LAW ON CORPORATION

TOPIC OUTLINE:
1. Definition and Attributes of a Corporation
2. Classes of Corporation
3. Organization and Incorporation
4. Board of Directors
5. Committees
6. Corporate Officers
7. Shares of Stock
8. Rights of a Stockholder
9. By-laws
10.Meetings
11. Reorganization: Mergers and Consolidation
12. Non-Stock Corporation
13. Close Corporation
14. One Person Corporation
15. Foreign Corporation
16. Dissolution
DEFINITION AND ATTRIBUTES
DEFINITION: A corporation is an artificial being created by operation of law,
having the right of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence.
ATTRIBUTES:
1. ARTIFICIAL BEING- it has a juridical personality, separate and distinct from the
persons composing it.
CORPORATE ENTITY THEORY
As a legal entity the corporation is possessed with a juridical personality
separate and distinct from individual stockholder or members and is not affected
by the personal rights, obligations or transaction of the latter.
PIERCING THE VEIL OF CORPORATE ENTITY: The applicability of the corporate
entity theory is confined to legitimate transactions and is subject to equitable
limitations to prevent its being used as a cloak or cover for fraud or illegality, or to
work injustice.
When the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, define crime, the law will regard the corporation as a mere
association of persons, or in the case
of two corporations, merge them into one, the one being merely regarded as part
of the instrumentality of the other. The same is true where a corporation is mere
dummy and serves no business purpose and is intended only as a blind, or an
alter-ego or business conduit for the sole benefit of the stockholders.
In cases where the doctrine of piercing the veil of corporate fiction, the concept
of a separate juridical personality shall be set aside.
2. CREATED BY OPERATION OF LAW- the formal requirement of the State’s
consent through compliance with the requirements imposed by law is necessary
for its creation such as that mere agreement of the persons composing it or
intending to organize it does not warrant the grant of its independent existence
as a juridical entity.
COMMENCEMENT OF CORPORATE EXISTENCE: is at the time of the
issuance of the Certificate of Incorporation or Registration it is only from
this time that it acquires juridical personality and legal existence, EXCEPT:
a. Corporations by Estoppel
b Those created by special laws,
c. Sole Corporation-which is reckoned from the filling of verified articles.
3. RIGHT OF SUCCESSION- unlike in a partnership, the death, incapacity or civil
interdiction of one or more of its stockholders does not result in its dissolution,
this is otherwise referred to as the corporation's "strong" juridical personality.
4. POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW -
it can exercise only such powers and can hold only such properties as are
granted to it by the enabling statutes unlike natural persons who can do anything
as they please
Powers of a corporation:
a. Express Powers- those expressly authorized by the Corporation Code and
other laws, and its Articles of Incorporation
b. Implied Powers- Those that can be inferred from or necessary for the
exercise of EXPRESS powers
c. Incidental Powers-those that are incidental to the existence of the
corporation.
under the Corporation Code, a Corporation has power and capacity:
a. To sue and be sued in its corporate name,
b. Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate of incorporation
c. To adopt and use a corporate seal
d. To amend its articles of incorporation in accordance with the provisions of
this Code:
e. to adopt by-laws, not contrary to law, morals, or public policy, and to
amend or repeal the same in accordance with this Code
f. In case of stock corporations, to issue or sell stocks to subscribers and to
sell stocks to subscribers and to sell treasury stocks in accordance with the
provisions of this Code, and to admit members to the corporation if it be a
non-stock corporation
g. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property,
including securities and bonds of other corporations, as the transaction of
the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution;
h. To enter into merger or consolidation with other corporations as provided
in this Code (now, a corporation can also enter into a partnership and
joint venture);
i. To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural scientific, civic or similar purposes. Provided,
that no corporation, domestic-or foreign (now only foreign), shall give
donations in aid of any political party or candidate or for purposes of
partisan political activity
j. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees and
k. Implied Powers: To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated in the articles of
incorporation
ULTRA VIRES ACTS are those which cannot be executed or performed by a
corporation because they are not within its express, inherent, or implied powers
as defined by its Articles of incorporation.

CLASSES OF CORPORATIONS:
STOCK Corporations which have capital stock divided into
CORPORATIONS shares and are authorized to distribute to the holders
of such share’s dividends or allotments of the surplus
 profits on the basis of the shares held are stock
corporations
NON-STOCK Corporations which are not authorized to distribute
CORPORATIONS surplus profits
DOMESTIC are those organized or created under or by virtue of
CORPORATION the Philippine laws, either by legislative act or under
the provisions of the General Corporation Law
FOREIGN are those formed, organized or existing under any
CORPORATION laws other than those of the Philippines.
CLOSE are those whose shares of stock are held by a limited
CORPORATIONS number of persons like the family or other closely-
knit group. There are no public investors and the
shareholders are active in the conduct of the
corporate affairs.
OPEN CORPORATIONS are those formed to openly accept outsiders as
stockholders or investors. They are authorized and
empowered to list in the stock exchange and to offer
their shares to the public such that stock ownership
can widely be dispersed. In which case, they are
called PUBLICLY-LISTED CORPORATIONS
PRIVATE those formed for some private purpose, benefit, aim
CORPORATIONS or end. They are created for the immediate benefit
and advantage of the individuals or members
composing it and their franchise may be considered
as privileges conferred by the State to be exercised
and enjoyed by them in the form of the corporation.
PUBLIC those formed or organized for the government of a
CORPORATIONS portion of the State or any of its political subdivisions
and which have for their purpose the general good
and welfare
ECCLESIASTICAL are composed. exclusively of ecclesiastics organized
CORPORATIONS for spiritual purposes or for administering properties
held for religious ones. They are organized to secure
public worship or perpetuating the right of a
particular religion.
LAY CORPORATIONS are those organized for purposes other than religion.
They may further be classified as
A. ELEEMOSYNARY: created for charitable and
benevolent purposes such as those organized for the
purpose of maintaining hospitals and houses for the
sick, aged or poor
B. CIVIL: organized not for the purpose of public
charity but for the benefit, pecuniary or otherwise, of
 its members.
AGGREGATE are those composed of a number of individuals
CORPORATIONS vested with corporate powers
CORPORATION SOLE those consist of one person or individual only and
who are made as bodies corporate and politic in
order to give them some legal capacity and
advantage which, as natural persons, they cannot
have. Under the Code, a corporation sole may be
formed by the chief archbishop, bishop, priest,
minister, rabbi, or other presiding elder or religious
denominations sects or churches.

Classes of Corporations according to validity of formation:

Compliance with Separate and Questioning the
requirements for distinct personality of the
valid incorporation personality from corporation.
stockholders Direct Collateral
Attack Attack
De Jure Full Compliance Yes No No
Corporation
De Facto Requisites for Yes Yes, via No
Corporation existence. quo
1. There exists a warranto
valid law under
which it may be
incorporated.
2. An attempt in
good faith to
incorporated
(colorable
compliance)
3. Use of corporate
powers.
Corporation No compliance at all. None, Yes Yes
by Estoppel The persons who stockholders are
compose it only set liable as general
themselves out as a partners
corporation.
Direct Attack: means the very subject of the case is the legal existence or
personality of the corporation. This is allowed in a de facto corporation via a quo
warranto proceeding.
**Collateral Attack: means that the main subject of the case is other than
attacking the personality of the corporation, but it is questioned as a side subject.

ORGANIZATION AND INCORPORATION

1. PROMOTIONAL STAGE: Undertaken by the organizers or promoters who bring
together persons interested in the business venture. They enter into contract
either in their own names or in the name of the proposed corporation.
A promoter, although he may assume to act for an on behalf of a projected
corporation and not for himself, will be held personally liable on contracts made
by him for the benefit of a corporation he intends to organize. The personal
liability continues even after the formation of the corporation unless there is
novation or other agreement to release him from liability.
2. PROCESS OF INCORPORATION: includes the drafting of the articles of
incorporation, preparation and submission of additional and supporting
documents filing with the SEC and the subsequent issuance of the Certificate of
Incorporation.

Contents of the Articles of Incorporation:

a. The name of the corporation;
The name of the corporation is essential to its existence since it is through
it that it can act and perform all legal acts. Each corporation should
therefore, have a name by which it is to sue and be sued and do all the
legal acts.
Thus, the organizers must make sure that the name they intend to use as a
corporate name is not similar or confusingly similar to any other name
already registered and protected by law since the SEC would refuse
registration if such be the case.
This requirement is now specifically indicated in the Revised Corporation
Code.
b. The specific purpose for which the corporation is being incorporated. Where
a corporation has more than one stated purpose, the articles of incorporation
shall state which is the primary purpose and which is/are the secondary
purpose or purposes. Provided, that a non-stock corporation may not include a
purpose which would change or contradict its nature as such;
The statement of the objects or purpose or powers in the charter results
practically in defining the scope of authority of the corporate enterprise or
undertaking. This statement both congers and also limits the actual
authority of the corporate representatives.
The reasons for requiring a statement of the purposes or objects:
1. In order that the stockholder who contemplates on an investment in a
business enterprise shall know within what lines of business his money is
to be put at risks.
2. So that the board of Directors and management may know within what
lines of business they are authorized to act; and
3. So that anyone who deals with the company may ascertain whether a
contract or transaction into which he contemplates entering is one within
the general authority of the management.
SECONDARY PURPOSE: Although the Corporation Code does not restrict
nor limit the number of purpose or purposes which a corporation may have,
Sec. 14 thereof requires that if it has more than one purpose, the primary
purpose as well as secondary ones must be indicated therein.

GENERAL LIMITATIONS:
1. The purpose or purposes must be lawful;
2. The purpose must be specific or stated concisely although in broad or
general terms.
3. If there is more than one purpose, the primary as well as the secondary
ones must be specified; and
4. The purposes must be capable of being lawfully combined.
c. The place where the principal office of the corporation is to be located, which
must be within the Philippines;
It must be located within the Philippines. The AOI must not only specify the
province, but also the City or Municipality where it is located.
 The principal office serves as the residence of the corporation and is thus
important in:
i. venue of actions;
ii. registration of chattel mortgage of shares;
iii. validity of meetings of stockholders in so far as venue thereof is
concerned.
d. The term for which the corporation is to exist, if the corporation has not
elected perpetual existence;
A corporation now generally has perpetual existence since the Revised
Corporation Code removed the limitation of 50 years unless the Articles of
Incorporation would provide otherwise.
This equally applies to already existing corporations, except if by majority
vote of its stockholders, it notifies the SEC to retain its specific corporate
term.
Definite term: if the corporation would opt to have a definite term for its
existence, any extension thereof can be made no earlier than 3 years (from
5 years) prior to expiry date, unless there are justifiable reasons to allow
earlier extension.
Revival: Also under Sec. 11, after the expiration of the corporate term, a
corporation may file for revival of its corporate existence Upon approval by
the Commission, the Corporation shall be deemed revived and a certificate
of revival of corporate existence shall be issued, giving it perpetual
existence, unless its application for revival provides otherwise.
e. The names, nationalities and residence addresses of the incorporators;
CORPORATORS apply to all who composed the corporation at any given
time and need not be among those who executed the AOI at the start of its
formation or organization.
INCORPORATORS are those mentioned in the AOI as originally forming the
corporation and who are signatories in the AOI.

