockholders representing or holding at majority of the outstanding capital stocks or
least a majority of the outstanding capital member signing the demand who may call a
stock, or, if it be a non-stock corporation, meeting for the purpose of removal.
on the written demand of a majority of the Vacancies in the Board
members entitled to vote. Should the Sec. 29 of the Corporation Code provides
secretary fail or refuse to call the special that: “Any vacancy occurring in the board of
meeting upon such demand or fail or refuse directors or trustees other than by removal
to give the notice, or if there is no by the stockholders or members or by
secretary, the call for the meeting may be expiration of term, may be filled by the vote
addressed directly to the stockholders or of at least a majority of the remaining
members by any stockholder or member of directors or trustees, if still constituting a
the corporation signing the demand. Notice quorum; otherwise, said vacancies must be
of the time and place of such meeting, as filled by the stockholders in a regular or
well as of the intention to propose such special meeting called for that purpose. A
removal, must be given by publication or by director or trustee so elected to fill a
written notice prescribed in this Code. vacancy shall be elected only or the
Removal may be with or without cause: unexpired term of his predecessor in office.
Provided, that removal without cause may A directorship or trusteeship to be filled by
not be used to deprive minority reason of an increase in the number of
stockholders or members of the right of directors or trustees shall be filled only by
representation to which they may be an election at a regular or at a special
entitled under Sec. 24 of this Code.” meeting of stockholders or members duly
Requisites: called for the purpose, or in the same
meeting authorizing the increase of
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Exception: If the requisites provided in Sec. subject to the provisions of the preceding
32 are present. section insofar as the latter corporation or
Exception to the Exception: If requirement corporations are concerned. Stockholdings
number 1 or 2 is absent, in the case of a exceeding 20% of the outstanding capital
contract with a director or trustee, such stock shall be considered substantial for
contract may be considered valid by the purposes of interlocking directors.”
ratification of at least 2/3 of the Example:
outstanding capital stock or 2/3 of the A is a director of two corporation, ABC
members. Corporation and XYZ Corporation. XYZ
Requisites: Corporation and ABC Corporation entered
1. The presence of such director or trustee into a lease contract where ABC
in the board meeting in which the contract Corporation is the lessor and XYZ
was approved was not necessary to Corporation is the lessee.
constitute a quorum for such meeting; Q: Can this contract be invalidated on the
2. The vote of such director or trustee was ground that there is an interlocking
not necessary for the approval of the director?
contract; A: NO.
3. The contract is fair and reasonable under Q: What is the status of the contract?
the circumstances; A: General Rule: Contracts between two or
4. In case of an officer, the contract has more corporations having interlocking
been previously authorized by the board of directors are valid.
directors. Exceptions:
Reason: A’s presence in the board meeting 1. Contracts are void if contracts are
might affect the status of the contract. fraudulent or if contracts are unfair
and unreasonable.
Self-Dealing Directors/Officers – 2. If the By-Laws prohibits interlocking
directors/officers who transact business director.
with their own corporation. Case: Gokongwei, Jr. v SEC
- This is not prohibited by law. *The interest is nominal if his interest is
Interlocking Directors – those who have 20% or less of the outstanding capital stock.
been elected as directors in 2 or more The interest is substantial if his interest is
different corporations. more than 20% of the outstanding capital
- May be prohibited by the By-Laws stock.
(Gokongwei case). *If the interlocking director has a
-Not prohibited by law however there are substantial interest in one corporation and
consequences. has a nominal interest in the other
Contracts involving Inter-locking Directors corporation, the director must comply with
Sec. 33 of the Corporation Code provides the requisites provided in Sec. 32 on self-
that: “Except in cases of fraud, and dealing directors.
provided the contract is fair and reasonable Reason: The case is analogous to that of
under the circumstances, a contract transactions involving self-dealing directors
between two or more corporations having because such director holds substantial
interlocking directors shall not be interest with the other company.
invalidated on that ground alone: Provided, Doctrine of Corporate Opportunity
That if the interest of the interlocking Sec. 34 of the Corporation Code states that:
director in one corporation is substantial “Where a director, by virtue of his office,
and his interest in the other corporation or acquires for himself a business opportunity
corporations is merely nominal, he shall be which should belong to the corporation,
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thereby obtaining profits to the prejudice of *It must be stated in the By-Laws.
such corporation, he must account to the *Board Resolution is not sufficient if there is no
latter for all such profits by refunding the provision in the By-Laws.
same, unless his act has been ratified by a *The decision of the executive committee is
vote of the stockholders owning or considered a Board Resolution.
representing at least 2/3 of the outstanding *The decision of the executive committee is not
capital stock. This provision shall be subject to appeal to the board. However, if the
applicable notwithstanding the fact that the resolution of the Executive Committee is invalid
director risked his own funds in the it may be ratified by the Board.
venture.” *The decision of the executive committee
General Rule: A director shall refund to the needs no confirmation from the Board.
corporation all the profits he realizes on a Case: Filipinas Port, Inc.
business opportunity which: 1. the *The corporation may create other committees.
corporation is financially able to undertake; Distinction: In executive committee, there is a
2. from its nature, is in line with statutory restriction on members whereas in
corporations business and is of practical other committee there is no such restriction.
advantage to it; and 3. the corporation has General Rule: The executive committee may act
an interest or a reasonable expectancy. on specific matters within the competence of
Exception: His act has been ratified by a the board as may be delegated to it in the by-
vote of the stockholders owning or laws or on a majority vote of the board.
representing at least 2/3 of the outstanding Exceptions:
capital stock. 1. Approval of any action for which
*A business opportunity ceases to be shareholders’ approval is also required;
corporate opportunity and transforms to 2. The filing of vacancies in the board;
personal opportunity where the 3. The amendment or repeal of by-laws or the
corporation refuses or is definitely no adoption of new by-laws;
longer able to avail itself of the opportunity. 4. The amendment or repeal of any resolution
of the board which by its express terms is
E. Executive Committee not so amendable or repealable;
Sec. 35 of the Corporation Code states that: 5. A distribution of cash dividends to the
“The by-laws of a corporation may create an shareholders.
executive committee composed of not less than
3 members of the board to be appointed by the CORPORATE POWERS:
board. Said committee may act, by majority A. Doctrine of Limited Capacity; Concept of Ultra
vote of all its members, on such specific matters Vires Act
within the competence of the board, as may be Sec. 45 of the Corporation Code states that:
delegated to it in the by-laws or on a majority “No corporation under this Code shall possess
vote of the board, except with respect to: (1) or exercise any corporate powers except those
approval of any action for which shareholders’ conferred by this Code or by its articles of
approval is also required; (2) the filing of incorporation and except such as are necessary
vacancies in the board; (3) the amendment or or incidental to the exercise of powers so
repeal of by-laws or the adoption of new by- conferred.”
laws; (4) the amendment or repeal of any Ultra Vires Acts – an act committed outside the
resolution of the board which by its express object for which a corporation is created as
terms is not so amendable or repealable; and defined by the law of its organization and
(5) a distribution of cash dividends to the therefore beyond the power conferred upon it
shareholders.” by law.
