Corporation Code ( Batas Pambansa Bilang 68)

Section 1 provides that the Code or the law governing private corporations in the Philippines is now
embodied in Batas Pambansa Bilang 68, which took effect on May 1, 1980.

Definition of Corporation.

“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”. (Section 2).

Attributes of a corporation.

An analysis of the definition in Section 2 reveals the following attributes of a corporation:

1. It is an artificial being.
2. It is created by operation of law.
3. It has the right of succession, and
4. It has only the powers, attributes and properties expressly authorized by law or incident to its
existence.

Attributes, explained.

1. It is an artificial being.

A corporation is legal or juridical person with a personality separate and apart from its individual
members or stockholders who, as natural persons, are merged in the corporate body (Doctrine of
Juridical Personality or Corporate Entity). It is not in fact and in reality a person but the law treats
it as though it were a person by process of fiction. The stockholders or members compose the
corporation but they are not the corporation.

The Doctrine that a corporation is a legal entity or a person in law, distinct from the persons
composing it, is a legal theory introduced for the purposes of convenience and to subserve the
ends of justice.

Being a mere creature of the law, a corporation may be allowed to exist solely for lawful purposes
but where the fiction of corporate entity is being used as a cloak or cover for fraud or illegality, or
to “defeat public convenience, justify wrong, protect fraud, or defend crime, or for ends subversive
of the policy and purpose behind its creation, especially where the corporation is a closed family
corporation, this fiction will be disregarded and the individuals composing it will be treated as
identical.

2. It is created by operation of law.

This means that corporations cannot come into existence by mere agreement of the parties as in
the case of business partnerships. Corporations can only come into existence in the manner
prescribed by law. The general law which governs the creation of private corporations is Batas
Pambansa Bilang 68.

3. It has the right of succession.

A corporation has a capacity of continuous existence irrespective of the death, withdrawal,

insolvency, or incapacity of the individual stockholders or members and regardless of the transfer
of their interest or shares of stocks.

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 4. It has only the powers, attributes and properties expressly authorized by law or incident to its
existence.

A corporation, being purely a creation of law, any exercise only such powers as are granted by
the law of its creation. An express grant, however, is not necessary. All powers which may be
implied from those expressly provided by law and those which are incidental or essential tot eh
corporation’s existence may also be exercised.

Distinctions between a partnership and a corporation.

The following are the points of distinctions:

a. Manner of Creation

A partnership is created by mere agreement of the parties, while a corporation is created by

law or by operation of law.

b. Number of Incorporators

A partnership may be organized by only two persons, while a corporation requires at least
five (5) incorporators.

c. Commencement of juridical personality

A partnership commences to acquire juridical personality from the moment of the execution of
the contract of partnership, while a corporation only from the date of the issuance of the
certificate of incorporation by the Securities and Exchange Commission under its official seal.

d. Powers

A partnership may exercise any power authorized by the partners provided it is not contrary
to law, morals, good customs, public order or public policy, while a corporation can exercise
only the powers expressly granted by law or implied from those granted or incident to its
existence.

e. Management

In a partnership, when the management is not agreed upon, every partner is an agent of the
partnership, while in a corporation, the power to do business is vested in the board of
directors or trustees.

f. Effect of mismanagement

In a partnership, a partner as such can sue a co-partner who mismanages, while in a

corporation, the suit against a member of the board of directors or trustees who mismanages
must be in the name of the corporation.

g. Right of succession

A partnership has no right of succession, while a corporation has such right.

h. Extent of liability to third persons

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 In a partnership, the partner (except limited partners) are liable personally and subsidiarily
(sometimes solidarily) for partnership debts to third persons, while in corporation, the
stockholders are liable only to the extent of the shares subscribed by them.

i. Transferability of interest

In a partnership, a partner cannot transfer his interest in the partnership so as to make the
transferee a partner without the consent of all the other partners because the partnership is
based on the principle of deletes personarum, while in a stock corporation, a stockholder has
the right to transfer his shares without the prior consent of the other stockholders.

j. Term of existence

A partnership may be established for any period of time stipulated by the partners, while a
corporation may not be formed for a term in excess of 50 years extendible to not more than
50 years in any one instance.

k. Firm name

A limited partnership is required by the law to add the word “Ltd.” to its name, while a
corporation may adopt any firm name provided it is not identical or deceptively similar to any
registered firm name, or contrary to existing law.

l. Dissolution

A partnership may be dissolved at any time by the will of any or all of the partners, while a
corporation can only be dissolved with the consent of the State.

m. Law which govern

The governing law on partnership is the Civil Code of the Philippines while, Batas Pambansa
Bilang 68 is to the private corporation.

Classes of Corporations.

a. Stock and Non-stock

A Stock corporation is the ordinary business corporation created and operated for the
purpose of making a profit which may be distributed in the form of dividends to stockholders
on the basis of their invested capital.

Non-stock corporations are created not for profit but for the public good and welfare of the
society such as religious, social, literary, scientific, civic and others.

b. Aggregate and Sole

Corporation Aggregate is a corporation consisting of more than one (1) member or

corporator.

Corporation sole is a special form of corporation usually associated with the clergy.

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c. Ecclesiastical and Lay

Ecclesiastica corporation is one organized for religious purposes.

Lay corporation is one organized for a purpose other than for religion.

d. Eleemosynary and Civil

Eleemosynary is one established for or devoted to charitable purposes or those supported by

charity.

Civil corporation is one established for business or profit.

e. Domestic and Foreign

Domestic corporation is one incorporated under the laws of the Philippines.

Foreign corporation is one formed, organized or existing under any laws other than those of
the Philippines.

f. De jure and De facto

De jure corporation is a corporation existing in fact and in law.

De facto is a corporation existing in fact but not in law.

g. Close and Open

Close corporation is one which is limited to selected persons or members of a family.

Open corporation is one which is open to any person who may wish to become a
stockholders or member thereto.

h. Parent or Holding and Subsidiary and Affiliates

Parent or holding corporation is one which is so related to another corporation that it has the
power either, directly or indirectly, to elect the majority of the directors of such other
corporation.

Subsidiary corporation is one in which another corporation owns at least a majority of the
shares and thus has control.

Affiliates corporation is one related to another by a owning or being owned by common

management or other control device.

i. Public, and Government owned or controlled corporations, and Private

Public corporations are those formed or organized for the government of a portion of the
State, and have for their purpose, the general good and welfare.

Government owned or controlled corporations (GOCCs) are those created or organized by

the government or of which the government is the majority of the stockholder.

Private corporations are formed for some private purpose, benefit or end.

j. Corporation by prescription and Corporation by estoppels

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 Corporation by prescription is one which has exercised corporate powers for an indefinite
period without interference on the part of the sovereign power and which by fiction of law is
given the status of a corporation.

Corporation by estoppel is one which in reality is not a corporation, either de jure or de facto
because it is defectively formed, but is considered a corporation in relation to those only who,
by reason of their acts or admissions, are precluded from asserting that it is not a corporation.

k. Quasi-corporations and Quasi-public corporations

Quasi-corporations are in a limited sense, public corporations but unlike the latter, they are
not organized for the government of a portion of the State.

Quasi-public corporations are private corporations which have accepted from the State the
grant of a franchise or contract involving the performance of public duties.

Incorporation of a private corporation by special act

A corporation created by special law or charter is primarily governed by such law and suppletorily,
by the provisions of the Batas Pambansa Bilang 68.

Components of a corporation

The four (4) classes of persons composing a corporation are the following:

1. Corporators or those who compose the corporators, whether stockholders or

members.

2. Incorporators or those corporators mentioned in the articles of incorporation as

originally forming and composing the corporation and who executed and signed the
articles of incorporation and acknowledged the same before a notary public.

3. Stockholders or the owners of shares of stocks in a stock corporation. They are

also called shareholders. Stockholders may be natural or juridical persons but only
natural persons can be incorporators.

4. Members or corporators of a corporation which has no capital stock.

Power to Classify Shares

The Corporation through its Board of Directors and stockholders has the power to classify the shares of
stock as the prospects and needs of its business may require.
The primary classification of shares is common and preferred each of which may be divided into other
classes. The shares of stock usually differ with respect to voting rights, dividend rights, and, in case of
liquidation, rights to corporate assets.

When classification of shares may be made?

1. During incorporation – by the incorporators as stated in the articles of incorporation filed with the
Securities and Exchange Commission.

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 2. After incorporation - by the board of directors and the stockholders through amendment of the
articles of incorporation pursuant to Section 16.

Classification to comply with constitutional or legal requirements.

A corporation may classify its shares for the purpose of insuring compliance with constitutional or legal
requirements such as those prescribe the minimum percentage of capital stock ownership of Filipino
citizens in corporations engaged in any business or activity reserved for Filipino citizens.

Shares presumed to be equal in all respects.

In the absence of any provisions in the articles of incorporation and in the certificate of stock, all stocks
enjoy equal rights and privileges.

Definition of terms as to capitalization.

1. Capital stock – is the amount fixed in the articles of incorporation, to be subscribed and paid in
the shareholders of a corporation. It represents the equity of the stockholders in the corporation
assets. It limits the maximum amount or number of shares that may be issued by the corporation
without formal amendment of the articles of incorporation.

2. Authorized capital stock – is synonymous with capital stock where the shares of the corporation
have par value. If the shares of stock have no par value, the corporation has no authorized
capital stock, but it has capital stock, the amount of which is not specified in the articles of
incorporation as it cannot determined until all the shares have been issued.

3. Subscribed capital stock is the amount of the capital stock subscribed whether fully paid or not.

4. Outstanding capital stock is the portion of the capital stock which is issued and held by persons
other than the corporation itself.

5. Paid-up capital stock – portion of the subscribed or outstanding capital stock that is paid.
6. Unissued capital stock – portion of the capital stock that is not issued or subscribed . It does not
vote and draws no dividends.

7. Legal capital - is the amount equal to the aggregate par value and or issued value of the
outstanding capital stock.

8. Capital – is used broadly to indicate the entire property or assets of the corporation. it includes
the amount invested by the stockholders plus the undistributed earnings less losses and
expenses.

Example:

The articles of incorporation of L.A.Lakers Corp. stated that the authorized capital stock of said
corporation is P1,000,000.00 divided into 1,000,000 shares with a par value of P1.00 per share.
At its incorporation, only P250,000.00 of the authorized capital stock was subscribed.

Under Section 13, 25% of the subscription is required to be paid by the incorporating
stockholders to the treasurer of the corporation – thus, only P62,500.00 was paid.

Hence, the authorized capital stock of L.A.Lakers Corp. is P1,000,000.00, the subscribed,
outstanding, or issued capital stock is P250,000.00, the paid-up capital stock is P62,500.00 and
the unissued capital stock is P750,000.00. The legal capital is P250,000.00.

Stock or Share of Stock.

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Stock or share of stock is one of the units into which the capital stock is divided. It represents the interest
or right which the owner has in the management of the corporation in which he takes part through his right
of vote, in a portion of the corporate earnings in form of dividends, and upon dissolution and winding up,
in the property and assets thereof remaining after payment of corporate debts and liabilities to creditors.

Certificate of Stock.

Certificate of stock is a written acknowledgment by the corporation of the interest, right, and participation
of a person in the management, profits, and assets of a corporation.

Classes of Shares.

1. Par value share – is one with specific money value fixed in the articles of incorporation and
appearing in the certificate of stock for each share of stock of the same issue. The primary
purpose of par value is to fix the minimum issue price of the shares thus assuring creditors that
the corporation would receive a minimum amount for its stock.
2. No par value share – is one without any stated or par value on the face of the stock certificate. It
has no par value but is has always an issued value – the consideration fixed by the corporation
for its issuance.

3. Voting share – is share with right to vote. It is generally customary to give the right to vote to the
common stock and to withhold it from the preferred.

4. Non-voting share – is share without right to vote. Under the Code, no share may be deprived of
voting rights except those classified and issued and ‘preferred’ or ‘redeemable’ shares, unless to
those matters refer to Section 6 paragraph 6 (1 to 8) of B.P. Blg. 68. Please take note that the
said enumeration does not include the election of directors or trustees.

5. Common share of stock – is stock which entitles the holder thereof to pro rata division of profits, if
there are any, without any preference or advantage in that respect over other stockholder. It is the
stock which private corporations ordinarily issue.

6. Preferred share of stock – is stock which entitles the holder thereof to certain preferences over
the holders of common stock. The preferences may consist in the payment of dividends or the
distribution of assets in case of dissolution. It is rarely given the voting privileges.

7. Promotion stock – issued to promoters, or those in some way interested in the company, for
incorporating the company, or for services rendered in launching or promoting the welfare of the
company.

8. Share in escrow – share subject to an agreement by virtue of which the share is deposited by the
grantor or his agent with a third person t be kept by the depositary until the performance of a
certain condition or the happening of certain event contained in the agreement.

9. Convertible stock - is changeable by the stockholder from one class to another class, such as
from preferred to common, at the conversion ratio.

Nature of par value, book value and market value

1. Par value – the value indicated in the certificate of stock represents the amount of money or
property contributed by the shareholder to the capital stock of the corporation.

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 2. Book value – the true value which may be determined by dividing the net value of the total
corporate assets by the number of shares issued or outstanding.
3. Market value – the price a willing seller would sell and a willing buyer would buy neither being
under abnormal pressure to sell or buy. It is affected by the law of supply and demand.