An incorporator may be considered as a corporator as long as he continues

to be a stockholder or member, but not all corporators are incorporators.
Number of Incorporators: not more than 15 (previously 5 to 15)
Qualifications:
1. Must be natural persons (now can also include a partnership, association
 or corporation
2. Of Legal Age (still a requirement for natural person-incorporators under
SEC MC No. 16-2019)
3. Must own or subscribe to at least 1 share
4. Majority must be residents of the Philippines (already removed)
f. The number of directors which shall not be more than fifteen (15) or the
number of trustees which may be more than fifteen (15)
DIRECTORS: compose the governing board in stock corporations which should
not exceed 15
TRUSTEES: pertain to non-stock corporations which may exceed 15
INDEPENDENT DIRECTORS: Section 22 of the RCC, the following
corporations vested with public interest shall have independent directors
constituting at least 20% of such board:
1. Corporations covered by the Securities Regulations Code;
2. Banks and quasi-banks, NSSLA’s pawnshops, corporations engaged in
money service business, pre-need, trust and insurance companies, and
other financial intermediaries; and
3. Other corporations engaged in business vested with public interest
similar to the above, as may be determined by the SEC
An Independent director as a person who, apart from shareholdings and
fees received from the corporation, is independent of management and
free from any business or other relationship which could, or could
reasonably be perceived to materially interfere with the exercise of
independent judgment in carrying out the responsibilities as a director.
g. The names, nationalities and residences of persons who shall act as directors
or trustees are duly elected and qualified in accordance with this Code;
h. If it be a stock corporation, the amount of its authorized capital stock, the
number of shares into which it is divided, the par value of each, the names,
nationalities and residences of the original subscribers, and the amount
subscribed and paid by each on his subscription, and statement that some or
all of the shares are without par value, if applicable;
This requirement that at least 25% of the authorized capital stock must be
subscribed and that 25% of the subscription must be paid-up has already been
removed under the Revised Corporation Code, but still applies to increase in
authorized capital stock.
AUTHORIZED CAPITAL Signifies the MAXIMUM amount fixed in the articles to be
subscribed and paid in or secured to be paid by the subscribers it may also refer
to the maximum number of shares that a corporation can issue.
SUBSCRIBED CAPITAL STOCK is the total number of shares and its total value for
which there are contracts for their acquisition or subscription.
PAID UP CAPITAL STOCK or paid in capital is the actual amount or value which
has been actually contributed or paid to the corporation in consideration of the
subscriptions made thereon.

Considerations for stocks.

1 Actual cash paid to the corporation;
2 Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair valuation equal
to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4.Previously incurred indebtedness of the corporation,
5. Amounts transferred from unrestricted retained earnings to stated capital, and
Outstanding shares exchanged for stocks in the event of reclassification or
conversion.

AMENDMENT: Consideration for stocks under Section 61 (formerly Section 60)

now includes:
1 Shares of stock in another corporation, and/or
2 Other generally accepted form of consideration.

Note:
 Stocks cannot be issued for a consideration less than the par or issue price
thereof
 Promissory notes or future service cannot be considered valid
consideration for stocks

OUTSTANDING CAPITAL STOCK: total number of shares issued, including those

which are subscribed and not yet fully paid, but excluding treasury shares.
i. If it be a non-stock corporation, the amount of its capital, the names,
nationalities and residence addresses of the contributors and the amount
contributed by each; and

J. Such other matters as are not inconsistent with law and which the
incorporators may deem necessary and convenient.

RESTRICTIONS AND PREFERENCES:

If the corporation desires to grant such options, restrictions and/or preferences,
the same must be indicated in the AOI AND in all of the stock certificates. Failure
to provide the same in the AOI would not bind the purchasers in good faith
despite the fact that the said restriction and/or preference is indicated in the by-
laws of the corporation
In a close corporation, however, such restrictions and preferences must not only
appear in the articles of incorporation and in the stock certificates BUT ALSO be
embodied in the by-laws of that close corporation otherwise it may not bind
purchasers in good faith.

OTHER MATTERS TO BE INDICATED IN THE ARTICLES OF INCORPORATION:

1. The name of the Treasurer duly elected by the subscribers
2. No Transfer Clause in case a corporation is required to maintain a required
minimum Filipino ownership committing that no transfer shall be made
which shall reduce the ownership of Filipino citizens to less than the
required percentage.
3. The Execution Clause which will contain the names and signatures of the
incorporators
4. Notarial Acknowledgment

AMENDMENT: The following were specifically included as those who would be

needing a favorable recommendation from the concerned government agency:
1. Non-Stock Savings and Loans Associations, and
2. Pawnshops

On the other hand, the following were removed from the enumeration of entities
requiring favorable recommendations:
1. Educational Institutions, and
2. Other corporations governed by special laws.

AMENDMENT OF THE ARTICLES OF INCORORPATION, IN GENERAL WOULD

REQUIRE:
a. Majority approval of the members of the Board;
b. Written assent of stockholders representing 2/3 of the outstanding stocks or
2/3 of the members in case of non-stock corporations
c. Approval of the SEC. If the SEC did not act on the application within 6 months
from the date of filing, the amended is deemed approved.

BOARD OF DIRECTORS

The Board of Directors (or trustees or other designation allowed under Sec. 138)
is the supreme authority in matter of management of the regular and ordinary
business affairs of the corporation.
However, this authority does not extend to the fundamental changes in the
corporate charter such as amendments or substantial changes thereof, which
belong to the stockholders as a whole.

Classification of powers of the board members/corporate officers: The general

rule is that a corporation is bound by the acts of its corporate officers who act
within the scope of the classifications of powers of corporate agents. which are:

1. Those expressly conferred or those granted by the articles of incorporation,

corporate by-laws or by the official act of the board of directors
2. Those that are Incidental or those acts as are naturally and ordinarily done
which are reasonable and necessary to carry out the corporate purpose or
purposes;
3. Those that are inherent or acts that go with the office;
4. Those that are apparent or those acts which although not actually granted, the
principal knowingly allows or permits it to be done, and
5. Powers arising out of customs, usage or emergency

QUALIFICATIONS AND DISQUALIFICATIONS: The by-laws of a corporation may

provide for additional qualifications and disqualifications of its members of the
board of directors or trustees. However, it may not do away with the minimum
qualifications and disqualifications

Qualifications of a Director/Trustee: Must own at least 1 share in their own

names or a member (in the case of trustees)
A director who ceases to own at least 1 share or a trustee who crases to be a
member of the corporation shall cease to be as such
Residency: the requirement that majority of the directors must be residents has
already been removed by the Revised Corporation Code
Disqualifications of a Director/Trustee: A person shall be disqualified from being
a director, trustee or officer of any corporation:
1. If within 5 years prior to election or appointment as such, the person was
Convicted by Final Judgment
a. Of an offense punishable by imprisonment for a period exceeding 6
years;
b Violation of the Corporation Code;
c Violation of the Securities Regulations Code
2. Found administratively liable for any offense involving fraud acts; and
3 By a foreign court or equivalent foreign regulatory authority for acts, violations
or misconduct similar to the disqualifications under the Code.
4 Such other disqualifications that may be provided in the by-laws.

Qualifications and Disqualifications under the Revised Code of Corporate

Governance
Qualifications of Directors
In addition to the qualifications for membership in the Board provided for in the
Corporation Code, Securities Regulation Code and other relevant laws, the Board
may provide for additional qualifications which include, among others, the
following
1. College education or equivalent academic degree;
2. Practical understanding of the business of the corporation;
3. Membership in good standing in relevant industry, business or professional
organizations; and
4. Previous business experience

Disqualifications of Directors
1. Permanent Disqualification - the following shall be grounds for the permanent
disqualification of a director.
i. Any person convicted by final judgment or order by a competent judicial
or administrative body of any crime that:

a. Involves the purchase or sale of securities, as defined in the Securities

Regulation Code
b Arises out of the person's conduct as an underwriter, broker, dealer,
investment adviser, principal, distributor, mutual fund dealer, futures
commission merchant, commodity trading advisor, or floor broker, or
c. Arises out of his fiduciary relationship with a bank, quasi-bank, trust
company, investment house or as an affiliated person of any of them

ii. Any person who, by reason of misconduct, after hearing, is permanently

enjoined by a final judgment or order of the Commission or any court or
administrative body of competent jurisdiction from:
a. Acting as underwriter, broker, dealer, investment adviser, principal
distributor, mutual fund dealer, futures commission merchant, commodity
trading advisor, or floor broker
b. Acting as director or officer of a bank, quasi bank, trust company,
investment house, or investment company;
c. Engaging in or continuing any conduct or practice in any of the
capacities mentioned in sub-paragraphs (a) and (b) above, or willfully
violating the laws that govern securities and banking activities.
The disqualification shall also apply if such person is currently the subject
of an order of the Commission or any court or administrative body denying
 revoking or suspending any registration, license or permit issued to him
under the Corporation Code Securities Regulation Code or any other law
administered by the Commission or Bangko Sentral ng Pilipinas (BSP) or
under any rule or regulation issued by the Commission or BSP or has
otherwise been restrained to engage in any activity involving securities
and banking, or such person is currently the subject of an effective order of
a self-regulatory organization suspending or expelling him from
membership, participation or association with a member or participant of
the organization;
iii. Any person convicted by final judgment or order by a court or
competent administrative body of an offense involving moral turpitude
fraud, embezzlement, theft, estafa counterfeiting, misappropriation,
forgery, bribery, false affirmation, perjury or other fraudulent acts;
iv. Any person who has been adjudged by final judgment or order of the
Commission, court, or competent administrative body to have willfully
violated, or willfully aided, abetted, counseled, induced or procured the
violation of any provision of the Corporation Code. Securities Regulation
Code or any other law administered by the Commission or BSP, or any of
its rule, regulation or order;

v. Any person earlier elected as independent director who becomes an

officer, employee or consultant of the same corporation;
vi. Any person judicially declared as insolvent;
vii. Any person found guilty by final judgment or order of a foreign court or
equivalent financial regulatory authority of acts, violations or misconduct
similar to any of the acts, violations or misconduct enumerated in sub-
paragraphs (i) to (v) above
viii. Conviction by final judgment of an offense punishable by
imprisonment for more than six (6) years, or a violation of the Corporation
Code committed within five (5) years prior to the date of his election or
appointment