Keyword: BY-LAWS Effects of Ultra Vires Acts:
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1. Executed Contract – courts will not set transaction of the lawful business of the
aside or interfere with such contracts. corporation may reasonably and necessarily
2. Executory Contract – no enforcement even require, subject to the limitations prescribed by
at the suit of either party. law and the Constitution; 8. To enter into
3. Partly executed and Partly executory merger or consolidation with other
contract – principle against unjust corporations as provided in this Code; 9. To
enrichment shall apply. make reasonable donations, including those for
the public welfare or for hospital, charitable,
B. Classes of Corporate Powers cultural, scientific, civic, or similar purposes:
1. Express Provided, That no corporation, domestic or
2. Implied foreign, shall give donations in aid of any
3. Incidental political party or candidate or for purposes of
Express – those expressly authorized by the partisan political activity; 10. To establish
Corporation Code and other laws, and its pension, retirement, and other plans for the
Articles of Incorporation or Charter. benefit of its directors, trustees, officers and
Implied – those that can be inferred from or employees; and 11. To exercise such other
necessary for the exercise of the express powers as may be essential or necessary to
powers. carry out its purpose or purposes as stated in
Incidental – those that are incidental to the the articles of incorporation.”
existence of the corporation. Amendment of Articles of Incorporation
Sec. 16 of the Corporation Code states that:
Doctrine of Necessary Implication – those which can be “Unless otherwise prescribed by this Code
reasonably inferred from the express powers given or by special law, and for legitimate
since they are necessary for the corporation to perform purposes, any provision or matter stated in
a particular act are deemed part of such powers. the articles of incorporation may be
amended by a majority vote of the board of
C. Statutory Powers of a Corporation and the
directors or trustees and the vote or written
Limitations on their Exercise
assent of the stockholders representing at
Sec. 36 of the Corporation Code states that:
least 2/3 of the outstanding capital stock,
“Every corporation incorporated under this
without prejudice to the appraisal right of
Code has the power and capacity: 1. To sue and
dissenting stockholders in accordance with
be sued in its corporate name; 2. Of succession
the provisions of this Code, or the vote or
by its corporate name for the period of time
written assent of at least 2/3 of the
stated in the articles of incorporation and the
members if it be a non-stock corporation.”
certificate of incorporation; 3. To adopt and use
*The following are excluded in counting the
a corporate seal; 4. To amend its articles of
outstanding capital stock: 1. Treasury stock;
incorporation in accordance with the provisions
2. Unissued shares.
of this Code; 5. To adopt by-laws, not contrary
*Aside from the votes of majority of the
to law, morals, or public policy, and to amend
board and assent of the 2/3 of the OCS, the
or repeal the same in accordance with this
approval of the SEC is necessary for the
Code; 6. In case of stock corporations, to issue
amendment of the AOI.
or sell stocks to subscribers and to sell treasury
*There is an implied approval of the SEC,
stocks in accordance with the provisions of this
i.e., failure to act on the application filed by
Code; and to admit members to the corporation
the corporation within 6 mos.
if it be a non-stock corporation; 7. To purchase,
Q: How to get the approval of the
receive, take or grant, hold, convey, sell, lease,
stockholders?
pledge, mortgage and otherwise deal with such
A: 1. Call for a meeting; 2. Obtain the
real and personal property, including securities
written assent of the stockholders.
and bonds of other corporations, as the
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*In Tan v Sycip, the Supreme Court held diminution of the capital stock, or the
that in case of a non-stock corporation, incurring, creating or increasing of any
membership is personal and non- bonded indebtedness. Written notice of the
transferrable unless the by-laws provides proposed increase or diminution of the
otherwise. The deceased member is not capital stock or of the incurring, creating, or
entitled to vote. increasing of any bonded indebtedness and
of the time and place of the stockholders’
Four changes in Articles of Incorporation that require meeting at which the proposed increase or
the approval of the stockholders. diminution of the capital stock or the
1. Extension of corporate term;
incurring or increasing of any bonded
2. Shortening of corporate term; indebtedness is to be considered , must be
3. Increase or Decrease of Capital Stock; addressed to each stockholder at his place
4. Increase or Decrease of Bonded indebtedness. of residence as shown on the books of the
*Approval of Stockholders is necessary in these changes corporation and deposited to the addressee
because they are necessary for the corporation’s in the post office with postage prepaid, or
existence. served personally. xxx.”
Extension/Shortening of Corporate Term Q: When the corporation increases its
Sec. 37 of the Corporation Code states that: capital stock, is the 25% requirement
“A private corporation may extend or necessary? How can it be computed?
shorten its term as stated in the articles of A: YES. The SEC ruled that the 25% applies
incorporation when approved by a majority to the increase amount.
vote of the board of directors or trustees *The corporation is required to maintain a
and ratified at a meeting by the sinking fund.
stockholders representing at least 2/3 of Q: What does bonded indebtedness mean?
the outstanding capital stock or by at least A: Requires longer time of payment; special
2/3 of the members in case of non-stock burden on the corporation; involves the
corporation. Written notice of the proposed important assets of the corporation.
action and of the time and place of the Denial of Pre-emptive Right
meeting shall be addressed to each Sec. 39 of the Corporation Code states that:
stockholder or member at his place of “All stockholders of a stock corporation
residence as shown on the books of the shall enjoy pre-emptive right to subscribe to
corporation and deposited to the addressee all issues or disposition of shares of any
in the post office with postage prepaid, or class, in proportion to their respective
served personally: Provided, That in case of shareholdings, unless such right is denied
extension of corporate term, any dissenting by the articles of incorporation or an
stockholder may exercise his appraisal right amendment thereto: Provided, That such
under the conditions provided in this code.” pre-emptive right shall not extend to shares
Increase or Decrease of Capital Stock/ to be issued in compliance with laws
Incurrence, Creation or Increase of Bonded requiring stock offerings or minimum stock
Indebtedness ownership by the public; or to shares to be
Sec. 38 of the Corporation Code states that: issued in good faith with the approval of the
“No corporation shall increase or decrease stockholders representing 2/3 of the
its capital stock or incur, create or increase outstanding capital stock, in exchange for
any bonded indebtedness unless approved property needed for corporate purposes or
by a majority vote of the board of directors in payment of a previously contracted
and, at a stockholders’ meeting duly called debt.”
for the purpose, 2/3 of the outstanding *Coming from the increased authorized
capital stock shall favor the increase or capital stock.
