CORPORATION CODE

(B.P. Blg. 68, effective May 1, 1980)

I. GENERAL PROVISIONS liabilities. (Creese vs. CA, 93

CORPORATION SCRA 483)
An artificial being created by operation 2. Right to bring actions may
of law having the right of succession, and
the powers, attributes and properties bring civil and criminal actions in
its own name in the same manner
expressly authorized by law and incident
as natural persons. (Art. 46, Civil
to its existence. (Sec. 2)
Code)
3. Right to acquire and possess
ATTRIBUTES OF A CORPORATION
1. It is an artificial being. property property conveyed to
2. It is created by operation of law. or acquired by the corporation is
3. It enjoys the right of succession. in law the property of the
4. It has the powers, attributes and corporation itself as a distinct
properties expressly authorized by legal entity and not that of the
law or incident to its existence. stockholders or members. (Art.
44(3), Civil Code)
THEORIES ON THE FORMATION OF A 4. Acquisition of court of jurisdiction
CORPORATION: service of summons may be
1. Concession Theory espouses that made on the president, general
a corporation is an artificial creature manager, corporate secretary,
without any existence until it has received treasurer or in-house counsel.
the imprimatur of the state acting (Sec. 11, Rule 14, Rules of
according to law, through the SEC. Court).
(Tayag vs. Benguet Consolidated, Inc., 26 5. Changes in individual
SCRA 242) membership remains
2. Theory of corporate enterprise or
unchanged and unaffected in its
economic unit espouses that the identity by changes in its
corporation is not merely an artificial individual membership. (The
being, but more of an aggregation of Corporation Code of the
persons doing business, or an underlying Philippines Annotated, Hector de
business unit. (Philippine Corporate Law, Leon, 2002 ed.)
Cesar Villanueva, 2001 ed.) 6. Entitlement to constitutional
3. Genossenschaft Theory treats a guaranties:
a. Due process (Albert vs.
corporation as the reality of the group as
a social and legal entity, independent of University Publishing, 13
SCRA 84)
state recognition and concession. (Tayag
b. Equal protection of the law
vs. Benguet Consolidated, Inc., 26 SCRA
242) (Smith, Bell & Co. vs.
Natividad, 40 Phil. 136)
c. Protection against
DOCTRINE OF SEPARATE
PERSONALITY unreasonable searches and
seizures. (Stonehill vs.
A corporation has a juridical
Diokno, 20 SCRA 383)
personality separate and distinct from that
of its stockholders or members. A corporation is not
entitled to invoke the right against
Used for purposes of convenience and
self-incrimination. (Bataan
to subserve the ends of justice.
Consequences/significance: Shipyard vs. PCGG)
7. Liability for torts a corporation
1. Liability for acts or contracts
is liable whenever a tortuous act
obligations incurred by a
is committed by an officer or
corporation, acting through its
agent under the express direction
authorized agents are its sole
or authority of the stockholders or
 members acting as a body, or, the mere proof of control
generally, from the directors as of the corporation by
the governing body. (PNB vs. CA, itself would not authorize
83 SCRA 237) piercing.
8. A corporation is not entitled to b. The main action should
moral damages because it has no seek for the enforcement
feelings, no emotions, no senses. of pecuniary claims
(ABS-CBN vs. Court of Appeals) pertaining to the
9. Liability for Crimes since a corporation against
corporate officers or
corporation is a mere legal fiction, stockholders.
it cannot be held liable for a crime
committed by its officers, since it 2. Alter Ego Cases when the
does not have the essential corporate entity is merely a farce
element of malice; in such case since the corporation is an alter ego,
the responsible officers would be business conduit or instrumentality of
criminally liable. (People vs. Tan a person or another corporation.
Boon Kong, 54 Phil.607) Rules:
a. It applies because of the
DOCTRINE OF PIERCING THE VEIL OF direct violation of a central
CORPORATE ENTITY corporate law principle of
Requires the court to see through the separating ownership from
protective shroud which exempts its management.
stockholders from liabilities that they b. If the stockholders do not
ordinarily would be subject to, or respect the separate entity,
distinguishes a corporation from a others cannot also be
seemingly separate one, were it not for expected to be bound by the
the existing corporate fiction. (Lim vs. CA, separate juridical entity.
323 SCRA 102) c. Applies even when there are
Rules: (Philippine Corporate Law, no monetary claims sought to
Cesar Villanueva, 2001 ed.) be enforced.
1. has only a res judicata effect 3. Equity cases when piercing the
2. to prevent wrong or fraud and not
available for other purposes corporate fiction is necessary to
3. judicial prerogative only achieve justice or equity.
4. must be with necessary and with
factual basis INSTRUMENTALITY / ALTER EGO
When directors and officers are unable RULE
Where one corporation is so organized
to compensate a party for a personal
obligation, it is far-fetched to allege that a and controlled and its affairs are
corporation is perpetuating fraud or conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the
promoting injustice, and thereby could be
held liable therefor by piercing the fiction of the corporate entity of the
corporate veil. (Francisco Motors, Inc. vs. instrumentality may be disregarded.
Requisites:
CA, G.R. No. 100812, June 25, 1999)
1. There must be control, not mere
3 CLASSES OF PIERCING (Philippine majority or complete stock
control, but complete domination,
Corporate Law, Cesar Villanueva, 2001
not only of finances, but of policy,
ed.)
and business practice in respect
to the transaction attacked so that
1. Fraud Cases when a corporation is the corporate entity as to this
used as a cloak to cover fraud, or to transaction had, at that time, no
do wrong. separate mind, will or existence
Rules: of its own (control);
a. There must have been 2. Such control must have been
fraud or evil motive in the used by the defendant to commit
affected transaction and fraud or wrong, to perpetrate the
 violation of a statutory or other personally and liable only to the
positive duty, or dishonest and subsidiarily extent of the shares
unjust act in contravention of (sometimes solidarily) subscribed by them
plaintiffs legal rights (breach of for partnership debts
to third persons
duty); and
9. Transferability of interest
3. Such control and breach of duty
Partner cannot Stockholder has
must proximately cause the injury transfer his interest in generally the right
to the plaintiff. (Concept Builders, the partnership so as to transfer his
Inc. vs. NLRC, 257 SCRA, 149) to make the shares without prior
transferee a partner consent of the
Partnership Corporation without the other stockholders
1. Creation unanimous consent of because
Created by mere Created by law or all the existing corporation is not
agreement of the by operation of law partners because the based on this
parties partnership is based principle
2. Number of incorporators on the principle of
May be organized by Requires at least delectus personarum
at least two persons five incorporators
(except a 10. Term of existence
corporation sole) partnership may be corporation may
established for any not be formed for a
3. Commencement of juridical personality period of time term in excess of
Acquires juridical Acquires juridical stipulated by the 50 years extendible
personality from the personality from the partners to not more than 50
moment of execution date of issuance of years in any one
of the contract of the certificate of instance
partnership incorporation by the 11. Firm name
Securities and Limited partnership is corporation may
Exchange required by law to adopt any name
Commission add the word Ltd. To provided it is not
4. Powers its name the same as or
Partnership Corporation can similar to any
may exercise any exercise only the registered firm
power authorized by powers expressly name
the partners (provided granted by law or 12. Dissolution
it is not contrary to implied from those may be dissolved at can only be
law, morals, good granted or incident any time by any or all dissolved with the
customs, public order, to its existence of the partners consent of the
public policy) State
5. Management
When management is The power to do 13. Governing Law
not agreed upon, business and governed by the Civil governed by the
every partner is an manage its affairs Code Corporation Code
agent of the is vested in the
partnership board of directors
or trustees

6. Effect of mismanagement
A partner as such can The suit against a
sue a co-partner who member of the
mismanages board of directors
ADVANTAGES VIS--VIS
or trustees who
mismanages must DISADVANTAGES OF A BUSINESS
be in the name of CORPORATION (The Corporation Code
the corporation of the Philippines Annotated, Hector de
Leon, 2002 ed.)
7. Right of succession
Partnership has no Corporation has ADVANTAGES DISADVANTAGE
right of succession right of succession S
1. has a legal 1. complica-
8. Extent of liability to third persons capacity to act and ted in formation and
Partners are liable Stockholders are
contract as a distinct management b.private by private persons alone
unit in its own name 2. high cost
2. continuity of of formation and or with the State.
existence operations 2. AS TO FUNCTIONS
3. its credit is 3. its credit is a. public government of a portion
strengthened by its weakened by the
continuity of existence limited liability of the territory; and
4. centralized feature b. private usually for profit-making
management in the 4. lack of
board of directors. personal element. 3. AS TO GOVERNING LAW
5. its creation, 5. greater a. public Special Laws; and
management, degree of
organization and governmental b. private Law on Private
dissolution are supervision Corporations
standardized as they 6. manage- 4. AS TO LEGAL STATUS
are governed under ment and control
one general are separated from a. De jure corporation organized in
incorporation law. ownership. accordance with the requirements
6. limited liability 7. Stockhol- of law.
7. shareholders ders have little voice
are not the general in the conduct of the b. De facto corporation organized
agents of the business business. with a colorable compliance with
8. transferability of the requirements of a valid law.
shares Its existence cannot be inquired
collaterally. Such inquiry may be
FRANCHISES OF CORPORATION made by the Solicitor General in
1. Primary or corporate franchise/General a quo warranto proceeding. (Sec.
Franchise 20)
The right or privilege granted by the Requisites:
State to individuals to exist and act as a 1. The existence of a valid law
corporation after its incorporation. under which it may be
2. Secondary or special franchise incorporated;
The special right or privilege conferred 2. A bona fide attempt in good
upon an existing corporation to the faith to incorporate under
business for which it was created. such law;
Example, use of the streets of a 3. Actual use or exercise in
municipality to lay pipes or tracks, or good faith of corporate
operation of a messenger and express powers; and
delivery service. 4. Issuance of a certificate of
incorporation by the SEC as
PRIMARY SECONDARY a minimum requirement of
Refers to the Refers to the exercise continued good faith.
franchise of being or of rights. Example: The only difference
existing as a right of eminent
between a de facto
corporation domain
corporation and a de jure
Vested in the Vested in the corporation is that a de jure
individuals who corporation after its corporation can successfully
compose the incorporation and not resist a suit by a state
corporation upon the individuals
who compose the
brought to challenge its
corporation. existence; a de facto
Cannot be sold or May be sold or corporation cannot sustain its
transferred because transferred; subject to right to exist.
it is inseparable from sale on execution, c. Corporation by estoppel group of
the corporation itself. subject to levy.
persons that assumes to act as a
corporation knowing it to be
CLASSES OF CORPORATION without authority to do so, and
1. AS TO ORGANIZERS enters into a transaction with a
a. public by State only; and third person on the strength of
such appearance. It cannot be
 permitted to deny its existence in in the board meetings of its
an action under said transaction. subsidiary.
(Sec. 21) It is neither de jure nor 7. AS TO PLACE OF
de facto. INCORPORATION
d. Corporation by prescription a. Domestic corporation- a
corporation formed, organized, or
one which has exercised
existing under Philippine laws.
corporate powers for an indefinite
period without interference on the b. Foreign corporation a
part of the sovereign power, e.g. corporation formed, organized, or
Roman Catholic Church. existing under any laws other
5. AS TO EXISTENCE OF SHARES OF than those of the Philippines.
STOCK (Sec. 123)
a. Stock corporation a corporation
ONE-MAN CORPORATION
(1) whose capital stock is divided A corporation wherein all or
into shares and (2) which is
substantially all of the stocks is held
authorized to distribute to
directly or indirectly by one person.
shareholders dividends or However, it should still follow the formal
allotments of the surplus profits
requirements of a corporation (e.g.
on the basis of the shares held.
number of incorporators, board of
(Sec. 3) directors composed of stockholders
b. Non-stock corporation does not owning shares in a nominal capacity) in
issue stocks nor distribute order to validly enjoy the attributes of the
dividends to their members. corporation, so as to avoid the application
6. AS TO RELATIONSHIP OF of the doctrine of piercing the veil of
MANAGEMENT AND CONTROL corporate entity.
a. Holding Corporation - it is one
which controls another as a TESTS TO DETERMINE NATIONALITY
subsidiary by the power to elect OF CORPORATIONS
management. It is one that holds 1. INCORPORATION TEST
stocks in other companies for determined by the state of incorporation,
purposes of control rather than for
regardless of the nationality of the
mere investment.
stockholders.
b. Subsidiary Corporation - one
which is so related to another 2. DOMICILE TEST determined by the
corporation that the majority of its state where it is domiciled.
directors can be elected directly The domicile of a corporation is the
or indirectly by such other place fixed by the law creating or
corporation. (The Corporation recognizing it; in the absence thereof, it
Code of the Philippines shall be understood to be the place where
Annotated, Hector de Leon, 2002 its legal representation is established or
ed.) where it exercise its principal functions.
c. Affiliates - company which is (Art. 51, NCC)
subject to common control of a 3. CONTROL TEST determined by the
mother holding company and
operated as part of the system. nationality of the controlling stockholders
or members. This test is applied in times
d. Parent and Subsidiary Corporation
- separate entities with power to of war. Also known as the WARTIME
contract with each other. The TEST.
board of directors of the parent
company determines its PHILIPPINE NATIONAL UNDER THE
representatives to attend and FOREIGN INVESTMENT ACT OF 1991
(R.A. No. 7042):
vote in the stockholders meeting
of its subsidiary. The 1. A corporation organized under the laws
stockholders of the parent of the Philippines of which at least 60% of
the outstanding capital stock entitled to
company demand representation
vote is owned and held by Filipino Articles of corporation) or
citizens; Incorporation member (non-stock
2. A foreign corporation licensed as doing corporation)
business in the Philippines of which 100% fait accompli; they may cease to
of the outstanding capital stock entitled to accomplished fact (the be such if they
Articles of subsequently lose
vote is wholly owned by Filipinos; and Incorporation cannot their qualifications
However, it provides that where a be amended to replace
corporation and its non-Filipino them)
stockholders own stocks in a SEC- number is limited to 5- no restriction as to
registered enterprise, at least 60% of the 15 number
capital stock outstanding and entitled to must have contractual may be such
vote of both corporations and at least capacity through a guardian
60% of the members of the board of
directors of both corporations must be OTHER COMPONENTS
Filipino citizens (double 60% rule). a. Promoter - A person who, acting alone
NOTE: The law applies the control test or with others, takes initiative in founding
both with respect to the ownership of and organizing the business or enterprise
shares entitled to vote and the of the issuer and receives consideration
membership in the board of directors. therefor.
He is an agent of the incorporators but
COMPONENTS OF A CORPORATION not of the corporation.
a. Corporators those who compose a Contracts by the promoter for and in
corporation, whether as stockholders or behalf of a proposed corporation
members generally bind only him, subject to and to
b. Incorporators - They are those the extent of his representations, and not
mentioned in the Articles of Incorporation the corporation, unless and until after
as originally forming and composing the these contracts are ratified, expressly or
corporation, having signed the Articles impliedly, by its Board of
and acknowledged the same before a Directors/Trustees.
notary public. They have no powers b. Subscriber persons who have
beyond those vested in them by the agreed to take and pay for original,
statute. unissued shares of a corporation formed
Qualifications: or to be formed.
