Enabling Law- The New Corporation

Code (Batas Pambansa No. 68), which

became effective 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.

Attributes of a Corporation:

1. It is an artificial person. Separate and

distinct juridical personality commencing
from the time the SEC approves the Articles
of Incorporation and issues the certificate of
Incorporation (Sec. 19)
(Doctrine of corporate entity)
2. It is created by operation of law. - Once
approved by the State, the corporation is
conferred
Primary Franchise the right given to exist as a
corporation
Secondary Franchise- It is the right given to
operate its business wit all the powers, attributes
and properties.


PRIMARY

SECONDARY

1. refers to the franchise of

1. refers to the exercise of
being or existing as a
rights as for
example,
corporation, i. e.,
the right of eminent
possessing a unity and
domain or the partial
of public
2.continuity
vested in theof existence appropriation
2.
It
is
deemed
to
property

individuals who
compose the
corporation and is
essential to a
corporation de jure.
3. it cannot be sold or
transferred because it is
inseparable from the
corporation itself.

vest in the
corporation

3. It may be sold or
transferred; sue or
be sued; subject to
sale on execution,
subject to levy
provided such sale
is decreed or
ordered in judgment
and is effective only
when sale is

3. It has the right of succession.- May

continue to exist for the duration of its
life term, uninterrupted and unaffected
by the internal changes within the
corporation, such as death, insolvency
or insanity of a director or stockholders.
Doctrine of Perpetual Succession
4. It has the powers, attributes and
properties authorized by law of incident
to its existence. Doctrine Doctrine of
Limited Capacity

How to determine the nationality of

citizenship of a corporation?
Incorporation rule - The corporate
nationality of the corporation shall be
determined in accordance with the
laws of the country where it is
created.
Control Test- The nationality of the
corporation is determined by the
nationality of the controlling
stockholders.

Based on the Corporation Code of the

Philippines, the principal test in determining
the
nationality of a corporation is the Place of
incorporation Test. Simply put, Section 123
of the Code states that a corporation will be
deemed a foreign corporation if it was
"formed, organized or existing under any
laws other than those of the Philippines."
For the purpose of determining compliance
with nationality restrictions on fully or partly
nationalised activities, however, the place of
incorporation test is not the only test
applicable. For such purpose, the control
test has also been adopted by the SEC (SEC
Opinion dated November 23 1993).

Under the control test, the nationality of a

corporation is determined by the nationality of
its
stockholders (see SEC Opinion No. 0440
dated August 10 2004, where the SEC stated that
in
applying the control test, all of the corporation's
capital stock must be considered this should
now be read in light of the Teves decision).
To determine the nationality of a corporation
under
the control test, the formula is quite simple: a
corporation is automatically considered a Filipino
national if at least 60% of its capital is owned by
Filipino citizens.

In addition to the above tests, a third test has

been applied by the SEC in determining the
nationality of a corporation for purposes of
meeting the nationality requirements in
certain activities. Known as the grandfather
rule, this method applies when a
corporation is owned by another corporation
with foreign stockholdings (SEC Opinion No.
3110 dated December 9 2010 see also
SECOGC Opinion No. 1907 dated November
28 2007). Under this rule, nationality is
determined by breaking down the equity
structure of the component corporation(s).

If the percentage of Filipino ownership in the corporation

is less than 60%, only the number of shares
corresponding to such percentage will be counted as of
Philippine nationality.
This is done by multiplying the number of shares in
the corporate shareholder owned by Filipinos by the
number of shares of that corporate shareholder in the
investee company, and then adding the numbers of
shares owned by Filipinos in the investee company.
One must not stop until the citizenships of the
individual or natural stockholders of layer after layer of
investing corporations have been established, the very
essence of the grandfather rule (see SEC En Banc Case
No. 0909177 dated March 25 2010 some
commentators have also stated, relying on the early
case of Palting v San Jose Petroleum (18 SCRA 924
(1966)), that the application of the grandfather rule
cannot go beyond what is reasonable for instance,
the SEC has suggested in the past that the grandfather
rule be applied up to three levels in relation to shares
not traded in the stock exchange (Cesar Villanueva,
Philippine Corporate Law 66 (2010))).