2. Temporary Disqualification- the Board may provide for the temporary

disqualification of a director for any of the following reasons:
i. Refusal to comply with the disclosure requirements of the Securities
Regulation Code and its Implementing Rules and Regulations. The
disqualification shall be in effect as long as the refusal persists
ii. Absence in more than fifty (50) percent of all regular and special
 meetings of the Board during his incumbency, or any twelve (12) month
period during the said incumbency, unless the absence is due to illness,
death in the immediate family or serious accident. The disqualification shall
apply for purposes of the succeeding election
iii. Dismissal or termination for cause as director of any corporation
covered by this Code The disqualification shall be in effect until he has
cleared himself from any involvement in the cause that gave rise to his
dismissal or termination.
iv If the beneficial equity ownership of an independent director in the
corporation or its subsidiaries and affiliates exceeds two percent of its
subscribed capital stock. The disqualification shall be lifted if the limit is
later complied with.
v. If any of the judgments or orders cited in the grounds for permanent
disqualification has not yet become final
A temporarily disqualified director shall, within sixty (60) business days from such
disqualification, take the appropriate action to remedy or correct the
disqualification. If he fails or refuses to do so for unjustified reasons, the
disqualification shall become permanent.

ELECTION OF MEMBERS OF THE BOARD/TRUSTEES

1 Majority of the outstanding capital stock, whether in person or by written proxy
must be present at the election of the directors or majority of members entitled
to vote, in the case of a non-stock corporation. If the required quorum is not
obtaining, the meeting may be adjourned,
2. On the request of any voting stockholder or member, the election may be held
by ballot otherwise viva-voce would suffice
3. The candidates receiving the highest number of votes shall be elected
Report Requirement: Section 25 of the RCC requires a report within 30 days to be
submitted to the SEC in case of non-holding of elections, which shall include a
new date for the election, which shall not be later than 60 days from the
scheduled date
If no new date has been designated, or if the rescheduled election is likewise not
held, the SEC may, upon the application of a stockholder, member, director or
trustee, summarily order that an election be held
Should a director, trustee or officer die, resign or in any manner cease to hold
office, the secretary, or the director trustee or officer of the corporation, or in
case of death, the officer's heirs shall, within seven (7) days from knowledge
thereof, report in writing such fact to the SEC.

METHODS OF VOTING
1 Straight Voting- every stockholder may vote such number of shares for as
many persons as there are directors to be elected. E.g., if a stockholder has 1,000
shares, he gets 1,000 votes
2 Cumulative Voting:
a Cumulative voting gives the stockholder entitled to vote the right to give
a candidate as many votes as the number of directors to be elected
multiplied by the number of his shares shall equal (Cumulative Voting for
one candidate) or he may distribute them among the candidates as he
may see fit (Cumulative voting by distribution)
b. This is granted by law to each stockholder with voting rights. However,
in non-stock corporations, cumulative voting is generally not allowed,
UNLESS allowed by the AOI or by-laws.
c. PURPOSE to allow the minority to have a rightful representation in the
board of directors
REMOVAL AND FILLING-UP OF VACANCIES
1.By-laws may provide for causes or grounds for removal of a director;
2. A director representing the minority may not be removed except for those
causes;
3. A director NOT representing the minority may be removed even without a
cause;

AMENDMENT: The SEC is now empowered to motu proprio (not just upon
verified complaint) and after due notice and hearing, order the removal of a
director or trustee elected despite the disqualification, or whose disqualification
arose or is discovered subsequent to an election.
Requirements for a valid removal:
1. The removal should take place at a general or special meeting duly call for that
purpose;
2. The removal must be by the vote of the stockholders holding or representing
2/3 of the outstanding capital stock or the members entitled to vote in cases of
non-stock corporations; and
3. There must be a previous notice to the stockholders or members of the
intention to propose such removal at the meeting either by publication or on
written notice to the stockholders or members.

Vacancy:
CAUSE OF VACANCY WHO WILL FILL THE WHEN ELECTION WILL BE
VACANCY HELD
Removal Stockholders Same of the meeting
authorizing the removal
Expiration of the Stockholders No later than the day of
term such expiration at a
meeting or called for that
purpose
Other Causes (death, Board of Directors- if they No later than 45 days from
resignation, still constitute a quorum; the time the vacancy arose
abandonment)
Stockholders- if the
Directors no longer
constitute the quorum
Increase in the Stockholders In a general or special
number of Directors meeting called for the
purpose or in the same
meeting authorizing the
increase in the number of
directors

Replacement of Hold-Over Directors: in the event that a director, after the

expiration of his term is not replace since there was no election held, such
director can continue to function in a holdover capacity However, if he resigns
the stockholders will be the one to replace him even if the remaining directors
continue to constitute a quorum. Note that the power of the Board to fill up the
vacancy is only if the director resigns before the expiration of his term. In this
instance, the term of the director already expired, he just continued as such only
in a hold-over capacity
EMERGENCY BOARD: When the vacancy prevents the remaining directors from
constituting a quorum and emergency action is required to prevent grave,
substantial, and irreparable loss or damage to the corporation, the vacancy may
be temporarily filled from among the officers of the corporation by unanimous
vote of the remaining directors or trustees.
The action by the designated director or trustee shall be limited to the
emergency action necessary, and the term shall cease within a reasonable time
from the termination of the emergency or upon election of the replacement
director or trustee, whichever comes earlier. The corporation must notify the SEC
within 3 days from the creation of the emergency board stating therein the
reason for its creation.
DIRECTOR’S DUTY OF LOYALTY
CORPORATE OPPORTUNITY DOCTRINE: it places a director of a corporation in
the position of a fiduciary and prohibits him from seizing a business opportunity
and/or developing it at the expense and with the facilities of the corporation. He
cannot appropriate to himself opportunity which in fairness should belong to
the corporation.
Ratification: if a director acquires a business opportunity which should belong to
the corporation, he is bound to account for such profits unless his act is ratified
by the stockholders owing or representing at least 2/3 of the outstanding capital
stock.
ACQUIRING ADVERSE INTEREST ON A MATTER REPOSED IN HIM IN CONFIDENCE:
A director liable is to account for profits if he attempts to acquire or acquires any
interest adverse to the corporation in respect to any matter reposed in him in
confidence as to which equity imposes a disability upon him to deal in his own
behalf. This is not subject to ratification.
SELF-DEALING DIRECTORS: is one who deals or transacts business with his own
corporation.
Generally. A contract entered into by a director with his own corporation is
voidable at the latter's option. This is because the director might take advantage
of his position to make the terms of the transaction more favorable to him to the
detriment of the corporation.
Except (in which case the transaction will be valid)
1. All of the following are present
a. That the presence of such director or trustee in the board meeting in
which the contract was approved was not necessary to constitute a
quorum for such meeting;
b. That the vote of such director or trustee was not necessary for the
approval of the contract (see amendment below);
The approval for transactions of self-dealing directors of corporations
vested with public interest shall require:
  At least two-thirds (2/3) of the entire membership of the board, with
 At least a majority of the independent directors.
C. That the contract is fair and reasonable under the circumstances, and

2 Where any of the first two conditions is absent, the contract becomes voidable
subject to the ratification of the stockholders representing 2/3 of the
outstanding capital stock-the requirements of which are

a. there must be a meeting called for that purpose;

b. full disclosure of the adverse interest of the director; and
c. the contract is fair and reasonable under the circumstances
3 the self-dealing director owns all or substantially all of the shares of stock,
thereby making ratification easily possible, the reasonableness of the
transaction shall be determined- to which there is no yardstick and remains to be
a question of fact depending on the circumstances.
Seif Dealing Officers: Generally voidable as well, except if the contract has been
previously authorized by the board of directors.
INTERLOCKING DIRECTOR: is also director in one corporation who deals or
transacts with another corporation of which he is also a director. In such case,
there may be a dual agency, a divided allegiance where allegiance in one
corporation may be subordinated to the other.
General Rule: The contract between corporations with interlocking director is
valid provided it is reasonable under the circumstances;
Exceptions:
1. If there is fraud; or
2. If the interest of the interlocking director in one corporation exceeds 20%
(substantial) and in the other merely nominal the contract becomes voidable
at the latter corporation's option. In effect, the director would be treated as a self-
dealing director discussed above.
If the interest in both companies is either both substantial or both nominal, the
transaction is valid.
REMEDIES AGAINST ERRING OFFICERS/DIRECTORS: In case of a wrongful or
fraudulent act of a director, officer or agent, stockholders have the following
options:
1. Individual or Personal Action- for direct injury to his rights, such as denial of his
right to inspect corporate books and records or pre-emptive rights;
2 Representative or Class Suit-in which one or more members of a class sus for
themselves as a class or for at to whom the right was denied, either as an
individual action or a derivative suit, and a
3 Derivative Suit - an action based on injury to the corporation to enforce a
corporate right wherein the corporation itself is Joined as a necessary party, and
recovery is in favor of and for the corporation. It is a suit granted to any
stockholder to institute a case to remedy a wrong done directly to the
corporation and indirectly to stockholders.

COMMITTEES
EXECUTIVE COMMITTEE: The by-laws of a corporation may create an executive
committee, composed of not less than three members of the Board, to be
appointed by the Board.
Said committee may act, by majority vote of all its members, on such specific
matters within the competence of the board, as may be delegated to it in the by
-laws or on a majority vote of the board, except with respect to:
1. Approval of any action for which shareholders' approval is also required;
2. The filing ng of vacancies in the board;
3. The amendment or repeal of bylaws or the adoption of new by-laws:
4. The amendment or repeal of any resolution of the board which by its express
terms is not so amendable or repealable; and
5. A distribution of cash dividends to the shareholders.

AMENDMENT: The board of directors may create special committees of

temporary or permanent nature and to determine the members term,
composition, compensation, powers, and responsibilities.