1. natural person;
2. not less than 5 but not more than c. Underwriter a person who
15; guarantees on a firm commitment and/ or
3. of legal age; declared best effort basis the distribution
4. majority must be residents of the and sale of securities of any king by
Philippines; and another company. (Sec. 3 R.A. 8799)
5. each must own or subscribe to at
least one share. (Sec. 10) CLASSIFICATION OF SHARES
GENERAL RULE: Only natural persons 1. COMMON SHARES
can be incorporators. The basic class of stock ordinarily and
EXCEPTION: When otherwise allowed usually issued without extraordinary rights
by law, e.g., Rural Banks Act of 1992, and privileges, and the owners thereof
where incorporated cooperatives are are entitled to a pro rata share in the
allowed to be incorporators of rural banks. profits of the corporation and in its assets
Note: However, it is undeniable that upon dissolution and, likewise, in the
corporations can be corporators. management of its affairs without
c. Stockholders owners of shares of preference or advantage whatsoever.
2. PREFERRED SHARES
stock in a stock corporation Those issued with par value, and
d. Members corporators of a preferences either with respect to (a)
corporation which has no capital stock assets after dissolution, (b) distribution of
dividends, or both, and other preferences.
INCORPORATORS CORPORATORS Limitations:
signatory to the stockholder (stock
a. If deprived of voting rights, it shall still Treasury shares need not be sold at
be entitled to vote on matters enumerated par or issued value but may be sold at the
in Section 6 paragraph 6. best price obtainable, provided it is
b. Preference must not be violative of the reasonable. When treasury shares are
Code. sold below its par or issued value, there
c. May be issued only with a stated par can be no watering of stock because such
value. watering contemplates an original
d. The board of directors may fix the issuance of shares.
terms and conditions only when so Treasury shares have no voting rights
authorized by the articles of incorporation as long as they remain in treasury
and such terms and conditions shall be (uncalled and subject to reissue).
effective upon filing a certificate thereof Reason: A corporation cannot in any
with the SEC. proper sense be a stockholder in itself
3. REDEEMABLE SHARES and equal distribution of voting rights will
Those which permit the issuing be effectively lost.
corporation to redeem or purchase its Neither are treasury shares entitled to
own shares. dividends or assets because dividends
Limitations: cannot be declared by a corporation to
a. Redeemable shares may be issued itself.
only when expressly provided for in the 5. FOUNDERS' SHARE
articles of incorporation; Shares issued to organizers and
b. The terms and conditions affecting promoters of a corporation in
said shares must be stated both in the consideration of some supposed right or
articles of incorporation and in the property.
certificates of stock representing such Shares classified as such in the
shares; articles of incorporation which may be
c. Redeemable shares may be given special preference in voting rights
deprived of voting rights in the articles and dividend payments. But if an
of incorporation, unless otherwise exclusive right to vote and be voted for as
provided in the Code. director is granted, this privilege is subject
Redeemable shares may be to approval by the SEC, and cannot
redeemed, regardless of the existence of exceed 5 years from the date of approval.
unrestricted retained earnings (Sec. 8), 6. VOTING SHARES
provided that the corporation has, after Shares with a right to vote.
such redemption, sufficient assets in its 7. NON-VOTING SHARES
books to cover debts and liabilities Shares without right to vote.
inclusive of capital stock. The law only authorizes the denial of
4. TREASURY SHARES voting rights in the case of redeemable
Shares that have been earlier issued shares and preferred shares, provided
as fully paid and have thereafter been that there shall always be a class or
acquired by the corporation by purchase, series of shares which have complete
donation, and redemption or through voting rights.
some lawful means. (Sec. 9) These redeemable and preferred
If purchased from stockholders: The shares, when such voting rights are
transaction in effect is a return to the denied, shall nevertheless be entitled to
stockholders of the value of their vote on the following fundamental
investment in the company and a matters: Key: A2 SI2 MID
reversion of the shares to the corporation. a. amendment of Articles of
The corporation must have surplus profits Incorporation
with which to buy the shares so that the b. adoption and amendment of by-
transaction will not cause an impairment laws;
of the capital. c. sale or disposition of all or
If acquired by donation from the substantially all of corporate
stockholders: The act would amount to a property;
surrender of their stock without getting d. incurring, creating or increasing
back their investments that are instead, bonded indebtedness;
voluntarily given to the corporation.
 e. increase or decrease of capital d. They cannot be issued by banks,
stock trust companies, insurance
f. merger or consolidation of companies, public utilities and building
capital stock and loan association;
g. investments of corporate funds e. The articles of incorporation must
in another corporation or state the fact that it issued no par
another business purpose; and value shares as well as the number of
h. corporate dissolution said shares;
f. Once issued, they are deemed
8. ESCROW STOCK fully paid and non-assessable. (Sec.
Deposited with a third person to be 6)
delivered to a stockholder or his assign 13. STREET CERTIFICATE
after complying with certain conditions, A stock certificate endorsed by the
usually payment of full subscription price. registered holder in blank and transferee
9. OVER-ISSUED STOCK can command its transfer to his name
Stock issued in excess of the from the issuing corporation.
authorized capital stock. It is also known 14. CONVERTIBLE SHARE
as spurious stock. Its issuance is A share that is changeable by the
considered null and void. stockholder from one class to another at a
10. WATERED STOCK certain price and within a certain period.
A stock issued not in exchange for its 15. FRACTIONAL SHARE
equivalent either in cash, property, share, A share with a value of less than one
stock dividends, or services. full share.
Water in the stock represents the
difference between the fair market value DOCTRINE OF EQUALITY OF SHARES
at the time of the issuance of the stock Where the articles of incorporation do
and the par or issued value of said stock. not provide for any distinction of the
Both par and no par stocks can thus be shares of stock, all shares issued by the
watered stocks. corporation are presumed to be equal and
It includes stocks: enjoy the same rights and privileges and
a. Issued without consideration. are also subject to the same liabilities.
b. Issued as fully paid when the (Sec. 6)
corporation has received a lesser sum of
money than its par or issued value. DEFINITION OF TERMS:
c. Issued for a consideration other than 1. CAPITAL STOCK OR LEGAL STOCK
actual cash, the fair valuation of which is OR STATED CAPITAL - The amount
less than its par or issued value. fixed in the corporate charter to be
d. Issued as stock dividend when there subscribed and paid in cash, kind or
are no sufficient retained earnings to property at the organization of the
justify it. corporation or afterwards and upon which
11. PAR VALUE SHARES the corporation is to conduct its operation.
Shares with a value fixed in the 2. CAPITAL The value of the actual
certificates of stock and the articles of
incorporation. property or estate of the corporation
whether in money or property. Its net
12. NO PAR VALUE SHARES
worth (or stockholders equity) is its
Shares having no par value but have
assets less liabilities.
issued value stated in the certificate or
3. AUTHORIZED CAPITAL STOCK - The
articles of incorporation.
capital stock divided into shares with par
Limitations:
values. Par value stocks are required in
a. No par value shares cannot have
the case of corporations issuing preferred
an issued price of less than P5.00;
shares, as well as in the case of banks,
b. The entire consideration for its
trust companies, insurance companies,
issuance constitutes capital so that no
building and loan associations, and public
part of it should be distributed as
utilities. It is the total amount in the
dividends;
charter, which may be raised by the
c. They cannot be issued as
corporation for its operations.
preferred stocks;
4. SUBSCRIBED CAPITAL STOCK - The term there is no more corporate life to
total amount of the capital stock extend.
subscribed whether fully paid or not. c. The extension cannot be made earlier
5. OUTSTANDING CAPITAL STOCK - than 5 years prior to the expiration date
The portion of the capital stock issued to unless there are justifiable reasons as
subscribers except treasury stocks. determined by the SEC.
6. STATED CAPITAL The capital stock
CAPITAL STOCK REQUIREMENT
divided into no par value shares.
General Rule: No minimum authorized
7. PAID-UP CAPITAL The amount paid capital stock as long as the paid-up
by the stockholders on subscriptions from capital is not less than P5,000.00
unissued shares of the corporation. Except:
a. as provided for by special law
II. INCORPORATION AND 1. Domestic Insurance
ORGANIZATION Corporations - P500T capital
stock; 50% subscribed and the
STEPS IN THE CREATION OF A balance payable in 12 months.
CORPORATION 2. Private Development Banks
a. PROMOTION a number of business - P4M for class A
- P2M for class B
operations peculiar to the commercial - P1M for class C
world by which a company is generally
brought into existence. (18 Am. Jur. 2d 3. Investment Companies paid up
647, cited in de Leon p. 116) at least P500T
b. INCORPORATION 4. Savings and Loan Corporation
Steps: to be fixed by the Monetary
1. Drafting and execution of Articles of
Board, but not less than P100T
Incorporation by the incorporators and
5. Financing Companies
other documents required for registration Paid up: - P2M for Metro Manila
of the corporation
- P1M for Cities
2. Filing with the SEC of the articles of
- P500T for others
incorporation b. provided that at least 25% of the
3. Payment of filing and publication fees
authorized capital stock has been
4. Issuance by the SEC of the certificate
subscribed and at least 25% of the total
of incorporation subscription must be paid-up
c. FORMAL ORGANIZATION AND
COMMENCEMENT OF THE
FILIPINO PERCENTAGE
TRANSACTION OF BUSINESS OWNERSHIP REQUIREMENT
These are conditions subsequent,
which may be satisfied by substantial
NO FOREIGN EQUITY
compliance in order that a corporation
may legally continue as such.
1. Mass Media except recording (Art.
Formal organization:
XVI, Sec. 11 of the Constitution;
1. Adoption of By-Laws and filing of the Presidential Memorandum dated 04
same with the SEC;
May 1994)
2. Election of board of directors/trustees,
2. Practice of all professions
and officers; a) Engineering
3. Establishment of principal office; b) Medicine and Allied Professions
4. Providing for subscription and payment
c) Accountancy
of capital stock. d) Architecture
e) Criminology
TERM OF CORPORATE EXISTENCE
f) Chemistry
Limitations: g) Customs Brokerage
a. The term shall not exceed 50 years in h) Environmental Planning
any one instance.
i) Forestry
b. The amendment is effected before the j) Geology
expiration of corporate term, for after k) Interior Design
dissolution by expiration of the corporate
 l) Landscape Architecture 14. Contracts for the construction and
m) Law repair of locally-funded public works
n) Librarianship (Sec. 1 of CA 541, LOI 630) except:
o) Marine Deck Officers a) infrastructure/development
p) Marine Engine Officers projects covered in RA 7718; and
q) Master Plumbing b) projects which are foreign funded
r) Sugar Technology or assisted and required to
s) Social Work undergo international competitive
t) Teaching bidding (Sec. 2a of RA 7718)
u) Agriculture 15. Contracts for the construction of
v) Fisheries defense-related structures (Sec. 1 of
3. Retail trade enterprises with paid-up CA 541)
capital of less than
US$2,500,000(Sec. 5 of RA 8762) Up to Thirty Percent (30%) Foreign Equity
4. Cooperatives (Ch. III, Art. 26 of RA
6938) 16. Advertising (Art. XVI, Sec. 11 of the
5. Private Security Agencies (Sec. 4 of Constitution)
RA 5487)
6. Small-scale Mining (Sec. 3 of RA Up to Forty Percent (40%) Foreign Equity
7076) 17. Exploration, development and
7. Utilization of Marine Resources in utilization of natural resources (Art.
archipelagic waters, territorial sea, XII, Sec. 2 of the Constitution)
and exclusive economic zone as well 18. Ownership of private lands (Art. XII,
as small-scale utilization of natural Sec. 7 of the Constitution; Ch. 5, Sec.
resources in rivers, lakes, bays, and 22 of CA 141; Sec. 4 of RA 9182)
lagoons (Art. XII, Sec. 2 of the 19. Operation and management of public
Constitution) utilities (Art. XII, Sec. 11 of the
8. Ownership, operation and Constitution; Sec. 16 of CA 146)
management of cockpits (Sec. 5 of 20. Ownership/establishment and
PD 449) administration of educational
9. Manufacture, repair, stockpiling institutions (Art. XIV, Sec. 4 of the
and/or distribution of nuclear Constitution)
weapons (Art. II, Sec. 8 of the 21. Culture, production, milling,
Constitution) processing, trading excepting
10. Manufacture, repair, stockpiling retailing, of rice and corn and
and/or distribution of biological, acquiring, by barter, purchase or
chemical and radiological weapons otherwise, rice and corn and the by-
and anti-personnel mines (Various products thereof (Sec. 5 of PD
treaties to which the Philippines is a 194;Sec. 15 of RA 8762
signatory and conventions supported 22. Contracts for the supply of materials,
by the Philippines) goods and commodities to
11. Manufacture of firecrackers and other government-owned or controlled
pyrotechnic devices (Sec. 5 of RA corporation, company, agency or
7183) municipal corporation (Sec. 1 of RA
5183)
Up to Twenty Percent (20%) Foreign 23. Project Proponent and Facility
Equity Operator of a BOT project requiring a
public utilities franchise (Art. XII, Sec.
12. Private radio communications 11 of the Constitution; Sec. 2a of RA
network (RA 3846) 7718)
24. Operation of deep sea commercial
Up to Twenty-Five Percent (25%) Foreign fishing vessels (Sec. 27 of RA 8550)
Equity 25. Adjustment Companies (Sec. 323 of
PD 612 as amended by PD 1814)
13. Private recruitment, whether for local 26. Ownership of condominium units
or overseas employment (Art. 27 of where the common areas in the
PD 442) condominium project are co-owned by
the owners of the separate units or
 owned by a corporation (Sec. 5 of RA 11. name of treasurer elected by
4726) subscribers; and
12. if the corporation engages in a
Up to Sixty Percent (60%) Foreign Equity nationalized industry, a statement
that no transfer of stock will be
27. Financing companies regulated by allowed if it will reduce the stock
the Securities and Exchange ownership of Filipinos to a
Commission (Sec. 6 of RA 5980 as percentage below the required legal
amended by RA 8556) minimum.
28. Investment houses regulated by the
SEC (Sec. 5 of PD 129 as amended AMENDMENT OF ARTICLES OF
by RA 8366) INCORPORATION
Limitations:
ARTICLES OF INCORPORATION (AI) 1. The amendment of any provision or
The document prepared by the matters stated in the articles of
persons establishing a corporation and incorporation is not allowed when it will be
filed with the SEC containing the matters contrary to the provisions or requirement
required by the Code. prescribed by the Code or by special law
Significance: or changes any provision in the articles of
1. The issuance of a certificate of incorporation stating an accomplished
incorporation signals the birth of the fact
corporations juridical personality; 2. It must be for legitimate purposes
2. It is an essential requirement for 3. It must be approved by the required
the existence of a corporation, even a vote of the board of directors or trustees
de facto one. and the stockholders or members
4. The original articles and amended
articles together must contain all
Contents: (Sec. 14) provisions required by law to be set out in
1. name of corporation; the articles of incorporation
2. purpose/s, indicating the primary 5. Such articles, as amended, must be
and secondary purposes; indicated by underscoring the changes
3. place of principal office; made, and a copy thereof duly certified
4. term of existence; under oath by the corporate secretary and
5. names, citizenship and a majority of the directors or trustees
residences of incorporators; stating that the amendments have been
6. number, names, citizenship and duly approved by the required vote of the
residences of directors or trustees; stockholders or members must be
7. names, nationalities, and submitted to the SEC
residences of the persons who shall 6. The amendments shall take effect
act as directors or trustees until the only upon their approval by the SEC
first regular ones are elected and 7. If the corporation is governed by
qualified; special law, the amendments must be
8. if a stock corporation, the amount accompanied by a favorable
of its authorized capital stock, number recommendation of the appropriate
of shares and in case the shares are government agency.
par value shares, the par value of
each share; NON-AMENDABLE FACTS IN THE
9. names, residences, number of ARTICLES OF INCORPORATION
shares, and the amounts subscribed Those matters referring to facts
and paid by each of the original existing as of the date of the incorporation
subscribers which shall not be less such as:
than 25% of authorized capital stock; 1. Names of incorporators;
10. if non-stock, the amount of 2. Names of original subscribers to
capital, the names, residences, and the capital stock of the
amount paid by each contributor, corporation and their subscribed
which shall not be less than 25% of and paid up capital;
total subscription;
 3. Treasurer elected by the original corporation can be elected to seat in the
subscribers; Board of Trustees.