Take for example Corporation Y, whose voting stock is

owned 60% by Corporation Z, with the remaining
40% in Corporation Y being owned by foreigners.
Corporation Z, in turn, is 60% owned by Filipino
individuals and 40% owned by foreign individuals.
Under the grandfather rule, Corporation Y is not
necessarily considered a Filipino national because
Corporation Z's investment of 60% will have to be
broken down to determine the respective actual,
indirect interests in Corporation Y of Corporation Z's
Filipino and foreign shareholders. The respective
resulting indirect interests in Corporation Y of
Corporation Z's Filipino and foreign shareholders will
then be added to the existing direct Filipino and/or
foreign interests in Corporation Y. To illustrate,
Corporation Z's shareholding in Corporation Y (60%)
multiplied by Corporation Z's shares of stock actually
owned by Filipinos (60%) results in 36% Filipino
ownership. This means that, under the grandfather
rule, Corporation Y is not a Filipino national because
the percentage of shareholding actually held by
Filipino citizens is less 60%.

Nevertheless, in both the control test and the

grandfather rule, Section 3 (a) of the FIA
requires a second element: where a
corporation and its non Filipino
stockholders own stocks in an SEC
registered enterprise, at least 60% of the
capital stocks outstanding and entitled to
vote of both corporations must be owned
and held by citizens of the Philippines and
at least 60% of the members of the board
of directors of both corporations must be
citizens of the Philippines, in order for the
corporations to be considered a Philippine
national.

Control test v grandfather rule

As both tests have been applied in determining the
nationality of a corporation for purposes of
investment, the question of which of these two
tests should be applied is a recurrent issue. It
would be well to note that the control test and the
grandfather rule are in fact two parts of one rule
(DOJ Opinion No. 20 dated May 5 2005). In the
1967 SEC Rules implementing the requirements of
the Constitution and other laws imposing
nationality restrictions for the exploitation of
natural resources, the nationality of a corporation
with foreign equity was to be determined as
follows: "shares belonging to corporations or
partnerships at least 60% of the capital of which is
owned by Filipino citizens will be considered as of
Philippine Nationality, but if the percentage of
Filipino ownership in the corporation or partnership
is less than 60%, only the number of shares
corresponding to such percentage will be counted
as of Philippine nationality.

The Department of Justice (DOJ) has

explained that the first part of the rule is
what is now essentially known as the
control test. It is the more liberal rule
because there will be no need to look into
the equity or ownership of an investing
corporation as long as at least 60% of the
investee company is Filipino-owned..
Meanwhile, the second part of the rule
corresponds to what is now termed as the
grandfather rule. In contrast, it is the
more stringent of the two rules, since the
equity or ownership of both the investing
and investee company must be broken
down and ownership traced and thereafter
combined (grandfathered, in other words)
in order to determine the actual
percentage of Filipino ownership.

Under the grandfather rule, Corporation Y is not

necessarily considered a Filipino national
because Corporation Z's investment of 60% will
have to be broken down to determine the
respective actual, indirect interests in
Corporation Y of Corporation Z's Filipino and
foreign shareholders. The respective resulting
indirect interests in Corporation Y of
Corporation Z's Filipino and foreign
shareholders will then be added to the existing
direct Filipino and/or foreign interests in
Corporation Y. To illustrate, Corporation Z's
shareholding in Corporation Y (60%) multiplied
by Corporation Z's shares of stock actually
owned by Filipinos (60%) results in 36% Filipino
ownership. This means that, under the
grandfather rule, Corporation Y is not a Filipino
national because the percentage of
shareholding actually held by Filipino citizens is
less 60%.

Nevertheless, in both the control test and

the grandfather rule, Section 3 (a) of the
FIA requires a second element: where a
corporation and its non Filipino
stockholders own stocks in an SEC
registered enterprise, at least 60% of the
capital stocks outstanding and entitled to
vote of both corporations must be owned
and held by citizens of the Philippines
and at least 60% of the members of the
board of directors of both corporations
must be citizens of the Philippines, in
order for the corporations to be
considered a Philippine national.