Example:

The Cleveland Corp. has an authorized capital stock of said corporation is P1,000,000.00 divided
into 10,000 shares with a par value of P100.00 per share. The capital stock is fully paid up in
cash. At this stage, the par value is the same as its actual or book value. The book value is
determined by dividing the P1,000,000.00, the net asset, by 10,000, the number of shares issued
or outstanding.

If the Cleveland Corp. makes a net profit of P100,000.00, the increased book value of each share
would be P110.00. On the other hand, if it suffers loss of P100,000.00, its net assets would then
be reduced to P900,000.00, thereby making the book value of each share at only P90,000.00.

The market value, however, of each share may not be P100.00 or P110.00 or P90.00. Thus, the
market value of each share of Cleveland Corp. may be P150.00 when the book value is P110.00
or it may be P60.00 when the book value is P90.00. The market value of stocks may be
influenced by the present and prospective net income of the corporation, attractive dividend
payment, and other factors.

Restrictions regarding issuance of no par value shares.

1. Banks, trust companies, insurance companies, and building and loan associations shall not be
permitted to issue no par value shares of stock.
2. Preferred shares of stock may be issued only with a stated par value.
3. Shares issued without par value shall be deemed fully paid and non-assessable. This means that
the holder of such shall not be liable.
4. Shares without par value may not be issued for a consideration less than the value of P5.00 per
share.
5. The entire consideration received by the corporation for its no par value shares shall be treated
as capital and shall not be available for distribution as dividends.

Kinds of preferred shares

1. Preferred share as to assets – which gives the holder thereof preference in the distribution of the
assets of the corporation in case of liquidation.
2. Preferred share as to dividends – the holder of which entitled to receive dividends on said share
at fixed rates before any dividends at all are paid to common stockholders.
2.1. Cumulative preferred share – entitles the holder thereof not only to the payment of current
dividends but also to dividends in arrears .
2.2. Non-cumulative preferred share - entitles the holder to the payment of current dividends only
in preference to common stockholders.
2.3. Participating preferred share – share which gives the holder not only the right to
receive the stipulated dividends at the preferred rate but also to participate with the holders of
the common shares in the remaining profits pro rata after the common shares have been paid
the amount of the stipulated dividend at the same preferred rate.
2.4. Non-participating preferred share – share which entitles the holder thereof to receive the
stipulated preferred dividends and no more. The balance, if any, is given entirely to the
common stocks.

Founders’ shares

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Founders’ shares have been classified as ‘shares issued to the organizers and promoters of a corporation
in consideration of some supposed right or property. Such shares may be given special rights and
privileges not enjoyed by the owners of other stocks.

However, the exclusive right to vote and be voted for in the election of directors is granted, such right
must be for a limited period not exceeding five (5) years and must be approved by the Securities and
Exchange Commission.

Redeemable shares

Redeemable or callable share is share, usually preferred, which by its terms is redeemable at a fixed date
or at the option of either the corporation or the stockholder at both at certain redemption price.

Treasury Shares

Treasury share is share which has been lawfully issued by the corporation and fully paid for and later
reacquired by either purchase, redemption, donation, forfeiture or other lawful means. Only surplus
earnings of the corporation may be used for purchase of treasury shares.

Treasury shares are issued shares but being in the treasury they do not have the status of outstanding
shares. They may be resold by the corporation at any price the board of directors sees fit to accept,
even at less than par, having once been legally issued as fully paid.

Treasury shares have no voting rights neither entitled to dividends or assets.

Incorporation, a mere privilege

The right to be and act as a corporation doe snot belong to any person as a natural and civil right, but as
a special privilege conferred upon a group of persons by the special privilege conferred upon to a group
of persons by the sovereign power of the State. Until there is a grant of such right, therefore, whether by
special act of the legislature or under a general law, there can be no corporation.

1. Promotion – formation and organization of a corporation by bringing together the incorporators or

the persons interested in the business.

2. Incorporation – act by which the corporation is created.

Steps in incorporation:

a. Drafting and execution of the articles of incorporation by the incorporators.

b. Filing with the Securities of Exchange Commission of the articles of incorporation together
with the Treasurer’s Affidavit.
c. Payment of the filing and publication fees.
d. The issuance of the certificate of registration Securities of Exchange Commission.
e.
3. Formal organization and commencement of business operations

Incorporators
The incorporators must be natural persons and not be less than five (5) but not more than fifteen (15), all
of legal age, and majority of whom are residents of the Philippines.

Corporate term
The corporation shall exist for the term specified in the article of incorporation not exceeding fifty (50)
years.

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Extension of the term can be made five (5) years prior to the expiration of the corporate term unless there
are justifiable reasons for an earlier extension as may be determined by the Securities of Exchange
Commission.

Minimum capital stock requirement

The Code does not set a minimum authorized capital stock except as otherwise provided by special law
as long as the paid-up capital, as required by Section 13, is not less than P5,000.00.

Take note that special laws may require a higher paid up capital, as in the case of commercial banks,
insurance companies and investment houses.

Filipino ownership requirement regarding corporate capital

By specific constitutional and legal provisions, Filipino ownership of a certain percentage of the capital
stock or capital is required in certain cases, such as:

1. Corporation for exploration, development and utilization of natural resources – at least 60% of the
capital which is owned by citizens of the Philippines.
2. Public service corporations - at least 60% of the capital which is owned by citizens of the
Philippines.
3. Educational corporations – other than those established by religious orders and mission boards,
at least 60% of the capital which is owned by citizens of the Philippines.
4. Banking corporations - at least 60% of the capital which is owned by citizens of the Philippines.
5. Rural banks - at least 60% of the capital which is owned by citizens of the Philippines.
6. Corporations engaged in coastwise shipping - at least 60% of the capital which is owned by
citizens of the Philippines.
7. Corporations engaged in pawnshop business - at least 70% of the voting capital stock shall be
owned by citizens of the Philippines.

Minimum subscription and paid-up capital

1. Pre-incorporation – Section 13 requires that at least 25% of the amount of capital stock has been
actually subscribed and that at least 25% of such subscription paid.

2. Post incorporation – The 25% subscription and 25% paid-up capital is required not only during
the incorporation period but also in case of increase of the authorized capital stock.

Example:

Piezo Corp. authorized capital stock is P1,000,000.00 to be divided in 1,000,000 shares with a par
value of P1.00 per share.

In such case, there must be subscribed 250,000 shares of the total par value of P250,000 which
“represent 25% of the authorized capital stock” and from the said subscription, there must be paid to
the corporation “at least 25%” thereof or P62,500 in actual cash and/or property – the fair valuation of
which equals to P62,500.00.

Take note that it is not required for purposes of incorporation that each and every subscriber shall pay
25% of his subscription. The paid-up requirement is met as long as the ‘25% of the total subscription’
is paid although some subscribers have paid less than 25%, or even have not paid any amount.

Meaning of articles of incorporation

The articles of incorporation is the document prepared by the persons establishing a corporation and filed
with the Securities and Exchange Commission containing the matters required by the Code.

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A copy of the articles filed which is returned with the certificate of incorporation issued by the Securities
and Exchange Commission under its official seal becomes it corporate charter enabling the corporation to
exist and function as such.

Contents and form of articles of incorporation

1. Name of the corporation – to identify and distinguish it from other corporations. By that name it is
authorized to transact business. The name of the corporation is essential to its existence.
2. Purpose or purposes of the corporation – which must be lawful, definitely stated, and the primary
and secondary purposes must be capable of being lawfully combined.
The law requires the statement of the purpose or purposes in order that (i) a person who intends
to invest his money in the business corporation will know where and what kind of business activity
his money will be invested; (ii) the directors and officers of the corporation will know within what
scope of business they are authorized to act; and (iii) a third person who has dealings with the
corporation may know whether the transaction or dealing he has with the corporation is within the
authority of the corporation or not.
In other words, the main reason for stating the purpose of the corporation is to determine whether
the acts performed by the corporation are authorized or beyond its powers. If beyond its powers
– it is an ultra vires act.
3. Principal office of the corporation – the place where the principal office of the corporation is to be
established or located, which place must be within the Philippines. It is also where the corporate
books are ordinarily kept and its officers met.
4. The incorporating directors or trustees are those chosen by the incorporators and named in the
articles of incorporation and must specify the names, nationalities, residences and at least
majority of them are residents of the Philippines. They shall hold office until their successors are
duly elected and qualified.
The incorporating directors must be a subscriber to at least one (1) share of the capital stock of
the corporation.
5. Authorized capital stock, subscription and paid up capital. In non-stock corporation – the amount
contributed or donated by its members.

Limitation on power of corporation to amend the articles of incorporation:

1. The amendment of any provision or matters should be in conformity with law.

2. It must be for legitimate purpose.
3. The amended articles should contain all provisions required by law, and shall be indicated by
underscoring the change or changes made. A copy thereof should be duly certified under oath by
the Corporate Secretary and majority of the board of directors or trustees and by the required
votes of the stockholders or members and shall be submitted by the SEC.
4. The amendments shall take effect upon approval by SEC. However, it is deemed approved from
date of filing if not acted upon by SEC within 6 months from said date for a cause not attributable
to the corporation.
5. If the corporation is governed by special law such as banks (Bangko Sentral ng Pilipinas),
insurance companies (Insurance Commission) educational institutions (Department of
Education), the amendments must be accompanied by a favorable recommendation of the
appropriate government agency.

Grounds when articles of incorporation or amendment may be rejected or disapproved:

1. It is not substantially in accordance with the form prescribed.

2. Its provisions are unconstitutional, illegal, immoral, or contrary to government rules and
regulations.
3. The Treasurer’s Affidavit is false.
4. The required percentage of the capital stock to be owned by citizens of the Philippines has
not been complied with as required by existing laws.

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 The SEC will give reasonable time to correct or modify the objectionable portions. Please
take note that the said grounds are not exclusive.

Grounds for suspension or revocation of the certificate of registration:

1. Fraud in procuring the Certificate of Registration.

2. Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of
the public.
3. Refusal to comply with or defiance of a lawful order of the SEC .
4. Continuous inoperation for a period of at least 5 years.
5. Failure to file by-laws within the required period.
6. Failure to file required reports within the prescribed period.

Limitation upon use if corporate name:

The incorporators may choose and use any name they want provided it is one not identical with or similar
to a name which was previously registered and used by another corporation, or is contrary to existing law.

Commencement of corporate existence:

A corporate commences to have juridical personality and legal existence only from the moment the SEC
issues a certificate of registration under its official seal.
The corporation must formally organize and commence the transaction of its business within 2 years from
the date of its incorporation.

De Jure Corp. vs. De Facto Corp.

A de jure corporation is one created in strict or substantial conformity with the mandatory statutory
requirements for incorporation and whose right to exist as a corporation cannot be successfully
questioned by any party even in a direct proceeding for that purpose except by the State.

A de facto corporation is one which actually exists for all practical purposes as a corporation but which
has no right to corporate existence as against the State. It is a corporation from the fact of its acting as
such, though not in law or of right a corporation. It is one which had not complied with all the
requirements necessary to be a de jure corporation but has complied sufficiently to be accorded corporate
status as against third parties although not against the State.

Requirements of a de facto corporation:

1. A valid law under which a corporation with powers assumed might be incorporated.
2. A bona fide attempt to organize a corporation under such law.
Examples: The incorporator or a certain number of them are not residents of the
Philippines; The acknowledgement in the articles of incorporation is insufficient or
defective in form; or it was acknowledged before a person without authority.
3. Actual user or exercise in good Faith of corporate powers conferred upon it by law.
Note: Stockholders of a de facto corp. enjoy exemption from personal liability for corporate
obligations as same as the stockholders of a de jure corp.

Corporation by Estoppel

Estoppel aims to bring justice between the parties, through the operation of the principle that an
admission or representation is rendered conclusive upon the person making it and cannot be denied nor
disproved as against the person relying thereon.

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Note: All persons who assume to act as a corporation knowing it to be without authority to do shall be
liable as general partners for all debts, liabilities and damages incurred or arising as a result of their
pretension.

Formal organization and commencement of business:

Formal organization requires the adoption of by – laws and the election of board of directors/trustees and
officers, and other steps necessary to enable the corporation to transact business.

A corporation shall be considered to have commenced the transaction of its business when it performed
acts toward the fulfillment of the purpose for which it was established.
Where the corporation has commenced the transaction of its business but subsequently becomes
continuously inoperative for a period of at least 5 years, such inoperation be a ground for the suspension
or revocation of its corporate franchise or certificate of incorporation but notice and hearing are required
unless the it is due to causes beyond its control as found by the SEC.

Board of Directors
The board of directors or trustees is the governing body of the corporation chosen by the stockholders or
members. The stockholders/members elect a board of directors or trustees to oversee the management
and operation of the corporation.

Limitations on powers of board of directors or trustees:

1. It must observe the provisions of the Constitution, laws, rules and regulations including the
articles of incorporation and by – laws.
2. It cannot perform acts that will result into fundamental changes in the corporation.
3. It cannot exercise powers not possessed by the corporation.

Note: Directors or trustees hold a fiduciary relation which means position involving trust and
confidence to the corporation and the stockholders/members they represent, as such they are
required to discharge their duties in good faith and with diligence, care and skill. They are liable if
they breach their fiduciary duty.

Rule: The board of directors or trustees must act together as a body in order to bind the corporation
by their acts.