4. Members who contributed to the In order to be eligible as a director,
initial capital of a non-stock what is material is the legal title to, not
corporation; beneficial ownership of the stocks
5. Date and place of execution of appearing on the books of the corporation
the articles of incorporation; 2. A majority of the directors/trustees
6. Witnesses to the signing and must be residents of the Philippines.
acknowledgment of the articles. (Sec. 23)
3. He must not have been convicted by
GROUNDS FOR REJECTION OF final judgment of an offense punishable
ARTICLES OF INCORPORATION OR by imprisonment for a period exceeding 6
AMENDMENT THERETO years or a violation of the Corporation
1. The articles or its amendment is not Code, committed within five years from
substantially in accordance with the form the date of his election. (Sec. 27)
prescribed 4. Only natural persons can be elected
2. The purposes of the corporation are directors/trustees.
patently unconstitutional, illegal, immoral, In case of corporate stockholders or
or contrary to government rules and members, their representation in the
regulations board can be achieved by making their
3. The Treasurers Affidavit concerning individual representatives trustees of the
the amount of capital stock subscribed shares or membership to make them
and/or paid is false stockholders/members of record.
4. The required percentage of ownership 5. Other qualifications as may be
of the capital stock to be owned by prescribed in the by-laws of the
Filipino citizens has not been complied corporation.
with 6. Must be of legal age

GROUNDS FOR SUSPENSION OR CORPORATE OFFICERS

REVOCATION OF CERTIFICATE OF 1. President must be a director;
REGISTRATION (Pres. Decree No. 902-
A) 2. Treasurer may or may not be a
1. Fraud in procuring its certificate of director; as a matter of sound corporate
incorporation practice, must be a resident
2. Serious misrepresentation as to what 3. Secretary need not be a director
the corporation can do or is doing to the
great prejudice of, or damage to, the unless required by the by-laws; must be a
general public resident and citizen of the Philippines;
3. Refusal to comply with or defiance of a and
lawful order of the SEC restraining the 4. Such other officers as may be
commission of acts which would amount provided in the by-laws.
to a grave violation of its franchise
4. Continuous inoperation for a period of CORPORATE CORPORATE
at least 5 years OFFICER EMPLOYEE
5. Failure to file the by-laws within the Position is provided Employed by the
for in the by-laws or action of the
required period
under the Corporation managing officer of
6. Failure to file required reports Code the corporation
RTC has jurisdiction NLRC has jurisdiction
III. BOARD OF DIRECTORS/TRUSTEES in case of labor in case of labor
Qualifications: dispute disputes
1. For a stock corporation, ownership of
at least 1 share capital stock of the BOARD OF DIRECTORS/TRUSTEES AS
corporation in his own name, and if he REPOSITORY OF CORPORATE
ceases to own at least one share in his POWERS
own name, he automatically ceases to be GENERAL RULE: The corporate
a director. (Sec. 23) For a non-stock powers of the corporation shall be
corporation, only members of the exercised, all business conducted and all
property of such corporation controlled trustees are ORIGINAL and
and held by the board of directors or UNDELEGATED. The stockholders or
trustees. (Sec. 23) members do not confer, nor can they
EXCEPTIONS: revoke those powers.
1. In case of an Executive b. They are DERIVATIVE only in the
Committee duly authorized in the by- sense of being received from the State in
laws; the act of incorporation.
2. In case of a contracted manager
which may be an individual, a BUSINESS JUDGMENT RULE
partnership, or another corporation. A resolution or transaction pursued
Note: In case the contracted manager within the corporate powers and business
is another corporation, the special operations of the corporation, and passed
rule in Sec. 44 applies. in good faith by the board of directors, is
3. In case of close corporations, the valid and binding, and generally the
stockholders may manage the courts have no authority to review the
business of the corporation instead by same and substitute their own judgment,
a board of directors, if the articles of even when the exercise of such power
incorporation so provide. may cause losses to the corporation or
decrease the profits of a department.
The power to purchase real property (Philippine Corporate Law, Cesar
is vested in the board of directors or Villanueva, 2001 ed.)
trustees. While a corporation may
appoint agents to negotiate for the Consequences:
purchase of real property needed by a. Resolutions and transactions entered
the corporation, the final say will have into by the Board within the powers of the
to be with the board, whose approval corporation cannot be reversed by the
will finalize the transaction. A courts not even on the behest of the
corporation can only exercise its stockholders.
powers and transact its business b. Directors and officers acting within
through its board of directors and such business judgment cannot be held
through its officers and agents when personally liable for such acts. (Philippine
authorized by a board resolution or by Corporate Law, Cesar Villanueva, 2001
its by-laws. (Spouses Constantine ed.)
Firme vs. Bukal Enterprises and
Development Corporation, G.R. No. THREE-FOLD DUTIES OF DIRECTORS:
146608, October, 23, 2003) (Philippine Corporate Law, Cesar
Villanueva, 2001 ed.)
LIMITATIONS ON POWERS OF BOARD 1. Duty of Obedience
OR DIRECTORS/TRUSTEES To direct the affairs of the corporation
1. Limitations imposed by the only in accordance with the purposes for
Constitution, statutes, articles of which it was organized.
incorporation or by-laws. Legal Basis: The directors or trustees
2. Cannot perform constituent or those and officers to be elected shall perform
involving fundamental changes in the the duties enjoined on them by law and
corporation requiring the approval of the by-laws (Sec. 25)
stockholders or members. 2. Duty of Diligence
3. Cannot exercise powers not possessed Legal Basis: Directors or trustees who
by the corporation. (The Corporation willfully and knowingly vote for or assent
Code of the Philippines Annotated, Hector to patently unlawful acts of the
de Leon, 2002 ed.) corporation or who are guilty of gross
negligence or bad faith in directing the
NATURE OF POWERS OF BOARD OF affairs of the corporation shall be liable
DIRECTORS/TRUSTEES (The jointly and severally for all damages
Corporation Code of the Philippines resulting therefrom suffered by the
Annotated, Hector de Leon, 2002 ed.) corporation, its stockholders or members
a. Under the Theory of Original Power, and other persons (Sec. 31)
the powers of the board of directors or 3. Duty of Loyalty
 Legal Basis: Directors or trustees who his votes and give one candidate, as
acquire any pecuniary or personal interest many votes as the number of directors to
in conflict with their duty as such directors be elected multiplied by the number of his
or trustees shall be liable jointly and shares shall equal.
severally for all damages resulting c. Cumulative voting by distribution - a
therefrom. (Sec. 31) stockholder may cumulate his shares by
When a director or trustee multiplying the number of his shares by
attempts to acquire or acquires in the number of directors to be elected and
violation of his duty, any interest adverse distribute the same among as many
to the corporation in respect of any matter candidates as he shall see fit.
which has been reposed in him in
confidence as to which equity imposes a LIMITATIONS ON THE
liability upon him to deal in his own STOCKHOLDERS RIGHT TO VOTE
behalf, he shall be liable as trustee for the 1. Where the articles of incorporation
corporation and must account for all the provides for classification of shares
profits which otherwise would have pursuant to Sec. 6, non-voting shares are
accrued to the corporation (Sec. 31, 2nd not entitled to vote except as provided for
par.) in the last paragraph of Sec. 6.
Where a director, by virtue of his 2. Preferred or redeemable shares may
office, acquires for himself a business be deprived of the right to vote unless
opportunity which should belong to the otherwise provided in the Code.
corporation, thereby obtaining profits 3. Fractional shares of stock cannot be
which should belong to the corporation, voted.
he must account to the latter for all such 4. Treasury shares have no voting rights
profits by refunding the same (Sec. 34) as long as they remain in the treasury.
5. Holders of stock declared delinquent
ELECTION OF DIRECTORS/TRUSTEES by the board of directors for unpaid
Limitations: subscription are not entitled to vote or to a
a. At any meeting of stockholder or representation at any stockholders
members called for the election of meeting.
directors or trustees, there must be 6. A transferee of stock cannot vote if
present either in person or by his transfer is not registered in the stock
representative authorized to act by written and transfer book of the corporation.
proxy, the owners of the majority of the
outstanding capital stock or majority of REMOVAL OF DIRECTORS/TRUSTEES
the members entitled to vote. Limitations:
b. The election must be by ballot if a. Vote of the stockholders representing
requested by any voting member or at least 2/3 of the outstanding capital
stockholder. stock 2/3 of the members entitled to vote
c. A stockholder cannot be deprived in the b. At a regular or special meeting after
articles of incorporation or in the by-laws proper notice is given
of his statutory right to use any of the c. Removal may be with or without cause.
methods of voting in the election of d. A minority director elected through
directors. cumulative voting cannot be removed
d. No delinquent stock shall be voted. without cause. (Sec. 28)
e. The candidates receiving the highest
number of votes shall be declared EXTENT OF POWERS OR AUTHORITY
elected. OF CORPORATE OFFICERS
1. The authority which he has by virtue of
METHODS OF VOTING his office;
a. Straight Voting every stockholder 2. The authority which is expressly
conferred upon him or is incidental to the
may vote such number of shares for as
effectualness of such express authority;
many persons as there are directors to be 3. As to third persons dealing with him
elected. without notice of any restriction thereof,
b. Cumulative voting for one candidate the authority which the corporation holds
a stockholder is allowed to concentrate
the officer out as possessing or is 1. Receivership;
estopped to deny. 2. Injunction, if the act has not yet been
4. The nature of the corporate business done;
must also be taken into consideration; 3. Dissolution if the abuse amounts to a
and ground for quo warranto but the
5. The nature act of an officer though Solicitor General refuses to act; and
originally unauthorized, may become 4. Derivative suit or complaint filed with
upon the corporation by a subsequent SEC.
ratification. (The Corporation Code of the
Philippines Annotated, Hector de Leon,
2002 ed.) SPECIAL RULES ON CONTRACTS
ENTERED INTO BY
It is a familiar doctrine that if a DIRECTORS/TRUSTEES OR
corporation knowingly permits one of it OFFICERS:
officers, or any other agent, to act within 1. Doctrine of Corporate Opportunity
the scope of an apparent authority, it Unless his act is ratified, a director
holds him out to the public as possessing shall refund to the corporation all the
the power to do those acts; and thus, the profits he realizes on a business
corporation will, as against anyone who opportunity which:
has in good faith dealt with it through 1. The corporation is financially able to
such agent, be estopped from denying undertake;
the agents authority. (LapuLapu 2. From its nature, is in line with
Foundation Inc., vs. Court of Appeals, et corporations business and is of
al., G.R. No. 126006, January 29, 2004, practical advantage to it; and
Callejo, J.) 3. The corporation has an interest or a
reasonable expectancy.
PERSONAL LIABILITY OF DIRECTORS The rule shall be applied
1. Willfully and knowingly voting for and notwithstanding the fact that the director
assenting to patently unlawful acts of risked his own funds in the venture. (Sec.
the corporation; (Sec. 31) 34)
2. Gross negligence or bad faith in
directing the affairs of the corporation; 2. Contracts of self-dealing directors
(Sec. 31) Contracts which are entered into by the
3. Acquiring any personal or pecuniary corporation with one or more of its own
interest in conflict of duty; (Sec. 31) directors/trustees, or officers. (Sec. 32)
4. Consenting to the issuance of They are voidable, unless:
watered stocks, or, having knowledge a) The presence of such director/trustee
thereof, failing to file objections with in the board meeting approving the
the secretary;(Sec. 65) contract was not necessary to
5. Agreeing or stipulating in a contract to constitute a quorum for such meeting;
hold himself liable with the b) The vote of such director/trustee in
corporation; or the board meeting approving the
6. By virtue of a specific provision of law contract was not necessary for the
approval of the contract;
DOCTRINE OF DOCTRINE OF c) The contract is fair and reasonable
LIMITED LIABILITY IMMUNITY under the circumstances;
d) In the case of an officer, there was
Shields the Protects a previous authorization by the board of
corporators from person acting for directors.
corporate liability and in behalf of the Although not all said conditions are
beyond their agreed corporation from present, the corporation may elect not to
contribution to the being himself
attack or question the validity of the
capital or shareholding personally liable for
in the corporation. his authorized
contract, without prejudice, however, to
actions the liability of the director/trustee for
damages under Sec. 31.
REMEDIES IN CASE OF Where any of the first two conditions is
MISMANAGEMENT absent, said contract must be ratified by
the vote of the stockholders representing Limitations on the Powers of the
at least 2/3 of the outstanding capital Executive Committee (Sec. 35)
stock or 2/3 of the members in a meeting It cannot act on the following:
called for the purpose, provided that full 1. Matters needing stockholder
disclosure of the adverse interest of the approval;
director/ trustee involved is made at such 2. Filling up of board vacancies;
meeting. (Sec. 32) 3. Amendment, repeal or adoption of by-
3. Contracts of interlocking directors laws;
Contracts entered into between 4. Amendment or repeal of any
corporations with interlocking directors resolution of the Board which by its
(interest of said directors is substantial, express terms is not amendable or
i.e. exceeding 20% of the outstanding repealable; and
capital stock). 5. Cash dividend declaration.
They are valid, provided that:
a. The contract is not fraudulent; and IV. POWERS OF THE CORPORATION
b. The contract is fair and reasonable 1. Express Powers - granted by law,
under the circumstances. Corporation Code, and its Articles of
Incorporation or Charter
If the interlocking directors interest in 2. Inherent/Incidental Powers not
one corporation or corporations is
expressly stated but are deemed to be
nominal (not exceeding 20% of the
within the capacity of corporate entities
outstanding capital stock), then all the
conditions prescribed in Sec. 32 on self- 3. Implied/Necessary Powers exists
dealing directors must be present with as a necessary consequence of the
respect to the corporation in which he has exercise of the express powers of the
nominal interest. (Sec. 33) corporation or the pursuit of its purposes
as provided for in the Charter
COMPENSATION OF DIRECTORS OR Classification:
TRUSTEES 1. Acts in the usual course of business
General Rule: They shall be entitled to 2. Acts to protect debts owing to the
reasonable per diems only corporation
Except: 3. Acts which involve embarking in a
a. when their compensation is fixed in the different business usually to collect debts
by-laws out of profits
b. when granted by the vote of 4. Acts to protect or aid employees
stockholders representing at least a 5. Acts to increase business (The
majority of the outstanding capital stock at Corporation Code of the Philippines
a regular or special meeting Annotated, Hector de Leon, 2002 ed.)
c. when they are also officers of the
corporation GENERAL POWERS AND CAPACITY
(Sec. 36)
EXECUTIVE COMMITTEE 1. To sue and be sued;
A body created by the by-laws and 2. Of succession;
composed of some members of the board 3. To adopt and use of corporate seal;
which, subject to the statutory limitations, 4. To amend its Articles of Incorporation;
has all the authority of the board to the 5. To adopt its by-laws;
extent provided in the board resolution or 6. For stock corporations: issue and sell
by-laws. (The Corporation Code of the stocks to subscribers and treasury
Philippines Annotated, Hector de Leon, stocks; for non-stock corporations:
2002 ed.) admit members;
Must be provided for in the by laws and 7. To purchase, receive, take or grant,
composed of not less than 3 members of hold, convey, sell, lease, pledge,
the board appointed by the board. mortgage and deal with real and
May act by a majority vote of all of its personal property, securities and
members. bonds
8. To enter into merger or consolidation;
9. To make reasonable donations for b. By increasing/decreasing the par value
public welfare, hospital, charitable, of existing shares without
cultural, scientific, civic or similar increasing/decreasing the number of
purposes, provided that no donation shares;
is given to any (i) political party, (ii) c. By increasing/decreasing the number
candidate and (iii) partisan political of shares and increasing/decreasing the
activity. par value.