Board Committees under the Revised Code of Corporate Governance

The Board shall constitute the proper committees to assist it in good corporate
governance.
1. The Audit Committee shall consist of at least three (3) directors, who shall
preferably have accounting and finance backgrounds one of whom shall be an
independent director and another with audit experience. The chair of the Audit
Committee should be an independent director. The committee shall have the
following functions.
a. Assist the Board in the performance of its oversight responsibility for the
financial reporting process system of Internal control, audit process, and
monitoring of compliance with applicable laws, rules and regulations;
b. Provide oversight over Management's activities in managing credit, market,
liquidity, operational legal and other risks of the corporation. This function shall
include regular receipt from Management of information on risk exposures and
risk management activities,
c. Perform oversight functions over the corporation's internal and external
auditors. It should ensure that the internal d and external auditors act
independently from each other, and that both auditors are given unrestricted
access to all records, properties and personnel to enable them to perform their
respective audit functions;

d. Review the annual internal audit plan to ensure its conformity with the
objectives of the corporation. The plan shall include the audit scope, resources
and budget necessary to implement it;
e. Prior to the commencement of the audit, discuss with the external auditor the
nature, scope and expenses of the audit, and ensure proper coordination if more
than one audit firm is involved in the activity to secure proper coverage and
minimize duplication of efforts:
f. Organize an internal audit department, and consider the appointment of an
independent internal auditor and the terms and conditions of its engagement
and removal;
g Monitor and evaluate the adequacy and effectiveness of the corporation's
internal control system, including financial reporting control and information
technology security;
h. Review the reports submitted by the internal and external auditors;
i. Review the quarterly, half-year and annual financial statements before their
submission to the Board, with particular focus on the following matters:
 Any changes in accounting policies and practices
 Major judgmental areas
 Significant adjustments resulting from the audit
 Going concern assumptions.
  Compliance with accounting standards
 Compliance with tax, legal and regulatory requirements.
j. Coordinate, monitor and facilitate compliance with laws, rules and regulations;
k. Evaluate and determine the non-audit work, if any, of the external auditor, and
review periodically the non-audit fees paid to the external auditor in relation to
their significance to the total annual income of the external auditor and to the
corporation's overall consultancy expenses. The committee shall disallow any
non-audit work that will conflict with his duties as an external auditor or may
pose a threat to his independence. The non-audit work, if allowed, should be
disclosed in the corporation's annual report,
Non-audit work are the other services offered by an external auditor to a
corporation that are not directly related and relevant to its statutory audit
functions, such as, accounting, payroll, bookkeeping, reconciliation, computer
project management, data processing, or information technology outsourcing
services, internal audit, and other services that may compromise the
independence and objectivity of an external auditor.
l. Establish and identify the reporting line of the Internal Auditor to enable him to
property fulfill his duties and responsibilities He shall functionally report directly
to the Audit Committee
The Audit Committee shall ensure that, in the performance of the work of the
Internal Auditor, he shall be free from interference by outside parties.
For Philippine branches or subsidiaries of foreign corporations covered by this
Code, their Internal Auditor should be independent of the Philippine operations
and should report to the regional or corporate headquarters.
2. A Nomination Committee which may be composed of at least three (3)
members and one of whom should be an Independent director, to review and
evaluate the qualifications of all persons nominated to the Board and other
appointments that require Board approval, and to assess the effectiveness of the
Board's processes and procedures in the election or replacement of directors;
3 A Compensation or Remuneration Committee, which may be composed of at
least three (3) members and one of whom should be an independent director, to
establish a formal and transparent procedure for developing a policy on
remuneration of directors and officers to ensure that their compensation is
consistent with the corporation's culture, strategy and the business environment
in which it operates.

COMPENSATION OF DIRECTORS
Compensation of Directors/Trustees: General Rule Directors are not entitled to
receive any compensation this is because the office of a director is usually filled
up by those chiefly interested in the welfare of the institution by virtue of their
interest in stock or other advantages and such interests are presumed to be the
motive for executing duties of the office without compensation. Except:
1. Reasonable per diems,
2. As provided in the by-laws
3. Upon a majority vote of the stockholders, and
4. If they are performing functions other than that of a director.

Limit: in no case shall the total yearly compensation of the directors (except
number 4 above), exceed 10% of the net Income before tax of the corporation
during the preceding year. (Section 30)

CORPORATE OFFICERS
ELECTION OF CORPORATE OFFICERS: Except in a close corporation where the
corporate officers may be elected directly by the stockholders, the Code requires
the BOD to elect the said officers;

The officers that may be elected are the:

1 President who must be a director;
2. Treasurer-who may or may not be a director (now required to be a resident);
3 Secretary-who should be a resident and citizen of the Philippines,
4 Such other officers as may be provided for in the by-laws.
Compliance Officer- is now a required corporate officer in corporations. vested
with public interest
Any two or more positions may be held concurrently by the same person, except
1 The president and the secretary;
2 The president and the treasurer.

AUTHORITY OF CORPORATE OFFICERS TO ACT IN BEHALF OF THE

CORPORATION: a corporate officer or agent may represent and bind the
corporation in transactions with third person to the extent that authority has
been conferred upon him, and this includes powers which have been
1. Intentionally conferred, and
2. also, such powers as, in the usual course of business, are incidental thereto, or
may be Implied therefrom
3 powers added by custom and usage, as usually pertaining to the particular
officer or agent, and
4. such apparent powers as the corporation has caused persons dealing with the
officer or agent to believe that it has conferred
LIABILITY OF CORPORATE OFFICERS: The general rule is that unless the law
specifically provides a corporate officer or agent is not civilly or criminally liable
for acts done by him as such officer or agent, or when absent bad faith or malice
PERSONAL LIABILITY of a corporate director, trustee of officer along (although
not necessarily) with the corporation may so validly attach, as a rule, only when:
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith,
or (c) gross negligence in directing its affairs, or (d) conflict of interest, resulting
in damages to the corporation, its stockholders or other persons
2. He consents to the issuance of watered stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written objection
thereto,
3. He agrees to hold himself personally and solidarily liable with the corporation;
4. He is made, by a specific provision of law, to personally answer for his
corporate action.

ELECTION OF CORPORATE OFFICERS: require the majority of ALL MEMBERS of

the Board, not just the usual majority of those present in the meeting Meaning, if
there are 15 members of the Board, and 9 are present, 8 votes would be
necessary to elect a corporate officer.

Responsibilities of the Corporate Secretary and Compliance Officer under the

Revised Code of Corporate Governance
The Corporate Secretary
The Corporate Secretary, who should be a Filipino citizen and a resident of the
Philippines, is an officer of the corporation. He should
1 Be responsible for the safekeeping and preservation of the integrity of the
minutes of the meetings of the Board and its committees, as well as the other
official records of the corporation;
2. Be loyal to the mission, vision and objectives of the corporation;
3 Work fairly and objectively with the Board, Management and stockholders;
4 Have appropriate administrative and interpersonal skills;
5. If he is not at the same time the corporation's legal counsel, be aware of the
laws, rules and regulations necessary in the performance of his duties and
responsibilities;
6. Have a working knowledge of the operations of the corporation;
7. Inform the members of the Board, in accordance with the bylaws, of the
agenda of their meetings and ensure that the members have before them
accurate information that will enable them to arrive at intelligent decisions on
matters that require their approval;
8 Attend all Board meetings, except when justifiable causes, such as, illness,
death in the immediate family and serious accidents, prevent him from doing so;
9. Ensure that all Board procedures, rules and regulations are strictly followed by
the members; and
10. If he is also the Compliance Officer, perform all the duties and responsibilities
of the said officer as provided for in this Code

The Compliance Officer

The Board shall appoint a Compliance Officer who shall report directly to the
Chair of the Board. He shall perform the rules and regulations of regulatory
agencies and, if any following duties
1. Monitor compliance by the corporation with this Code and the violations are
found, report the matter to the Board and recommend the imposition of
appropriate disciplinary action on the responsible parties and the adoption of
measures to prevent a repetition of the violation;
2. Appear before the Commission when summoned in relation to compliance
with this Code, and
3. Issue a certification every January 30th of the year on the extent of the
corporation’s compliance with this Code for the completed year and, if there are
any deviations, explain the reason for such deviation.
 SHARES OF STOCK
Shares of Stock designate the units into which the proprietary interest in a
corporation is divided. They represent the proportionate units, the sum of which
constitutes the capital stock of the corporation. It is likewise the interest or right
which the owner, called the stockholders or shareholder, has in the management
of the corporation, and in the surplus profits and in case of distribution, in all of
its assets remaining after the payment of its debts.
Certificate of Stock is a document or instrument evidencing the interest of a
stockholder in the corporation.
COMMON STOCKS are those which entitles its owner to an equal or pro-rata
division of profits, if there are any, but without any preference or advantage in
that respect over any other stockholder or class of stockholders.
Voting Rights: A common share usually carries with it the right to vote, and
frequently, the exclusive right to do so. The only time a common stock's right to
vote may be limited is where there exists Founders' Shares
FOUNDER'S SHARES: are shares issued to the founders of the corporation which
are granted certain right and privileges such as the exclusive right to vote and be
voted for in the election of directors, for a period not to exceed 5 years
The period of 5 years is non-extendable because it may result in the almost
perpetual disqualification of other stockholders to elect or be elected as
members of the BOD resulting to the lack of proper representation thereat.
PREFERRED STOCKS is a stock that gives the holder preference over the holder
of common stocks with respect to the payment of dividends and/or with respect
to distribution of capital upon liquidation.
Limitations imposed by the Code in the issuance of preferred stocks:
1. They can be issued only with a stated par value, and
2. The preference must be stated in the AOI and in the certificate of stock
otherwise each share shall be, in all respect, equal to every other share

Preference as to Dividends: They have the privilege of being paid dividends first
before any other stockholders are paid theirs.

Participating and Non-Participating Preferred Shares

If the preferred share is participating, they are entitled to participate in dividends
with the common shareholders beyond their stated preference. Non-
participating preferred shares on the other hand are entitled to its fixed priority
or preference only,
Cumulative and Non-cumulative Preference Shares
Cumulative preferred shares are those that entitle the owner thereof to payment
not only of current dividends but also back dividends not previously paid
whether or not, during the past years, dividends were declared or paid. In light of
the provision of the Code stating that all shares are equal in all respects unless
otherwise stated in the AOI, a preferred share to be considered cumulative, the
same must be provided for and specified in the certificate.
Non-cumulative preferred shares are those which grant the holders of such
shares only to the payment of current dividends but not back dividends, when
and if dividends are paid, to the extent agreed upon before any other
stockholders are paid the same.