Exceptions:

1. Where the directors happened to be the sole stockholders.

2. When the particular transaction was ratified in a subsequent board meeting.
3. When the corporation has an executive committee (ExCom) with authority to act on such specific
matters within the competence of the board. ExCom is composed of not less than 3 board
members appointed by the board.
4. Execution of management contract which it delegates the management of its affairs to another
corporation for a period not longer than 5 years for any 1 term.
5. Subject to certain requirements, any action by the directors of a close corporation without a
meeting shall be deemed valid unless the by – laws otherwise provide.

The Board may delegate to corporate officers or agents of the corporation purely ministerial duties.

Term of office:
The Board of Directors or trustees shall hold office for one (1) year and until their successors are
elected and qualified.

Hold Over doctrine

13
 Upon failure of a quorum at any meeting of the stockholders or members called for an election, the
directorate naturally holds over and continues to function as such until other members of the board
are elected and qualified.

Qualifications of directors or trustees:

1. Every director must own at least 1 share of the capital stock.

2. The share of stock held by the director must be registered in his name on the books of the
corporation.
3. Every director must continuously own at least a share of stock during his term.
4. A majority of the directors must be residents of the Philippines.
5. The by – laws may provide additional qualifications.

Election of directors or trustees:

1. At the stockholders or members meeting, there must be present in person or by

representative authorized to act by written proxy, the owners of the majority of the
outstanding capital stock or majority of the members entitled to vote.
2. The election must be by ballot if requested by any voting stockholder or member. Voting by
viva voces or roll call is also allowed.
3. A stockholder cannot be deprived of his right to use any of the methods of voting in the
election of directors.
4. No delinquent stock shall be voted.
5. If a quorum is present, the candidates receiving the highest number of votes shall be
declared elected.
6. In case of failure to hold an election for any reason, the meeting may be adjourned from day
to day or from time to time but it cannot be adjourned sine die or indefinitely.
7. The requisite notice must be given.

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’.

Example:

Kobe owns 100 shares of stock in L.A. Lakers Corp. If there are 5 directors to be chosen,
Kobe is entitled to 500 votes obtained by multiplying 100 shares by 5 (number of directors to
be elected). He may give to the five candidates he wants to be elected 100 votes each.

Under the straight voting, the votes are distributed equally among the 5 candidates without
preference.

2. Cumulative voting for one candidate – a stockholder is allowed to concentrate his votes and
‘give 1 candidate as many votes as the number of directors to be elected multiplied by the
number of his shares shall equal’.

Example:

Lebron owns 100 shares of stock in Clevaland Corp. If there are 5 directors to be chosen,
Kobe is entitled to 500 votes obtained by multiplying 100 shares by 5 (number of directors to
be elected). He may give to one candidate, to Shaq the entire 500 votes.

Or

14
 Suppose that out of a total of 500 shares, Ronald and Jay-jay own 200 shares each or a total
of 400 shares while Sandy, Paul, Noel and Menk own 25 shares each or a total of 100
shares.
If there are 5 directors to be elected, Ronald and Jay-jay are entitled to 2,000 votes and
Sandy, Paul, Noel and Menk to 500 votes. The highest number of votes that Ronald and Jay-
jay can give each of their 4 candidates is 500 each. Hence, by cumulating their 500 votes in
favor of a candidate, Sandy, Paul, Noel and Menk would be able to secure representation in
the board of directors.

Note: Cumulative voting is permitted for the purpose of giving the minority stockholders
representation in the board of directors.

3. Cumulative voting by distribution – a stockholder may cumulate his shares by the number of
directors to be elected and distribute the same among many candidates as he shall see fit.

Example:

With 100 shares of stock, Kobe is entitled to 500 votes if there are five directors to be elected.
A may distribute his votes to candidates Michael, Larry, Earvin as follows: 100 votes to
Michael; 150 votes to Larry; and 250 votes to Earvin. Kobe may cast his votes in any
combination desired by him provided that the total number of votes casted does not exceed
500.

Corporate officers and agents.

The directors or trustees of the corporation are elected to their office by the stockholders or members at
the stockholders’ or members’ meeting.
The election of administrative officers, such as the president, treasurer, secretary, and such other officers
may be provided for in the by - laws is, in turn, entrusted to the board of directors or trustees. The
directors may elect a president, vice president, treasurer, secretary, general manager and such other
officers as the needs and nature of the business may demand.

Officers are agents of the corporation and they can bind the corporation as long as their actions are within
the actual, apparent, or inherent authority conferred by law, articles of incorporations, by – laws or by the
resolution of the board of directors.

Compensation and terms of office of the corporate officers.

It is within the power of the board to fix the salaries of the officers whom it appoints.

Positions concurrently held by the same person.

Rule: Any 2 or more positions may be held concurrently by the same person.

Exception: The positions of president and secretary or treasurer are considered by law as incompatible
with each other due to the very nature appertaining to each office.

Quorum:

Quorum is such number of the membership of a collective body as is competent to transact business or
do any other corporate act.

Under the Corporation Code, “unless the articles of incorporation or by – laws provide for a greater
majority, a majority of the number of directors or trustees as fixed in the articles or by – laws shall
constitute a quorum for the transaction of corporate business. As a general rule, majority vote of the

15
directors or trustees present at a meeting at which there is a quorum is sufficient to authorize corporate
action.

Proxy not allowed.

Directors or Trustees cannot validly act by proxy. They must attend the meeting of the board and act as a
body.

Requirements for Board meeting:

1. Meeting duly assembled or convened as a board – as a body in lawful meeting.

2. Presence of a quorum.
3. Decision of the majority of the quorum or, in other cases, a majority of the entire board
4. Meeting at the place, time and in the manner provided for in the by – laws.

Disqualification of directors/trustees or officers

Conviction of a final judgment of an offense punishable by imprisonment for a period exceeding 6 years or
a violation of the Corporation Code committed within 5 years prior to the date of his election or
appointment.

Removal of directors, requisites:

1. The removal must ‘take place at a regular meeting of the corporation or at a special meeting duly
called for the purpose.
2. There must be ‘previous notice tot eh stockholders or members of the corporation of the intention
to propose such removal at the meeting.
3. The removal must be ‘by vote of the stockholders holding or representing 2/3 of the outstanding
capital stock, or if the corporation be a non-stock corporation, by 2/3 votes of the members
entitled to vote.

Filling of vacancies in the office of director or trustee.

A vacancy may be filled up as follows:

1. By the stockholders or members

a. If the vacancy results from the removal by the stockholders or the expiration of the term
b. If vacancy occurs such as death, resignation, abandonment, or disqualification, if the
remaining directors or trustees do not constitute a quorum for the purpose of filling the
vacancy.
c. If the Board refers the matter to stockholders or members
d. If the vacancy is created by reason of an increase in the number of directors or trustees.
2. By the members of the Board – if still constituting a quorum. The Board has no power to fill any
directorship or trusteeship by reason of an increase in the number of directors or trustees.

Compensation of directors

In the absence of any provision in the by – laws fixing their compensation, the directors, as such, shall not
receive any compensation, unless authorized by a vote of the stockholders representing at least a
majority of the outstanding capital stock.

The directors have no authority to grant compensation to themselves.

Where compensation is granted either in the by – laws or by the vote of stockholders, the total yearly
compensation of directors shall not exceed 10% of the net income before income tax of the corporation
during the preceding year.

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Directors are authorized to receive reasonable per diems – an allowance given for each day while he was
away from his home or permanent station.

Compensation of corporate officers and employees

Officers and employees who perform valuable services for the corporation are entitled a reasonable
compensation even in the absence of express contract.

Liability of directors, trustees or officers

In the performance of their official duties, they are under obligations of trust and confidence to the
corporation and its stockholders must act in good faith and for the interest of the corporation or its
stockholders with due care and diligence and within the scope of their authority.

There are personally liable for any wrongful disposition of corporate asset and for any loss or injury to the
corporation arising from gross negligence or unauthorized acts or violation of their duties.

Directors are not liable, however, for business losses incurred because of honest bad judgment not
amounting to bad faith or gross negligence.

Liabilities of directors/trustees for damages

The Code enumerates the occasions when a director or trustee may be held liable for damages, as
follows:
1. He willfully and knowingly votes or assess to patently unlawful acts of the corporation.
2. He is guilty of gross negligence or bad faith in directing the affairs of the corporation.
3. He acquires any personal or pecuniary interest in conflict with his duty as such director or trustee.

Liability of directors/trustees or officers for secret profits

Director shall be held accountable for the profits which otherwise have accrued to the corporation.
Also, a director guilty of disloyal act against the corporation is required to account for the profits obtained
by him from a business opportunity which should belong to the corporation.

Self-dealing directors/trustees or officers

A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the
option of the corporation, unless all the following conditions are present:
1. 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.
2. The vote of such director or trustee was not necessary for the approval of the contract.
3. The contract is fair and reasonable under the circumstances
4. That in case of an officer, the contract with the officer has been previously authorized by the
board of directors.

If not all the conditions set forth are present but the corporation elects not to question the validity of
the contract without prejudice to the liability of the directors or trustees for damages.

In case the contract has only the third condition is present, but it was ratified by 2/3 vote of the
stockholders or members, and provided that full disclosure of the adverse interest of the directors or
trustees involved is made at such meeting.

Contracts between corporations with interlocking directors

The Code recognizes a valid contract between two (2) or more corporations which have interlocking
director (meaning one, or all of the directors in one corporation is/are also director/directors in another
corporation) as long as there is no fraud and the contract is fair and reasonable under the
circumstances.

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 However, if the interest of the interlocking director in one corporation is substantial, that is – his
stockholdings exceed 20% of the outstanding capital stock and in the other merely nominal, the rules
on ‘self-dealing director’ shall apply in so far as the latter corporation is concerned.

Disloyalty of a director

Under the theory of ‘corporate opportunity theory’, a director who, by virtue of his office, acquires for
himself a business opportunity which should belong to the corporation, is guilty of disloyalty and,
should, therefore, account to the latter for all such profits by refunding the same, notwithstanding that
he risked his funds in the venture.

Under the Code, the guilty director will only be exempted from liability to the corporation if his disloyal
act is ratified by the vote of the stockholders owning or representing at least 2/3 of the outstanding
capital stock.

Executive Committee

1. Reason: to expedite action on important matters without need for a board meeting especially
when such meeting cannot be held.

The Code requires that the Executive Committee (ExCom) must be provided for in the by-laws
and composed of not less than three (3) members of the board.
The ExCom may act on specific matters within the competence of the Board, as may be
delegated to it except on the following matters:
a. approval of any action for which shareholders’ approval is also required.
b. The filling of vacancies in the board.
c. The amendment or repeal of the by – laws or the adoption of new by –laws.
d. The amendment or repeal of any resolution of the board which by its express
terms is not so amenable or repealable; and
e. Distribution of cash dividends to the shareholders.

2. Quorum and voting – A majority of the ExCom members constitute a quorum.

Relative powers of corporations and natural persons / partnerships

1. Any act not prohibited – An individual has absolute right fully to use, enjoy and dispose of his
properties, to perform all acts and to make all contracts without any restriction except when they
are forbidden by the law. The same is true of an ordinary partnership.
2. Only powers those granted – On the other hand, the civil rights of a corporation are widely
different. Under the doctrine of limited capacity adopted by our corporation law, a corporation has
only such powers as are expressly granted and those that are necessarily implied from those
expressly granted or those which are incident to its existence. It is, therefore, not correct to say
that a corporation has the power to do all acts not expressly or impliedly prohibited.

Classification of corporate powers

The three classes of powers of a corporation are:

1. Those expressly granted or authorized by law

2. Those that are necessary to the exercise of the express or incidental powers
3. Those incidental to its existence.

The powers of a corporation, however, frequently cut across lines of the above classification.

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Acts or contracts of a corporation outside the scope of its express, implied, and incidental powers are
ultra vires.

Express powers explained

Express powers are the powers expressly conferred upon the corporation by law. These powers can be
ascertained from the special law creating the corporation, or from the general incorporation law under
which it is created, the general laws of the land applicable to corporations, and its articles of incorporation.

Implied powers explained

Implied powers are those powers which are reasonably necessary to exercise the express powers and to
accomplish or carry out the purpose for which the corporation was formed.

Sometimes it is difficult to determine whether a certain activity is an implied power or not. However, the
following rough classification embraces most of the implied powers:

1. Acts in the usual course of business – This includes such acts as borrowing money; making
ordinary contracts; executing promissory notes, checks or bills of exchange; taking notes or other
securities; acquiring personal property for the use in connection with the business; acquiring
lands and buildings to be used as places of business or in connection therewith; and selling,
leasing, mortgaging or other transfers of property of the corporation in connection with the
running of the business. It is evident that all of such acts, under ordinary circumstances, are
necessary in order to run a business.
2. Acts to protect debts owing to a corporation – if a corporation is a creditor, it may do such acts as
may be necessary to protect its right as such creditor. Thus, a corporation may purchase
property, act as a guarantor or sometimes even run a business temporarily to collect a debt;
3. Embarking in different business – a corporation may not engage in a business different from that
for which it was created as a regular and a permanent part of its business. This is especially true
with respect to those particular kinds of corporate activities which are governed by special laws.
Thus a corporation not organized for the purpose cannot go into the banking or insurance
business but it may do any isolated act of banking or insurance in connection with some express
power. So, it is generally held that a corporation may temporarily conduct an outside business to
collect a debt out of its profits;
4. Acts in part or wholly to protect or aid employees – while the cases are divided, the better view
favors such acts as building homes, places of amusement, hospitals, etc., for employees, as
within the corporate powers;
5. Acts to increase business – thus, a corporation may conduct contests or sponsor radio or
television programs, or promote fairs and other gatherings to advertise and increase its business.