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Q: Are the stock dividends considered as a meeting duly called for the purpose:
watered stocks because the stockholder Provided, That 1. Where a stockholder or
concerned does not pay anything therefor? stockholders representing the same interest
A: NO. The unrestricted retained earnings of both the managing and the managed
are considered to be a consideration thus corporations own or control more than 1/3
dividends received through stocks are not of the total outstanding capital stock
watered stocks. entitled to vote of the managing
*The source of payment is the unrestricted corporation; or 2. Where a majority of the
retained earnings. members of the board of directors of the
Q: Are delinquent stockholders entitled to managing corporation also constitute a
receive dividends? majority of the members of the board of
A: YES. But only in terms of cash dividends. directors of the managed corporation, then
Q: Who are entitled to receive dividends? the management contract must be
A: Stockholders approved by the stockholders of the
*In Nielson case, the SC held that dividends managed corporation owning at least 2/3 of
cannot be given to non-stockholders. the total outstanding capital stock entitled
*If there is date of record – Dividends may to vote, or by at least 2/3 of the members in
be received by those persons who are the case of a non-stock corporation. No
holders of stocks as of date of record. management contract shall be entered into
*If there is no date of record – dividends for a period longer than 5 years for any one
may be received by those persons who are term. The provisions of the next preceding
holders of stocks as of the declaration. paragraph shall apply to any contract
Q: When the corporation declares stock whereby a corporation undertakes to
dividends, would it likewise create a manage or operate all or substantially all of
creditor-debtor relationship between the the business of another corporation,
corporation and the stockholder? whether such contracts are called service
A: NO. Stock dividends will not bring about contracts, operating agreements or
a creditor-debtor relationship. When it otherwise: Provided, however, That such
comes to shareholdings, the one holding service contracts or operating agreements
the shares are considered investors; risk- which relate to the exploration,
takers. development, exploitation or utilization of
Q: Will legal compensation possible to natural resources may be entered into for
occur? such periods as may be provided by the
A: NO. The parties are not mutually pertinent laws or regulations.”
creditor-debtor of each other. The Requisite:
requisites under the Civil Code on legal General Rule: Majority vote of the OCS
compensation are not present. Exception: 2/3 of the OCS
Management Contract *SEC’s approval is not necessary
Sec. 44 of the Corporation Code states that: *When the corporation enters into a
“No corporation shall conclude a management contract, appraisal right is
management contract with another NOT AVAILABLE to any dissenting
corporation unless such contract shall have stockholder.
been approved by the board of directors Reason: Sound business policy dictates that
and by stockholders owning at least the it would be better for the corporation, at
majority of the outstanding capital stock, or the inception of its operation, to be
by at least a majority of the members in the managed by a company who has been
case of a non-stock corporation, of both the experienced in a particular kind of business
managing and the managed corporation, at if the managed corporation needs the
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*In China Banking Corporation v CA, the SC corporation by giving proper notice required by
held that in the absence of evidence that China this Code or by the by-laws. The petitioning
Bank is aware of the provisions of the By-Laws, stockholder or member shall preside thereat
China Bank is not bound to observe the until at least a majority of the stockholders or
provisions of the By-Laws. Hence, China Bank members present have been chosen one of
must be allowed to register the shares in its their number as presiding officer.”
name. *Regular meeting of stockholders/members
General Rule: Third parties are not affected by shall be held annually on a date fixed in the by-
the By-Laws. laws or if not so fixed, on any date in April of
Exception: If the third party has actual every year. Written notice of regular meetings
knowledge of the provisions of the By-Laws. shall be sent 2 weeks prior to the meeting
unless a different period is required by the by-
CORPORATE MEETINGS: laws.
A. Kinds of Corporate Meetings ** Special meeting of stockholders/members
Sec. 49 of the Corporation Code provides that: shall be held at any time deemed necessary or
“Meetings of directors, trustees, stockholders, as provided in the by-laws. Written notice shall
or members may be regular or special.” be sent to all stockholders or members at least
Kinds: one week or unless otherwise provided in the
a. Stockholders/Members: by-laws.
1. Regular meeting Sec. 53 of the Corporation Code provides that:
2. Special meeting “Regular meetings of the board of directors or
b. Directors/Trustees: trustees of every corporation shall be held
1. Regular meeting monthly, unless the by-laws provide otherwise.
2. Special meeting Special meetings of the board of directors or
Sec. 50 of the Corporation Code provides that: trustees may be held at any time upon the call
“Regular meetings of stockholders or members of the president or as provided in the by-laws.
shall be held annually on a date fixed in the by- Meetings of directors or trustees of
laws, or if not so fixed, on any date in April of corporations may be held anywhere in or
every year as determined by the board of outside of the Philippines, unless the by-laws
directors or trustees: Provided, That written provide otherwise. Notice of regular or special
notice of regular meetings shall be sent to all meetings stating the date, time and place of the
stockholders or members of record at least 2 meeting must be sent to every director or
weeks prior to the meeting, unless a different trustee at least 1 day prior to the scheduled
period is required by the by-laws. Special meeting, unless otherwise provided by the by-
meetings of stockholders or members shall be laws. A director or trustee may waive this
held at any time deemed necessary or as requirement, either expressly or impliedly.”
provided in the by-laws: Provided, however, *Regular meetings of directors/trustees shall be
That at least 1 week written notice shall be sent held monthly unless the by-laws provide
to all stockholders or members, unless otherwise.
otherwise provided in the by-laws. Notice of *Special meetings of directors/trustees may be
any meeting may be waived, expressly or held at any time upon the call of the president
impliedly, by any stockholder or member. or as provided in the by-laws.
Whenever, for any cause, there is no person *Meetings of directors or trustees may be held
authorized to call a meeting, the SEC, upon anywhere in or outside of the Philippines unless
petition of a stockholder or member on a the by-laws provide otherwise.
showing of good cause therefor, may issue an *Notice of regular or special meetings stating
order to the petitioning stockholder or member the date, time and place of the meeting must
directing him to call a meeting of the be sent to every director or trustee at least 1
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day prior to the scheduled meeting unless within the Philippines and notice has been
otherwise provided by the by-laws. given. As an exception, if the by-laws is silent of
the place of the meeting, section 51 applies.
B. Requirements of a Meeting Sec. 52 of the Corporation Code provides that:
1. It must be held at the proper place. “Unless otherwise provided for in this Code or
2. It must be held at the stated date and at the in the by-laws, a quorum shall consist of the
appointed time or at a reasonable time stockholders representing a majority of the
thereafter. outstanding capital stock or a majority of the
3. It must be called by the proper person. members in the case of non-stock
4. There must be a previous notice.
corporations.”