Voting Rights of Preferred Shares: same with redeemable shares preferred

shares are usually denied voting rights- but this right must be clearly withheld.
However, even if the night to vote is withheld, they shall have the right to vote on
the following:
1. Amendment of the articles of incorporation
2 Adoption and amendment of by-laws
3. Sale lease exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property.

AMENDMENTS: in determining whether the sale involved covers all or

substantially all the properties and assets of the corporation, the old Section 40
only provides "If thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for which it was
incorporated"
Section 39, amending the above-mentioned provision now includes "The
determination of whether or not the sale involves all or substantially all of the
corporation's properties and assets must be computed based on its net asset
value, as shown in its latest financial statements"

4 Incurring creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations:
7. Investment of corporate funds in another corporation or business in
accordance with this Code, and
8.Dissolution of the corporation
Preference upon liquidation: this preference must be stated in the contract to
accordingly grant such preference in the distribution of the assets ahead of the
common stockholders, including dividends in arrears in case the preferred shares
are cumulative
PAR AND NO-PAR VALUE SHARES
Par Value Shares are those whose values are fixed in the Articles and shown on
the certificate. The par value is the minimum subscription or original issue price
of the shares
No Par Value Shares are those whose issued price are not stated in the certificate
of stock but may be fixed in the AOI, or by the BOD when so authorized the
articles or the by-laws, or in the absence thereof, the stockholders themselves

The Code allows the issuance of no-par value shares, subject to the following
limitations:
1. Such shares once issued, are deemed fully paid and thus, non-assessable
2. The consideration for its issuance should not be less than P5,
3. The entire consideration constitutes capital, hence, not available for dividend
declaration;
4. They cannot be issued as preferred stock; and
5. They cannot be issued by banks, trust companies, insurance companies, public
utilities and building and loans associations
WATERED STOCKS: Watering of stocks happened when the shares are issued at
less than its par value or issue price
REDEEMABLE SHARES: are those subject to redemption, as indicated in the
contract. This type of shares grants the corporation the right to repurchase the
shares at its option or at the option of the holder based on the face of issued
value plus a specified premium. The redemption may be optional or mandatory at
a fixed future date

The repurchase is not subject to the availability of unrestricted retained earnings.

TREASURY SHARES: are shares of stock which have been issued and fully paid
for, but subsequently reacquired by the issuing corporation by purchase,
redemption, donation or through some other lawful means. Subsequently, the
corporation can re-issue the shares of stock or sell them or declare them as
property dividends

Such shares, though paid for already do not form part of outstanding shares and
accordingly, do not have the right to vote and receive dividends
SUBSCRIPTION CONTRACT: Any contract for the acquisition of unissued stock in
an existing corporation or a corporation still to be formed shall be deemed a
subscription, notwithstanding the fact that the parties refer to it as a purchase or
some other contract
Pre-incorporation subscriptions: refer to subscriptions for shares of stock of a
corporation still to be formed and are deemed irrevocable:
1 For a period of at least 6 months from the date of subscription unless (a) all the
subscribers consent to the revocation, or (b) the incorporation fails to materialize
within said period or within a longer period as may stipulated in the contract of
subscription, and
2 After submission of the AOI to the SEC
While post-incorporation subscriptions are those made or executed after the
formation or organization of the corporation.
Issuance of certificates of stock, requisites:
1 It must be signed by the president or vice-president and countersigned by the
secretary or assistant secretary.
2. it must be sealed with the corporate seal, and
3. The entire value thereof (together with the interest or expenses, if any) should
have been paid
Indivisibility: Subscription to shares of stock are deemed indivisible and no
certificate of stock can be issued unless and until the full amount of his
subscription including interest and expenses, if any is paid.
Rights of a SUBSCRIBER: a subscriber, even if not yet fully paid, is entitled to
exercise all the rights of a stockholder and the corresponding liability that attach
thereunder, except
1. For the issuance of a certificate of stock
2 If his shares are declared delinquent, or
3 When he exercises appraisal right.
Delinquent Shares of Stock: a subscription to shares of stock become delinquent
if there no payment made on the balance of all or any portion of the subscription
within 30 days on the date or dates fixed in the contract of subscription without
need of call, or on the date specified by the BOD pursuant to a call.
Effect of Delinquency:
General Rule: the stockholder thereof immediately loses the right to vote and be
voted upon or represented in any stockholders meeting as well as all the rights
pertaining to a stockholder.
Except the right to receive dividends:
1. Cash dividend-shall first be applied to the unpaid balance on his
subscription plus cost and expenses, while
2 Stock dividends-shall be withheld until his unpaid subscription is paid in
full.
Delinquent shares; enforcement of payment of subscriptions: Unpaid
subscription or any percentage thereof, together with interest if required by the
by-laws or the contract of subscription, shall be paid either
1 On the date or dates fixed in the contract or subscription,
2. On the date or dates that may be specified by the BOD pursuant to a "call”
declaring any or all unpaid portion thereof to be so payable.

To enforce payment, the following remedies are available:

1 By board action and
2 By a collection case in court.
Failure or refusal of the BOD to enforce or collect payment of unpaid subscription
will not prevent the creditors or the receiver of the corporation to institute a court
action to collect the unpaid portion thereof
Delinquency Sale
1. Amount to be paid includes:
a. The balance due on each subscription
b. All accrued interest
c. Costs of advertisement
d. Expenses of sale
2. Bids: shall all be for the amount due above and shall differ only on the number
of shares that the bidders are willing to accept in exchange of the said amount
3. Highest Bidder shall be the bid made for the least number of shares in
exchange for the total amount due.

4. Effect of Delinquency Sale. The stock so purchased shall be transferred to such

purchaser in the books of the corporation and a certificate for such stock shall be
issued in his favor. The remaining shares, if any, shall be credited in favor of the
delinquent stockholder who shall likewise be entitled to the issuance of a
certificate of stock covering such shares.
5. No bidder Should there be no bidder at the public auction, the corporation may
bid for the same, and the total amount due shall be credited as paid in full in the
books of the corporation. Title to all the shares of stock covered by the
subscription shall be vested in the corporation as treasury shares.

RIGHTS OF A STOCKHOLDER

1. Participation in the management of the corporate affairs by exercising their

right to vote and be voted upon either personally or by proxy as provided for
under Sec. 50 and 58 of the Code:
Instances where the concurrence of the stockholders are necessary for the
exercise of the powers of the corporations
a. Requiring majority vote of the BOD and concurrence of the stockholders
representing 2/3 of the outstanding capital stock:
i. Increase/decrease corporate stock
ii. Incur or create bonded indebtedness,
iii. Sell, dispose, lease, encumber all or substantially all of corporate assets:
iv. Invest in another corporation other than the primary purpose
v. Amend the articles of incorporation.
vi. Merger or consolidation
vii. Voluntary dissolution of the corporation
AMENDMENT: Voluntary dissolution now requires a majority vote only of the
stockholders for instances with NO creditors affected. For voluntary dissolutions
where creditors are affected, the voting requirement remains to be 2/3.

viii.. Extend or shorten the corporate term,

ix. Deny pre-emptive night
x. Declare stock dividends
xi. Enter into a management contract-where
a. A stockholder(s) representing the same interest in the managed and the
managing corporation, owns or controls 1/3 of the capital stock of the
managing corporation, or
b. where a majority of the members of the board of the managing
corporation also constitute a majority of the board of the managed
corporation

b Majority of the BOD majority of the outstanding capital:

i. Enter into a management contract, as a general rule (other than above);
ii. adopt, amend or repeal the by-laws

c. Without board resolution 2/3 of the stockholders may:

i. A Delegate to the board the power to amend the by-laws
ii. Remove a member of the Board of Directors - vote required
iii. Ratify a business opportunity entered into by a member of the Board
(corporate opportunity doctrine)
iv. Ratification of contracts of self-dealing directors, where his presence is
required to constitute a quorum and/or

d. Without board resolution, majority of the stockholders may:

i. Revoke delegated power to amend by-laws

ii. Calling a special meeting to remove directors
iii. To fix compensation of directors
 iv. To fix the issue price or stated value of no-par value shares.
2. To enter into a voting trust agreement subject to the procedure, requirements
and limitations imposed under Sec. 50;
3 To receive DIVIDENDS and to compel their declaration if warranted under Sec.
43;
If the dividends to be declared are stock dividends, it requires not only the
majority vote of the BOD but also the approval of stockholders owning at
least 2/3 of the outstanding capital stock,

The BOD can be compelled to declare dividends if the retained earnings

are in excess of 100% of the paid-up capital. However, the BOD can still
refuse, if:
a. Justified by a definite corporate expansion/projects/programs approved
by the Board
b. The corporation is prohibited under a loan agreement to declare
dividends without the creditor's consent and such consent has not yet
been secured,
c. It can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation
If there are no retained earnings, dividends, as a rule, cannot be declared
out of capital stock. EXCEPT:
a Liquidating dividend
b Investments in wasting assets such as mining, oil, well, etc.
4 To transfer shares of stock subject only to reasonable restrictions such as the
options and preferences as may be allowed by law inclusive of the right of the
transferee to compel the registration of the transfer in the books of the
corporation as provided for in Sec. 63.
5. To be issued a certificate of stock for fully paid-up shares in accordance with
Sec. 64
6. To exercise pre-emptive rights as provided for in Sec. 39;
A pre-emptive right is the shareholder's right to subscribe to all issues or
disposition of shares of any class in proportion to his present holdings, the
purpose being to enable the shareholder to retain his proportionate control
in the corporation and to retain his equity in the surplus. Except in the
following cases
 a Shares to be issued to comply with the laws requiring stock offering or
minimum stock ownership by the public.
b Shares issued in good faith in exchange for property needed for
corporate purposes,
c. Shares issued in payment for previously contracted debt
d. In case the right is denied in the Articles of incorporation
If one shareholder does not want to exercise his pre-emptive right, the
other shareholders are not entitled to purchase the corresponding shares
of the shareholder who declined. But if nobody purchased the same and
later on the board re-issued the shares, the pre-emptive right applies.
7. To exercise their appraisal right in accordance with the provision of Sec 81 and
in those instances allowed by law Such as Sec 42 and 105:

APPRAISAL RIGHT: Right is the method of paying a shareholder for the taking of
his property. It is a statutory means whereby a stockholder can avoid the
conversion of this property into another property not of his own choosing
When may it be exercised:
a. In case any amendment to the articles of incorporation has the effect of
changing or restricting the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to those of outstanding shares of
any class, or of extending or shortening the term of corporate existence,
Not all amendments: the right may only be exercised in cases of amendment
which has the effect of changing or restricting the rights of any stockholder or
class of shares, or of authorizing preferences in any respect superior to those of
outstanding shares of any class, or of extending or shortening the term of
corporate existence
Accordingly, if the amendment is to increase or decrease the number of directors,
or change the corporate name or change of principal office, the appraisal right is
not available.
b. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition
of all or substantially all of the corporate property and assets as provided in the
Code:
c. In case of merger or consolidation
d. Investment of funds in another corporation or business or for any other
purpose other than its primary purpose,
e. In a close corporation, a stockholder has the unbridled right to compel the
corporation for any reason to purchase his shares at their fair value which shall
not be less than the par or issued value, when the corporation has sufficient
assets to cover its debts and liabilities, exclusive of capital stock.
Suspension of rights: the stockholder concerned is regarded as having made an
election to withdraw from the corporate enterprise and take the value of his
stock. Such a procedure suspends (for a maximum period of 30 days) certain
ownership rights associated with stockholder status, such as the right to receive
dividends or distribution and the right to vote which cannot be restored without
compliance with the governing statutory conditions.