Incidental or Inherent powers explained

Incidental or inherent powers are powers which a corporation can exercise by the mere fact of its being a
corporation or powers which are necessary to corporate existence and are, therefore, impliedly granted.
As powers inherent in the corporation as a legal entity, they exist independently of the express powers.

Examples of incidental powers are:

1. The power of succession; to sue and be sued;

2. To have a corporate name;
3. To purchase and hold real and personal property;
4. To adopt and use a corporate seal;
5. To contract
6. To make by-laws

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Power to sue and be sued

This power is an incident to corporate existence. Suits are to be brought by or against the corporation in
its own name:

1. Corporations de facto
2. A corporation which has been dissolved after the expiration of the three-(3) year winding-up
period ceases to exist de jure or de facto and, therefore, it cannot sue not be sued.
3. A corporation not duly registered in accordance with law has no legal capacity to sue as such.
4. Neither can a foreign corporation which transacts business in the Philippines without the
necessary license from the Securities and Exchange Commission sue in the Philippine courts.
5. Obviously, an artificial person like a corporation cannot experience physical suffering, mental
anguish, besmirched reputation, wounded feelings, moral shock, social humiliation and similar
injury. Nevertheless, a corporation may have a good reputation or business standing which, if
besmirched, may be a ground for the award of moral damages under the Civil Code.

Power to adopt and use a corporate seal

A seal is a device used to identify or replace the signature of an individual or organization and to
authenticate written matter purportedly emanating from such individual or organization. It may refer also
to the impression of such a device on document like certificate of stock.

Certificates of stock issued by corporations are required to be sealed with the seal of the corporation.
Nevertheless, the use of a corporate seal in certificates of stock must be deemed merely directory rather
than mandatory. A corporation may exist even without a seal. Any seal adopted and used by the
corporation may be altered by it at its pleasure.

Power to acquire and convey property

1. Inherent in every corporation – This power which is also expressly conferred under the law has
always been regarded as an incident to every corporation. A corporation needs properties or
assets to carry on its business. It has been held by the Supreme Court that “a corporation whose
business may properly be conducted in a populous center may acquire an appropriate lot and
construct thereon an edifice with facilities in excess of its own immediate requirement. If it has the
power to acquire such lot, construct an edifice, and hold it beneficially, the beneficial
administration by the corporation of such parts of the building as shared to others must
necessarily be lawful.”
2. Subject to constitutional and statutory limitations – The right or power of private corporations to
deal in real as well as personal property are subject to limitations or restrictions prescribed by
special laws and the Constitution. Under the Constitution, a private corporation or association
may not hold alienable lands of the public domain except by lease for a period not exceeding 25
years, renewable for not more than 25 years, and not to exceed 1,000 hectares in area. Natural
resources such as coal, petroleum and other mineral oils belong to the State and cannot be
alienated to corporations. Their exploration, development and utilization shall be under the full
control and supervision of the State.

Power to acquire shares or securities

1. Shares of other corporations – authorizes a corporation to acquire shares or securities of other

corporations. Such an act does not need the approval of the stockholders if done in pursuance of
the purpose or purposes of the corporation as stated in its articles of incorporation but when the
purpose is done solely for investment; the approval of the stockholders is necessary.

In any case, the power to acquire shares in other corporations is subject to specific limitations
established by the Code, special laws, and the Constitution. The shares must be limited to shares

20
 of existing corporations. Under the Civil Code, the pledgee may appropriate may the thing
pledged if after the second auction the pledged is not sold.

2. Shares of the acquiring corporation – Our corporation law expressly authorizes a corporation
subject to limitations stated therein to acquire its own stocks. A corporation may purchase its own
stock, however, only when it has “unrestricted retained earnings” to cover the shares to be
purchased or acquired.

Power to contribute to charity

1. Public responsibility of corporations – expressly vests in business corporations the authority

to contribute to purely charitable purposes. It gives recognition to the growing tendency to
regard charitable gifts as within the scope of corporate authority. It is based on the view that
business corporations are not organized solely as profit-making enterprises but also as
economic and social institutions with corresponding public responsibility to aid in the
betterment of economic and social conditions in the community in which such corporations
are doing business.
2. Limitations on power – Under the Code, the only limitations imposed on the authority of a
corporation to make donations are:
a. The amount thereof must be reasonable
b. The donations must not be in aid of any political party or candidate or for purpose of
partisan political activity

Power to establish pension, retirement and other plans

The authority granted to every corporation to establish pension, retirement and other plans for the benefit
of its officers and employees is a statutory recognition that disbursement of corporate funds in pursuance
of such plans likewise promotes the purpose or purposes for which the corporation was formed.

Power to extend or shorten corporate term

The corporate term of a private corporation may be extended or shortened by an amendment of the
articles of incorporation approved by the majority vote of the board of directors or trustees and ratified at a
meeting of the stockholders representing at least 2/3 of the outstanding capital stock or by at least 2/3 of
the members in case of non-stock corporations.

1. The amendment in general of articles of incorporation must be taken at a meeting of the

stockholders or members and upon a vote. “Mere written assent” would not be sufficient.
2. A voluntary dissolution of a corporation may be effected by amending the articles of
incorporation to shorten the corporate term.
3. The extension of the corporate term as originally stated in the articles of incorporation is
subject to the limitations provided.

Appraisal right of dissenting stockholders

Right of such stockholder in the cases provided by law to demand payment of the fair value of his shares
“in case of an extension of corporate term”.

Power to increase or decrease capital stock

An increase or reduction in the capital stock of the corporation involves a fundamental change in the
corporation. The authority of the corporation to take such action exists only when expressly conferred by
law.

Limitations on the power

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They are as follows:

1. As a general rule, a corporation cannot lawfully decrease its capital stock if such decrease
will have the effect of relieving existing subscribers from the obligation of paying for their
unpaid subscriptions without a valuable consideration for such release as such an act of the
corporation constitutes an attempted withdrawal of so much capital of the corporation upon
which corporate creditors are entitled to rely.
2. A corporation cannot issue stock in excess of the amount limited by its articles of
incorporation; such issue is ultra vires and the stock so issued is void even in the hands of a
bona fide purchaser for value.
3. A reduction or increase of the capital stock can take place only in the manner and under the
conditions prescribed by law.

The Corporation Code contains no prohibition for a corporation to increase its authorized capital stocks
even if the same has not yet been fully subscribed.

Necessity for increasing capital stock

1. Increase of corporate assets – An increase of the amount of the stated capital may be for the
purpose of effecting an increase in the corporate assets. It may be effected:
a. By authorizing the creation of news shares to be offered and issued at a fixed valuation
b. Without any corresponding increase in the corporate assets, by the issuance of stock
dividends

2. Issuance of stock dividends – The capital stock may also be increased without any
corresponding increase in the corporate assets by the issuance of stock dividends.

Subscription requirement in case of increase of capital stock

The law requires that at least 25% of the increased capital stock has been subscribed and that at least
25% of the amount subscribed has been paid in actual cash or property.

Thus, if the corporation has an authorized capital stock of P80,000.00 and it is proposed to increase it to
P100,000.00, an increased of P20,000.00, subscriptions must be obtained for not less than P5,000.00
and payment in cash or in property amounting to not less than P1,250.00 must be made on account of
such subscriptions.

Ways of increasing (decreasing) authorized capital stock

There are at least three (3) ways by which the authorized capital stock may be increased (decreased):

1. By increasing (decreasing) the number of shares authorized to be issued without increasing

(decreasing) the par value thereof;
2. By increasing (decreasing) the par value of each share without increasing (decreasing) the
number thereof;
3. By increasing (decreasing) both the number of shares authorized to be issued and the par
value thereof.

Illustration:

Assume that the authorized capital stock of X Corporation is fixed at P1,000,000 divided into
100,000 shares with par value of P10.00 per share. The capital stock may be increased (or decreased) as
follows:

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 The number of shares is increased (decreased) to 150,000 (75,000) shares with the same
par value of P10.00 each share; or the par value per share is increased (decreased) to P15.00 (P5.00)
without increasing (decreasing) the number of the authorized shares; or the number of shares is
increased (decreased) to 150,000 (75,000) and at the same time increasing (decreasing the par value of
each share to P15.00 (P5.00)

Effect of reduction of capital stock on liability for unpaid subscription

A corporation has no power to release an original subscriber to its capital stock from the obligation of
paying for his shares without a valuable consideration for such release.

Distribution of surplus on reduction

1. Where there is no impairment of capital – Upon a reduction of capital stock, if capital has not
been impaired by losses, there necessarily occurs a surplus of assets to the extent of the
reduction. Unless the rights of creditors will be affected or the capital impaired, the directors
may make an equitable distribution of such surplus or so much thereof as may not be
required in carrying on the business for the best interests of the stockholders.
2. Where reduction is made to meet impairment – there can be a distribution of only those
assets over and above the amount equal to the par value of the outstanding reduced capital
and the amount necessary to discharge the existing corporate indebtedness. Thus, as a
general rule, where capital stock is impaired and a reduction is made merely to meet that
impairment, there will be no distribution of assets among the shareholders.
3. Distribution not mandatory – The distribution to stockholders of surplus remaining after a
reduction of capital stock is authorized by the Code but cannot be compelled. It must be
borne in mind that the funds resulting from such reduction represent capital and not profits.

Illustrations:

a. X Corporation has an authorized capital stock of P1,000,000.00 divided into 100,000 shares with
par value of P10.00 each. Only 60,000 shares with a par value of P600,000.00 were subscribed
and fully paid.

X Corporation can reduce its authorized capital stock only after complying with the formalities
prescribed. If X Corporation reduces its authorized capital stock to P600,000.00, the unissued
40,000 shares are considered retired no longer exist for any purpose. Hence there is no
reduction of legal capital of P600,000.00

Power to incur bonded indebtedness

A corporate bond is an obligation to pay a definite sum of money at a future date at fixed rate of interest.

1. Stock and non-stock corporation – The power of a corporation to incur bonded indebtedness.
But it is also a power implied from the powers expressed. A business corporation, in the
absence of restriction, may borrow money whenever the necessity of its business so requires
and issue security or customary evidence of debt such as notes, bonds, or mortgages.
2. Procedure – for incurring bonded indebtedness is the same as the procedure for increasing
or decreasing the capital stock except that the certificate need not state the matters set forth
in Nos (2) & (3)
3. Prior approval of, and registration of bonds with SEC – Any incurring, creating or increasing
by the corporation of any bonded indebtedness is subject to prior approval of the Securities
and Exchange Commission. The bonds issued by the Corporation have to be registered with
the Commission which is given the authority to determine the sufficiency of the terms thereof.

Right to pre-emption of stockholders

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 Whenever the capital stock of a corporation is increased and new shares of stock are issued,
the new issue must be offered first to the stockholders whoa re such at the time the increase was made in
proportion to their existing shareholdings and on equal terms with other holders of the original stocks
before subscriptions are received from the general public.

Reason for the grant of right.

The rule aims to safeguard the right of a stockholder to preserve his proportionate influence and interest
in the corporation and the relative value of his holdings.

The purpose of the right is to protect from impairment and dilution the basic rights of the stockholder in
the corporation.

Example:
a. To Voting control
b. To Dividend payments
c. To the net assets of the corporation.

However, the stockholders may waive such right.

Illustration:

Corporation x has an original capital stock of P100,000.00 divided into 1,000 shares with a par value of
P100.00 A owns 500 shares. Subsequently, the capital stock is increased to P200,000.00 (to 1,000 more
shares). Both the old and new shares are voting shares.

1. Right to vote – A must be given a right to subscribe to 500 of the new shares before they are
offered to others. If A is allowed to subscribed to only 100 shares of the increased stock, his
voting control would be reduced from 50% (500/1,000) to only 30% (600/2,000).
2. Right too net earnings as dividends – Suppose the corporation made a net earnings of
P50,000.00 Had this entire amount been distributed as cash dividends before the increase,
each stockholders, including A, would have received P50.00 (P50,000/1,000) per share. After
the increase, the dividend would be reduced to P25.00 (P50,000.00/2,000) per share.
3. Right to net corporate assets after liquidation – Assume that the total assets of the
corporation amount to P170,000.00, with liabilities of P20,000.00 and surplus of P50,000.00.
Thus, its net assets or net worth is P150,000.00. Therefore, the actual value per share is
P150.00 (P150,000.00/1,000). If the new shares were to be issued at their par value of
P100.00, the actual value of the original shares would be reduced to P125.00
(P250,000.00/2,000).

If the rule of pre-emption will not be observed, it is evident that existing stockholders who are allowed to
subscribe to more than their pro rata shares in the increase of the capital stock and new stockholders will
unjustly benefit by P25.00 per share at the expense of the stockholders whose pre-emptive right is
violated. In the event the liquidation, each stockholders, old and new, will participate in the net assets of
the corporation at the rate of P125.00 per share.

Power to deny pre-emptive right

The pre-emptive right of stockholders of a stock corporation “to subscribe to all issues or disposition of
shares of any class in proportion to their respective share-holdings” may be “denied by the articles of
incorporation or an amendment thereto.” Unless so denied, the right should be granted to a holder of
shares although they are of a class different from the those issued or disposed of.

Example:

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Holders of common “A” shares are entitled to subscribe to common “B” shares in proportion to their
interest, but they cannot be compelled to subscribed to the common “B” shares especially since the latter
are of a class different from the class they are holding.