Important Doctrines:
1. Doctrine of the Piercing the Veil of the Corporate
Fiction - When a corporations are organized in a
manner which is detrimental to the society such as for
the protection of fraud, for tax evasion, such corporate
entity will be disregarded and will be considered as a
mere association of persons and all members thereof
will be personally liable.
2. Doctrine of Business Opportunity- (Sec. 34)- This
principle reiterates that no director of a corporation
shall place his personal interest over and above the
interest of the corporation. Thus a director is given a
business opportunity which the corporation can
financially take advantage of considering the director
is expected to turn over such business opportunity to
the corporation.
3. Trust Fund Theory (Sec. 65)- A subscriber or
stockholder shall be considered a trustee for his
unpaid subscription by the corporation and the
corporate creditors until such unpaid balance of the
said subscription is fully paid.

4. Trust Fund Doctrine- (Sec. 122) There are two

concepts of this doctrine whereby the
stockholders who receive he corporate assets are
deemed Trustees for such property or assets
received by them under the following instances:
When a solvent corporation, through its Board of
Directors, distributes all its corporate assets to its
stockholders, the corporate creditors can sue directors
and recover the assets from the stockholders;
In a dissolved corporations, the corporate creditors
may also sue the directors if the assets are distributed
to the stockholders without first liquidating all
corporate liabilities and recover such assets from the
stockholders.

5. Doctrine of Limited Capacity Under Section 2 of

the New Corporation Code, a corporation has only
such powers as are expressly granted, those are
necessarily implied from those expressly granted
and those incident to its existence.

Classes of Corporation:
Stock Corporation - Private
corporations with capital stock divided
into shares and are authorized to
distribute to holders of such shares,
dividends or allotments of the surplus
profits on the basis of the shares held.
Non- Stock Corporation- Those which
are organized for profit and do not
issue shares of stocks.

Kinds of Corporation:
1. Public Corporation- those formed or
organized for the government of a portion of a
State.
2. Quasi Public corporation-Those which
accepted from the State the grant of franchise
or contract involving the performance of
public duties but which are organized for
profit.
3. Private Corporation- those formed for some
private purpose, benefit, aim or end.
4. Domestic Corporation- one incorporated
under the laws of the Philippines.
5. Foreign Corporation-one formed or organized
or existing under the laws other than the Phils.

6. Corporation Sole-a Religious Corporation consisting

of one member or corporator only and his
successors, such as a bishop.
7. Corporation Aggregate- A corporation composing
of more than one corporator.
8. De Facto Corporation- a corporation existing in fact
but not in law (Sec. 21).
REQUISITES OF DE FACTO CORPORATION:
The existence of a valid law under which it may be
incorporated;
An attempt in good faith to incorporate;
Use of corporate powers; and
Issuance of certificate of incorporation by the SEC
as a minimum requirement of continued good faith.
9. De Jure Corporation- A corporation in fact and in
law.
10. Eleemosynary Corporation- one established for
charitable purposes or those supported by charity.

11.Ecclesiastical Corporation-one
organized for religious purpose.
12. Lay Corporation- One organized for
a purpose other than for religion.
13. Close Corporation- A corporation
limited to selected persons or
members of a family (Secs. 96-105)
14. Open Corporation- Corporation
that is open to everybody who
wishes to become a stockholder.
15. Multi-national Corporation- A
corporation organized in one state
but operates in several countries.

16. Corporation by Estoppel one that in reality

is not a corporation, either de jure or de
facto, because it is so defectively formed, but
it is considered a corporation in relation to
those who, by reason of acts or admissions,
are precluded from asserting that it is not a
corporation. Under Sec. 21, persons who
represent themselves as a corporation
although not legally constituted shall be
liable as general partners for all debts,
liabilities and damages incurred therein.
17. Corporation by Prescription- one which has
exercised corporate powers for an indefinite
period without interference on the part of the
sovereign power and by fiction of law is given
a status of a corporation. Ex. The Roman
Catholic Church

Distinction between Incorporators and

corporators (Sec. 5)
Corporators are the people who
comprise the corporation such as the
incorporators, stockholders or members.
Incorporators - These are the original
founders of the corporation whose name
appears in the articles of incorporation.
Definition of Promoter - A promoter is one
who assists the incorporations in the
organization of a corporation by making
all the preparations for its organization,
attracts investors to finance it and
assists in the approval and launching of
the corporation.