5. There must be a quorum. General Rule: Majority of the OCS or Majority
Sec. 51 of the Corporation Code provides that: of the members
“Stockholders’ or members’ meetings, whether Exception: Unless otherwise provided by the
regular or special, shall be held in the city or Code or by the By-Laws.
municipality where the principal office of the *In Tan v Sycip, deceased member is not
corporation is located, and if practicable in the entitled to vote
principal office of the corporation: Provided, Sec. 54 of the Corporation Code provides that:
That Metro Manila shall, for purposes of this “The president shall preside at all meetings of
section, be considered a city or municipality. the directors or trustees as well as of the
Notice of meetings shall be in writing, and the stockholders or members, unless the by-laws
time and place thereof stated therein. All provide otherwise.”
proceedings had and any business transacted at
any meeting of the stockholders or members, if C. Right to Vote of Stockholders
within the powers or authority of the Instances when voting right not available
corporation, shall be valid even if the meeting Sec. 6 of the Corporation Code provides
be improperly held or called, provided all the that: “Except as provided in the
stockholders or members of the corporation are immediately preceding paragraph, the vote
present or duly represented at the meeting.” necessary to approve a particular corporate
*Applies to both stock and non-stock act as provided in this Code shall be
corporations. deemed to refer only to stocks with voting
General Rule: The meeting must be held in the rights.”
city or municipality where the principal office is Instances when voting right is not
located. available:
Exception: Sec. 93 on non-stock corporations, 1. Delinquent shares
the By-Laws may provide different venue for 2. Treasury shares
their meeting. 3. Fractional shares
*A casual reading of section 51 would say that a 4. Escrow shares
corporation cannot provide any other place for Rules on:
the meeting of stockholders. But in case of a 1. Delinquent Shares
non-stock corporation, Section 93 of the Sec. 71 of the Corporation Code
Corporation provides that the by-laws could provides that: “No delinquent stock
provide any place for the meeting of its shall be voted for or be entitled to vote
members provided that it is within the or to representation at any
Philippines and proper notice has been given. stockholders’ meeting, nor shall the
Q: Is there a conflict between Section 51 and holder thereof be entitled to any of the
Section 93? rights of a stockholder except the right
A: YES. There is conflict but this conflict may be to dividends in accordance with the
reconciled. As a rule, the by-laws may provide a provisions of this Code, until and unless
different place of meeting provided that it is he pays the amount due on his
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agreement is ineffective and unenforceable. performing the duties of a director because the
The certificate or certificates of stock covered law requires each and every director to have
by the voting trust agreement shall be cancelled legal, not beneficial title to at least one share.
and new ones shall be issued in the name of the
trustee or trustees stating that they are issued E. Derivative Suit; Concept and Requisites
pursuant to said agreement. In the books of the Derivative Suit is a suit brought by any
corporation, it shall be noted that the transfer stockholder, usually a minority shareholder, to
in the name of the trustee or trustees is made redress a wrong committed against the
pursuant to said voting trust agreement. The corporation whenever the responsible officers
refuse to take any action thereon or are the
trustee or trustees shall execute and deliver to
the transferors voting trust certificates, which very person to be sued.
shall be transferable in the same manner and *This prerogative is developed through
with the same effect as certificates of stock. The jurisprudence.
voting trust agreement filed with the *This is expressly mandated by Sec. 31 of the
corporation shall be subject to examination by Corporation Code.
any stockholder of the corporation in the same Q: Why derivative?
manner as any other corporate book or record: A: From the word derive. The one bringing the
Provided, That both the transferor and the suit derives the cause of action from the
trustee or trustees may exercise the right of corporation.
inspection of all corporate books and records in Q: Who brings the suit?
accordance with the provisions of this Code. A: Any stockholder/member usually minority
Any other stockholder may transfer his shares stockholder.
to the same trustee or trustees upon the terms Q: Whose cause of action?
and conditions stated in the voting trust A: It is the corporation’s cause of action.
agreement, and thereupon shall be bound by all Q: Are we in violation of the Code?
A: No. Because the power to sue lies on the
the provisions of said agreement. No voting
trust agreement shall be entered into for the board thus when the board refuses to take
purpose of circumventing the law against action in order to protect the corporation
monopolies and illegal combinations in restraint derivative suit may be allowed.
of trade or used for purposes of fraud. Unless Compelling Reason: Inaction of the officers.
expressly renewed, all rights granted in a voting Failure to discharge their responsibilities.
trust agreement shall automatically expire at Requisites:
the end of the agreed period, and the voting 1. The stockholder bringing the suit must be
trust certificates as well as the certificates of one of record as of the time the cause of
stock in the name of the trustee or trustees action accrues as well as of the time the
shall thereby be deemed cancelled and new action is brought unless the cause of action
certificates of stock shall be reissued in the is a continuing offer.
name of the transferors. The voting trustee or *The stockholder must implead the real
trustees may vote by proxy unless the party in interest, i.e. the corporation.
agreement provides otherwise.” *In Chua v CA, the SC held that the
Consequence: The stockholder entering into a corporation must be impleaded since it is
voting trust agreement ceases to be a the real party in interest.
stockholder of record. 2. The action must be named under the
*In case of Lee v CA, the SC held that the corporation’s name
stockholder concerned loses his legal title to the 3. General Rule: The stockholder bringing the
shares so that if the stockholder is, at the same suit must have exhausted intra-corporate
time, a director of the corporation, remedies within the corporation.
automatically he is disqualified to continue Exception: If the very person to be sued is
the responsible officers themselves.
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exchange for promissory notes or future such percentage thereof, in either case with
service. The same considerations provided for accrued interest, if any, as it may deem
in this section, insofar as they may be necessary. Payment of any unpaid
applicable, may be used for the issuance of subscription or any percentage thereof,
bonds by the corporation. The issued price of together with the interest accrued, if any,
no-par value shares may be fixed in the articles shall be made on the date specified in the
of incorporation or by the board of directors contract of subscription or on the date
pursuant to authority conferred upon it by the stated in the call made by the board. Failure
articles of incorporation or the by-laws, or in to pay on such date shall render the entire
the absence thereof, by the stockholders balance due and payable and shall make the
representing at least a majority of the stockholder liable for interest at the legal
outstanding capital stock at a meeting duly rate on such balance, unless a different rate
called for the purpose.” of interest is provided in the by-laws,
Valid considerations for the subscription computed from such date until full
agreements: payment. If within 30 days from the said
1. Cash date no payment is made, all stocks covered
2. Property by said subscription shall thereupon
3. Labor or services actually rendered to the become delinquent and shall be subject to
corporation sale as hereinafter provided, unless the
4. Prior corporate obligations board of directors orders otherwise.”
5. Amounts transferred from unrestricted *If there was no date as to payment of
retained earnings to stated capital subscription stated in the subscription
6. Outstanding shares in exchange for stocks agreement, the board may call on all the
in the event of reclassification or unpaid subscribers to pay the remaining
conversion. balance of their subscription. Failure to pay
within 30 days from the said date, all stocks
E. Payment of Subscription covered by said subscription shall
Q:When payment of the subscription is made? thereupon become delinquent and shall be
A: Look into the subscription agreement. If subject to sale unless the board of directors
subscription agreement is silent as to when the orders otherwise.
amount of subscription to be paid, the board of
directors may call on all the unpaid subscribers F. Certificate of Stock
to pay the remaining balance of their Certificate of Stock is a written evidence of the
subscription. shares of stock but it is not the share itself.