A stockholders whose pre-emptive right is violated may maintain an action to compel the corporation to
give him that right. If the denial is by an amendment to the articles of incorporation, he may exercise his
appraisal right.

Shares to which right not available

1. Shares specified by law – the pre-emptive right of stockholders extends “to all issued or
disposition of shares of any class” unless denied by the articles of incorporation or an
amendment thereto, and except to the following:
a. Shares to be issued in compliance with laws requiring stock offerings or minimum stock
ownership by the public;
b. Shares to be issued in good faith with the approval of the stockholders representing 2/3
of the outstanding capital stock in exchange for property needed for corporate purposes;
c. Shares to be issued in good faith with the approval of the stockholders representing 2/3
of the outstanding capital stock in payment of previously contracted debt.

2. Remaining unsubscribed shares – if the shares corresponding to one stockholder are not
subscribed or purchased by him within the period fixed for the exercise of his pre-emptive
right, it does not follow that said shares should again be offered on a pro rata basis too
stockholders who took advantage of their right of pre-emption. This is because as long as
they exercise their pre-emptive rights, their relative and proportionate voting strength in the
corporation will not be affected adversely.

Illustration:

A owns 20% of the capital stock of Corporation X. He exercised his pre-emptive right to new
shares issued by the corporation. B, another stockholder, did not exercise his right with respect to the
shares corresponding to him. His shares were offered to and purchased by stockholders C.

In this case, A still maintains his 20% interest in the corporation although C’s proportionate
holdings increased. A has no cause for complaint as long as his 20% interest is not reduced.

Pre-emptive right as to treasury share

1. In close corporations, the pre-emptive right of stockholders extends to all stock to be

issued, including reissuance of treasury shares, whether for money or for property or
personal services, or in payment of corporate debts, unless the articles of incorporation
provides otherwise.
2. In widely held corporations, it would seem that existing stockholders have also a pre-
emptive right as to treasury shares in view of the use of the phrase “disposition of shares
of any class.

Availability of right to issue of originally authorized shares.

A shareholder’s pre-emptive right is his option to subscribe to allotment of

shares, in proportion to his holdings of outstanding shares, before new shares are offered to others. This
doctrine applies when a corporation increases its capital stock by declaring a stock dividend in which case
it cannot discriminate between stockholders.

1. All originally authorized shares initially offered for subscription – The shareholder’s pre-
emptive rights do not generally apply where the shares belong to the original stock of the

25
 corporation unsubscribe or undisposed of, inasmuch as such shares constitute a part of the
assets, and may be sold either to stockholders or to strangers as the corporation may deem
best even without notice to stockholders. When one subscribes fro shares in a corporation,
he realized that his position is fixed on the basis of the proportion between the number of
shares subscribed by him and the total number of shares subscribed by him and the total
number of shares which the corporation is authorized to issue. This presupposes, however,
that the corporation at its inception offered all its originally authorized shares, although such
should be the presumption.
2. Number of such shares initially offered specified – Where the number of shares initially
offered for subscription was specified, such that the original subscribers could not have
insisted on subscribing for more, the corporation must first offer the additional issue of shares
from the unsubscribed portion of the authorized capital stock pre-emptively to stockholders
before the same is offered to third parties. In this case, the original subscriber is deemed to
have taken his shares in relation to the number of shares then initially allotted for subscription
rather than to the total number of authorized shares at the time of his subscription.

Illustration:

X Corporation has an original capital stock of P1,000,000.00 divided into 100,000 shares
with a par value of P10.00 each.
At its inception, X Corporation offered for subscription all the 100,000 shares but only 40,000
shares were subscribed and fully paid. A’s subscription covers 4,000 shares.
In this case, A is not entitled to pre-emption with respect to the remaining unissued 60,000
shares. But where the number of shares initially offered for subscription was only 40,000, then A may
exercise his pre-emptive right, in case the remaining 60,000 shares are subsequently offered to
subscription, to the extent of 1/10, or 6,000 shares.

Power to sell, lease, etc. all or substantially all corporate assets

A corporation, by the action of its board of directors or trustees supported by the vote of
shareholders or members, may sell, lease, exchange, mortgage, pledge, or otherwise dispose of all
substantially all of its property and assets including its goodwill.

The requisites for the validity of such sale, etc. are as follows:

1. The sale etc., must be approved by the board of directors or trustees;

2. The action of the board of directors or trustees must be authorized by the vote of
stockholders representing 2/3 of the outstanding capital stock or 2/3 of the members, as the
case may be;
3. The authorization must be done at a stockholders’ or members meeting duly called for that
purpose after written notice;

The sale, etc., shall be subject to the provisions of existing laws in illegal combinations and
monopolies.

Authority of the board

1. Stock corporations – covers not only sale, but also lease, exchange, mortgage, pledge or
other disposition of its properties.
a. The board is given the right to decide upon the terms and conditions of the sale including
the consideration for the property sold, for at any rate, the sale is still subject to approval,
by the stockholders or members.
b. After such approval, the board may nevertheless, in its direction, abandon the
transaction, without further action or approval by the stockholders or members but
subject to the right of third parties under any contract relating thereto.

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 2. Non-stock corporations – the vote of the majority of the trustees in office will be sufficient
authorization for the corporation to enter into any transaction authorized in the case of non-
stock corporation where there are no members with voting rights.

Appraisal right of dissenting stockholder

It is to be noted that the exercise of the appraisal right of any dissenting stockholder is predicated on the
“sale or other assets, the phrase being defined as such which would render the corporation “incapable of
continuing the business or accomplishing the purpose for which it was incorporated.”

Conversely, any disposition which does not involve all or substantially all of the corporate assets made in
the ordinary course of business does not require the approval of the stockholders or members and would
not entitle any dissenting stockholder to exercise his appraisal right.

Power to acquire own shares

1. Elimination of fractional shares – A fractional share is a share which is less than one (1)
share. Thus, if a stockholder own 250 shares and the corporation declares 25% stock
dividend, his total shares will be 312 and ½ shares. Inasmuch as fractional shares cannot be
represented at corporate meetings, the corporation may purchase the same from the
stockholders concerned or issue fractional scrip certificates to such stockholders who may
negotiate for the sale thereof with other stockholders also owning fractional shares so as to
convert them into full shares.
2. Satisfaction of indebtedness to corporation – does not authorize a corporation to arbitrarily
purchase the shares it issued to any of its stockholders indebted to it, whether at the
prevailing market price or at par value for the purpose of applying the proceeds thereof to the
satisfaction of its claim against them, and this is particularly true where the consent of such
stockholders has not been secured. And even where their consent has been secured, the
corporation can buy their shares only if the conditions for the purchase.
3. Payment of shares of dissenting or withdrawing stockholders – refers to the instances when a
dissenting stockholder is given appraisal right and the right to withdraw from the corporation.
4. Other cases – This power of the corporation to acquire its own shares is not limited to the
cases enumerated in Section 41. Thus, it may also be exercised under treasury shares. With
respect to redeemable shares, they may be purchased by the corporation regardless of the
existence of unrestricted retained earnings in the book of the corporation.

Conditions for the exercise of the power

Briefly, a corporation’s right to purchase its shares according to the weight of authority is subject to the
following limitations:

1. That its capital is not thereby impaired;

2. That it be for a legitimate and proper corporate purpose;
3. That there shall be unrestricted retained earning s to purchase the same and its capital is not
thereby impaired;
4. That the corporation acts in good faith and without prejudice to the rights of creditors and
stockholders;
5. That the conditions of corporate affairs warrant it.

Thus, if the aforementioned conditions are obtained, a corporation may acquire the shares of alien
stockholders to comply with constitutional or legal requirements prescribing the minimum percentage of
capital stock ownership of Filipino citizens in certain corporations.

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Trust fund doctrine

1. Corporation generally without power to purchase its own shares – A corporation has no
general power to purchase its own shares of stock. This rule is dictated by the necessity of
protecting the interests of existing creditors who might be adversely affected by the stock
purchase which, in effect, may operate to reduce its capital stock to the extent of the shares
purchased without complying with the formalities.
2. Repayment to stockholders a fraud on corporate creditors – The foregoing is in consonance
with the trust fund doctrine. This doctrine holds that the assets of the corporation as
represented by its capital stock are “trust funds” to be maintained unimpaired and to be used
to pay corporate creditors in the sense that there can be no distribution of such assets among
the stockholders without provision being first made for the payment of corporate debts and
that any such disposition of it is a fraud on the creditors of the corporation and, therefore,
void. The purchase, in effect, amounts to repayment to the stockholder of his proportionate
share from the corporate assets and hence, an impairment of the capital available for the
benefit and protection of creditors who are preferred over the stockholders in the distribution
of corporate assets.

Power to invest funds in other corporations or for other purposes

A corporation may be organized with multiple lawful purposes so long as the primary purpose is indicated
in the articles of incorporation. However, the investment of its funds is limited to the primary purpose. In
order that if may invest its funds in any other corporation or business or for any purpose other than the
primary purpose, compliance with the requirements and subject to the prohibition against certain
corporations from having more than one purpose.

But a corporation may invest its fund in another business which is incident or auxiliary to its primary
purpose as stated in its articles of incorporation without the approval of the stockholders or members as
required. In such case, a dissenting stockholder shall have no appraisal right.

Concept of dividends

A dividends is that part or portion of the profits of a corporation set aside, declared and ordered by the
directors to be paid ratably to the stockholders on demand or at a fixed time.

It is a payment to the stockholders of a corporation as a return upon their investment. It is a characteristic

of a dividend that all stockholders of the same class share in it in proportion to the respective amounts of
stock which they hold.

Dividend distinguished from profits or earnings

1. A dividend, as applied to corporate stock, is that portion of the profit or net earnings which the
corporation has ser aside for ratable distribution among the stockholders. Thus, dividends
come from profits, while profits are a source of dividends.
2. Profits are not dividends until so declared or set aside by the corporation. In the meantime, all
profits are a part of the assets of the corporation and do not belong to the stockholders
individually.

Power to declare dividends.

The board of directors pf a stock corporation has the power to declare dividends out of the of the
unrestricted retained earnings” which shall be payable in cash, in property, or in stock to all stockholders
on the basis of outstanding stock held by them.

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 1. Stock dividends – it shall not be issued without the approval of stockholders representing at
least 2/3 of the capital stock then outstanding at a regular meeting of the corporation or at a
special meeting duly called for the purpose.
2. Other dividends – A mere majority of the quorum of the board of directors is sufficient to
declare other dividends. The board may declare dividends other than stock without need of
stockholders approval.

The dividend is paid to the registered owner of stocks as of a record date usually a date different from the
date of declaration. It is stated either at a given percent or a fixed amount for each share. The record date
determines the time when the stockholders of record shall be ascertained.

Dividends payable out of unrestricted retained earnings

Under the law, dividends other than liquidating dividends may be declared and paid out of “the
unrestricted retained earnings” of the corporation. A corporation cannot make a valid contract to pay
dividends other than from retained earnings or profits and an agreement to pay such dividends out of
capital is unlawful and void.

The power of corporation to acquire its own shares is likewise subject to the condition that there be
unrestricted retained earnings in its books to cover the shares to be purchased.

Existence of actual profits or earnings

To justify the declaration of dividends, there must be an actual bona fide surplus profits or earnings over
and above all debts and liabilities of the corporation.

1. Earnings of the corporation which have not yet been received even though they consist in
money which is due cannot be included in the profits out of which dividends may be paid.
2. Dividends cannot be declared out of the borrowed money, for the borrowed money is not
profits; but money may be borrowed temporarily for the purpose of paying dividends, if the
corporation has used its surplus assets to make improvements for which it might have
borrowed money.
3. A corporation may properly pay dividends from accumulated surplus out of previous years
although realizing no profit from current earnings.
4. It cannot pay dividends although it has realized actual profits for the year in which dividends
are declared until it has eliminated a deficit resulting from its operations of proceeding years.
In other words, dividends may not be declared so long as a deficit exists.

Retained earnings do not include increase in value of fixed assets.

An increase in the value of fixed assets such as land as a result of mere valuation cannot be counted in
the computation of a surplus as basis for a dividend declaration.

The reason why purely conjectured increase in valuation cannot be considered for purposes of dividend
declaration is because such appraisal, however justified for the time being, is subject to market
fluctuations, is merely anticipatory of future profits and may never be actually realized as asset of the
corporation. The surplus of a corporation which may be used for the payment of dividend must be a bona
fide and not on artificial or fictitious one and not be dependent for its existence upon a theoretical estimate
of an appreciation in the value of the corporations assets.

Declaration of dividends

A dividend declaration ordinarily requires the concurrence of two things:

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 1. The existence of “unrestricted retained earnings” out of which the dividends may be declared
and paid
2. A corporate resolution of the board of directors declaring the payment of a portion or all such
earnings to the stockholders

Cash dividends require only the approval by the board of directors. Stock dividends are issued by
resolution of the board of directors and approval of the resolution by the stockholders. For the declaration
of stock dividends, a corporation must have also a sufficient number of authorized unissued shares for
distribution to stockholders; otherwise, it must increase its capital stock to the extent of the corporate
earnings to be declared and distributed as stock dividends.

Discretion of the board of directors

The board of directors has the responsibility to declare dividends and determine the timing as well as their
amounts. The fact, that profits or earnings have been realized in the prosecution of the corporate
business does not necessarily impose upon the directors the duty to declare them as dividends. If their
honest judgement they reasonable determine that the profits should be kept in the business, no court has
the power to compel them to make the distribution in the absence of any showing of bad faith or clear
abuse of discretion on their part. The directors are the judges of how and when to spend corporate funds.