Functions of a Promoter:

Looks for the right kind of business

Takes care of the formulation of a
business and financial plans.
Look for financing people to invest in a
corporation
Assists in the approval and launching of
the corporation.

Steps in the creation of a corporation:

Promotion It includes all business operations

peculiar to the business world such a bringing
together the incorporation of persons interested
in the enterprise, procuring subscription, making
financial arrangement, etc.
Incorporation - Drafting and execution of the
articles of incorporation, filing of the articles of
incorporation, payment of the filing and
publication fees, issuance by the Securities and
Exchange Commission of the certificate of
incorporation if all papers are found in order.
Formal Organization and commencement of
business operations- Corporate existence
commences to have juridical personality only
from the moment the SEC issues to the
incorporators a certificate or incorporators, under
its official seal. But the corporation is not yet
ready for business unless it is organized.

Note: Non-user of the corporate charter within

two (2) years from the date of incorporation
shall result to automatic dissolution of the
corporation. If corporation already
commenced business but subsequently
becomes continuously inoperative for period
not less than 5 years, it becomes a ground
for suspension or revocation of its corporate
charter. (Section 22)
No. of Incorporator in Stock Corporation not
less than 5 but not more than 15
Qualifications
Natural persons
Capacitated to enter into contracts
Must own and subscribe to at least one share
Majority of the incorporators must be
residents of the Philippines.

Discussions:

In the absence of any provisions in the bylaws, directors are not entitled for any
compensation except for reasonable per
diems. Thus, they are entitled of
compensation if (a) provided in the by laws
and (b) by a vote of the stockholders
representing majority of the outstanding
capital stock. Significantly, if directors are
allowed to claim compensation, their
yearly compensation shall not exceed 10%
of the net income of the corporation before
income tax of the preceding year (Sec.
30).

Self-dealing directors are directors of the

corporation who enter a contract with the
corporation. Said contracts are voidable
in character at the option of the
corporation except:
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;
That the cote of such director or trustee is not
necessary for the approval of the contract;
The contract is fair and reasonable under the
circumstances; and
That in the case of an officer, the contract
with the officers has been previously
authorized by the Board of Directors.

Contracts entered by a self-dealing director is

however ratified by a vote of the stockholders
representing 2/3 of the outstanding capital
stock. (Sec. 32)

Interlocking director- is one who is a director of

two corporations dealing with each other.

The rule is the contract entered by two

corporations with interlocking directors are valid
provided there is no fraud and the contract is fair
and reasonable under circumstances. But an
interlocking director may be treated as selfdealing director where his interest in one
corporation is merely nominal and in the other
corporation greater than 20% of its outstanding
capital stock, in such case the rule on Sec. 32
applies. (Sec. 33)

AS TO PERIOD:
Maximum life of a corporation is fifty years (50)
years, unless sooner dissolved or unless said
period is extended for periods not exceeding a
total of another 50 years. Extension of the
term of the corporation must be made within 5
years prior to its expiration. Extension of
corporate existence must precede amendment
of its Articles of Incorporation, which is duly
approved by the SEC. The rule of Power of
Succession or Perpetual Existence applies.
This means that the corporation enjoys
continuity of corporate existence for the entire
duration of his life, uninterrupted and
unaffected by internal changes which may
occur in the corporation such as death,
insolvency or insanity of the directors or
stockholders.

 The Corporation Code does not prescribe

a fixed amount of Authorized Capital
Stock. But it is required that 25% of the
Authorized Capital Stock is subscribed
(which is then called as Subscribed
Capital Stock) and 25% of the Subscribed
Capital Stock shall be paid up. Paid up
capital must not be less tan P 5,000.
If the Authorized Capital Stock is
expressed in No Par Value shares, the
25% subscribed capital stock and 25%
paid in capital shall be based on he no
par value shares of the authorized
capital stock.