Remedies to enforce payment of *Does not represent credit.
subscription Q: How important is a stock certificate?
1. By Extra-judicial sale at public auction. A: It is an evidence of ownership of stocks.
2. By judicial action. Q: Who issue stock certificate?
3. Collection from cash dividends and A: Stock certificates must be signed by the
withholding of stock dividends. president or vice-president, countersigned by
When shares are considered delinquent the secretary or assistant secretary.
Sec. 67 of the Corporation Code provides Q: When certificate of stock may be issued?
that: “Subject to the provisions of the A: Sec. 64 of the Corporation Code states that:
contract of subscription, the board of “No certificate of stock shall be issued to a
directors of any stock corporation may at subscriber until the full amount of his
any time declare due and payable to the subscription together with interest and
corporation unpaid subscriptions to the expenses (in case of delinquent shares), if any is
capital stock and may collect the same or due, has been paid.”
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unless the registered owner files a bond or transactions of the corporation and the minutes
other security in lieu thereof as may be of any meetings shall be open to inspection by
required, effective for a period of 1 year, for any director, trustee, stockholder or member of
such amount and in such form and with such the corporation at reasonable hours on
sureties as may be satisfactory to the board of business days and he may demand, writing, for
directors, in which case a new certificate may a copy of excerpts from said records or minutes,
be issued even before the expiration of the 1 at his expense. Any officer or agent of the
year period provided herein: Provided, That if a corporation who shall refuse to allow any
contest has been presented to said corporation director, trustee, stockholder or member of the
or if an action is pending in court regarding the corporation to examine and copy excerpts from
ownership of said certificate of stock which has its records or minutes, in accordance with the
been lost, stolen or destroyed, the issuance of provisions of this Code, shall be liable to such
the new certificate of stock in lieu thereof shall director, trustee, stockholder or member for
be suspended until the final decision by the damages, and in addition, shall be guilty of an
court regarding the ownership of said certificate offense which shall be punishable under Section
of stock which has been lost, stolen or 144 of this Code: Provided, That if such refusal
destroyed. Except in case of fraud, bad faith, or is made pursuant to a resolution or order of the
negligence on the part of the corporation and board of directors or trustees, the liability under
its officers, no action may be brought against this section for such action shall be imposed
any corporation which shall have issued upon the directors or trustees who voted for
certificate of stock in lieu of those lost, stolen or such refusal: and Provided, further, That it shall
destroyed pursuant to the procedure above- be a defense to any action under this section
described.” that the person demanding to examine and
copy excerpts from the corporation’s records
CORPORATE BOOKS AND RECORDS: and minutes has improperly used any
A. Books required to be kept by a Corporation information secured through any prior
Sec. 74 of the Corporation Code provides that: examination of the records or minutes of such
“Every corporation shall keep and carefully corporation or of any other corporation, or was
preserve at its principal office a record of all not acting in good faith or for a legitimate
business transactions and minutes of all purpose in making his demand. Stock
meetings of stockholders or members, or of the corporations must also keep a book to be
board of directors or trustees, in which shall be known as the “stock and transfer book,” in
set forth in detail the time and place of holding which must be kept a record of all stocks in the
the meeting, how authorized, the notice given, names of the stockholders alphabetically
whether the meeting was regular or special, if arranged; the installments paid and unpaid on
special its object, those present and absent, and all stock for which subscription has been made,
every act done or ordered done at the meeting. and the date of payment of any installment; a
Upon the demand of any director, trustee, statement of every alienation, sale or transfer
stockholder or member, the time when any of stock made, the date thereof, and by and to
director, trustee, stockholder or member whom made; and such other entries as the by-
entered or left the meeting must be noted in laws may prescribe. The stock and transfer book
the minutes; and on a similar demand, the yeas shall be kept in the principal office of the
and nays must be taken on any motion or corporation or in the office of its stock transfer
proposition, and a record thereof carefully agent and shall be open for inspection by any
made. The protest of any director, trustee, director or stockholder of the corporation at
stockholder or member on any action or reasonable hours on business days. No stock
proposed action must be recorded in full on his transfer agent or one engaged principally in the
demand. The records of all business business of registering transfers of stocks in
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B. Right to Inspect Corporate Books B. Requisites of and Procedure for Merger and
Basis and Extent of the Right of Inspection Consolidation
Q: Is the keeping of these books 1. Approval by majority vote of the Board of
mandatory? Directors of each corporation.
A: YES. Section 144 of the Corporation Code 2. Approval of the stockholders of each
provides penalty for any violation of the corporation representing 2/3 of the
provision of the Code. outstanding capital stock.
Rationale: Right of inspection would be 3. Approval of SEC
futile. Right of inspection would not be Cases: Associated Bank v CA; Polyan v CA
exercised. Procedure:
Limitations on the Right of Inspection 1. The Board of each corporation shall draw
1. The books and records shall be open to up a plan of merger/consolidation.
inspection at reasonable hours on 2. The plan of merger or consolidation shall be
business days. approved by majority vote of each board of
2. The books and records shall not be the concerned corporations at separate
improperly used any information meetings.
secured through any prior examination 3. The plan of merger/consolidation shall be
of the books or records. approved by the majority vote of the 2/3 of
3. The stockholder’s demand must be in the shareholders of the outstanding capital
good faith or for a legitimate purpose. stock or members in case of a non-stock
*Inspection can be done personally or corporation.
through agent. 4. Articles of Merger/Consolidation shall be
Remedies to Enforce Right of Inspection executed by each of the constituent
*In case of refusal to exercise the right of corporators, signed by the President or
inspection, the stockholder concerned may Vice-President and certified by the
file an action for mandamus before the RTC. secretary or assistant secretary.