The board of directors cannot lawfully declare dividends until the corporation pays or at least provides for
the payment of its debts.

Limit on retained earnings

Stock corporations, are prohibited from retaining surplus profits in excess of 100% of their paid-in capital
stock except when justified. If the requirement is violated, the corporation may be compelled by the
Securities and Exchange Commission to declare dividends to its stockholders.

Payment of subscription from dividends

1. From dividends to be declared – it has been held that a stipulation to the effect that the
subscription is payable from the first dividends declared on any and all shares of said
company owned by me at the time dividends are declared until the full amount of the
subscription has been paid” is illegal for it “obligates the subscribe to pay nothing for the
shares except as dividends may accrue upon the stock.
2. From cash dividends – Where payment has been made, however, on stock subscription, the
stockholder is still entitled to receive cash dividends due on delinquent stock but the
dividends “shall first be applied to the unpaid balance on the subscription, plus costs and
expenses, while stock dividends shall be withheld from the delinquent stockholder until his
unpaid subscription is fully paid.”
3. From stock dividends – A stockholder’s indebtedness to a corporation under a subscription
agreement cannot be compensated or set-off with the amount of his shares in the same
corporation there being no relation of creditor and debtor with regard to such shares. “stock
dividends shall be withheld from the delinquent stockholder until his unpaid subscription is
fully paid.” Under the provisions, it is not allowed to apply stock dividend to unpaid
subscription.

Liability of stockholders for illegally received dividends

In case dividends are wrongfully or illegally declared and paid, the stockholders who received them can
be held liable to refund them to the corporation or its creditors. It is immaterial that the dividends were
mistakenly paid out or received in good faith. Since they do not act in a corporate capacity in receiving the
dividends, they do not thereby ratify the illegal act of the board as to preclude a subsequent recovery.

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Under the trust fund theory adopted in our jurisdiction, the payment of dividends from capital may be
considered a wrongful diversion of a “trust fund” held for the benefit of creditors, so that the fund may
accordingly be followed into the hands of stockholders. Some courts take the view that unlawful dividends
received in good faith by the stockholders may not be recovered if the corporation is solvent.

Right of stockholders after declaration of dividends

1. Cash dividends – As soon as dividends are publicly declared, the stockholders have the right
to their pro rata shares. In the absence of a record date, the dividend belongs to the person
who is the owner of the shares of stock at the time of declaration, and not to the owner of the
shares at the time of payment. The reason is that when a dividend declaration is made, the
corporation becomes debtor and the right of the shareholder to distribution, unless a record
date is fixed, becomes fixed by the declaration.
2. Stock Dividends – The above rule, however, does not apply to stock dividends as the
declaration of such dividends may be rescinded at any time before the actual issuance of the
stock. Unlike a cash dividend, a stock dividend requires, as a general rule, more than mere
declaration to make it effective. The vote to increase stock is not per se an increase; and until
the stock is actually issued, or at least in some manner especially set apart to the
stockholder, its effect is not complete.

Total subscriptions basis of share in dividends

As a general rule, and as applied to any form of dividend declaration, the participation of each stockholder
in the earnings of the corporation is based on his total subscription and not the amount paid by him. The
reason is that a stockholder’s entire subscription represents his holdings in the company for which he
pays interest on any unpaid portion. Subscribers are considered stockholders not from the time they are
issued stock certificates but from the time their subscriptions are accepted by the corporation because it
is from this time that they are bound by their subscriptions, subjecting them to all the liabilities and
entitling them to all the rights of stockholders.

Classes of dividends

Dividends that may be declared by a corporation may be classified as follows:

1. Cash dividend or dividend payable in cash. Dividends on par value shares are made at a
stated percentage of the par value. As to no par value shares, dividends are payable in terms
of so many pesos or centavos per share since there is no basis on which a percentage can
be stated. Dividends are usually paid in money;
2. Property dividend or dividend distributed to the stockholders in the form of property, real or
personal, such as warehouse receipts or shares of stock of another corporation. A dividend
payable in property is actually a cash dividend. The stockholder can take the property, sell it
and realize the cash. A corporation may, therefore, pay declared cash dividend in the form of
a “property” provided the distribution of the same is practicable, specifically where the surplus
is in that form and it is not necessary for its corporate purposes;
3. Stock dividend or dividend payable on unissued or increase or additional shares of the
corporation instead of in cash or in property. By this alternative to declaring dividends, the
corporation can retain earnings. The declaration involves the issuance of new shares to be
distributed pro rata to the stockholders;
4. Optional dividend or dividend which gives the stockholder an option to receive cash or stock
dividend;
5. Composite dividend or dividend which is partly in cash and partly in stocks.
6. Scrip dividend or a writing or certificate issued to a stockholder entitling him to the payment of
money or the like at some future time inasmuch as the corporation at the time such dividends
are declared has profits not in cash, or has no sufficient cash, or has the cash but wishes to
reserve it for some corporate purposes. It is in the form of a promissory note or promise to
pay and may be issued to bear interest;

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 7. Bond dividend or dividend distributed in bonds of the corporation to the stockholders
8. Liquidating dividends which are actually distributions of the assets of the corporation upon
dissolution or winding up the same.

Effect of the declaration of cash dividend

When a corporation issues cash dividends, the assets of the corporation diminish by just so much the
amount paid out and correspondingly, the property of the individual stockholders increases.

Effect of declaration of stock dividend

A stock dividend converts the surplus or profits of the corporation covered by such dividend into the
permanent account thereby placing it beyond the power of the board of directors to withdraw from
corporate use and to distribute to the stockholders. Such a capitalization of surplus or transfer of such
surplus to the capital fund of the corporation adds nothing to and takes nothing from the corporation.

The declaration likewise adds nothing to the interests of the stockholders. After a declaration of stock
dividends, the stockholder receives no greater proportional interest in the assets of the corporation that he
had before. In this respect, it is identical in substance with a splitting of original shares in which
outstanding shares are exchange for an increased number of new shares of proportionally less par value
than the old.

Illustration:

A, B, C, D, and E organized a stock corporation with an authorized capital stock of P400,000.00 divided
into 4,000 shares with a par value of P100.00 per share. Each subscribed to and paid for 400 shares.
Hence, the actual asset of the corporation at the beginning of the business, was P200,000.00

After a few years of profitable business, the assets of the corporation amounted to P400,000.00 with no
debts. Instead of declaring ash dividends, it was agreed to increase the capital stock and for that purpose,
to issue 400 additional shares to each stockholder in the form of stock dividends with a total value of
P40,000, which amount represents the actual increase of his share or interest in the business.

At the start of the year, each stockholder held 400 shares with a total value of P40,000.00 which is 1/5 of
the total corporate capital P200,000.00. At the close of the year, after stock dividends are declared, each
stockholder still holds 1/5 interest in the corporation with his 800 shares worth P80,000.00 in relation to
the increased corporate capital of P400,000.00. But the proportional interest of each share in the
corporate assets is decreased because of the increase in the number of shares, from 1/2000 to 1/4000.

Effect of declaration of bond or scrip dividend

The declaration of bond or scrip dividend makes the stockholder a creditor of the corporation for the
amount of the bond or scrip issued as dividends but the assets of the corporation remain the same as
nothing passes out of the corporation to the stockholder.

Distinctions between cash dividend and stock dividend

1. A cash dividend involves a disbursement to the stockholder of accumulated earnings, while

stock dividend does not involve any disbursement
2. Cash dividend declared and paid becomes the absolute property of the stockholder and
cannot be reached by the creditors of the corporation in the absence of fraud, while stock
dividend, being still part of corporate property, may be reached by corporate creditors
3. Cash dividend is declared only by the board of directors, at its discretion, while stock dividend
is declared by the board with the concurrence of the stockholders representing at least 2/3 of
the outstanding capital stock at a regular or special meeting called for the purpose.

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 4. Cash dividend does not increase the corporate capital, while it is increased by a stock
dividend
5. The declaration of cash dividend creates a debt from the corporation in favor of its
stockholders, while no such debt is created by the declaration of stock dividend.
6. Cash dividend is taxable as income to the stockholder, while stock dividend is generally not
subject to income tax.

Distinction between distribution in liquidation and ordinary dividend

The distinction between the two depends in the particular circumstances of the case and the intent of the
parties.

If the distribution is in the nature of a recurring return on stock, it is an ordinary dividend. However, if the
corporation is really winding up its business or decreasing its capital stock and narrowing its activities, the
distribution may properly be treated as in complete or partial liquidation and as payment by the
corporation to the stockholder for his stock or as return of the capital invested by him.

Power to enter into management contract

A corporation is expressly allowed to enter into a management contract with another corporation, which
refers “to any contract whereby a corporation under takes to manage or operate all or substantially all of
the business of another corporation, whether such contracts are called service contracts, operating
agreements or otherwise.”

The following are the limitations for the exercise of the power:

1. The contract must be approved by a majority of the quorum of the board of directors or
trustees and ratified by the prescribed vote of the stockholders or members, as the case may
be, of both the managing and the managed corporations, at a meeting duly called for the
purpose.
2. The period of the contract must not be longer than five (5) years for any one term except that
contracts which relate to the exploration, development, exploitation or utilization of natural
resources may be entered for such periods as may be provided by pertinent laws or
regulations.

In either of the two cases mentioned, the management contract must be approved by the stockholders of
the managed corporation owning at least 2/3, not merely a majority, of the total outstanding capital stock
entitled to vote, or in case the managed corporation is a non-stock corporation, by at least 2/3, not merely
a majority, of the members.

Illustration

1. Interlocking stockholders – If A, B, and C, stockholders in both X Corporation and Y

Corporation, the managing and managed corporations, respectively, owns 35% of the total
outstanding capitals stock entitled to vote of X Corporation, the management contract must
be approved by the prescribed 2/3 vote of the stockholders of Y Corporation. The same vote
shall apply where A is the only stockholder in both corporations and he owns more than 1/3 of
the total outstanding capital stock entitled to vote of X Corporation. Only a majority vote is
required if the outstanding capital stock of y Corporation, the managed corporation.
2. Interlocking directors – if A, B, C, D and E constitute the majority of the members of the board
of directors of X Corporation and also of Y Corporation, the bigger 2/3 vote by the
stockholders of Y Corporation is necessary. This is a case of a contract between two
corporations with interlocking directorates. The extent of the shareholdings of A, B, C, D and
E in X Corporation is immaterial.

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 In both illustrations, the management contract need only be approved by the majority of the
outstanding capital stock of X Corporation is a non-stock corporation.

Ultra vires and intra acts explained

It is well-settled that a corporation is not restricted to the exercise of powers expressly conferred upon
it but has the implied or incidental powers to do what is reasonably necessary to carry out its express
powers and to accomplish the purposes for which it was formed.

According to the strict construction of the term, an ultra vires act is one not within the express,
implied, and incidental powers of the corporation. It is an act which is impliedly forbidden, because it
is not expressly or impliedly authorized or necessary or incidental in the exercise of the powers so
conferred. Acts within the legitimate powers of a corporation are called intra vires.
Illustration

A corporation was organized for the purpose of engaging in the buying and selling of home
appliances. The act of buying and selling motor vehicles would be ultra vires although it is itself lawful
because it is outside the object for which the corporation is created and, therefore, beyond its powers.

Ultra vires act distinguished from an illegal act.

When properly used, an ultra vires act means simply an act which is beyond the conferred powers of
a corporation or the purposes for which it is created. By itself, an ultra vires act is not necessarily
illegal. It may be lawful, moral and even praiseworthy.

An illegal corporate act, on the other hand, is an act which is contrary to law, morals, good customs,
public order or public policy. The buying and selling of contraband goods would not be illegal but also
ultra vires.

Ratification of ultra vires acts.

1. Where the contract is illegal per se, it is wholly void or existent. It cannot be ratified or
validated.
2. Where the contract is not illegal per se but merely beyond the power of a corporation, the
same is merely voidable and me be enforced by performance, ratification, or estoppel, or
an equitable ground.

Effects of ultra vires acts which are not illegal

The following rules are recognized:

1. An ultra vires contract, as long as it is executory on both sides, cannot be enforced by either
party thereto. It is in the public interest that corporations do not transcend the powers granted
to them and their assets be not subjected to risks created by forbidden acts.
2. When an ultra vires contract has been fully performed on both sides, neither party thereto can
lawfully set aside the same or to recover what has been given. No public interest is involved
here since both parties have already received to their advantage the benefits of the contract
voluntarily entered into.
3. When an ultra vires contract has been performed on one side and the other has received
benefits by reason of such performance, recovery is permitted in most courts on behalf of the
former on the ground that it would be unjust to allow retention of benefits by a party coupled
with his refusal to perform. Other courts hold the contract unenforceable but require the party
who has received the benefits of performance to return what he has received or failing to that,
to pay its reasonable value.

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In any case, when a contract is not on its face necessarily beyond the scope of the power of the
corporation by which it was made, it will, in the absence of proof to the contrary, be presumed to be valid.

BY-LAWS AND CORPORATE CHARTER

1. Define or what is by-laws?

By-laws may be defined as the rules of action adopted by the corporation for its internal
government and management and for the government and supervision of its officers and of his
stockholders or members.

2. State the functions of the corporate by-laws.

The functions of the by-laws “is to prescribe the rights and duties of the members toward the
corporation and among themselves with reference to the management of the corporate affairs
and to regulate the transaction of the business of the corporation in a particular way.