8. To institute and file a derivative suit

9. To recover shares of stock unlawfully sold for delinquency as may be allowed
under Sec. 69,
10. To inspect the books of the corporation subject only to the limitations
imposed by Sec. 75

AMENDMENTS: Section 73 (formerly Section 74) introduced the following

amendments
a. Includes an enumeration of, and specified, the records to be kept in the
principal place of business
b. Specifies that the inspection of the books and records are bound by the
Intellectual Property Law, the Data Privacy Act, the Securities Regulations Code
and the Rules of Court
c. A requesting party who is not a stockholder or member of record, of is a
competitor or otherwise represents the interests of a competitor shall have no
right to inspect or demand reproduction of corporate records
d. Abuse of the right to inspect is punishable under Section 158
e. If the corporation denies or does not act on a demand for inspection and/or
reproduction the aggrieved party may report such to the SEC Within five (5) days
from receipt of such report, the SEC shall conduct a summary investigation and
issue an order directing the inspection or reproduction of the requested records
f. the SEC may require stock corporations which transfer and/or trade stocks in
secondary markets to have an Independent transfer agent

11. To be furnished by the most recent financial statement of the corporation as

by Sec. 75

AMENDMENT: Changes introduced by Section 74 (formerly Section 75)

concerning the issuance of the corporation's financial statements are as follows:
Section 75 (old) Section 74 (RCC)
Certification Independent CPA In accordance with the
code and the rules the
SEC may prescribe
Alternative If paid-up capital is less than if the total assets or total
Certification P50,000, the FS may be certified liabilities of the
under oath by the Treasurer or any corporation is less than
responsible officer of the corporation P600,000, or such other
amount as may be
determined appropriate
by the Department of
Finance, the financial
statements may be
certified under oath by
the treasurer and the
president.

12. To be issued a new stock certificate in lieu of the lost or destroyed one
subject to the procedure laid down in Sec 73;
13. To have the corporation dissolved under Sec. 118 to 121, and Sec. 105 in a
close corporation, 14. To participate in the distribution of assets of the
corporation upon dissolution under Sec.122
15 In the case of a close corporation, to petition the SEC to arbitrate in the event
of a deadlock as allowed under Sec 104, and
16. Also, in the case of a close corporation, to withdraw therefrom, for any reason,
and compel the corporation to purchase his shares as provided for in Sec. 105.

BY-LAWS
BY-LAWS are rules made by a corporation for its own government; to regulate
the conduct and define the duties of the stockholders or members towards the
corporation and among themselves. They are the rules and regulations or private
laws enacted by the corporation to regulate, govern and control its own actions,
affairs and concerns and its stockholder or members and directors and officers
with relation thereto and among themselves in their relation to it.
Effectivity: After approval by the SEC

Adoption of by-laws: may be made:

1. Prior to incorporation- it must be signed by all the incorporators without need
of the majority vote of outstanding stocks or members as long as it is submitted
together with the AOI
2. After incorporation- must be submitted within 1 month after receipt of the
notice of issuance of certificate of registration or incorporation and must be
approved by majority of the outstanding capital stock or members. Failure to file
within the 1-month period may be a ground for suspension or revocation of the
corporate franchise.

AMENDMENT: Section 45 (amending Section 46) of the RCC removed the one-
month (from receipt of the notice issuance of the certificate of incorporation)
requirement to submit the by-laws.

Amendment of by-laws; two modes.

1 By a majority vote of the directors or trustees and the majority vote of the
outstanding capital stock or members at a regular or special meeting called for
that purpose or
2 By the board of directors alone when delegated by stockholders owning 2/3 of
the outstanding capital stock or 2/3 of the members. This power, however, is
considered revoked, when so voted by a majority of the outstanding capital
stock of members in a regular or special meeting.

AMENDMENTS: Section 46(d) of the RCC now includes "The modes by which a
stockholder, member, director, or trustee may attend meetings and cast their
vote."
It likewise includes that an arbitration agreement may be provided in the bylaws.
The submission of the amended by-laws no longer requires that it be filed with
the SEC attached to the original articles of incorporation and original bylaws.

MEETINGS

DIRECTORS STOCKHOLDERS
Quorum Majority Majority of the Outstanding
Capital Stock
Date of Regular Monthly as fixed in the by-
Annual as fixed in the by-laws. If
Meeting laws no such date is fixed, any date
after April 15.
Date of Special At any time deemed At any time deemed necessary
Meeting necessary or as provided or as provided for in the by-
for in the by-laws. laws.
Notice Regular/ Special Meetings Regular meeting- 21 days (from
- 2 days prior to the 2 weeks)
meeting (previously one Special Meetings – 1 week
day prior to the meeting)
Place Anywhere (even outside The meeting shall be at the
the Philippines) principal office itself, unless it is
not practicable, in the city or
municipality where the principal
office is located.
Moreover, Metro Cebu and
Metro Davao, as well as other
metropolitan areas are now
considered a city or municipality
Proxy Voting Not allowed for a director Generally Allowed
or trustee, since he was
supposedly elected
because of his personal
qualification and thus
must personally attend
and vote on matters
brought before the
meeting.
Voting General Rule: Majority of Refer to the voting
Requirements those present shall be requirements under Rights of
valid as a corporate act. Stockholders.
Exceptions:
 a. Election of a corporate
officers: majority of all the
members of the board.
b. When the by-laws
provide for higher voting
requirement.
Validity of Stockholder’s Meetings despite defect: if the voting requirement is met,
any resolution passed in the meeting even if Improperly held or called will be
valid if ALL the stockholders or members are present or duly represented thereat
as provided under the last paragraph of Sec. 51 "All proceedings had and any
business transacted at any meeting of the stockholders or members, if within the
powers of authority of the corporation, shall be valid even if the meeting be
improperly held or called, provided all the stockholders or members of the
corporation are present or duly represented at the meeting.”
AMENDMENT: The meeting is still considered valid even if improperly held as long
as ALL the stockholders or members are present or duly represented, EXCEPT if
the purpose of their attendance is only object to the transaction of any business
because the meeting is not lawfully called or convened.
Notice: Notice of any meeting may be waived, expressly or impliedly, by any
stockholder or member.
However, under the revised Section 49 of the RCC, general waivers of notice in
the articles of incorporation or the bylaws shall not be allowed.
The attendance at a meeting shall constitute a waiver of notice of such meeting,
except when the person attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting is not lawfully called or
convened.
Attending the meeting in absentia: In the stockholders' meeting for the election
of directors/trustees, Section 23 of the RCC now specifically allows the
stockholders or members to vote through remote communication or in absentia,
in case the by-laws or majority of the BOD authorizes the same, or even without
such authorization in case of corporations vested with public interest
Directors/trustees are also now allowed to attend the meeting through remote
communication such as videoconferencing teleconferencing, or other alternative
modes of communication that allow them reasonable opportunities to participate.
A stockholder or member who participates through remote communication or in
absentia, shall be deemed present for purposes of quorum.
STOCK AND TRANSFER BOOK OR MEMBERSHIP BOOK: The stock and transfer
book contains a record of:
1. All stocks in the names of the stockholders alphabetically arranged:
2. The installments paid and unpaid on all stocks for which subscriptions has
been made, the date of payment of any installment,
3. A statement of every alienation, sale or transfer of stock made, the date
thereof, by and to whome made;
4. Such other entries as the bylaws may prescribe
Unless the bylaws provide for a longer period, the stock and transfer book or
membership book shall be closed at least 20 days for regular meetings and 7
days for special meetings before the scheduled date of the meeting

REORGANIZATION; MERGER AND CONSOLIDATION

REORGANIZATION: is generally entered into to put the company upon a sound

financial basis and to enable it to take care of its obligations thereby avoiding
liquidation or bankruptcy. But in some cases, a reorganization is effected
notwithstanding the fact that the corporation is solvent.
The provisions governing stock corporation, when pertinent, shall be applicable
to non-stock corporations, except as may be covered by specific provisions
pertaining to non-stock corporations.

Differences:
STOCK CORPORATION NON-STOCK
CORPORATION
Purpose Generally, for profit Primarily organized for
charitable, religious,
educational,
professional, cultural,
scientific, social civic
service, or similar
purposes, like trade,
industry, agricultural and
like chambers or any
combination thereof.
Distribution of dividend Authorized Not Authorized
Term of office of the 1 year until their 3 years
directors /trustees successor is elected and
qualified
Voting Cumulative Straight voting unless
cumulative voting is
authorized under the by-
laws or AOI
Manner of Voting Either in person or by By mail or other similar
proxy means as may be
authorized by the by-
laws
Transferability of interest Transferable Membership is personal
and non-transferable,
unless the AOI or by-
laws provide otherwise
Ownership of Director At least 1 share Member
Independent trustees
are not required to be a
member.
CLOSE CORPORATIONS
DEFINITION: A close corporation is one whose articles of incorporation provide
that:
1. All the corporation's issued stock of all classes, exclusive of treasury shares,
shall be held of record by not more than a specified number of persons, not
exceeding twenty (20);
2. All the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted by the Title on Close Corporations in the
Corporation Code; and
3. The corporation shall not list in any stock exchange or make any public
offering of any of its stock of any class.