*Can also claim damages. 5. Four copies of the Articles of Merger or
Consolidation together with favorable
MERGER AND CONSOLIDATION:
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stock representing his shares, the fair value D. Effects of Exercising Appraisal Right
thereof as of the day prior to the date on which Sec. 83 of the Corporation Code provides that:
the vote was taken, excluding any appreciation “From the time of demand for payment of the
or depreciation in anticipation of such fair value of a stockholder’s shares until either
corporate action. If within a period of 60 days the abandonment of the corporate action
from the date the corporate action was involved or the purchase of the said shares by
approved by the stockholders, the withdrawing the corporation, all rights accruing to such
stockholder and the corporation cannot agree shares, including voting and dividend rights,
on the fair value of the shares, it shall be shall be suspended in accordance with the
determined and appraised by 3 disinterested provisions of this Code, except the right of such
persons, one of whom shall be named by the stockholder to receive payment of the fair value
stockholder, another by the corporation, and thereof: Provided, That if the dissenting
the third by the two thus chosen. The findings stockholder is not paid the value of his shares
of the majority of the appraisers shall be final, within 30 days after the award, his voting and
and their award shall be paid by the corporation dividend rights shall immediately be restored.”
within 30 days after such award is made: Effects:
Provided, That no payment shall be made to 1. All rights accruing to such shares shall be
any dissenting stockholder unless the suspended from the time of demand for
corporation has unrestricted retained earnings payment of the fair value of the shares until
in its books to cover such payment: and either the abandonment of the corporate
Provided, further, That upon payment by the action.
corporation of the agreed or awarded price, the 2. The dissenting stockholder shall be entitled
stockholder shall forthwith transfer his shares to receive payment of the fair value of his
to the corporation.” shares as agreed upon between him and
Requisites: the corporation or as determined by the
1. Any of the instances set forth by law must appraisers chosen by them.
be present. *Sec. 86. The dissenting stock can be sold
2. Dissenting stockholder must have voted during the pendency of its payment.
against the proposed action. Remedy in case appraisal right cannot be
*Abstaining stockholder cannot claim or exercised: Dispose the shareholdings.
exercise his appraisal right.
3. Demand for payment must be made within NON-STOCK CORPORATIONS:
30 days from the date vote is taken A. Definition and Purposes of a Non-Stock
thereon. Failure to make demand shall be Corporation
deemed a waiver. Sec. 87 of the Corporation Code states that:
4. Price must be based on fair value as of day “For the purposes of this Code, a non-stock is
prior to date on which vote was taken one where no part of its income is distributable
5. Submission by withdrawing stockholder of as dividends to its members, trustees, or
his shares to the corporation for notation of officers, subject to the provisions of this Code
being a dissenting stockholder within 10 on dissolution: Provided, That any profit which
days from written demand. a non-stock corporation may obtain as an
6. Payment must be made only when the incident to its operations shall, whenever
corporation has unrestricted retained necessary or proper, be used for the
earnings in its books. furtherance of the purpose or purposes for
7. Stockholder must transfer his shares to the which the corporation was organized, subject to
corporation upon payment by the the provisions of this Title. The provisions
corporation. governing stock corporations, when pertinent,
shall be applicable to non-stock corporations,
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except as may be covered by specific provisions Sec. 89 of the Corporation Code provides that:
of this Title.” “The right of the membership of any class or
*Sec. 87 should be read in harmony with Sec. classes to vote may be limited, broadened or
94. denied to the extent specified in the articles of
*A Non-stock corporation is not precluded from incorporation or the by-laws. Unless so limited,
engaging in profit-business related. broadened or denied, each member, regardless
Sec. 88 of the Corporation Code provides that: of class, shall be entitled to one vote. Unless
“Non-stock corporations may be formed or otherwise provided in the articles of
organized for charitable, religious, educational, incorporation of the by-laws, a member may
professional, cultural, fraternal, literary, vote by proxy in accordance with the provisions
scientific, social, civic service, or similar of this Code. Voting by mail or other similar
purposes, like trade, industry, agricultural and means by members of non-stock corporations
like chambers, or any combination thereof, may be authorized by the by-laws of non-stock
subject to the special provisions of this Title corporations with the approval of, and under
governing particular classes of non-stock such conditions which may be prescribed by,
corporations.” the SEC.”
*The purpose of a non-stock corporation is General Rule: Sec. 58
related to public welfare. Exception: Sec. 89. This provision allows denial
of proxy.
B. Distinguished from Stock Corporation Reason: To promote camaraderie,
Non- stock Stock Corporation togetherness, unity and familiarity.
Corporation *A member is entitled to 1 vote. However, such
Public welfare For profit right may be limited, broadened or denied in
Board of Trustees Board of directors the Articles of Incorporation or By-Laws. Thus,
Generally, the term of 1 year subject to hold-
the By-laws of a non-stock corporation may
office of trustees is 3 over principle
years provide for the desired voting rights of
By-laws can provide City or municipality members including the number of votes.
for a different venue where the principal Sec. 90 of the Corporation Code provides that:
as long as it is within office is located “Membership in a non-stock corporation and all
the Philippines rights arising therefrom are personal and non-
Member may be Proxy is allowed transferable, unless the articles of incorporation
deprived of their right
or the by-laws otherwise provide.”
to designate proxies
General Rule: Membership is non-transferable.
by provisions in the
articles of Exception: If the Articles of Incorporation or the
incorporation or by- By-laws provide otherwise.
laws Sec. 91 of the Corporation Code provides that:
Reason: To promote “Membership shall be terminated in the
camaraderie, manner and for the causes provided in the
togetherness, unity
articles of incorporation or the by-laws.
and familiarity.
Generally, members Election is vested Termination of membership shall have the
could directly elect upon Board of effect of extinguishing all rights of a member in
officers. Except unless Directors the corporation or in its property, unless
AOI provides otherwise provided in the articles of
otherwise. incorporation or the by-laws.”