3. What are the requisites and the limitations of the by-law?

The requisites and limitations of the by-laws are:

a. The by-laws must be consistent with the general law;
b. Must be consistent with public policy and public welfare; hence, one which has the tendency to
unreasonable restraint of trade is void;
c. Must be reasonable and not “unreasonable, oppressive or extortionate”,
d. Must be general and uniform in their operation and not directed discriminately against a particular
individuals;
e. Must be in consonance with the charter or with the articles of incorporation;
f. Must not impair obligations and contracts;

4. What are the binding effects of a valid by-laws?

By-laws are binding upon its directors, officers and corporate agents and stockholders or
members who are bound by and must comply with them. As a rule, however, third persons are
not bound by the by-laws not expressly authorized by the charter or statutes unless they have
actual knowledge of them.

5. When are by-laws adopted?

The corporation is required to adopt the by-laws within 30 days from the issuance of certificate of
incorporation. By-laws, however, may be adopted and filled with the SEC prior to incorporation
and submitted together with the articles of incorporation for registration and filling.

6. What is the effect if the by-laws not being filled within 30 day period from SEC approval of
incorporation?

Failure to submit the by-laws within 30 days from incorporation is not a ground to automatically
dissolve the corporation or to revoke its certificate of incorporation. However, it may be a ground
for suspension or revocation after proper notice and hearing.

7. What are the proper subjects to be incorporated in the corporate by-laws?

The proper subject or contents of the by-laws, are:

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a. Setting the time, place and manner of calling and conducting of regular or special meeting of its
stockholders;
b. Setting the time and manner of calling and conducting regular or special meetings of its directors;
c. Fixing the number of stockholders or members necessary to constitute a quorum for the
transaction of business or at the meeting of stockholders or members;
d. Outlining the conditions upon which the members of non-stock corporation shall be entitled to
vote;
e. Providing for the mode of securing proxies of stockholders or members and voting them.
f. Setting forth the qualifications, duties and compensation of directors, officers and employees;
g. Fixing the time for holding the annual election of directors and the mode and manner of giving
notice thereof.
h. Providing for the manner of election and tenure of office of all other officers other than the
directors and those elected by the directors or trustees;
i. Imposing penalties for violation of by-laws;
j. Regulating the manner or mode of issuing stock certificates or shares of stock in case of stock
corporation;
k. Including such other matters not otherwise provided in the Corporation Code as may be
necessary for the power or convenient transaction of the corporate business.

8. What is a corporate charter?

A corporate charter is an instrument or authority from the sovereign power bestowing the right or
privilege to be and act a corporation.
9. Distinguish articles of incorporation from by-laws of the corporation.
a. Articles of incorporation is to be considered as a charter of the corporation; whereas, by-
laws are treated as its rules and regulations;
b. Articles are executed before incorporation; whereas, by-laws usually after incorporation;

10. What is a franchise?

A franchise is a right, privilege or power of public concern which ought not to be exercised by
private individuals at their mere will or pleasure but should be reserved to public control and
administration by the State.

11. Classify franchises.

Franchises are either:

a. Primary franchise – a privilege conferred upon a group of persons to act as a legal unit; a
privilege of being or acting as a corporation.
b. Secondary franchise – a special privilege granted by the State to a corporation to use public
property for their private business or to exercise the power of eminent domain; this type belongs
to the corporation, not to individuals composing the corporation.

12. State the extent of the charter as a contract.

The charter of a corporation whether it is created by special law

or under the general incorporation law such as the Corporation
Code of the Philippines, is a contract:
a. Between the State and the corporation;
b. Between the corporation and the stockholders/members;
c. Between the stockholders/members and the State; and
d. Stockholders/members among themselves.

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 AMENDMENT AND REPEAL

1. What is the date effectivity of the amendments?

The amended or new by-laws become effective upon issuance by the SEC of a certificate
of filling.

Under the Corporation Code the rule is that the amendments to the articles take effect
upon approval by the SEC or from the date of filling with the SEC if not acted upon within sic
months from date of filling for a cause not attributed to the corporation.

CORPORATE MEETING AND QUORUM

1. What are the requisites of a valid meeting?

The requisites are:
a. The meeting shall be held at a proper place
b. The meeting shall be held at the appointed time or at a reasonable time thereafter
c. The meeting must be called by the proper persons
d. There must be previous notice on those cases where notice is necessary
That those present must constitute a quorum.

2. Who can call a meeting?

The following may call a meeting, namely:

a. The person or persons indicated to have authority to call such meeting in the corporate by-laws;
b. In the absence of such specific designation in the by-laws, the meeting is called by the board of
directors;
c. The President when authorized by the board of directors through a resolution or when provided in
the corporate by-laws;
The secretary or clerk may call special meeting for the purpose of removing a director under Sec
27, Corporation Code and in case of refusal or failure of the secretary or clerk to call such
meeting, the call may be made by any member or stockholder of the corporation signing the
demand or by the SEC upon proper petition.

3. What are the rules governing quorum?

The basic and fundamental rules governing quorum are:

a. General rule – A corporation may determine in its by-laws the number of stockholders or
members who may constitute a quorum to do business, except, however, in cases where the law
has specifically set forth the requisite number to transact business.

b. Majority of the members of the non-stock corporation – or if stock corporation, the stockholders
representing or holding majority of the capital or outstanding stocks:

i. To increase or decrease the number of directors

ii. To incur, create and increase indebtedness;
iii. To adopt by-laws
iv. To amend, repeal, or adopt new by-laws
v. To revoke delegated powers of the board to amend, repeal or adopt new by-laws
vi. To elect directors
vii. To sell, dispose of stocks purchased by the corporation and to auction sale of delinquent
stocks for unpaid subscription;
viii. To fix consideration of no par value shares
ix. To choose the presiding officer in a special meeting called by the order of the court

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c. Two-thirds (2/3) of the members if non-stock corporation or if stock corporation by stockholders
representing or holding at least two-thirds of the subscribing/voting capital stock:

i. To issue stock or bond of dividends

ii. To amend the articles by increasing or decreasing the capital stock
iii. To invest corporate funds in any corporation or to purpose other than the main purpose
iv. To amend the articles on any matter
v. To delegate to the board the power to amend, repeal or adopt new by-laws
vi. To remove directors
vii. To sell, exchange, lease or otherwise dispose of all or substantially all of its property and assets,
including the goodwill
viii. To dissolve the corporation voluntarily

d. One half of the shares entitled to vote in case of calling special meeting to remove directors.

4. What rights of the stockholders are related to “control and management”?

Control and management rights of stockholders are amplified by the following:

1. Voting rights for election, removal of directors and other incidental rights relative to notice and
holding of meetings;
2. Voting rights as to the making of amendment to the charter or other fundamental changes in the
corporate existence and set-up;
3. Voting rights as to the making and amendment of the by-laws;
4. Right to enter into voting trust agreement;
5. Voting rights to the approval of certain corporate acts i.e., execution of management contract,
delegation to the board of directors the power to amend by-law or adopt one; ratification of certain
corporate contracts with a director or officer approval of merger or consolidation;
6. The right to have the corporation managed honestly and carefully for the benefit and profit of the
shareholders.

5. Enumerate the proprietary rights of the stockholders. or What are the rights of stockholders?
The proprietary rights of the stockholders are exemplified by the following:
1. The right to participate ratably in the dividend distribution when ordered in the direction of the
management;
2. The right to participate in the assets distribution in total or partial liquidation;
3. The right to equal treatment and honest treatment by the management and by majority
stockholders in corporate transactions affecting his new interest such as new shares issued;
4. The right to be issued shares and to be registered as shareholders in the corporate books;
5. The privilege of immunity from personal liability for corporate debts subject to judicial limitations
against abuse of this privilege;
6. Appraisal right;
7. Transfer of stocks;
8. Right to inspect the books;
9. Right to financial statements;
10. Right to recover stocks unlawfully sold for delinquent payment of the subscriptions.

6. What rights are being enjoyed by the stockholders falling under the category of “remedial rights”?

The following rights are categorized as remedial rights:

1. The right to information and inspection of the corporate books and records;

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 2. The right to bring representative or derivative suit;
3. The right to compel the calling of meeting when corporate officers fail to do so;
4. Equitable and statutory rights or remedies under common law for the infringement of individual
rights.

7. What is voting trust agreement?

It is an agreement in writing where one or more stockholders of any corporation transfer their
shares to any person or persons or to corporations having authority to act as a trustee for the
purpose or to vesting in such person or persons or corporation as trustee or trustees, voting or
other rights for certain period (not exceeding 5 years) and upon the term and conditions stated in
the agreement.

8. What is the object of voting trust?

The object is to vest in the trustee, voting and other rights pertaining to the shares transferred.
The general object of forming a voting trust is to ensure permanency of tenure of directors and to
take away from the shareholders the power to change the management.

9. What is a voting trust certificate ?

It is a certificate which the voting trustee executes and delivers to the shareholder in return for the
certificate of stock issued to shareholder to show that the latter in reality is the owner of the
shares held in trust.

10. Who are the parties in the voting trust certificate?

The transferee is known as the voting trustee and the transferor, the transferring or depositing
stockholder.

STOCKS AND STOCKHOLDERS

1. What is issue?
The term “issue” is employed to indicate the making of a share contract.

2. What are the modes of issuing shares?

There are four ways of issuing shares, namely:
a. Subscription – by subscribing before and after incorporation, original, unissued shares
b. Sale or exchange of unissued shares – by sale of the unissued stocks after incorporation
for money, property or service
c. New subscription – by subscription or sale of new stocks when all the original stocks
have been issued and the amount of the capital stock has been increased
d. Dividend – by making or issuing stock dividend

3. How will one acquire shares of a corporation?

Shares may be acquired by any of the following methods:
a. By pre-incorporated subscription
b. By purchase of the unissued shares of stock of an existing corporation
c. By succeeding to the rights of one who has been previously a shareholder either by
purchase or bequest of the shares
d. By means of a subscription or purchase of new shares of an existing corporation which
has increased its capital stock
e. By purchase from the corporation of “treasury shares”.

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 4. What is subscription?

Subscription is the actual agreement of the subscription to be taken and to be paid for the stock
of the corporation.

5. Classify subscriptions?
Subscriptions are classified as follows:
a. Pre-incorporation subscription – those made before incorporation
b. Post-incorporation subscription – those made after incorporation of the corporation
c. Miscellaneous – subscription to an original issue of stock; subscription made to an
increase of stock; subscription with special term; and conditional subscription.

6. What are the considerations for shares of stocks?

The valid considerations may be as follows:
a. Actual cash payment
b. Delivery of property real/personal with an agreed assessment or valuation
c. Services already rendered the value of which is worth the stocks issued by the
corporation

7. Distinguish subscription from purchase of shares

The distinguishing features are:

a. In subscription, the subscriber, from the moment of the subscription, has all the rights and
obligations of the stockholder even though he has not yet fully paid his subscription; in purchase,
the purchaser becomes a stockholder when he has fully paid the purchase price;

b. Subscription refers only to stocks issued prior to incorporation and to additional stocks issued
after incorporation; purchase may refer only to shares of stock issued after incorporation;

What are the cases where a stockholder is allowed to withdraw from the corporation and compel
the corporation of which he is stockholder to buy his shares of stocks?

Instances where appraisal may be invoked are:

1. In case of amendment of articles resulting in restriction of existing right or
new preferences of stockholders;
2. In case of sale, lease, exchange, transfer, mortgage, etc. of all or
substantially all of the corporate property and assets;
3. In case of merger and consolidations;
4. In case of extension or shortening of corporate term;
5. When corporate funds is diverted from primary to secondary purpose
6. In case of close corporations

What is an individual suit?

An individual suit is one brought to assert a right by a stockholder
peculiar to himself such as: suit demanding issuance of stock certificate,
payment of dividends, payment of the book value, etc.

What is a representative suit?

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 A representative suit is one brought by a stockholder in his own behalf
and in behalf of other stockholders similarly situated, and having a common
cause against the corporation.

What is a derivative suit?

A derivative suit is one brought by stockholder for and in behalf of the
corporation and against any person, stockholder, director, officer or third
person. In such action the suing stockholder is regarded as nominal party,
with the corporation as the real party in interest.

A derivative suit is an action brought by the minority shareholder in the

name of the corporation to redress wrongs committed against it, for which
the directors refuse to sue. It is a remedy designed by equity and has been
the principal defense of the minority stockholders against abuses by the
minority.

What are the requisites required before a derivative suit can be filed by a stockholder?
The requisites are:
1. Cause of action in favor of the corporation;
2. Refusal of the corporation to sue;
3. Party filing the suit is stockholder
4. In case of success reimbursement is proper.

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A derivative suit will be dismissed if the petitioner fails to show that they have a
legal basis for representing their co-members and have not shown what acts of
the board are detrimental to the interest of the corporation and its members.

Transfer of Stock and Enforcement of Stock Subscription

What is a certificate of stock?

A certificate of stock is the written acknowledgement by the corporation of the stockholders interest in the
corporation and property.

What are the contents of a certificate of stock?

The items or matters that must be included in the certificate of stock are:
The number of the certificate
The name of the registered holder
The number of shares that the certificate represents and the class thereof
The designation, preferences and special rights of the particular class of stock and the limitations,
restrictions and qualifications thereof
The total number of authorized shares and the value thereof, or if shares have no par value, statement to
that effect
The date of the issuance of the certificate
The signatures of the authorized offers
The corporate seal

What is the nature of a certificate of stock?