Notwithstanding the foregoing, a corporation shall not be deemed a close

corporation when at least two-thirds (2/3) of its voting stock or voting rights is
owned or controlled by another corporation which is not a close corporation.
Business with public interest: may not be formed as close corporation. Sec. 140 of
the Code lays down a similar policy authorizing NEDA to recommend to the
legislature the setting of maximum limits to family or group ownership of stock in
corporations vested with public interest, and the determination of whether or not
it should be vested with public interest within its domain. The following cannot
be a close corporation:
1. Mining companies,
2. Oil companies,
3 Stock exchanges;
4 Banks
5 Insurance companies:
6 Public utility,
7 Educational institutions
Differences with an Ordinary Stock Corporation

CLOSE CORPORATION ORDINARY STOCK CORPORATION

The number of stockholders cannot No limitation as to number of
exceed 20 shareholders
Shares of stock are subject to Generally no restriction on transfer of
specified restriction shares
Shares of stock are prohibited from No prohibition
being listed in the stock exchange or
offered for sale to the public
Stockholders may take an active part Management is lodged in the Board of
in corporate management by vesting Directors
management to them rather than
Board of Director.
To the extent that all stockholders can Maximum number of directors is 15
be deemed directors, the number of
directors can effectively be up to 20.
To the extent that directors may be Ordinarily, no such classification and
classified into one or more classes and no restrictions on cumulative voting
to be voted solely by a particular class
of stock, cumulative voting may, in
effect, be restricted
The articles of incorporation may Officers are elected by the Board of
provide that all officers shall be Directors
elected or appointed by the
stockholders
Restriction on transfer of shares Valid and binding if indicated in the
should be indicated in the articles of articles of incorporation, stock
incorporation, stock certificates and certificates
by-laws.
Pre-emptive right of stockholders is Pre-emptive rights may be denied on
broader as it includes all issues certain grounds
without exception.
Appraisal right may be exercised for Appraisal right may be exercised only
any reason with the limitation only on specific grounds
that the corporation has sufficient
assets to cover
its liabilities exclusive of capital stock

ONE PERSON CORPORATION

A One Person Corporation (OPC) is one formed by a natural person, a trust or an
estate, who is the sole stockholder thereof. The provision of the new Chapter III
of the Revised Corporation Code shall apply to an OPC and other provisions of
the Code shall apply suppletorily
Corporate Name: must contain "OPC".
Not Applicable to OPC.
1. Authorized Capital Stock
2. By-Laws
3 Minutes of the Meetings of the Board of Directors (in lieu of which shall be the
resolutions recorded in a Minutes Book)
Not allowed to incorporate as an OPC:
1. Banks, quasi-banks, pre-need, trust, insurance companies
2. Public and publicly-listed companies
3. Non-chartered GOCCs
4. Natural persons for the purpose of exercising their profession.
Articles of Incorporation: shall be the same as an ordinary corporation with the
following additional provisions:
1. If the single stockholder is a trust or an estate, the name, nationality, and
residence of the trustee, administrator, executor, guardian, conservator,
custodian. or other-person exercising fiduciary duties together with the proof of
such authority to act on behalf of the trust or estate; and
2. Name, nationality, residence of the nominee and alternate nominee, and the
extent, coverage and limitation of the authority.
Corporate Officers: The sole stockholder shall automatically be the sole director
and the President. Within 15 days from the Issuance of its certificate of
incorporation, an OPC shall appoint treasurer, corporate secretary, and other
officers as it may deem necessary, and notify the SEC thereof within S days from
appointment.

Other positions of the president/sole stockholder:

1. Corporate Secretary: not allowed
Corporate Secretary: In addition to the functions designated by the OPC,
corporate secretary shall:
a. Be responsible for maintaining the minutes book and/or records of the
corporation
b. Notify the nominee or alternate nominee of the death or incapacity of the
single stockholder, which notice shall be given no later than 5 days from such
occurrence,
c. Notify the SEC of the death of the single stockholder within 5 days from such
occurrence and stating in such notice the names, residence addresses, and
contact details of all known legal heirs, and;
d. Call the nominee or alternate nominee and the known legal heirs to a meeting
and advise the legal heirs with regard to, among others, the election of a new
director, amendment of the articles of incorporation, and other ancillary and/or
consequential matters
2. Treasurer allowed provided e shall give a bond to the SEC in such a sum as may
be required and a written undertaking to faithfully administer the OPC's funds to
be received as treasurer, and to disburse and invest the same according to the
Articles as approved by the SEC.
Nominee and Alternate Nominee: The single stockholder shall designate a
nominee and an alternate nominee who shall in the event of the single
stockholder's death or incapacity, take the place of the single stockholder as
director and shall manage the corporation's affairs
The articles of incorporation shall state the names, residence addresses and
contact details of the nominee and alternate nominee, as well as the extent and
limitations of their authority in managing the affairs of the OPC.
The written consent of the nominee and alternate nominee shall be attached to
the application for incorporation. Such consent may be withdrawn in writing any
time before the death or incapacity of the single stockholder.
Term of the Nominee: When the incapacity of the single stockholder is
temporary, the nominee shall sit as director and manage the affairs of the OPC
until the stockholder, by self-determination, regains the capacity to assume such
duties
In case of death or permanent incapacity of the single stockholder, the nominee
shall sit as director and manage the affairs of the OPC until the legal heirs of the
single stockholder have been lawfully determined, and the heirs have designated
one of them or have agreed that the estate shall be the single stockholder of the
OPC.
The alternate nominee shall sit as director and manage the OPC in case of the
nominee's inability, incapacity, death, or refusal to discharge the functions as
director and manager of the corporation, and only for the same term and under
the same conditions applicable to the nominee.
Change of Nominee: The single stockholder may, at any time, change its
nominee and alternate nominee by submitting to the SEC the names of the new
nominees and their corresponding written consent. For this purpose, the articles
of incorporation need not be amended.

Liability of Single Stockholder: A sole shareholder claiming limited liability has the
burden of affirmatively showing that the corporation was adequately financed.
Where the single stockholder cannot prove that the property of the OPC is
independent of the stockholder's personal property, the stockholder shall be
jointly and severally liable for the debts and other liabilities of the OPC.
The principles of piercing the corporate veil applies with equal force to OPC as
with other corporations.
Conversion from Ordinary Corporation to OPC: When a single stockholder
acquires all stocks of an ordinary stock corporation the latter may apply for
conversion into n OPC subject to the submission of such documents as the SEC
may require.
If the application for conversion is approved, the Commission shall issue
certificate of filing of amended articles of incorporation reflecting the conversion.
The OPC OP converted from an ordinary stock corporation shall succeed the
latter and be legally responsible for all the latter's outstanding liabilities as of the
date of conversion.
Conversion from OPC to Ordinary Corporation: An OPC may be converted into
an ordinary stock corporation after due notice to the SEC (within 60 days from
occurrence) of such fact and of the circumstances leading to the conversion and
after compliance with all other requirements for stock corporations under the
RCC. If all requirements have been complied with the Commission shall issue an
amended certificate of incorporation reflecting the conversion.
In case of death of the single stockholder, the nominee or alternate nominee shall
transfer the shares to the duly designated legal heir or estate within 7 days from
receipt of either an affidavit of heirship or self-adjudication executed by a sole
heir or any other legal document declaring the legal heirs of the single
stockholder and notify the SEC of the transfer. Within 60 days from the transfer
of the shares, the legal heirs shall notify the SEC of their decision to either wind
up and dissolve the OPC or convert it into an ordinary stock corporation.
The ordinary stock corporation converted from an OPC shall succeed the latter
and be legally responsible for all the latter's outstanding liabilities as of the date
of conversion.

FOREIGN CORPORATIONS

A FOREIGN CORPORATION is one formed, organized or existing under any laws

other than those of the Philippines
Incorporation Test: is applied in determining whether a corporation is domestic
or foreign. If it is incorporated under Philippine laws, it is deemed a domestic
corporation, if it is incorporated in another state, it is a foreign corporation, while
if it is created, irrespective of the nationality of its stockholders.

Control Test or Liberal Rule and the Grandfather Rule/Test: The Control Test is
used to determine corporate nationality for purposes of applying laws, e.g.,
prohibition to acquire lands applicable to corporations more than 40% of which is
owned by non-Filipinos.
Under the liberal Control Test, there is no need to further trace the ownership of
the 60% (or more) Filipino stockholdings of the Investing Corporation since a
corporation which is at least 60% Filipino-owned is considered as Filipino.
On the other hand, the Grandfather Rule is a method of determining the
nationality of a corporation which in turn is owned by another corporation by
breaking down the entity structure of the shareholders of the corporation. The
true Filipino ownership is traced all the way to the individual stockholders of the
corporation (A) owning shares in another corporation (B) by multiplying the
Filipino ownership of the first corporation (A) to the corresponding ownership of
the other corporation
(B).
It applies to nationalized activities or those which require whole or partial Filipino
ownership.
Basically, there are two acknowledged tests in determining the nationality of a
corporation the control test and the grandfather rule Paragraph 7 of DOJ
Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which
Implemented the requirement of the Constitution and other laws pertaining to
the controlling interests in enterprises engaged in the exploitation of natural
resources owned by Filipino citizens, provides:
1 Shares belonging to corporations or partnerships at least 60% of the capital of
which is owned by Filipino citizens shall be considered as of Philippine nationality.
(Control Test)
2. But if the percentage of Filipino ownership in the corporation or partnership is
less than 80%, only the number of shares corresponding to such percentage shall
be counted as of Philippine nationality. (Grandfather Rule)
Thus, if 100 000 shares are registered in the name of a corporation or partnership
at least 60% of the capital stock or capital respectively, of which belong to
Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if
less than 60%, or say, 50% of the capital stock or capital of the corporation or
partnership, respectively, belongs to Filipino citizens, only 50 000 shares shall be
counted as owned by Filipinos and the other 50 000 shall be recorded as
belonging to aliens.
In Narra Nickel Mining and Development Corporation vs. Redmont Consolidated
Mines Corporation (GR No 195580, Jan 28, 2015), the SC held that the
grandfather rule shall be applied when
a. The Corporation's Filipino equity falls below the threshold required, or
b. There exists doubt as to the Filipino or Foreign equity