Rules on Place of Meeting:
General Rule: Sec. 51
C. Membership in a Non-Stock Corporation
Exception: Sec. 93
Sec. 94 of the Corporation Code provides that: 4. All other assets shall be distributed to
“In case dissolution of a non-stock corporation members, as provided for in the Articles or
in accordance with the provisions of this Code, By-Laws.
its assets shall be applied and distributed as Sec. 95 of the Corporation Code provides that:
follows: 1. All liabilities and obligations of the “A plan providing for the distribution of assets,
corporation shall be paid, satisfied and not inconsistent with the provisions of this Title,
discharged, or adequate provision shall be may be adopted by a non-stock corporation in
made therefor; 2. Assets held by the the process of dissolution in the following
corporation upon a condition requiring return, manner: The board of trustees shall, by majority
transfer or conveyance, and which condition vote, adopt a resolution recommending a plan
occurs by reason of the dissolution, shall be of distribution and directing the submission
returned, transferred or conveyed in thereof to a vote at a regular or special meeting
accordance with such requirements; 3. Assets of members having voting rights. Written notice
received and held by the corporation subject to setting forth the proposed plan of distribution
limitations permitting their use only for or a summary thereof and the date, time and
charitable, religious, benevolent, educational or place of such meeting shall be given to each
similar purposes, but not held upon a condition member entitled to vote, within the time and in
requiring return, transfer or conveyance by the manner provided in this Code for the giving
reason of the dissolution, shall be transferred or of notice of meetings to members. Such plan of
conveyed to one or more corporations, distribution shall be adopted upon approval of
societies or organizations engaged in activities at least 2/3 of the members having voting rights
in the Philippines substantially similar to those present or represented by proxy at such
of the dissolving corporation according to a plan meeting.”
of distribution adopted pursuant to this Q: Would it be possible for a non-stock
Chapter; 4. Assets other than those mentioned corporation to be converted into a stock
in the preceding paragraphs, if any, shall be corporation by mere amendment of the Articles
distributed in accordance with the provisions of of Incorporation?
the articles of incorporation or the by-laws, to A: NO. Because it would violate Section 87 of
the extent that the articles of incorporation or the Corporation Code which prohibits
the by-laws, determine the distributive rights of distribution of income as dividends to
members, or any class or classes of members, members.
or provide for distribution; and 5. In any other Reason: Fraudulent to donors
case, assets may be distributed to such persons, Q: Can a stock corporation be converted to a
societies, organizations or corporations, non-stock corporation by mere amendment of
whether or not organized for profit, as may be the Articles of Incorporation?
specified in a plan of distribution adopted A: YES.
pursuant to this Chapter.” Requirements:
Order of distribution: 1. Approval of 2/3 of the members
1. All its creditors shall be paid; 2. Approval of the SEC
2. Assets held subject to return on dissolution, Q: What was relinquished?
shall be delivered back to their givers; A: Proprietary rights.
3. Assets held for charitable, religious *Appraisal right is available.
purposes, etc., without a condition for their
return on dissolution, shall be conveyed to CLOSE CORPORATIONS:
one or more organizations engaged in A. Concept; Distinguished from Open Corporations
similar activities as dissolved corporation; Sec. 96 of the Corporation Code states that: “A
and corporation, within the meaning of this Code, is
one whose articles of incorporation provide
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that: (1) All the corporation’s issued stock of all Open Corporation Close Corporation
classes, exclusive of treasury shares, shall be Its articles of Its articles must
held of record by not more than a specified incorporation need contain the special
number of persons, not exceeding 20; (2) all the only contain the matters prescribed by
general matters Section 97 aside from
issued stock of all classes shall be subject to one
enumerated in Section the general matters in
or more specified restrictions on transfer 14 of the Corporation Section 14. Failure to
permitted by this Title; and (3) The corporation Code do so precludes a de
shall not list in any stock exchange or make any jure close corporation
public offering of any of its stock of any class. status
Notwithstanding the foregoing, a corporation Its status as an 2/3 of its voting stock
shall not be deemed a close corporation when ordinary stock or voting rights must
corporation is not not be owned or
at least 2/3 of its voting stock or voting rights is
affected by the controlled by another
owned or controlled by another corporation ownership of its voting corporation which is
which is not a close corporation within the stock or voting rights not a close
meaning of this Code. Any corporation may be corporation
incorporated as a close corporation, except Its articles cannot Its articles may classify
mining or oil companies, stock exchanges, classify its directors its directors
banks, insurance companies, public utilities, Business of the Business of the
corporation is corporation may be
educational institutions and corporations
managed by the board managed by the
declared to be vested with public interest in of directors stockholders if the
accordance with the provisions of this Code. articles so provide, but
The provisions of this Title shall primarily they are liable as
govern close corporations: Provided, That the directors
provisions of other Titles of this Code shall The corporate officers Its articles may
apply suppletorily except insofar as this Title and employees are provide that any or all
elected by a majority of the corporate
otherwise provides.”
vote of all the officers or employees
*Whether open or close corporation depends members of the board may be elected or
on its charter. of directors appointed by the
Case: San Juan Structural stockholders
The following must be stated in the Articles of The pre-emptive right The pre-emptive right
Incorporation: is subject to the is subject to no
1. Membership is limited to 20 exceptions found in exceptions unless
Section 39 of the denied in the articles
2. Transfer or disposition of shares is subject
Corporation Code
to specified restrictions The appraisal right The appraisal right
3. Prohibition against offering to the public of may be exercised by a may be exercised and
the shares or listing in the stock exchange. stockholder only in the compelled against the
General Rule: Any corporation may be cases provided in corporation by a
incorporated as close corporation. Sections 81 and 42 of stockholder for any
Exceptions: the Corporation Code reason
Except as regards In case of an
1. Mining or oil companies
redeemable shares, arbitration of an
2. Stock exchanges the purchase by the intracorporate
3. Banks corporation of its own deadlock by the SEC,
4. Insurance companies stock must always be the corporation may
5. Public utilities made from the be ordered to
6. Educational institutions unrestricted retained purchase its own
7. Corporations declared to be vested with earnings shares from the
stockholders
public interest
regardless of the
availability of
Distinctions from Open Corporations:
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the Commission shall proceed to hear the accordance with this Code. Upon approval
petition and try any issue made by the of the amended articles of incorporation of
objections filed; and if no such objection is the expiration of the shortened term, as the
sufficient, and the material allegations of
case may be, the corporation shall be
the petition are true, it shall render
judgment dissolving the corporation and deemed dissolved without any further
directing such disposition of its assets as proceedings, subject to the provisions of
justice requires, and may appoint a receiver this Code on liquidation.”
to collect such assets and pay the debts of
the corporation.” B. Concept of Involuntary Dissolution and the
Requisites: Grounds therefor
1. Approval of the stockholders
Sec. 121 of the Corporation Code provides that:
representing at least 2/3 of the
outstanding capital stock or 2/3 of “A corporation may be dissolved by the
members in a meeting called for that Securities and Exchange Commission upon filing
purpose; of a verified complaint and after proper notice
2. Filing of a Petition with the SEC signed and hearing on the grounds provided by existing
by majority of directors or trustees or laws, rules and regulations.”
other officers having the management *This must be done with substantive and
of its affairs verified by President or
procedural due process.