The certificate is a personal property and may be mortgaged or pledged. As

negatively commented:

A certificate of stock is not in the corporation but merely evidence of the holders interest in the corporation
and his ownership of the share represented thereby;
Certificate is not a negotiable instrument under the NIL even endorsed in the blank. It is merely
considered as a “quasi-negotiable instrument”.

What are the formalities in the issuance of certificate?

The certificate should be signed by the President or vice-president, countersigned by the secretary or
assistant secretary.

When is a stockholder entitled to a certificate of stock?

As soon as he has complied with all the formalities (I.e. payment for the share) which would entitled him
to a share. When there are two conflicting claimants of a share, an interpleader suit is proper.

Explain the right to transfer shares of stock.

Shares of stock are personal property, and the owner as the case of other properties, has an absolute
and inherent right as an incident of his ownership, to sell, transfer (I. E., pledge, mortgage) the
same at will. This disposition/transfer right may be restricted by the articles, the general law, the by-
laws or agreement between him and the corporation.

Give the effects of unregistered transfer?

Generally the corporation is not bound to recognize unregistered stockholder,

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consequently:

An unregistered stockholder cannot vote at corporate meeting for the transferor (registered stockholder)
has still the right to vote;
The corporation is protected in paying dividends in good faith to one registered as stockholder;
The assignor, not the assignee, is liable for calls;
Regarding the rights of creditors of registered stockholder, the transfer is invalid as to those without notice
of the transfer;
Corporate creditors may hold the transferor liable to the corporation.

What are the remedies available to the corporation to enforce stock subscription?

The methods or remedies available are:

Extrajudicial sale at public auction to put the unpaid stock for sale and dispose of it for the account of the
delinquent subscriber;
Judicial action by ordinary civil action in court;
Delinquent stockholder may be deprived of his right to vote or be voted at any stockholders or directors
meeting or for any corporate purpose whatsoever;
Providing in the by-laws any conceivable remedy-i.e.., non-payment of dividends.

What is the concept of call?

Unpaid subscriptions are not due and payable unless there is a call pursuant to a board resolution.

When is a stock considered “delinquent”?

It is considered “delinquent” when it is not paid on the date fixed in the resolution of the board declaring
such stock due and payable.

When is a stock considered “delinquent”?

It is considered “delinquent” when it is not paid on the date fixed in the

resolution of the board declaring such stock due and payable.

State the procedure in the sale of delinquent stocks?

Procedurally,
The board of Directors passes a resolution declaring that part of the whole of the unpaid subscription is
payable, fixing the date when it should be paid;
The Secretary will notify the stockholders of the resolution;
If the stockholders do not pay on the date of delinquency, a notice will be issued by the corporation
stating that the delinquent stock will be sold at a certain specified date;
On the sate of sale, so many shares of stock as may be necessary to pay the amount due on
subscription, interest accrued, expenses of advertisement and cost of sale, will be sold cash to
highest bidder at public auction.

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Who is the highest bidder in the sale of delinquent stock?

Highest bidder is one offering at such sale to pay the unpaid subscription with interest, expenses of
advertising and cost of sale for the smallest number of shares or fraction shares.

Example:
X offers P300.00 for 6 shares; Y offers P300.00 for 5 shares and Z offers P300.00 for 4 shares and so Z
is the highest bidder.

CORPORATE BOOKS AND RECORDS

What corporate books and records must be kept?

They are:
The records of all business transactions;
The minutes of all meetings (regular and special board of directors);
The minutes of all meetings of the members/stockholders;
Stock and transfer book;
Financial statements

Who has the right to inspect corporate books?

Usually the following:

Directors, members or stockholders of a corporation
Government personnel or agencies authorized by law to exercise visitorial powers of state.

MERGER AND CONSOLIDATION

Give the concept of merger and consolidation

In merger, one corporation absorbs the other and remains in existence while the other is dissolved;

In consolidation a new corporation is created and the condolidating corporations are extinguished.

What is the procedure to effect corporate merger or consolidation?

The procedure being as follows:

Approval of the plan of merger by the board of directors/trustees of the constituent corporations, setting
forth the term of merger/consolidation, a statement of changes in the articles of incorporation of the
surviving or consolidating corporation;
Approval of the plan by the stockholders of each constituent corporation by a vote of at least 2/3 of the
outstanding stocks or 2/3 of the members if non-stock;
Execution of the articles of merger/consolidation of each constituent corporation duly signed by their
respective officers;
Submission of four copies of the executed articles of merger/consolidation to the SEC and the issuance of
proper certificate of merger/consolidation by the SEC.

State the effects or consequences of the corporate merger or consolidation

The consequential effects are:

In merger, the constituent corporation shall become one corporation; in consolidation, the new
consolidated corporation shall be the remaining corporation;
The separate existence of the constituent corporations shall cease;
The surviving or consolidated shall posses all rights and liabilities of a corporation organized under the
Corporation Code.

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All rights, privileges, immunities and franchise of each of the constituent corporations are transferred to
the surviving/consolidated corporation;
The surviving/consolidated corporation shall absorb and be liable for liabilities and obligations of each of
the constituent corporations.

Define dissolution

Dissolution as applied to a corporation signifies the extinguishment of its corporate existence. A

corporation is considered dissolved when its existence is terminated, its charter extinguished; its
affairs wound up, and its assets distributed among the corporate creditors and stockholders.

What are the steps involved in corporate dissolution?

The steps involved are:

Termination – of the corporate existence at least as far as the right to go on doing ordinary business is
concerned;
Winding up – of its affairs, the payment of debts and the distribution of its assets among the shareholders.

What are the causes/methods of corporate dissolution?

The methods may either be:

Voluntary dissolution – with the following situational cases:

Where no creditors being affected
Where creditors are affected
Shortening corporate term

Involuntary dissolution – and the causes are:

Expiration of the corporate term, legislative enactment, failure to organize and commence
transactions within 5 years from date of incorporation
Judicial decree of forfeiture upon quo warranto proceeding under the Code
Upon filing petitions on grounds specified under PD No. 902-A with RTC

State the procedure for voluntary dissolution where no creditors are affected

Affirmative vote of the majority of the board;

Call for meeting of stockholders/members and publication of notice of the same once a week for three
weeks;
Affirmative vote of 2/3 of the members or 2/3 of the outstanding capital stock;
Certified copy of the resolution signed by majority of the directors and countersigned by the Secretary
filed with the SEC

What is the procedure of dissolution where creditors are affected?

Call for meeting of stockholders or members for the specific purpose of dissolving the corporations;
Affirmative vote of the majority of the members if non-stock or 2/3 of the outstanding capital stock in stock
corporation;
Petition filed with the SEC signed by the majority of the Board and verified by the President/Corporate
Secretary/Director;
Order by SEC setting the date for filing of objections, not less than 30 days nor more than 60 days after
entry order;
Publication once a week for three weeks and posting of the orders in three public places;
Hearing of the petition;
Judgement

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What are the effects of dissolution?
The corporation ceases as a body corporate to continue the business for which it was established;
The corporation continues as a body corporate for three years for purposes of winding up or for
liquidation;
Upon expiration of the winding up period the corporation ceases to exist for all purposes and as a general
rule, it has no longer the capacity or power to enter into correct, take hold or convey property,

What is liquidation or winding-up?

Liquidation means the winding up of the affairs of the corporation by getting on the assets, settling with
creditors and debtors, and appointing the amount of profits and losses.

What are the methods of liquidation of a dissolved corporation?

Liquidation by corporation itself – The Corporation Code grants a corporation for a period of three years
within which to wind up its affairs; the claims by and against it not presented or settled within that
period become unenforceable as there exist no longer a corporate entity against which it can be
enforced.

Liquidation by a duly appointed receiver – The SEC and RTC authorizes the liquidation by the receiver.

Liquidation by a trustee – The liquidation of the corporation may be placed in the hands of a trustee or
assignee to whom the corporate assets are conveyed.

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What are the basic rules in assets distribution?
When the corporation is insolvent, the creditors of the corporation are entitled to have all assets
distributed first among them according to their rights and priorities in line with the Trust Fund
Doctrine
Stockholders, directors or other corporate officers who are also its creditors as a rule of a legitimate loan
or claim must be paid next.
The remainder are to be distributed among the stockholders in proportion to the par value or issue value
of their share in the absence of any contrary provision
Holders of preferred stocks as to assets enjoy preference over common stockholders in the distribution of
the surplus proceeds of the assets of the dissolved corporation
Assets attributable to unknown creditors/stockholders to be escheated to the city/municipality where such
are located.

Notes:
Corporation continues to be a body corporate for three (3) years after its dissolution for purposes of
prosecuting and defending suits by and against it and for enabling it to settle and close its affairs,
culminating in the disposition of its remaining assets.
The corporation during the winding-up may negotiate and transfer the assets of the dissolved corporation,
provided the stockholders give their consent.
In labor case, the corporate directors and officers are solidarily liable with the corporation for the
termination of employment done with malice or in bad faith.
During the 3 year period, corporation has still personality to sue and be sued but not after expiry of the
period unless the case was filed before the dissolution; however, it cannot extend corporate life by
amendment during the 3-year period.
There can be no distribution of assets to stockholder without first paying the creditors.

FOREIGN CORPORATIONS

What is a foreign corporation?

Foreign corporation is a corporation created by or under the laws of another state or country. Under the
Corporation Code “it is one formed, organized or existing under any laws other than those of the
Philippines and whose laws allows Filipino citizens and the corporations to do business in its own
country or state.

What is the requirement before a foreign corporation may transact or do business in the Philippines?

Foreign corporations shall not be permitted or transact business in the Philippines until they have secured
a license for that purpose from the SEC in case of banking corporation upon order of the Monetary
Board of the Bangko Sentral ng Pilipinas.

What is the object of corporate licensing?

The object of the statute is not to prevent the foreign corporation from performing single act but to prevent
it from acquiring a domicile for the purpose of doing business without taking steps necessary to
render it amenable to suits in the local courts.

What are consequences of non-compliance of licensing as required by law?

The effect of non-compliance of the corporate licensing as required by law are:

The foreign corporation shall not be permitted to transact business in the Philippines.
The Foreign corporations doing business in the Philippines without a license cannot maintain a suit in the
local courts except for infringement, unfair competition or tort.
The officer or agent of the corporation not having the required license is criminally liable.

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Contracts entered into by the unlicensed foreign corporation doing business in the Philippines many be
questioned as contrary to law and public order.

What constitutes “transacting/doing business” in the Philippines”?

The real test whether a corporation is doing business in the state is:
Is the corporation engaged in the transaction of business or any part thereof, which it was created and
organized to transact”?
If it be, it does business within the meaning of the Corporation law.

Who may organize a corporation sole? Its purpose?

The chief archbishop, bishop, chief priests, minister or rabbi or presiding elder of a religious
denomination, society or church may organize corporation sole. The purpose of a corporation sole
is administration of any religious denomination, society or church and the management of the
estates and properties thereof.

How are educational institutions being classified?

Non-stock corporations with the following features:

Trustees shall not be less than 5 nor more than 15 and should be multiple of five.
Only one-fifth of the trustee are elected annually.
5 years term of the trustees.
Powers and authority where the term and number of directors are governed by the provision of the
stock corporation.

Stock corporations with the terms and number of directors are governed by the provision of the stock
corporations.

When is there a close corporation?

Close corporation is one whose articles provides for the following:
That its shares shall not be held by a group of more than 20 persons;
That all of the issued stocks shall be subject to one or more restrictions on transfer;
That the corporation shall not list in any stock exchange or make public offering of any of its stocks.

What are the principal features or characteristics of a close corporation?

Stockholders act as directors without need of election and therefore are liable as directors;
Quorum may be greater than a mere majority;
Transfer of stock to others which would increase the number of stockholders to more than the maximum
are invalid;
Corporate actuations may be binding even without a formal board meeting, if the stockholders have
knowledge or ratify the informal action of others;
Pre-emptive right extends to all stocks issued;
Deadlocks in the board are settled by the SEC on written petition by any stockholder;
A stockholder may withdraw and avail of his right of appraisal.

What are the purposes of non-stock corporation?

The non-stock corporation may be organized for charitable, religious, educational,
professional, cultural, fraternal, literary, trade, industry, agricultural and like chambers or any combination
thereof.

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Discuss the voting rights of the members in non-stock corporation

Each member is entitled to vote unless his voting right is limited broadened or denied by the articles/by-
laws. Voting may be done by proxy, unless restricted by the articles/by-laws. The voting may be
conducted by mail or other similar means as authorized by the articles/by-laws and under such
conditions as may be fixed by the securities and Exchange Commission. Corporate officers elected
by the members directly unless otherwise provided by the articles/by-laws.

Give the composition of the Board of Trustees

The board may be more than 15 in number divided into three groups, such that the term of one group
after each other shall expire every year. A trustee shall have 3-year term of office.

In case of corporate dissolution, what is the rule in assets distribution?

Assets of non-stock corporation, on its dissolution shall be distributed in the

following manner:

All its creditors shall be paid;

Assets held subject to return on dissolution, shall be delivered back to their givers;
Assets held for charitable, religious, etc. without a condition for their return on dissolution, shall be
conveyed to one or more organizations engaged in similar activities as the dissolved corporation;
All other assets shall be distributed to members, as provided for in the articles or by-laws.
In any other cases the assets may be distributed according to a plan of distribution, approved by at least
2/3 of the members in a meeting where they have been properly notified.

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