10. To establish pension, retirement, and TOOLS AVAILABLE TO THE
other plans for the benefit of its STOCKHOLDERS TO REPLENISH
directors, trustees, officers and CAPITAL
employees. a. Additional subscription to shares of
11. To exercise other powers essential or stock of the corporation by stockholders
necessary to carry out its purposes. or by investors;
b. Advances by the stockholders to the
SPECIAL/SPECIFIC POWERS (Secs. corporation;
37-44) c. Payment of unpaid subscription by the
1. Power to extend or shorten corporate stockholders; and
term; d. Loans from third persons.
2. Increase or decrease corporate stock; 3.Incur, create or increase bonded
3. Incur, create, or increase bonded indebtedness
indebtedness; Corporate bond an obligation to pay
4. Sell, dispose, lease, encumber all or
substantially all of corporate assets; a definite sum of money at a future time at
5. Purchase or acquire own shares fixed rate of interest
provided:
a. there is an unrestricted retained BONDED DEBENTURE
earnings, and INDEBTEDNESS
Secured by a Serial obligations
b. it is for a legitimate purpose.
mortgage on or notes issued on
6. Invest corporate funds in another corporate property. . the basis of the
corporation or business for other (Philippine Corporate general credit of the
purpose other than primary purpose; Law, Cesar corporation. Hence,
7. Power to declare dividends out of Villanueva, 2001 ed.) they are not bonded
unrestricted retained earnings; indebtedness
8. Enter into management contract with 4. Sell, dispose, lease, encumber all or
another corporation (not with an substantially all of corporate assets;
individual or a partnership-within No ratificatory vote needed:
general powers) whereby one a. If it is necessary in the usual and
corporation undertakes to manage all regular course of business
or substantially all of the business of b. if the proceeds of the sale or other
the other corporation for a period not disposition of such property and assets
longer than 5 years for any one term. be appropriated for the conduct of the
remaining business
CORPORATE ACTS (see ANNEX for 5. Power to acquire own shares
procedure and requisites) Instances:
1. Power to extend or shorten corporate a. To eliminate fractional shares out of
term stock dividends
May be used as means to voluntarily b. To collect or compromise an
dissolve a corporation indebtedness to the corporation, arising
2. Power to increase or decrease capital out of unpaid subscription, in a
stock delinquency sale and to purchase
delinquent shares sold during said sale
WAYS OF c. To pay dissenting stockholders
INCREASING/DECREASING THE d. To acquire treasury shares
CAPITAL STOCK e. Redeemable shares regardless of
a. By increasing/decreasing the number existence of retained earnings
of shares and retaining the par value; f. To effect a decrease of capital stock
g. In close corporations, when there is a corporation, such as when there is a need
deadlock in the management of the for special reserve for probable
business contingencies.
Note: In letters a-c, there must be Sources of dividends:
unrestricted retained earnings GENERAL RULE: Dividends can only
6. Invest corporate funds in another be declared and paid out of actual and
corporation or business for other purpose bona fide unrestricted retained earnings.
other than primary purpose SPECIAL RULES:
The other purposes for which the funds a. Where a corporation sold its real
may be invested must be among those property, which is not being used for
enumerated as secondary purposes and business, at a gain, the income derived
must further comply with the requirements therefrom may be availed of for
of Section 42. dividend distribution.
7. Power to declare dividends out of b. Increase in the value of a fixed asset as
unrestricted retained earnings a result of its revaluation is not retained
RETAINED EARNINGS = ASSETS earning. However, increase in the value
of fixed assets as a result of revaluation
LIABILITIES AND LEGAL CAPITAL
(Revaluation surplus) may be
UNRESTRICTED if the retained declared as cash or stock dividends
earnings have not been reserved or set provided that the company:
aside by the board of directors for some (i) Has sufficient income from
corporate purpose operations from which the depreciation
DIVIDENDS on the appraisal increase was charged
Corporate profits set aside, declared, (ii) Has no deficit at the time the
and ordered to be paid by the directors for depreciation on the appraisal increase
distribution among shareholders at a fixed was charged to operations; and
time. (iii) Such depreciation on appraisal
Forms: increase previously charged to
a. Cash operations has not been impaired by
b. Property losses.
c. Stock c. Dividends can be declared out of the
While cash dividends due on amount received in excess of the par
delinquent shares can be applied to the value of shares (paid-in surplus)
payment of the unpaid balance, stock when:
dividends cannot be applied as payment (i) That they be declared only as
for unpaid subscription. stock dividends and not cash;
The right to dividends is based on duly (ii) No creditors are prejudiced; and
recorded stockholdings; accordingly, the (iii) There is no impairment of
corporation is prohibited from entitling capital.
thereto anyone else. Note that unlike par value shares,
General Rule: Stock corporations are when no par value shares are sold at
prohibited from retaining surplus profits in a premium, the entire consideration
excess of 100% of their paid-in capital paid is considered capital; hence the
stock same cannot be declared as
Except: dividends.
a. When justified by definite corporate d. Reduction surplus can be a source of
expansion projects approved by the board dividends. Rule on paid-in surplus is
of directors applicable.
b. When the corporation is prohibited e. No dividends can be declared out of
under any loan agreement with any capital except only in two instances: 1)
financial institution or creditor from liquidating dividends; and 2) dividends
declaring dividends without its/his from investments in wasting asset
consent and such consent has not yet corporation.
been secured It permits corporations solely or
c. When it can be clearly shown that such principally engaged in the exploitation
retention is necessary under special of wasting assets to distribute the net
circumstances obtaining in the proceeds derived from exploitation of
 their holdings such as mines, oil wells, Application of the TFD:
patents and leaseholds, without 1. Where the corporation has distributed
allowance or deduction for depletion. its capital among the stockholders
f. Profits realized from sale of treasury without providing for the payment of
shares are part of capital and cannot be creditors;
declared as cash or stock dividend as 2. Where it had released the subscribers
purchase and sale of such shares are to the capital stock from their
regarded as contractions and subscriptions;
expansions of paid-in capital. 3. Where it has transferred the corporate
g. Money cannot be borrowed for the property in fraud of its creditors; and
payment of dividends because 4. Where the corporation is insolvent.
indebtedness is not a retained earning Coverage of the TFD:
of the corporation. 1. If the corporation is solvent, the TFD
h. Corporate earnings which have not yet extends to the capital stock represented
been received even though they consist by the corporations legal capital.
in money which is due, cannot be 2. If the corporation is insolvent, the TFD
included in the profits out of which extends to the capital stock of the
dividends may be paid. corporation as well as all of its property
and assets.
CASH DIVIDENDS STOCK Exceptions to the TFD:
DIVIDENDS 1. Redemption of redeemable shares
1. Involves a 1. Does not involve (Sec. 8)
disbursement to the any disbursement 2. In close corporation, when there should
stockholders of be a deadlock and the SEC orders the
accumulated earnings payment of the appraised value of the
2. When declared and 2. Since it is still stockholders share. (Sec. 104)
paid becomes the part of corporate
absolute property of property, may be
the stockholder and reached by 8. Power to enter into management
cannot be reached by corporate creditors contract
creditors of the
corporation in the EXECUTIVE MANAGEMENT
absence of fraud COMMITTEE CONTRACT
3. Declared only by the 3. Declared by the
board of directors at its board with the 1. Its creation must 1. Express power of
discretion concurrence of the be provided for in a corporation
stockholders the by-laws
representing at
least 2/3 of the 2. A governing body 2. Management
outstanding capital which functions as company must
stock at a the board itself. always be subject to
regular/special (The Corporation the superior power of
meeting Code of the the board to give
4. Does not increase 4. Corporate capital Philippines specific directions
the corporate capital is increased Annotated, Hector from time to time or
5. Its declaration 5. No debt is de Leon, 2002 ed.) to recall the
creates a debt from the created by its delegation of
corporation to each of declaration managerial power.
its stockholders (The Corporation
Code of the
TRUST FUND DOCTRINE (TFD) Philippines
The subscribed capital stock of the Annotated, Hector de
corporation is a trust fund for the payment Leon, 2002 ed.)
of debts of the corporation which the
creditors have the right to look up to
satisfy their credits, and which the ULTRA VIRES (beyond powers) ACT
corporation may not dissipate. The An act which is beyond the conferred
creditors may sue the stockholders powers of a corporation or the purposes
directly for the latters unpaid or objects for which it is created as
subscription. defined by the law of its organization.
(Republic vs. Acoje Mining Co., Inc. 7 Can bind the parties if Cannot bind the
SCRAS 361) wholly or partly parties
An act done by a corporation outside of executed
the express and implied powers vested in
it by its charter and by the law. (Bar TEST whether or not a corporation
Review Materials in Commercial Law, may perform an act: consider the logical
Jorge Miravite, 2002 ed.) and necessary relation between the act
Types: (Philippine Corporate Law, questioned and the corporate purpose
Cesar Villanueva, 2001 ed.) expressed by law or in the charter. If the
1. Acts done beyond the powers of act is lawful in itself and not prohibited,
the corporation as provided in and is done for the purpose of serving
the law or its articles of corporate ends, and reasonably
incorporation; contributes to the promotion of those
2. Acts or contracts entered into in ends in a substantial and not in a remote
behalf of a corporation by and fanciful sense. (Montelibano vs.
persons who have no corporate Bacolod-Murcia Milling Co., Inc., 5 SCRA
authority (Note: This is technically 36)
ultra vires acts of officers and not
of the corporation); and REMEDIES IN CASE OF ULTRA VIRES
3. Acts or contracts, which are per ACTS
se illegal as being contrary to law. 1. State
An ultra vires act may be that of: a. Obtain a judgment of forfeiture; or
a. The corporation; b. The SEC may suspend or revoke the
b. The Board of Directors; and certificate of registration
c. The corporate officers. 2. Stockholders
Effects of ultra vires act on: a. Injunction; or
b. Derivative suit
a. Executed contract courts will not 3. Creditors
set aside or interfere with such a. Nullification of contract in fraud of
contracts; creditors
b. Executory contracts no
V. BY-LAWS
enforcement even at the suit of either
Rules of action adopted by a
party (void and unenforceable);
corporation for its internal government
c. Part executed and part executory and for the regulation of conduct and
principle of no unjust enrichment at prescribe the rights and duties of its
expense of another shall apply; and stockholders or members towards itself
d. Executory contracts apparently and among themselves in reference to
authorized but ultra vires the the management of its affairs.
principle of estoppel shall apply. Functions:
ULTRA VIRES ACTS AND ILLEGAL a. Supplement the articles of
ACTS incorporation
Ultra vires (beyond powers) refers b. Provide for details not important
only to an act outside or beyond corporate enough to be stated in the articles of
powers, including those that may incorporation
ostensibly be within such powers but are, c. Continuing rule for the government of
by general or special laws, either the corporation and the individuals
prohibited or declared illegal. It is in this composing it
context that the Code has used the term. d. Define the rights and duties of
corporate officers and directors/trustees
ULTRA VIRES ILLEGAL ACTS and of stockholders/members towards the
ACTS corporation and among themselves
Not necessarily Unlawful; against
e. Source of authority for corporate
unlawful, but outside law, morals, public
the powers of the policy, and public officers and agents of the corporation
corporation order Requisites for validity:
Can be ratified Cannot be ratified a. Must not be contrary to law nor
with the Corporation Code
 b. Must not be contrary to morals and ARTICLES OF BY-LAWS
public policy; INCORPORATION
c. Must not impair obligations and Condition precedent in Condition
contracts; the acquisition of subsequent; its
d. Must be general and uniform; corporate existence; absence merely
e. Must be consistent with the charter furnishes a ground
or articles of incorporation; and for the revocation of
the franchise
f. Must be reasonable, not arbitrary or
Essentially a contract For the internal
oppressive. between the government of the
Binding effect: corporation and the corporation but has
a. As to members and corporation stockholders/ the force of a
They have the force of contract members; between the contract between the
between the members themselves. stockholders/ member corporation and the
They are binding only upon the inter se, and between stockholders/
corporation and on its members and the corporation and the members, and
those having direction, management and State; between the
stockholders and
control of its affairs.
members;
b. As to third persons Executed before May be executed
They are not bound to know the by- incorporation after incorporation.
laws which are merely provisions for the Sec. 46 allows the
government of a corporation and notice to filing of the by-laws
them will not be presumed. simultaneously with
Reason: By-laws have no extra- the Articles of
corporate force and are not in the nature Incorporation
of legislative enactments so far as third Amended by a majority May be amended by
persons are concerned. of the directors/ a majority vote of
trustees and the BOD and
CONTENTS OF BY-LAWS stockholders majority vote of
representing 2/3 of the outstanding capital
a. Time, place and manner of calling and
outstanding capital stock or a majority
conducting regular or special meetings of stock, or 2/3 of the of the member in
directors or trustees members in case of non-stock
b. Time and manner of calling and non-stock corporations corporation
conducting regular or special meetings of Power to amend/repeal Power to amend or
the stockholder or members articles cannot be repeal by-laws or
c. The required quorum in meeting of delegated by the adopt new by-laws
stockholders or members and the manner stockholders/ members may be delegated
of voting therein to the board of by the 2/3 of the
d. The form for proxies of stockholders directors/ trustees outstanding capital
stock or 2/3 of the
and members and the manner of voting members in the
them case of non-stock
e. The qualification, duties and corporation
compensation of directors or trustees,
officers and employees VI. MEETINGS
f. Time for holding the annual election of
directors or trustees and the mode or STOCKHOLDERS/MEMBERS MEETING
manner of giving notice thereof
g. Manner of election or appointment and WHEN:
the term of office of all officers other than 1. REGULAR - held on the date fixed
directors or trustees in the by-laws or if not fixed on any
h. Penalties for violation of the by-laws date in April;and
i. In case of stock corporations, the 2. SPECIAL - held at any time
manner of issuing certificates deemed necessary or as so provided
j. Such other matters as may be in the by-laws.
necessary for the proper or convenient WHERE:
transaction of its corporate business and In the city or municipality where the
affairs principal office of the corporation is
located, and if practicable, in the principal and may direct the manner in which the
office of the corporation. vote shall be cast
However, in the case of non-stock
corporations, the by-laws may provide VOTING TRUST
that meetings may be held at any place An agreement whereby one or more
even outside the principal place of the stockholders transfer their shares of
corporation. (Sec. 93) stocks to a trustee, who thereby acquires
for a period of time the voting rights
BOARD MEETING (Sec. 53) (and/or any other rights) over such
WHEN: shares; and in return, trust certificates are
1. REGULAR - held monthly, unless given to the stockholder/s, which are
otherwise provided in the by-laws; transferable like stock certificates,
and subject, however, to the trust agreement.