Secretary or Director. Claims and
demands must be stated in the petition; Grounds:
3. If petition is sufficient in form and 1. Failure to submit by-laws within the
substance, the SEC shall issue an Order prescribed period
fixing a hearing date for objections; 2. Fraud in the procurement of Certificate of
4. A copy of the Order shall be published Registration
at least once a week for 3 consecutive
3. Misrepresentation as to the activities that
weeks in a newspaper of general
circulation or if there is no newspaper the corporation will undertake
in the municipality or city of the 4. Treasurer’s affidavit is false
principal office, posting for 3 5. Continued inoperation for 5 years
consecutive weeks in 3 public places is 6. Failure to commence business transactions
sufficient; within 2 years from issuance of certificate
5. Objections must be filed no less than 30 of registration
days nor more than 60 days after the
7. To some cases, performance of ultra vires
entry of the order;
6. After the expiration of the time to file act since it is a violation to the franchise but
objections, a hearing shall be conducted depending on the seriousness or gravity of
upon prior 5 day notice to hear the the offense
objections; 8. Issuance of watered stocks
7. Judgment shall be rendered dissolving 9. De facto status
the corporation and directing the 10. Failure to keep corporate books and records
disposition of assets; the judgment may
depending on the gravity or seriousness of
include appointment of a receiver.
the offense
Shortening of term of existence 11. Violation of its charter
Sec. 120 of the Corporation Code provides
that: “A voluntary dissolution may be C. Corporate Liquidation
effected by amending the articles of Liquidation is a process by which all the assets
incorporation to shorten the corporate of the corporation are converted into liquid
term pursuant to the provisions of this assets in order to facilitate the payment of
Code. A copy of the amended articles of obligations to creditors, and the remaining
incorporation shall be submitted to the balance if any is to be distributed to the
Securities and Exchange Commission in stockholders.
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*Liquidation takes place after dissolution. Reason: Beyond the 3 year period, there is no
Sec. 122 of the Corporation Code provides that: corporate existence for all purposes subject to
“Every corporation whose charter expires by its doctrine of relation.
own limitation or is annulled by forfeiture or Remedy: Before the expiration of the 3 year
otherwise, or whose corporate existence for period, appoint a trustee/receiver.
other purposes is terminated in any other Q: During the 3 year period, does the
manner, shall nevertheless be continued as a corporation enjoy corporate existence?
body corporate for three (3) years after the A: YES. But for limited purpose only, i.e., for
time when it would have been so dissolved, for liquidation purposes only. (Limited existence)
the purpose of prosecuting and defending suits Q: May such corporation sue during the 3 year
by or against it and enabling it to settle and period?
close its affairs, to dispose of and convey its A: YES. But only when the subject matter is
property and to distribute its assets, but not for related to liquidation and winding up of its
the purpose of continuing the business for remaining affairs.
which it was established. At any time during *In case trustee/receiver is appointed, he is not
said three (3) years, the corporation is bound by the 3 year period.
authorized and empowered to convey all of its *In Gelano v CA, the SC held that the lawyer of
property to trustees for the benefit of the corporation can be considered as trustee.
stockholders, members, creditors, and other The term trustee must be considered in its
persons in interest. From and after any such generic sense. Anyone who has been
conveyance by the corporation of its property in designated by the corporation to act on its
trust for the benefit of its stockholders, behalf could be considered as trustee for
members, creditors and others in interest, all purposes of pursuing a claim for and on behalf
interest which the corporation had in the of the corporation. A lawyer falls within the
property terminates, the legal interest vests in ambit of the word “trustee.”
the trustees, and the beneficial interest in the *Appointment of trustee can be inferred from
stockholders, members, creditors or other the conduct of the corporation. This is by
persons in interest. Upon the winding up of the Implication.
corporate affairs, any asset distributable to any *If the corporation is the creditor appoint a
creditor or stockholder or member who is trustee. If the corporation is the debtor appoint
unknown or cannot be found shall be escheated a receiver.
to the city or municipality where such assets are Q: What if the corporate properties have
located. Except by decrease of capital stock and already been distributed among the
as otherwise allowed by this Code, no shareholders without trustee/receiver?
corporation shall distribute any of its assets or A: Remedy: Run after the erring directors and
property except upon lawful dissolution and officers.
after payment of all its debts and liabilities.”
E. Concept of Rehabilitation; Effects of
D. Methods of Liquidation or Winding Up Appointment of Management Committee or
1. By Board of Directors Receiver
2. Through a trustee to whom the properties Rehabilitation connotes a reopening or
are conveyed reorganization. Contemplates a continuance of
3. By management committee or corporate existence in an effort to restore the
rehabilitation receiver corporation to its former successful operation.
Q: Can the 3 year period be extended? *This is a remedy expressly allowed under
A: NO. Section 6 of PD 902-A.
Purpose: To make the corporation financially
viable again.
Substantive Grounds:
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*If the foreign corporation is not licensed to do 2. Failure to appoint and maintain a resident
business in the Philippines, General Rule: they agent in the Philippines as required by the
have no access in Philippine Courts Corporation Code
Exceptions: 3. Failure, after change of its resident agent or
1. Isolated transactions his address, to submit to the SEC a
2. Infringement of trademark statement of such change as required by
*International offense can be sued the Corporation Code
anywhere. 4. Failure to submit to the SEC an
Cases: Expert Travel Tours v CA; Home authenticated copy of any amendment to
Insurance v Eastern Shipping Lines its articles of incorporation or by-laws or of
*In Expert Travel Tours v CA, the SC held that any articles of merger or consolidation
resident agent is not with authority to execute a within the time prescribed by the
certification of Forum shopping following Sec. Corporation Code
23 of the Corporation Code. 5. A misrepresentation of any material matter
*In Home Insurance v Eastern Shipping Lines, in any application, report affidavit or other
the SC held that if at the time the suit was document submitted by such corporation
brought, the suing foreign entity already have pursuant to the provisions of the
license to do business in the Philippines, the suit Corporation Code
will be allowed although at the time the 6. Failure to pay any and all taxes, imposts,
transaction was made it does not have the assessments or penalties, if any, lawfully
requisite of a license to do so, the remedial due to the Philippine Government or any of
defect is cured. its agencies or political subdivision
Cases: Japan Airlines v CA 7. Transacting business in the Philippines
*In Japan Airlines v CA, the SC held that the outside of the purpose or purposes for
selling of tickets though there is no aircraft which such corporation is authorized under
landing in the Philippines constitute doing its license
business in the Philippines. 8. Transacting business in the Philippines as
*In Ericks v CA, the SC held that license is agent of or acting for and in behalf of any
necessary in order the foreign corporation may foreign corporation or entity not duly
sue. In this case, the court considered the licensed to do business in the Philippines
continuity test, they found out that the foreign 9. Any other ground as would render it unfit
corporation has the intent to continue business to transact business in the Philippines.
in the Philippines.
*Credit is obtained to maintain longer
transactions.
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