This would thus require the application first of the control test. When after
applying the Control Test, and it meets the required nationality requirement but
there exists a “doubt” as to the Filipino ownership of the Corporation, the
grandfather rule would be supplementally applied.
RESIDENT AGENT: As a condition precedent to the grant of license to do or
transact business in the Philippines, the foreign corporation is required to
designate its resident agent on whom summons and other legal processes may
be served in all actions or legal proceedings against such corporation.
AMENDMENT: A resident agent corporation for a foreign corporation is now
required that it is of sound financial standing and must show proof that it is in
good standing as certified by the SEC.
LICENSE REQUIREMENT AND DOING BUSINESS WITHOUT ONE: A foreign
corporation must secure the necessary license before it can transact or do
business in the Philippines.
What constitutes "doing business” Doing business in the Philippines may be
determined using the following tests:
1. Continuity test- doing business implies a continuity of commercial dealings and
arrangements and contemplates to some extent the performance of acts or
works or the exercise of some functions normally incident to and in progressive
prosecution of the purpose and object of its organization;
2. Substance test- a foreign corporation is doing business in the country if it is
continuing the body or substance of the enterprise of business for which it was
organized
3. Contract test-actual performance of specific commercial acts within the
territory of the Philippines
"DOING BUSINESS" under the Foreign Investment Act (Sec. 3, d), "doing business"
would include:
1 Soliciting orders, service contracts;
2. Opening offices, whether called "liaison offices" or branches;
3. Appointing representatives or distributor domiciled in the Philippines or who in
any calendar year stay in the country for a period or periods totaling 180 days or
more;
4. Participating in the management, supervision or control of any domestic
business, firm, entity or corporation in the Philippines;
5. Any other act that imply a continuity of commercial dealings or arrangements
and contemplate to that extent the performance of acts or works, or the exercise
of functions normally incident to and in progressive prosecution of commercial
gain or of the purpose and object of the business organization.

Provided, however, that the phrase "doing business shall not be deemed to
include:
1 Mere investment as a shareholder by a foreign entity in domestic corporations
duly registered to do business, and/or exercise of rights as such investor, nor
2. Having a nominee director or officer to represent its interest in such
corporation, nor
3. Appointing a representative of distributor domiciled in the Philippines which
transacts business in its own name and for its own account.

Doing Business without a license: a foreign corporation shall NOT be permitted

to maintain or intervene in any action suit or proceeding in any court or
administrative agency of the Philippines, but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any
valid cause of action recognized under Philippine laws.
"It is not the lack of required license but doing business without a license which
bars a foreign corporation from access to our courts" (Universal Shipping vs IAC)

EXCEPTIONS:
1 Foreign Corporations can sue before the Philippine Courts if the act or
transaction involved is an "isolated transaction” or the corporation is not seeking
to enforce any legal or contractual rights arising from, or growing out of, any
business which it has transacted in the Philippines (Western Equipment Supply vs.
Reyes)
2 Neither is a license required before a foreign corporation may sue before the
forum if the purpose of the suit is to protect its trademark trade name, corporate
name, reputation or goodwill. (Western Equipment Supply vs Reyes)
3. Or where it is based on a violation of the Revised Penal Code (Le Chemise
Lacoste, SA vs Fernandez).
4 Or merely defending a suit filed against it (Time, Inc. vs. Reyes)
5 Or where a party is estopped to challenge the personality of the corporation by
entering into a contract with it (Communications Materials and Design, Inc. vs. CA
and ITEC)

DISSOLUTION

DISSOLUTION is the extinguishment of the corporate franchise and the

termination of corporate existence.

When a corporation is dissolved, it ceases to be a juridical entity and can no

longer pursue the business for which it was incorporated. It will nevertheless
continue as a body corporate for another period of three years from the time it is
dissolved but only for the purpose of winding up its affairs and the liquidation of
its assets.
THREE WAYS OF DISSOLUTION:
1. Expiration of its corporate term

Extension: should be made before the expiration of the original term, but
not earlier than 3 years prior to such expiration, otherwise the corporation
is dissolved, ipso facto.
Dissolution by shortening the term of corporate existence: The
stockholders may cause the amendment of the Articles to shorten the term
and have the corporation dissolved. This, however, requires the vote of the
stockholders to be cast in a meeting therefor, not only "written assent as
for general amendments. Moreover, this requires the approval of the SEC
and its Inaction is not deemed an approval therefor.

2. Voluntary surrender of its primary franchise (voluntary dissolution); and

Formal and Procedural Requirements when no creditors are affected
a. Majority vote of the board of directors or trustees;
b. Sending of notice of each stockholders or member either by registered
mail or personal delivery at least thirty (30) days prior (now 20 days) to the
meeting (scheduled by the board for the purpose of submitting the board
action to dissolve the corporation for approval of the stockholder or
members);
c Publication of the notice of time, place and subject of the meeting for
three (3) consecutive weeks (now once) in a newspaper published in the
place where the principal office of said corporation is located or in a
newspaper of general circulation in the Philippines
d Resolution adopted by the affirmative vote of the stockholders owning at
least 2/3 of the outstanding capital stock or 2/3 of the members (now
majority) at the meeting duly called for the purpose;
e. A copy of the resolution authorizing the dissolution must be certified by
a majority of the board of directors of trustees and countersigned by the
corporate secretary (now A verified request for dissolution shall be filed
with the SEC stating (a) the reason for the dissolution, (b) the form, manner,
and time when the notices were given, (c) names of the stockholders and
directors or members and trustees, who approved the dissolution. (d) the
date, place and time of the meeting in which the vote was made, and (e)
 details of publication)
Withdrawal
i. A withdrawal of the request for dissolution shall be made in writing, duly
verified by any incorporator director trustee, shareholder, or member and
signed by the same number of incorporators directors trustees,
shareholders, or members necessary to request for dissolution.
ii. The withdrawal shall be submitted no later than fifteen (15) days from
receipt by the SEC of the request for dissolution.
iii. Upon receipt of a withdrawal of request for dissolution, the SEC shall
withhold action on the request for dissolution and shall, after investigation
(a) make a pronouncement that the request for dissolution is deemed
withdrawn, (b) direct a joint meeting of the board of directors or trustees
and the stockholders or members for the purpose of ascertaining whether
to proceed with dissolution, or (c) issue such other orders as it may deem
appropriate
f. Issuance of a certificate of dissolution by the SEC.
Where creditors are affected, the voting requirement remains to be 2/3 of the
stockholders and what is filed with the SEC is a petition not a request.

3. The revocation of its corporate franchise (involuntary dissolution)

Grounds:
a. Serious misrepresentation as to what the corporation can do or is doing
to the great prejudice of or damage to the general public;
b Refusal to comply or defiance of any lawful order of the Commission
restraining commission of acts which would amount to a grave violation of
its franchise;
c. Continuous inoperation for a period of at least five (5) years;

Continuous inoperation: if a corporation has commenced its business but

subsequently becomes Inoperative continuously for a period of at least 5 years,
the same shall be merely a ground for suspension or revocation of its corporate
franchise or certificate of registration.

AMENDMENTS: In case of continuous non-operation for 5 years, it is no longer

considered a ground for revocation, at least not immediately. In such case, the
SEC may, after due hearing and notice, place the corporation under delinquent
status and allow the corporation to resume operations within 2 years upon
compliance with the requirements of the SEC, where upon compliance, the SEC
shall issue an order lifting the delinquent status.
In case of non-compliance, with the requirements and to resume operations, only
then will the SEC cause the revocation of the corporation's certificate of
incorporation.
Notably, the Section 21 no longer includes the exception that the provision on
failure to commence and continuous non-operation shall not apply if the failure
to organize, commence the transaction of its businesses or the construction of its
works, or to continuously operate is due to causes beyond the control of the
corporation as may be determined by the SEC.

COMMENCEMENT OF BUSINESS: Once the certificate of incorporation has been

issued the corporation MUST formally organize and commence its business.
Non-Use of Corporation Charter: the failure of the corporation to organize within
2 years would result in it automatic dissolution, unless, of course, its failure to do
so is due to causes beyond its control.
AMENDMENT: The period for the automatic revocation of the corporate charter
has been increase from 2 to 5 years in case of failure to organize.

Formal Organization: refers to the process of structuring the corporation to

enable it to effectively pursue the purpose for which it was organized.
d. Failure to file by-laws within the required period,
e. Failure to file required reports in appropriate forms as determined by the
Commission within the prescribed period

Other grounds provided under the Corporation Code:

a Violation of any provision of the Code under section 144;
b. In case of deadlock in a close corporation as provided for in section 105;
c. In a close corporation, any acts of directors, officers or those in control of the
corporation which is illegal or fraudulent or dishonest or oppressive or unfairly
prejudicial to the corporation or any stockholder or whenever corporate assets
are being misapplied or wasted under section 105.
AMENDMENTS: Aside from empowering the SEC to motu proprio dissolve a
corporation, the following grounds are now specified under Section 138:
1. Non-use of corporate charter
2 Continuous inoperation of a corporation

3. Upon receipt of a lawful court order dissolving the corporation

4. Upon finding by final judgment that the corporation procured its incorporation
through fraud 5. Upon finding by final judgment that the corporation

a. Was created for the purpose of committing, concealing or aiding the

commission of securities violations, smuggling, tax evasion, money
laundering, or graft and corrupt practices;
b. Committed or aided in the commission of securities violations,
smuggling, tax evasion, money laundering, or graft and corrupt practices,
and its stockholders knew; and
c. Repeatedly and knowingly tolerated the commission of graft and corrupt
practices on other fraudulent or illegal acts by its directors, trustees,
officers, or employees.
If the corporation is ordered dissolved by final judgment pursuant to the above
grounds (a), (b) and (c) under no. 5. its assets, after payment of its liabilities, shall,
upon petition of the SEC with the appropriate court, be forfeited in favor of the
national government. Such forfeiture shall be without prejudice to the rights of
innocent stockholders and employees for services rendered, and to the
application of other penalty or sanction under the RCC or other laws.

EFFECTS OF DISSOLUTION: Dissolution terminates its power to enter into

contracts or to continue the business as a going concern.
Despite its dissolution, a corporation nonetheless, continues to be a body
corporate for a period of 3 years for purposes of liquidation and winding up its
affairs (Sec. 122. now Sec 139) Upon expiration of the 3-year period to wind up its
affairs, the juridical personality of the corporation ceases for all intent and
purposes, and as a general rule, it can no longer sue and be sued.
But if the liquidation is to be pursued by appointing a trustee or a receiver, the 3-
year penod will not apply.
LIQUIDATION AND WINDING-UP:
1. The assets are collected and sold;
2. The rights and claims of creditors are settled;
3. The remaining assets, if any, are distributed to the stockholders.

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