2. SPECIAL - held at any time upon Limitations:
the call of the president. a. Cannot be entered into for a period
WHERE: exceeding 5 years at any one time except
May be held anywhere in or outside of when it is a condition in a loan agreement
the Philippines. or for the purpose of circumventing the
law against monopolies and illegal
PROXY combinations
Limitations: b. The agreement must not be used for
a. It must be in writing and signed by the purposes of fraud
stockholder or member (as principal) and c. It must be in writing and notarized and
filed before the scheduled meeting with specify the terms and conditions thereof
the corporate secretary, and given to d. A certified copy of the agreement must
another person (as agent) authorizing be filed with the corporation and with the
such person to exercise the voting rights SEC
of the former. e. The agreement shall be subject to
b. Unless otherwise provided in the examination by any stockholder of the
proxy, it shall be valid only for the meeting corporation
for which it is intended. f. Unless expressly renewed, all rights
c. No proxy shall be valid and effective for granted in the agreement shall
a longer period than five years at any one automatically expire at the end of the
time. (Sec. 58) agreed period
The right to vote by proxy may be
exercised in any of the following VOTING TRUSTS PROXY
instances: The trustee votes as The proxy holder
1. Election of the board of directors or owner rather than as votes as agent
trustees; mere agent
2. Voting in case of joint ownership of The trust may vote in The proxy must vote
stock; person or by proxy in person
unless the agreement
3. Voting by trustee under voting trust
provides otherwise
agreement;
4. Pledge or mortgage of shares; Trustee acquires Proxy has no legal
5. As provided for in its by-laws. legal title to the title to the shares of
Note: Stockholders or members may shares of the the principal
attend and vote in their meetings by proxy transferring
stockholder
(Sec. 58); directors cannot do so.
The agreement must Proxy need not be
Directors must always act in person. be notarized notarized
(Sec. 25). The agreement is Revocable anytime
EXTENT OF AUTHORITY irrevocable except one with
a. GENERAL PROXY confers a interest
Trustee is not limited Proxy can only act at
general discretionary power to attend and to act at any a specified
vote at annual meeting. particular meeting stockholders meeting
b. LIMITED PROXY restrict the (if not continuing)
authority to vote to specified matters only A trustee can vote A proxy can only vote
and exercise all the in the absence of the UNDERWRITING STOCK
rights of the owners of the stock AGREEMENT SUBSCRIPTION
stockholder even AGREEMENT
when the latter is The signers obligate The obligation of the
present themselves to take signer to the
An agreement must A proxy is usually of the shares of stock purchasers and to
not exceed 5 years at shorter duration which cannot be the public is absolute.
any one time except although under Sec. sold.
when the same is 58 it cannot exceed 5 Underwriters are There is no
made a condition of a years at any one time given commission. commission.
loan. The signer can He becomes a
The voting right is The right to vote is refuse to become a stockholder of the
divorced from the inherent in or stockholder/ member company and is liable
ownership of stocks inseparable from the of the company. to pay the amount
right to ownership of due on the stock.
stock

VII. STOCKS AND STOCKHOLDERS

STOCK OPTION
A privilege granted to a party to
SUBSCRIPTION CONTRACT - any
subscribe to a certain portion of the
contract for the acquisition of unissued
unissued capital stock of a corporation
stock in an existing corporation or a
within a certain period and under the
corporation still to be formed shall be
terms and conditions of the grant
deemed a subscription. (Sec. 60)
exercisable by the grantee at any time
The subscribed shares need not be
within the period granted.
paid in full in order that the subscription
WARRANT
may be valid. The subscription contract is
A type of security which entitles the
a consensual contract that is perfected
holder the right to subscribe to, the
upon the meeting of the minds of the
unissued capital stock of a corporation or
parties. The name of the subscriber is
to purchase issued shares in the future,
recorded in the stock and transfer book,
evidenced by a Warrant Certificate,
and from that time, such subscriber
whether detachable or not, which may be
becomes a stockholder of record entitled
sold or offered for sale to the public.
to all the rights of a stockholder. Until the
stocks are fully paid, it continues to be a
PRE-INCORPORATION
subsisting liability that is legally
SUBSCRIPTION AGREEMENTS (PISA)
enforceable.
Subscription of shares of stock of a
corporation still to be formed shall be
In Ong Yong, et.al, vs. David Tiu, the
irrevocable for a period of at least 6
Court did not allow the rescission of the
months from date of subscription, unless:
Pre-Subscription agreement since the
1. All of the other subscribers
action was filed by the Tius in their
consent to the revocation;
personal capacities. It ruled that it was the
2. The incorporation of said
corporation who had the legal personality
corporation fails to materialize
to file the suit, it being the real party in
with said period or within a longer
interest.
period as may be stipulated in the
contract of subscription; provided
UNDERWRITING AGREEMENT
that no pre-incorporation
An agreement between a corporation
subscription may be revoked after
and a third person, termed the
the submission of the articles of
underwriter, by which the latter agrees,
incorporation to the SEC. (Sec.
for a certain compensation, to take a
61)
stipulated amount of stocks or bonds,
specified in the underwriting agreement, if
MODES OF ISSUANCE OF SHARES
such securities are not taken by those to
a. By subscription before and after
whom they are first offered. incorporation to original, unissued stock
b. By sale of treasury stock after 1. To the extent that there is an
incorporation for money, property or overissue, the excess issuance (over
service the authorized capital stock or the
c. By subscription to new issues of stock stated capital) shall be void as being
in case of an increase in the capital stock ultra vires.
d. By making a stock dividend 2. If there is no overissue, but no
payment has been made to cover the
VALID CONSIDERATIONS IN par or stated value of the excess
SUBSCRIPTION AGREEMENT (Sec. 62) shares, the latter would constitute
1. Cash actually received; watered stocks.
2. Property, tangible or intangible, 3. If there is no overissue and
actually received AND necessary or watering of stocks, the corporation
convenient for its use and lawful may be bound to honor the certificate
purposes; (if duly signed and released by its
Requisites; authorized officers) in the hands of a
a. Necessary or proper in holder in good faith, reserving a right
carrying on the corporate of recourse that an aggrieved party
business may pursue against the culpable or
b. Ascertainable pecuniary unjustly enriched party.
value
c. Capable of being
transferred and applied to CAPITAL STOCK SHARES OF
payment of debts STOCK
3. Labor or services actually rendered to Amount paid in or Interest or right which
the corporation; secured to be paid the stockholder has
4. Previously incurred corporate in by the in the management of
indebtedness; stockholders upon the corporation, and
which the its surplus profits,
5. Amounts transferred from unrestricted
corporation is to and upon a
retained earning to stated capital, conduct its dissolution, in all of
6. Outstanding shares in exchange for operation. It is the its assets remaining
stocks in the event of reclassification property of the after payment of
or conversion. corporation itself corporate debts.
Note: Shares of stock shall not be issued (monetary value).
in exchange for promissory notes or
future services. Note that there is no SHARES OF CERTIFICATE OF
prohibition on the use of checks, bills or STOCK STOCK
notes in payment of the cash Unit of interest in a Evidence of the
consideration. corporation holders ownership
of the stock and of
SHARES OF STOCK his right as a
Interest or right which owner has in the shareholder
Incorporeal or Concrete and
management of the corporation, and its
intangible property tangible
surplus profits, and, on dissolution, in all
May be issued by the May be issued only
of its assets remaining after the payment corporation even if if the subscription is
of its debt. the subscription is fully paid.
not fully paid.
CERTIFICATE OF STOCK
The document evidencing the
ownership of shares of stocks by a REQUIREMENTS FOR TRANSFER OF
stockholder and the full payment of its STOCK
issue or subscription price. a. In case of shares covered by a
It is not essential to the ownership certificate, the indorsement of the owner
and/or existence of the share of stock. or his agent coupled with delivery is
Where the certificate of stock reflects a essential
greater volume of shares than the actual b. Where no certificate has been issued
number of shares issued or to be issued, or for some reason it is not in the
the following rules may be considered: possession of the stockholder, it may be
transferred by means of a deed of
assignment duly recorded in the books of ii. Application of dividends
the corporation b. Judicial action
c. To be valid against the corporation and Note: The prescriptive period in case of
third persons, the transfer must be subscription of shares begins to run only
recorded in the stock and transfer book from the time the board of directors
d. The transferee must present the declares that the balance are due and
indorsed certificate to the corporate payable. It does not begin to run from the
secretary who shall effect the transfer in date of the subscription. (Garcia vs.
the corporate books, issue a new stock Suarez, 67 Phil. 441)
certificate in favor of the transferee and
cancel the former certificate. DELINQUENCY
Only absolute transfers need be 1. If the subscription contract fixes the
registered. The pledge or mortgage itself date for payment, failure to pay on
need not be recorded in the stock and such date shall render the entire
transfer book, but a chattel mortgage balance due and payable with
must comply with the Chattel Mortgage interest. Thirty days therefrom, if still
Law, and a pledge would require the unpaid, the shares become
shares to be placed in the possession of delinquent, as of the due date, and
the creditor/pledgee. The agreement must subject to sale, unless the board
appear in a public instrument to take declares otherwise.
effect against third persons. (Chemphil 2. If no date is fixed in the subscription
vs. CA, 251 SCRA 257) contract, the board of directors can
make the call for payment, and
EFFECTS OF UNREGISTERED specify the due date. The notice of
TRANSFER OF SHARES call is mandatory. The failure to pay
a. It is valid and binding as between the on such date shall render the entire
transferor and the transferee balance due and payable with
b. It is invalid as to the corporation except interest. Thirty days therefrom, if still
when notice is given to the corporation for unpaid, the shares become
purposes of registration delinquent, as of the date of call, and
c. It is invalid as against corporate subject to sale, unless the board
creditors and the transferor is still liable to declares otherwise. (Sec. 67)
the corporation
d. It is invalid as to the attaching or Effect:
executing creditors of the transferor, as A. Upon the stockholder
well as subsequent purchasers in good 1. Accelerates the entire amount of
faith without notice of the transfer. the unpaid subscription;
2. Subjects the shares to interest,
ISSUANCE OF CERTIFICATE OF expenses and costs;
STOCK 3. Disenfranchises the shares from
No certificate of stock shall be issued any right that inheres to a
until the full amount of the subscription is shareholder, except the right to
paid. Basis: Doctrine of Individuality of dividends (but which shall be
Subscription that espouses that the applied to any amount due on
subscription is one, entire, indivisible, and said shares or, in the case of
whole contract, which cannot be divided stock dividends, to be withheld by
into portions. (SEC Opinion) the corporation until full payment
of the delinquent shares. (Sec.
COLLECTION OF UNPAID 43)
SUBSCRIPTION B. Upon the director owning delinquent
1. Voluntary payment shares
a. Upon the date specified in the 1. He can continue serving in that
subscription contract capacity unless and until said shares are
b. Upon call by the Board of Directors totally bidded away, he continues to be
2. Involuntary payment the owner thereof and in the interim he is
a. Extra-judicial not disqualified.
i. Delinquency sale
2. A delinquent stockholder seeking to be other words, the amount of the bid does
elected as director may not be a not vary but only the number of shares to
candidate for, nor be duly elected to, the be bought changes and determines the
board. highest bidder.
No delinquency stock shall be voted for b. If there is no bidder as mentioned
or be entitled to vote or representation at above, the corporation may bid for the
any stockholders meeting, nor shall the same, and the total amount due shall be
holder be entitled to any of the rights of a credited as paid in full in the books of the
stockholder except the right to dividends corporation. Such shares shall be
in accordance with the provisions of this considered as treasury shares.
Code until and unless he pays the
amount due on his subscription with PROCEDURE FOR ISSUANCE OF NEW
accrued interest, and the cost and CERTIFICATE OF STOCK IN LIEU OF
expenses of advertisement, if any. (Sec. LOST, STOLEN OR DESTROYED ONES
71) (Sec. 73)
1. Filing with the corporation an affidavit
PROCEDURE FOR THE SALE OF in triplicate by the registered owner
DELINQUENT STOCKS (Sec. 68) setting forth the circumstances as to how
Call by resolution demanding payment of the certificate was lost, stolen or
the balance. However, if the contract destroyed, the number of shares, serial
of subscription prescribes the date of number of the certificate and the name of
payment, no call is necessary. the corporation that issued the same.
Notice of the board resolution given to the 2. Publication of notice of loss by the
stockholders by the corporate corporation in a newspaper of general
secretary, either personally or by circulation in the place of the principal
registered mail. Publication of notice office, once a week for 3 consecutive
of call is not required. weeks.
Failure of the stockholder to pay within a 3. After the lapse of 1 year from the date
grace period of 30 days from the date of the last publication, if no contest has
specified in the contract of been presented, the corporation shall
subscription or in the call, the stocks cancel in its books the certificate of stock,
shall be declared delinquent and shall which has been lost, stolen or destroyed,
be subject to sale. and issue in lieu thereof a new certificate
Notice of delinquency served on the of stock.
subscribers either personally or However, if the registered owner files a
registered mail and publication in a bond or other securities as may be
newspaper of general circulation in necessary to the board, the new
the province or the city where certificate of stock may be issued even
principal office is located for once a before the expiration of one (1) year
week for 2 consecutive weeks. Notice period.
shall state the amount due on each The prescribed procedure does
subscription plus accrued interest, not apply to a case where the certificates
and the date, time and place of the are in the companys possession when
sale which shall not be less than 30 mislaid which thereby obligates the
days nor more than 60 days from the corporation, not the stockholder, to suffer
date the stocks become delinquent. the consequences. (SEC Opinion)
Sale of the delinquent shares at public
auction. RIGHTS OF STOCKHOLDERS (Pandect
of Commercial Law and Jurisprudence,
HIGHEST BIDDER IN A DELINQUENCY Justice Jose Vitug, 1997 ed.)
SALE 1. MANAGERIAL RIGHTS
a. The person participating in the a. Voting rights; and
delinquency sale who offers to pay the full b. Right to remove directors
amount of the balance of the subscription 2. PROPRIETARY RIGHTS
together with the accrued interest, costs a. Right to dividends;
of advertisement and expenses of sale, b. Right to issuance of stock
for the smallest number of shares. In certificate for fully paid shares;
 c. Proportionate participation in the PRE-EMPTIVE RIGHT vis--vis RIGHT
distribution of assets in OF FIRST REFUSAL (Philippine
liquidation; Corporate Law, Cesar Villanueva, 2001
d. Right to transfer of stocks in ed.)
corporate books;
e. Right to recover stocks unlawfully PRE-EMPTIVE RIGHT OF FIRST
sold for delinquent payment of RIGHT REFUSAL
subscription May be exercised Arises only by virtue
f. Preemptive right even when there is of contractual
PREEMPTIVE RIGHT OF no express stipulations but is
STOCKHOLDERS provision of law also granted under
the provisions on
It is the shareholders preferential right
Close Corporation
to subscribe to all issues or dispositions
Pertains to Exercisable against
of shares of any class in proportion to unsubscribed another stockholder
their present stockholdings. portion of the of the corporation of
Purpose: to enable the shareholder to authorized capital his shares of stock
retain his proportionate control in the stock. A right that
corporation and to retain his equity in the may be claimed
surplus. against the
Extends to treasury shares in case of corporation
their reissuance.
If the shares preferentially offered to a 3. REMEDIAL RIGHTS
stockholder are not subscribed or a. Individual suit a suit instituted
purchased by him, it does not follow that by a shareholder for his own
said shares shall again be re-offered on a behalf against the corporation;
pro rata basis to stockholders who
already exercised their preemptive rights. b. Representative suit a suit filed
There is no preemptive right with respect by a shareholder in his behalf and
to the share to be re-offered. in behalf likewise of other
In case additional issues of originally stockholders similarly situated
authorized shares: and with a common cause
GENERAL RULE: There is no against the corporation; and
preemptive right. This is on the theory c. Derivative suit a suit filed in
that when a corporation at its inception
behalf of the corporation by its
offers its first shares, it is presumed to
shareholders (not creditors
have offered all of those which it is
whose remedies are merely
authorized to issue.
subsidiary such as accion
EXCEPTION: When a corporation at its subrogatoria and accion
inception offers only a specified portion of
pauliana) upon a cause of action
its authorized capital stock for
belonging to the corporation, but
subscription. If subsequently, it offers the
not duly pursued by it, against
remaining unsubscribed portion, there
any person or against the
would be preemptive right as to the
directors, officers and/or
remaining portion thus offered for
controlling shareholders of the
subscription.
corporation.
When pre-emptive right not available:
Requisites:
a. When denied by the article of
(i) An existing cause of action in
incorporation
favor of the corporation
b. Shares requiring stock offering or
(ii) The stockholder/member must
minimum stock ownership by the public
first make a demand upon the
c. Shares to be issued in good faith with
corporation or the management
the approval of the stockholders
to sue unless such a demand
representing 2/3 of the outstanding capital
would be futile
stock, in exchange for property needed
(iii) The stockholder/member
for corporate purposes or in payment of a
must be such at the time of the
previously contracted debt
objectionable acts or transactions
 unless the transactions are 2. List of Stockholders or Members;
continuously injurious and
(iv) The action must be brought in 3. Financial Records.
the name of the corporation
The number of shares of the IX. MERGER AND CONSOLIDATION
stockholder is immaterial since he MERGER CONSOLIDATION
is not suing in his own behalf A union whereby The union of two or
Note: The mere trustee of shares one or more existing more existing
registered in his name cannot file corporations are corporations to form a
a derivative suit for he is not a absorbed by another new corporation
stockholder in his own right. corporation which called the
survives and consolidated
(Bitong vs. CA, 292 SCRA 304) continues the corporation.
combined business.
LIABILITIES OF STOCKHOLDERS
a. Liability to the corporation for unpaid
subscription PROCEDURE:
b. Liability to the corporation for interest a. The board of directors or trustees of
on unpaid subscription each corporation shall approve a plan of
c. Liability to creditors of the corporation merger or consolidation
on the unpaid subscription b. The plan shall be submitted for
d. Liability for watered stock approval by the stockholders or members
e. Liability for dividends unlawfully paid of each of such corporation at separate
f. Liability for failure to create corporation corporate meetings duly called for the
purpose
VIII. CORPORATE BOOKS AND c. The articles of merger or consolidation
RECORDS shall be executed by each of the
INSPECTION RIGHTS constituent corporations
Limitations: d. Submission to the SEC for approval
a. The right must be exercised e. The SEC may or may not conduct a
during reasonable hours on hearing
business days; f. Issuance of certificate of merger or
b. The person demanding the right consolidation by the SEC
has not improperly used nay
information obtained through any EFFECTS OF MERGER OR
previous examination of the CONSOLIDATION (Sec. 80)
books and records of the 1. The constituent corporations shall
corporation; and become a single corporation which, in
c. The demand is made in good case of merger shall be the surviving
faith or for a legitimate purpose. corporation and, in the case of
(Sec. 74) consolidation, shall be the consolidated
The right extends, in consonance with corporation;
equity, good faith, and fair dealing, to a 2. The separate existence of the
foreign subsidiary wholly-owned by the constituent corporation shall cease,
corporation. except that of the surviving corporation;
Books required to be kept by the 3. The surviving or consolidated
corporation: corporation shall possess all rights,
1. Book of Minutes privileges, immunities and powers and
a. minutes of stockholder or subject to all the duties and liabilities of a
members meetings; and corporation;
b. minutes of board meetings. 4. The surviving or consolidated
2. Book of all business transactions; corporation shall thereafter possess all
3. Stock and transfer book, in case the rights, privileges, immunities and
of stock corporations. franchises of each of the constituent
Corporate records required by the SEC corporations;
to be kept and/or registered: 5. All property, real or personal, and all
1. Books of Account; receivables due to, and all other interest
of each constituent corporation, shall be
deemed transferred to and vested in such the debts and
surviving or consolidated corporation liabilities of the selling
without further act or deed; corporation
6. The surviving or consolidated 3. There is 3. The selling
corporation shall be responsible for all the continuance of the corporation ordinarily
enterprise and of the contemplates a
liabilities and obligations of each of the
stockholders liquidation of the
constituent corporations; enterprise
7. Any claim, action or proceeding 4. Title to the assets 4. Transfer of title is
pending by or against any of the are transferred by by virtue of contract
constituent corporations may be operation of law
prosecuted by or against the surviving or 5. The constituent 5. The selling
consolidated corporations; and corporations are corporation is not
8. The rights of the creditors or lien upon automatically dissolved by the mere
the property of any of each constituent dissolved transfer of all its
corporation shall not be impaired by such property
merger or consolidation.
TYPES OF ACQUISITIONS (Philippine
GENERAL RULE: When one Corporate Law, Cesar Villanueva, 2001
corporation buys all the shares of another ed.)
corporation, this will not operate to a. ASSETS-ONLY LEVEL
dissolve the other corporation and as the The purchaser is interested only in the
two corporations still maintaining their raw assets and properties of the
separate corporate entities, one will not business. He is not interested in the entity
answer for the debts of the other. of the corporate owner of the assets nor
EXCEPTIONS AS TO NON- of the goodwill and other factors relating
ASSUMPTION OF LIABILITIES: to the business itself.
1. If there is an express assumption of The transferee would not be liable for
liabilities; the debts and liabilities of his transferor
2. If there is a consolidation or merger; since there is no privity of contract over
3. If the purchase was in fraud of debt obligations between the transferee
creditors; and and the transferors creditors
4. If the purchaser is merely a b. BUSINESS-ENTERPRISE LEVEL
continuation of the seller. The transferee merely continues the
same business of the transferor since he
DE FACTO MERGER obtains the earning capability of the
One corporation acquiring all or venture
substantially all of the properties of The transferee is liable for the debts
another corporation in exchange for and liabilities of the transferor
shares of stock of the acquiring c. EQUITY LEVEL
corporation. The acquiring corporation The purchaser takes control and
would end-up with the business ownership of the business by purchasing
enterprise of the selling corporation the shareholdings of the corporate owner.
whereas the latter would end up with What the purchaser actually purchased is
basically its remaining assets being the the ability to elect the members of the
shares of stock of the acquiring board of the corporation who run the
corporation and may then distribute it as business.
liquidating dividend to its stockholders.
(Philippine Corporate Law, Cesar X. APPRAISAL RIGHT
Villanueva, 2001 ed.)
APPRAISAL RIGHTS
MERGER and SALE OF ASSETS The right to withdraw from the
CONSOLIDATION corporation and demand payment of the
1. Sale of assets is 1.merger/consolidatio fair value of his shares after dissenting
always involved n is not always from certain corporate acts involving
involved fundamental changes in corporate
2. There is automatic 2. Purchasing structure, namely: Key: ASIM
assumption of corporation is not 1. An amendment to the articles that
liabilities generally liable for has the effect of a) changing or
 restricting the rights of 3. The stockholder must make a written
shareholders or of authorizing demand within 30 days from the date
preferences over those of that the vote was taken.
outstanding shares, or b) 4. The price must be based on the fair
changing the term of corporate value of the shares as of the day prior
existence; to the date in which the vote was
2. Sale, encumbrance or other taken.
dispositions of all or substantially 5. Payment of the shares must be made
all of the corporate property or only out of the unrestricted retained
assets. (Sec. 81) earnings of the corporation.
3. Merger or consolidations; and 6. Upon payment, the stockholder must
4. Investment of corporate funds in transfer his shares to the corporation.
another corporation or in a
purpose other than the primary Effect of the Exercise of the Right:
purpose; (Sec. 42) a. All rights accruing to the such shares
Other instances when right available: shall be suspended
5. When a corporation invest its funds in b. The dissenting stockholder shall be
another corporation or business for entitled to receive payment of the fair
any purpose other than its primary value of his shares as agreed upon
purpose between him and the corporation or as
6. In a close corporation, a determined by the appraisers chosen
stockholder for any reason by them.
compel the corporation to
purchase his shares when the GENERAL RULE: A dissenting
corporation has sufficient assets stockholder who demands payment of his
in its books to cover its debts and shares is no longer allowed to withdraw
liabilities exclusive of capital from his decision
stock Except when:
1. The corporation consents to the
PROCEDURE withdrawal
a. The dissenting stockholder shall make 2. The proposed corporate action is
a written demand on the corporation abandoned or rescinded by the
within 30 days after the date on which the corporation
vote was taken for the payment of the fair 3. The proposed corporate action is
value of his shares. Failure to do so, shall disapproved by the SEC where its
be deemed a waiver of his a waiver of his approval is necessary
appraisal right 4. The Commission determines that such
b. If the proposed corporate action is stockholder is not entitled to appraisal
implemented or effected, the corporation right.
shall pay to such stockholder, upon
surrender of the corresponding certificate XI. NON-STOCK CORPORATION
of stock within 10 days after demanding A corporation organized for an
payment of his shares eleemosynary purpose, and no part of
c. Upon payment of the agreed or whose income is, during its existence,
awarded price, the stockholder shall distributable as dividends to its members,
transfer his shares to the corporation trustees, or officers, subject to the
provisions of the Corporation Code on
LIMITATIONS ON THE EXERCISE OF dissolution. (Sec. 87)
APPRAISAL RIGHT Any profit which it may obtain as an
1. Any of the instances provided for by incident to its operations shall, whenever
law for the exercise of the right must necessary or proper, be used for the
be present. furtherance of the purpose or purposes
2. The dissenting stockholder must have for which it was organized.
voted against the proposed corporate
action.
Eleemosynary purposes: charitable,
religious, educational, professional,
cultural, recreational, fraternal, literary, Directors cannot Trustees may exceed
scientific, social, civic service, or similar exceed 15 in number 15 in number
purposes, like trade, industry, agricultural. The term of a director The term of a trustee
(Sec. 88) is 1 year is 3 years; 1/3 of the
They are governed by the same rules Board shall be
elected annually
established for stock corporations,
Stockholders may Members may be
whenever pertinent, subject, however, to vote by proxy deprived of the right
a number of special features. to vote by proxy in
the articles or by-laws
RULES ON CONVERSION (SEC Officers are elected Officers may be
Opinion) by the Board of directly elected by the
1. Stock to non-stock corporation Directors members unless
Conversion may be made by mere otherwise provided in
amendment of the articles of the articles or by-laws
incorporation. Stockholders and Members may be
directors must act in a allowed by the by-
2. Non-stock to stock corporation meeting, except laws to vote by mail
The corporation must first be where a mere written or other similar
dissolved; mere amendment of the assent is sufficient or means
articles of incorporation would not suffice a formal meeting
because the conversion would change unnecessary
the corporate nature from non-profit to
monetary gain. RULES FOR DISTRIBUTION OF
The conversion without dissolving it ASSETS IN CASE OF DISSOLUTION
first would be tantamount to distribution of (SEC. 94)
its assets or income to its members 1. All liabilities and obligations of the
inasmuch as after its conversion, the corporation shall be paid, satisfied and
asset of the non-stock corporation would discharged or adequate provision shall be
now be treated as payment to the made therefor
subscriptions of the members who will 2. Assets held by the corporation upon a
now become stockholders of the condition requiring return, transfer or
corporation. conveyance, and which condition occurs
by reason of dissolution, shall be
RIGHTS OF MEMBERS returned, transferred or conveyed in
1. To be entitled to 1 vote unless accordance with such requirements
otherwise provided in the articles 3. Assets received and held by the
or by-laws corporation subject to limitations
2. To vote by proxy unless permitting their use only for charitable,
otherwise provided in the articles religious, benevolent, educational or
or by-laws similar purposes but not held upon a
3. To transfer membership if condition requiring return, transfer or
allowed by the articles or by-laws conveyance by reason of dissolution,
4. To be elected as trustee shall be transferred or conveyed to one or
more corporations, societies or
organizations engaged in activities in the
STOCK NON-STOCK Philippines substantially similar to those
Has capital stock Does not have shares of the dissolving corporation pursuant to a
divided into shares and may not plan of distribution
and with authority to distribute profits to its 4. Other assets, if any, shall be distributed
distribute dividends to members in accordance with the provisions of the
its stockholders
articles of incorporation or the by-laws
Stockholders may Members cannot
transfer their shares transfer their 5. In any other case, assets may be
membership unless distributed to such persons, societies,
allowed by the organizations or corporations, whether or
articles or by-laws not organized for profit, as may be
Cumulative voting is Cumulative voting not specified in a plan of distribution.
available in the available unless The plan of distribution shall be
election of directors otherwise provided in approved by a majority vote of the board
the articles or by-laws
of trustees and by 2/3 of the members a. mining companies;
having voting rights at a meeting b. oil companies;
c. stock exchanges;
XII. CLOSE CORPORATION d. banks;
A special kind of stock corporation: e. insurance companies;
1. whose articles of incorporation f. public utilities;
should provide that: g. education institutions;
a. the number of stockholders h. other corporations declared to be
shall not exceed 20; vested with public interest. (Sec.
b. issued stocks are subject to 96)
transfer restrictions, with a right of
preemption in favor of the ORDINARY CLOSE
stockholders or the corporation; STOCK CORPORATION
and CORPORATION
c. the corporation shall not be Its articles of Its articles must
listed in the stock exchange or its incorporation need contain the special
stocks should not be publicly only contain the matters prescribed by
offered; AND general matters Sec. 97, aside from
enumerated in Sec. the general matters in
2. whose at least 2/3 of the voting
14 of the Code. Sec. 14. Failure to do
stocks or voting rights should not be so precludes a de jure
owned or controlled by another close corporation
corporation which is not a close status.
corporation. (Sec. 96) Its status as an 2/3 of its voting stock
Characteristics: ordinary stock or voting rights must
1. Stockholders may act as directors corporation is not not be owned or
without need of election and affected by the controlled by another
therefore are liable as directors; ownership of its corporation which is
2. Stockholders who are involved in voting stock or voting not a close
rights. corporation.
the management of the
Its articles cannot Its articles may
corporation are liable in the same classify its directors. classify its directors.
manner as directors are. Business of the Business of the
3. Quorum may be greater than corporation is corporation may be
mere majority; managed by the managed by the
4. Transfers of stocks to others, board of directors. stockholders if the
which would increase the number articles so provide,
of stockholders to more than the but they are liable as
maximum are invalid; directors.
5. Corporate actuations may be The corporate Its articles may
officers and provide that any or all
binding even without a formal
employees are of the corporate
board meeting, if the stockholder elected by a majority officers or employees
had knowledge or ratified the vote of all the may be elected or
informal action of the others; members of the appointed by the
6. Preemptive right extends to all board of directors. stockholders.
stock issues;
7. Deadlocks in board are settled by The pre-emptive right The pre-emptive right
the SEC, on the written petition is subject to the is subject to no
by any stockholder; and exceptions found in exceptions unless
8. Stockholder may withdraw and Sec. 39. denied in the articles
The appraisal right may The appraisal right may
avail of his right of appraisal. be exercised by a be exercised and
Note: Special rules are provided for close stockholder only in the compelled against the
corporations because it is essentially an cases provided in Secs. corporation by a
incorporated partnership. (The 81 and 42 of the Code. stockholder for any
reason.
Corporation Code of the Philippines Except as regards In case of an
Annotated, Hector de Leon, 2002 ed.) redeemable shares, arbitration of an intra-
the purchase by the corporate deadlock by
The following cannot be a close corporation of its own the SEC, the
corporation: stock must always be corporation may be
made from the ordered to purchase Governed by the Governed by special
unrestricted retained its own shares from provisions on non- laws and by the
earnings. the stockholders stock corporations general provisions of
regardless of the and suppletorily by the Corporation Code
availability of the provisions on
unrestricted retained stock corporations
earnings. The number of board The number of the
Arbitration of intra- Arbitration of intra- of trustees may be board of trustees
corporate deadlock corporate deadlock by more than 15 should not be less
by the SEC is not a the SEC is an than 5 but not more
remedy in case the available remedy in than 15.
directors or case the directors or The term of office of The term of office of
stockholders are so stockholders are so the board of trustees the board of trustees
divided respecting divided respecting the shall be 3 years shall be 5 years
the management of management of the
the corporation. corporation. 2. RELIGIOUS CORPORATION
A corporation composed entirely of
POWERS OF THE SEC IN CASE OF spiritual persons and which is organized
DEADLOCK IN CLOSE for the furtherance of a religion or for
CORPORATIONS perpetuating the rights of the church or for
1. Cancel or alter any provision in the the administration of church or religious
articles of incorporation or bylaws work or property. It is different from an
2. Cancel, alter or enjoin any resolution ordinary non-stock corporation organized
of the corporation for religious purposes.
3. Direct or prohibit any act of the Kinds:
corporation a) CORPORATION SOLE
4. Require the purchase at their fair - A special form of corporation,
value of shares of any stockholder usually associated with the clergy,
either by any stockholder or by the consisting of one person only and his
corporation regardless of the successors, who is incorporated by
availability of unrestricted retained law to give some legal capacities and
earnings. advantages; and
5. Appoint a provisional director b) RELIGIOUS SOCIETIES
6. Dissolve the corporation - A non-stock corporation
7. Granting such other relief as the governed by a board but with religious
circumstances may warrant. purposes. It is incorporated by an
aggregate of persons, e.g. religious order,
XIII. SPECIAL CORPORATIONS diocese, synod, sect, etc.
1. EDUCATIONAL CORPORATION
A stock or non-stock corporation XIV. DISSOLUTION AND WINDING UP
organized to provide facilities for teaching (LIQUIDATION)
or instruction.
A favorable recommendation of the DISSOLUTION
DECS is essential for the approval of its Extinguishment of the franchise of a
articles and by-laws. corporation and the termination of its
It is primarily governed by special laws corporate existence.
and suppletorily by the provisions of the
Code. Modes:
1. Voluntary
NON-STOCK EDUCATIONAL a) Application for dissolution with the
EDUCATIONAL CORPORATION SEC
CORPORATION i. Where no creditors are affected
A non-stock A special corporation ii. Where creditors are affected
corporation which may a stock or b) Shortening of the corporate term by
non-stock
amending the articles of incorporation.
2. Involuntary
a) Expiration of the corporate term;
b) Failure to organize and commence
business within 2 years from the date
 of issuance of the certificate of payment of obligations to creditors, and
incorporation (Note: However, the SEC the remaining balance, if any, is to be
has opined that the dissolution in this distributed to the stockholders or
case is not automatic. The corporation members.
continues to exist as such, Methods:
notwithstanding its non-operational 1. By the corporation itself through its
status until the SEC orders its board of directors/trustees;
dissolution after notice and hearing.) 2. By a trustee to whom the corporate
c) Legislative dissolution; assets have been conveyed; and
d) Quo warranto suit against a de facto 3. By a management committee or
corporation; rehabilitation receiver appointed by the
e) Minority stockholders suit for SEC.
dissolution on justifiable grounds; or Note: The 3-year period of liquidation
f) SEC dissolution, upon complaint and does not apply to Methods 2 and 3 as
after notice and hearing, on the following long as the trustee or the receiver is
grounds: appointed within the said period.
i. The corporation was illegally The termination of the life of a
organized; juridical entity does not by itself cause the
ii. Continuous inactivity extinction or diminution of the rights and
(subsequent to incorporation, liabilities of such entity nor those of its
organization and owners and creditors alike (see Sec.
commencement of business) 145).
for at least 5 years; The word trustee as sued in the
iii. Serious dissension in the corporation statute must be understood in
corporation; or its general concept which could include
iv. Commission by the the counsel to whom was entrusted the
corporation of illegal or ultra prosecution of the suit filed by the
vires acts or violations of the corporation. (Spouses Gelano vs. CA)
Code. LIQUIDATION REHABILITATION
Connotes a winding Connotes a
EFFECTS OF DISSOLUTION up or settling with reopening or
a. Transfer of legal title to corporate creditors and debtors reorganization
property to the stockholders who become Winding up process Contemplates a
co-owners thereof so that assets may be continuance of
distributed to those corporate life in an effort
b. Continuation of corporate business to restore the
merely as an association without juridical entitled
corporation to its former
personality successful operation
c. Conveyance by the stockholders of
their respective shareholdings toward the XV. FOREIGN CORPORATION
creation of a new corporation to continue A corporation formed, organized or
the business of the old existing under any law other than those of
d. Reincorporation of the dissolved the Philippines, and whose laws allow
corporation by refilling new articles of Filipino citizens and corporations to do
incorporation and by-laws business in its own country or state. (Sec.
e. The corporation continues as a body 123)
corporate for 3 years for purposes of The definition espouses the
winding up incorporation test and the reciprocity rule
f. Cessation of corporate existence for all and is significant for licensing purposes.
purposes upon the expiration of the It is not permitted to transact or do
winding up period of 3 years. (The business in the Philippines until it has
Corporation Code of the Philippines secured a license for that purpose from
Annotated, Hector de Leon, 2002 ed. the SEC and a certificate of authority from
the appropriate government agency.
LIQUIDATION
The process by which all the assets of RESIDENT AGENT
the corporation are converted into liquid An individual, who must be of good
assets (cash) in order to facilitate the moral character and of sound financial
standing, residing in the Philippines, or a
domestic corporation lawfully transacting TEST OF DOING OR TRANSACTING
business in the Philippines, designated in BUSINESS IN THE PHILIPPINES:
a written power of attorney by a foreign The Corporation Code does not define
corporation authorized to do business in the phrase doing or transacting
the Philippines, on whom any summons business.
and other legal processes may be served A. Jurisprudential Tests (Philippine
in all actions or other legal proceedings Corporate Law, Cesar Villanueva, 2001
against the foreign corporation. (Sec. ed.)
127-128) 1. Twin characterization test
a) Whether the foreign corporation is
CONTENTS FOR APPLICATION OF maintaining or continuing in the
LICENSE Philippines the body or substance of
1. Date and term of incorporation the business for which it was
2. The address of the principal office in organized or whether it has
the country of incorporation substantially retired from it and turned
3. The name and address of resident it over another (Substance Test); and
agent b) Whether there is continuity of
4. The place in the Philippines where it commercial dealings and
intends to operate arrangements, contemplating to some
5. The specific purpose or purposes extent the performance of acts or
6. The names and addresses of the works or the exercise of some
present directors and officers of the functions normally incident to and in
corporation progressive prosecution of, the
7. A statement of its authorized capital purpose and object of its organization
stock (Continuity Test).
8. A statement of its outstanding capital 2. Contract Test
stock Whether the contracts entered into
9. A statement of the amount actually by the foreign corporation, or by an
paid in agent acting under the control and
10. Such additional information as may direction of the foreign corporation,
be necessary to enable the SEC to are consummated in the Philippines.
determine whether such corporation
is entitled to license B. Statutory Tests
1. Foreign Investment Act of 1991 (R.A.
GROUNDS FOR REVOCATION OF No. 7042)
LICENSE Acts constituting doing business:
1. Failure to file annual reports required a) Soliciting orders, service
by the Code; contracts, opening offices,
2. Failure to appoint and maintain a whether called liaison offices or
resident agent; branches;
3. Failure to inform the SEC of the b) Appointing representatives or
change of residence of the resident distributors domiciled in the
agent; Philippines or who in any
4. Failure to submit copy of amended calendar year stay in the country
articles or by-laws or articles of merger or for a period or periods totaling
consolidation; 180 days or more;
5. A misrepresentation in material c) Participating in the management,
matters in reports; supervision or control of any
6. Failure to pay taxes, imposts and domestic business, firm or entity
assessments; or corporation in the Philippines;
7. Engage in business unauthorized by and
SEC; d) Any other act or acts that imply a
8. Acting as dummy of a foreign continuity of commercial dealings
corporation; and or arrangements, and
9. Not licensed to do business in the contemplate to that extent the
Philippines. (Sec. 134) performance of acts or works, or
 the exercise of some of the delicto because they equally violated R.A.
functions normally incident to, 5455
and in progressive prosecution of, 3. Estoppel Rule
commercial gain or of the A party is estopped from questioning
purpose of the business the capacity of a foreign corporation to
organization. institute an action in our courts where it
2. Implementing Rules of R.A. No. 7042 had obtained benefits from its dealings
Acts not constituting doing business: with such foreign corporations and
a) Mere investment as a thereafter committed a breach or sought
shareholder in a domestic to renege on its obligations. (European
corporation and/or the exercise of Resources vs. Ingnieburo)
rights as such investor;
b) Appointing a representative or EFFECTS OF LACK OF LICENSE
distributor domiciled in the A. On suits
Philippines which transacts 1. Foreign corporation doing business in
business in its own name and for the Philippines:
its own account; a) may not sue or intervene in any
c) Publication of a general action in any court or
advertisement through any print administrative agency of the
or broadcast media; Philippines; but
d) Maintaining a stock of goods in b) may be sued on any valid cause of
the Philippines solely for the action recognized in the
purpose of having the same Philippines (under the doctrine of
processed by another entity in the quasi-estoppel by acceptance of
Philippines; benefits). (Sec. 133)
e) Consignment by the foreign 2. Foreign corporation not doing business
corporation of equipment with a in the Philippines:
local company to be used in the a) Generally, it may not sue and be
processing of products for export; sued in any court or administrative
f) Collecting information in the agency of the Philippines;
Philippines; and b) However, it may sue and be sued
g) Performing services auxiliary to for isolated transactions, as well
an existing isolated contract of as for those which are casual or
sale which are not on a incidental thereto.
continuing basis. B. On contracts
The contracts contemplated are those
C. Jurisprudential Rules that satisfy the contract test or those that
1. Doctrine of Isolated Transactions make a foreign corporation as one doing
Foreign corporations, even unlicensed business in the Philippines.
ones, can sue or be sued on a transaction GENERAL RULE: The contracts are
or series of transactions set apart from unenforceable. They are enforceable only
their common business in the sense that upon securing a license.
there is no intention to engage in a EXCEPTION: However, the contracts
progressive pursuit of the purpose and are null and void if they are contrary to
object of business transaction. (Eriks law, morals, good customs, public order
Pte.Ltd vs. CA, 267 SCRA 567) and public policy.
2. In Pari Delicto Rule
In the case of Top-Weld Manufacturing INSTANCES WHEN A FOREIGN
vs. ECED, S.A., the Court denied the CORPORATION MAY SUE IN THE
relief prayed for by petitioner when it ruled PHILIPPINES WHETHER OR NOT
that the very purpose of the law was LICENSED TO DO BUSINESS
circumvented and evaded when the THEREAT
petitioner entered into the said 1. To seek redress for an isolated
agreements despite the prohibition business transaction;
contained in the questioned law. The 2. To protect its corporate reputation,
parties were considered as being in pari name, and goodwill;
3. To enforce a right not arising out of a 3. Action for recovery of corporate funds
business transaction, e.g. tort that Note: Allegations in the complaint
occurred in the Philippines; determines jurisdiction.
4. When the parties have contractually
stipulated that Philippines is the venue of GROUNDS FOR SUSPENSION OR
actions; and CANCELLATION OF CERTIFICATE OF
5. When the party sued is barred by the REGISTRATION (SEC. 6[L])
principle of estoppel and/or principle of 1. fraud in procuring registration;
unjust enrichment from questioning the 2. serious misrepresentation as to
capacity of the foreign corporation. objectives of corporation;
3. refusal to comply with lawful order of
SECURITIES AND EXCHANGE SEC;
COMMISSION REORGANIZATION 4. continuous inoperation for at least 5
DECREE (P.D. No. 902-A) years;
5. failure to file by-laws within required
ORIGINAL AND EXCLUSIVE period;
JURISDICTION OF THE RTC (Sec. 5 in 6. failure to file reports; and
relation to Sec. 5.2 OF RA 8799): 7. Others similar grounds.
1. Fraudulent devices and schemes
employed by directors detrimental to INTERIM RULES OF PROCEDURE ON
the public interest and to other firms; CORPORATE REHABILITATION
2. Intra-corporate disputes; (effective December 15, 2000)
3. Disputes with the state in relation to
their franchise and right to exist as CORPORATE REHABILITATION
such; A process to try to conserve and
4. Controversies in election, administer the corporations assets in the
appointment of directors or trustees; hope that it may eventually be able to
5. Petition to be declared in a state of return from financial stress to solvency.
suspension of payments; Nature: in rem, summary, and non-
6. Petition for rehabilitation; and adversarial
7. Appointment of rehabilitation receiver Applicability: These Rules apply to
or management committee petitions for rehabilitation filed by
(provisional remedies). corporations, partnerships and
associations pursuant to P.D. 902-A
Note: A corporate officers dismissal is Steps:
always a corporate act and/or an intra- 1. Filing verified petition with the
corporate controversy. However, the appropriate RTC by:
corporate officers contemplated are those a. corporate debtor who foresees the
whose offices are created by the impossibility of meeting its debts
Corporation Code or the by-laws. when they respectively fall due; or
b. creditors holding at least 25% of
INTRA-CORPORATE DISPUTE the debtors total liabilities;
Elements: 2. The following shall be annexed to the
1. Status or relationship of the parties petition:
a. audited financial statements at end
controversy must be between and
of its last fiscal year;
among corporators, between
b. interim financial statement;
corporators and the corporation c. schedule of debts and liabilities;
2. Nature of the question intrinsic d. inventory of assets;
connection with the regulation or the e. rehabilitation plan;
internal affairs of the corporation f. schedule of payments and
Examples: disposition of assets effected
1. Action by a corporate officer to within 3 months preceding the
recover compensation from the filing of the petition;
corporation g. schedule of cash flow for the last 3
2. Action by a stockholder to compel months
issuance of certificate of stocks h. statement of possible claims;
 i. affidavit of general financial pendency of the proceedings. (Bar
condition; Review Materials in Commercial Law,
j. at least 3 nominations for Jorge Miravite, 2002 ed.)
rehabilitation receiver;
k. certificate under oath that directors POWERS AND FUNCTIONS OF
and stockholders have irrevocably MANAGEMENT COMMITTEE OR
approved/ consented to all REHABILITATION RECEIVER (Sec. 6[d],
actions/matters necessary under P.D. 902-A)
the rehabilitation plan. 1. To take custody of, and control over,
3. The court shall issue the stay order not all the existing assets and property of
later than 5 days from the filing of the such entities under management;
petition, which among others, shall: 2. To evaluate the existing assets and
a. appoint a rehabilitation receiver; liabilities, earnings and operations of
b. stay all actions for claims against such corporations, partnerships or
the debtor, which shall cover both other associations;
secured and unsecured creditors; 3. To determine the best way to salvage
c. set an initial hearing for the and protect the interest of the
petition (not earlier than 45 days investors and creditors;
but not later than 60 days from 4. To study, review and evaluate the
filing of the petition); and feasibility of continuing operations
d. direct the creditors to file their and structure and rehabilitate such
verified comment or opposition not entities if determined to be feasible by
later than 10 days before the initial the RTC;
hearing; their failure to do so 5. To report and be responsible to the
would bar them from any RTC until dissolved; and
participating in the proceedings. 6. May overrule or revoke the actions of
4. Publication of the stay order in a the previous management and board
newspaper of general circulation once a of directors of the entity under
week for 2 consecutive weeks; management, notwithstanding any
5. Referral of rehabilitation plan to provision of law, articles of
rehabilitation receiver; incorporation or by-laws to the
6. Meetings between corporate debtor contrary.
with creditors. Discussions on the
rehabilitation plan; Mere disagreement among
7. Submission of final rehabilitation plan stockholders as to the affairs of the
to the RTC for approval; corporation would not in itself suffice as a
8. The petition shall be dismissed (which ground for the appointment of a
results into the automatic lifting of the stay management committee. At least where
order unless RTC ordered otherwise) if no there is no imminent danger of loss of
rehabilitation plan is approved after 180 corporate property or of any other injury to
days from initial hearing; stockholders, management of corporate
9. Approval or disapproval of the business should not be wrested away
rehabilitation plan by RTC. from duly elected officers, who are prima
facie entitled to administer the affairs of
REHABILITATION RECEIVER the corporation, and placed in the hands
A person appointed by the RTC, in of the management committee. However,
behalf of all the parties for the purpose of where the dissension among stockholders
preserving and conserving the property is such that the corporation cannot
and preventing its possible destruction or successfully carry on its corporate
dissipation, if it were left in the possession functions the appointment of a
of any of the parties. management committee becomes
He acts in a fiduciary capacity and with imperative. (Ramon Jacinto and Jaime
impartiality towards all interested. Colayco vs. First Womens Credit
He does not take over the Corporation, G.R. No. 154049, August 28,
management and control of the debtor, 2003)
but shall closely oversee and monitor the
operations of the debtor during the
RA 8799 effectively amended Sec. 5 of 3. To enhance the democratization
PD 902-A, jurisdiction over intra-corporate of wealth
disputes is now vested in the RTCs. 4. To promote the development of
However, while Sec. 5 was amended, the capital market
there is no repeal of Sec. 6 thereof 5. To protect investors
declaring that the fraudulent acts or 6. To ensure full and fair disclosure
schemes, which the SEC shall exclusively about securities
investigate and prosecute, are those in 7. To minimize if not totally eliminate
violation of any law or rules and insider trading and other
regulations administered and enforced by fraudulent or manipulative
the SEC alone. The filing of civil/intra- devices and practices which
corporate case before SEC does not create distortions in the free
preclude the simultaneous and market. (Sec. 2)
concomitant filing of a criminal action
before the regular courts; such that a FEATURES WHICH ARE INTENDED TO
fraudulent act may give rise to liability for PROTECT THE INVESTING PUBLIC
violation of the rules and regulations of 1. All securities are required to be
the SEC cognizable by the SEC itself, as registered before they can be sold to
well as criminal liability for violation of the the public (Section 8);
Revised Penal Code cognizable by the 2. Rejection and revocation of
regular courts, both charges to be filed registration of securities (Section 13);
and proceeded independently, and may 3. Regulation of pre-need plans.
be simultaneously with the other. (Fabia (Section 16);
vs. CA, G.R.No. 132684. September 11, 4. Protection of shareholder interests
2002.) (Section 19);
5. Prohibition on fraud, manipulation
Automatic Stay and insider trading (Sections 24, 25,
Effect of appointment of a 26 and 27);
management committee or rehabilitation 6. Regulations of Securities Market
receiver Professionals (Section 28);
All actions for claims against the 7. Revocation, refusal or suspension of
corporation shall be suspended registration of brokers, dealers and
accordingly. salesmen and associated persons
Purpose/justification: To enable the (Section 29);
management committee or the 8. Restrictions on over-the-counter
rehabilitation receiver to effectively markets (Section 32);
exercise its powers free from any judicial 9. Self-regulation of associations of
or extrajudicial interference that might securities brokers, dealers and other
unduly hinder or prevent the rescue of the securities related organizations
debtor company. (Rubberworld v. NLRC) (Section 29);
No definite duration; deemed to apply 10. Registration of clearing agencies
during the entire period that the corporate (Section 42);
debtor is under management committee 11. Limitations on margin trading or the
or the rehabilitation receiver. (BF Homes amount of credit that may be
v. CA) extended on any security (Section 49)
12. Civil liabilities arising from false
SECURITIES REGULATION CODE statement in the registration
(SRC) statement (Section 56)
(R.A. No. 8799) 13. Civil liabilities arising from false
statements or omissions in the
PURPOSES: prospectus, communications and
1. To establish a socially conscious, reports (Section 57)
free market that regulates itself 14. Protection against manipulation of
2. To encourage the widest security prices, manipulative and
participation of ownership in deceptive devices (Section 59), fraud
enterprises in pre-need plans and commodities
futures contracts (Section 60),
 fraudulent transactions (Section 58), Kinds:
and insider trading (Section 61); 1. Shares of stocks, bonds, debentures,
15. Establishment of trust funds to notes, evidence of indebtedness,
compensate investors for asset-backed securities;
extraordinary losses or damage they 2. Investment contracts, certificates of
may suffer due to business failure or interest or participation in a profit-
fraud or mismanagement of the sharing agreement, certificates of
persons with whom they transact deposit for a future subscription
(Section 36.5[a]). 3. Fractional undivided interests in oil,
gas, or other mineral rights;
POWERS AND FUNCTIONS OF THE 4. Derivatives like options and warrants;
SEC 5. Certificates of assignments and
1. Supervision over corporations, participation, trust certificates, voting
partnerships, and grantees of primary trust certificates or similar instruments;
franchise; 6. Proprietary or non-proprietary
2. Approve, reject registration membership certificates in
statements/licensing applications; corporations;
3. Suspend, revoke, after notice and 7. Other instruments as may in the future
hearing primary franchise on grounds; be determined by the SEC. (Sec. 3)
4. Regulate/supervise activities of Classes:
persons to ensure compliance; 1. Exempt securities and securities
5. Supervise monitor, suspend or take covered by exempt transactions; and
over, exchanges, clearing agencies and 2. Securities that are not exempt or the
SROs; sale of which is not an exempt
6. Recommend policies, advise, transaction.
propose legislation to Congress on
securities market; DERIVATIVE
7. Prepare, approve, amend or repeal A financial instrument, including
rules, regulations, issue opinions options and warrants, whose value
8. Enlist the aid and support of and/or depends on the interest in or performance
deputize any and all enforcement of an underlying security, but which does
agencies of the Government as well as not require any investment of principal in
any private institution, corporation, firm, the underlying security.
association or person in the Kinds:
implementation of its powers; 1. OPTIONS contracts that give the
9. Issue cease and desist orders to
buyer the right, but not the obligation,
prevent fraud or injury;
10. Punish for contempt of the to buy or sell an underlying security at
Commission; a predetermined price, called the
11. Compel the officers of any registered exercise or strike price, on or before a
corporation or association to call predetermined date, called the expiry
meetings of stockholders or members; date, which can only be extended in
12. Issue subpoena duces tecum and accordance with Exchange rules.
summon witnesses to appear in any 2. WARRANTS rights to subscribe
proceedings of the Commission; and or purchase new shares or existing
13. Exercise such other powers as may shares in a company, on or before a
be provided by law which are necessary predetermined date, called the expiry
or incidental to the carrying out its date, which can only be extended in
express powers. (Sec. 5) accordance with Exchange rules.
Warrants generally have a longer
SECURITIES exercise period than options. (SRC
Shares, participation or interest in a Rule 3.1-1)
corporation or in a commercial enterprise
or profit-making ventures and evidenced REGISTRATION OF SECURITIES
by a certificate, contract, instrument GENERAL RULE: A registration
whether written or electronic in character. statement duly filed and approved by the
(Sec. 3) SEC is necessary before securities may
be sold and offered for sale or distribution 7. Issuance of security in exchange of
within the Philippines. Prior to any sale, any security from same issuer
information on the securities, in such form pursuant to right of conversion.
and substance prescribed by the SEC, 8. Brokers transactions
shall be made available to each 9. Pre-incorporation subscription and
prospective purchaser. (Sec. 8) subscription pursuant to an increase of
EXCEPTIONS: the ACS.
1. Exempt securities; and 10. Exchange of securities by issuer with
2. Exempt transactions. existing security holders exclusively
11. Sale to less than 20 persons during
EXEMPT SECURITIES (Sec. 9) any 12- month period
1. Any security issued or guaranteed by 12. Sale of securities to banks, registered
the Government of the Philippines, or investment house, insurance
by any political subdivision or agency companies, pension fund or retirement
thereof, or by any person controlled by plan maintained by the government or
and acting as an instrumentality of said other persons authorized by the BSP
Government. to engage in trust functions.
2. Any security issued or guaranteed by
the government of any country with TENDER OFFER
which the Philippines maintains A publicly announced intention by a
diplomatic relations, or by any state, person acting alone or in concert with
province or political subdivision or other persons to acquire equity securities
agency thereof on the basis of of a public company.
reciprocity. It is mandatory to make a tender offer
3. Certificates issued by a receiver or by for equity shares of a public company in
a trustee in bankruptcy duly approved an amount equal to the number of shares
by the proper adjudicatory body. that the person intends to acquire in the
4. Any security or its derivatives the sale following circumstances:
or transfer of which, by law, is under a. The person intends to acquire 15% or
the supervision and regulation of the more of the equity shares of a public
Office of the Insurance Commission, company pursuant to an agreement
Housing and land Use Regulatory made between or among the person
Board, or the Bureau of Internal and one or more sellers;
Revenue. b. The person intends to acquire 30% or
5. Any security issued by a bank except more of the equity shares of a public
its own shares of stock. company within a period of 12 months;
6. Any securities added by the SEC by or
rule or regulation after public hearing. c. The person intends to acquire shares
that would result in ownership of more
EXEMPT TRANSACTIONS (Sec. 10) than 50% of the equity shares of a
1. Judicial sale by executor, public company. (SRC Rule 19)
administrator, guardian/receiver in Tender offer is made:
insolvency or bankruptcy. 1. By filing with the SEC a declaration to
2. Sale of pledged or mortgaged security make a tender offer;
to liquidate a bona fide debt. 2. By furnishing the issuer or the
3. Sale on isolated transactions by originator of the security a statement
owner. containing such information required
4. Distribution of stock dividends. under Sec. 17 of the SRC:
5. Sale of capital stock exclusively to i. Annual Report (includes balance
stockholders where no commission is sheet, profit and loss statement); and
paid. ii. Periodical reports for interim fiscal
6. The issuance of bonds or notes periods; and
secured by mortgage upon real estate 3. By publishing all requests or
or tangible personal property, where invitations for tender, or materials,
the entire mortgage are sold to a making a tender offer or requesting or
single purchaser at a single sale. inviting letters of such a security.
PUBLIC COMPANY market price of the stock at the time the
1. Any corporation with a class of equity put is purchased.
securities listed on an Exchange; or 4. CALL - An option that, in consideration
2. Any corporation with assets in excess of a premium paid, entitles the buyer the
of P50M and having 200 or more holders, right to compel the seller to deliver to him
at least 200 of which are holding at least a certain number of shares within a given
100 shares of a class of its equity time at a stipulated price which is usually
securities. higher than the prevailing market price at
the time the call is bought. Call is the
UNLAWFUL ACTS reverse of put.
1. For any beneficial owner, director, or 5. STRADDLE The double privilege of
officer to sell any security if the seller
a put and a call, and secures to the
or his principal does not own or does
not deliver it within 20 days from sale. holder the right to demand of the seller at
(Sec. 23.3) a certain price within a certain time a
certain number of shares of specified
2. Manipulation of security prices. (Sec.
24.1) stock, or to require him to take, at the
3. Employment of manipulative or price within the same time, the same
shares of stock.
deceptive device or contrivance in
connection with purchase and sale of 6. WASH SALE The operation of
authorities. Execution of short sale, simultaneously buying and selling the
stop-loss order not in accordance same stock. It is any transaction in any
with SEC rules. (Sec. 24.2) security which involves no change in the
4. For any member of Exchange directly beneficial ownership thereof. It is the
or indirectly endorse or guarantee the reverse of MATCHED ORDERS
performance of any put, call, wherein there is a change in the
straddle, option or privilege in ownership of the securities.
relation to any security registered. 7. SHORT SWING TRANSACTION -
(Sec. 25) One where a person buys securities and
5. Fraudulent transactions in the sale of sells the same within a period of six
securities. (Sec.26) months.
6. Insider trading (Sec. 27) 8. FLOOR TRADER - A professional
7. For an insider to communicate material trader in securities who acts for himself
non-public information about the issuer and not for the account of others, hence,
or security. (Sec. 27.3) receives no commission at all.
8. Unlawful Tender Offer. (Sec 27.4) 9. HYPE AND DUMP Engaging in
9. Use of Extensive Credit. (Sec 48.1)
buying activity at increasingly higher
DEFINITION OF TERMS: prices and then selling securities in the
market at higher securities.
1. SHORT SALE A contract for sale of
10. BOILER ROOM SALES The use of
shares of stock which the seller does not
own, or certificates which are not within high-pressure sales tactics to promote
his control, so as to be available for purchases and sales of securities.
delivery at the time when delivery must be 11. OVER THE COUNTER
made. TRANSACTION
Transactions which are not made at the
2. STOP-LOSS ORDER The direction stock exchange, but directly between the
by a customer to his broker that if the broker and the customer.
commodity touches the price named, the 12. OVER-THE-COUNTER MARKET
broker shall close the trade at the best A market created other than a
available price. registered stock exchange for both the
3. PUT An option that, in consideration purchase and sale of any security.
of a premium paid, gives the purchaser
INSIDER TRADING
the right to make the seller take from him
a given number of shares of a named The selling or buying of a security by
an insider while in possession of material
stock between a given time at a stipulated
price which is usually below the prevailing non-public information with respect to the
issuer or the security. It is considered A kind of trading that allows a broker to
unlawful unless: advance for the customer/investor part of
1. The insider proves that the information the purchase price of a security and to
was not gained from such relationship, keep it as a collateral for such advance.
or
2. If the other party selling to or buying The credit extended must be for an
from the insider (or his agent) is amount not greater than whichever is
identified, the insider proves: higher of:
a. that he disclosed the information 1. 65% of current market price of the
to the other party, or security
b. that he had reason to believe that 2. 100% of the lowest market price
the other party otherwise is also in of security during the preceding
possession of the information. (Sec. 36 calendar months, but not
27.1) greater than 75% of the current
market price. (Sec. 48)
INSIDER
A person who, with respect to a Margin
particular security, may be any of the Sum of money, or its equivalent,
following: placed in the hands of a broker by
1. The issuer; principal or persons on whose account
2. The director or officer of, or a person the purchase is to be made, as a security
controlling the issuer; to the former against losses to which he
3. A person whose relationship or former may be exposed by a subsequent
relationship to the issuer gives him depression in the market value of the
access to material information about the stock.
issuer or the security that is not generally
available to the public; Margin Call
4. A government employee, or director, Demand made by the broker on the
or officer of an exchange, clearing agency investor to deposit money or securities
and/or self-regulatory organization who with the broker when a purchase is made
has access to material information about or when the investors equity in a margin
an issuer or a security that is not account falls below a minimum standard
generally available to the public; or set by the exchange or broker.
5. A person who learns such information
by a communication from any of the
foregoing insiders. (Sec. 3.8)

MATERIAL NON-PUBLIC
INFORMATION (formerly Fact of Special
Significance)
a. Information about the issuer or the
security which has not been generally
disclosed to the public and would likely
affect the market price of the security
after being disseminated to the public
and the lapse of a reasonable time for
the market to absorb the information;
or
b. Information about the issuer or the
security which would be considered by
a reasonable person important under
the circumstances in determining his
course of action to buy, sell or hold
security. (Sec. 27.2)

MARGIN TRADING