DEFINITION OF COMMON CORPORATE

TERMS:
Capital Stock- The amount fixed in the
articles of incorporation to be subscribed
and paid in or agreed to be paid in by
the stockholders of a corporation.
Authorized capital stock- synonymous
with capital stock if referring to
corporations issuing par value shares. If
the corporation issues no par value
shares, it has no authorized capital stock
but it has a capital stock the amount of
which is not stated in the articles of
incorporation.

 Subscribed Capital Stock- the amount

of the capital stock subscribed
whether fully paid or not.
Outstanding Capital Stock- This is
synonymous with subscribed capital
stock in most cases. It is that portion
of the capital stock, which is issued
and held by persons other than the
corporation. Treasury shares are not
considered outstanding.
Paid-up capital stock- that portion of
the capital stock that is paid.
Capital- the actual property or assets
of the corporation.

Meaning of shares of stock - is an

integral unit of the authorized capital
stock of a corporation.

Meaning of Stock certificate- a

written evidence of ownership of
shares in a corporation and the
rights and liabilities and is not
considered as the stock itself.

Note: As a rule a certificate of stock

will not be issued to a stockholder
until his subscription is fully paid

Main classes of shares

Par value shares- shares with a
specific value fixed in the articles of
incorporation and appearing in the
certificate of stock;
No par value shares- shares without
any stated value appearing on the
face of the certificate of stock.

Notes :
The following cannot issue no par value
shares:
Banks, trust companies, insurance companies
and building and loan associations.

1. Preferred shares of stock may be issued

only with a stated par value.

2. Shares issued without par value shall be

deemed fully paid and non-assessable and
the holder of such shares shall not be
liable to the corporation or to the creditors
with respect thereto.

3. Shares without par may not be issued for

a consideration less than the value of P
5.00 per share. 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.
4. Voting shares- shares with right to vote.
5. Non Voting shares- shares without right
to vote. Shares issued originally with
voting rights cannot be deprived with
voting rights without the consent of the
holder.

Notes: Non-voting shares are, as a rule,

not allowed to vote, except:
In the approval of the amendment to the
Articles;
Adoption and amendment of the by-laws
Sale, lease, exchange etc. of all or
substantially assets of the corporation
Incurring, creating or increasing bonded
indebtedness
Investment of corporate funds in other
corporation
Dissolution of the corporation

 Common shares- stocks which

corporations generally issue.
Preferred shares- shares entitle the
holder thereof certain preferences over
the holders of common shares in the
payment of dividends or distribution of
the assets of the corporation.
Shares in Escrow- shares subject to an
agreement by virtue of which the share
is deposited by the grantor or his agent
with third person to be kept by the
depositary until the performance of a
certain condition or happening of a
certain event contained in the
agreement.

 Convertible shares- stock which is

convertible or changeable by stockholders
from one class to another class such as
from preferred to common, at a certain
price and within a certain period.
Promoter shares- shares issued to
promoters.
Founders shares- shares issued to
organizers of the corporation in
consideration a supposed right or property.
They are given special rights and
privileges not enjoyed by the owners of
other stocks, such as preference in the
payment of dividends and the exclusive
right to vote and be voted for the election
of directors. Said right to vote and be
voted is limited to a period of 5 years,
subject to the approval of SEC.

 Redeemable shares (callable Shares)-shares

usually preferred, which by its terms is
redeemable at a fixed date or at the option of
either the corporation or stockholder or both at a
certain redemption price. The law requires that
all terms and conditions affecting such shares
must be stated not only in the articles of
incorporation but also in the certificate stock.
Redeemable shares may be redeemed by the
corporation regardless of the existence of
unrestricted retained earnings in the books of
the corporation. (Sec. 8)
Treasury shares- shares which has been lawfully
issued by the corporation as fully paid and later
reacquired by purchase, redemption, donation or
through some other means. The corporation
may again dispose of for a reasonable price fixed
by the Board. It is not entitled to vote, not
entitled of dividends, cannot be voted and not
entitled of any privileges or rights.

 Watered stocks - Stocks issued by

the corporation that are:
Stocks issued for a price less than their
par value (discount shares);
Stocks are issued for no value or
consideration at all (Bonus shares);
Stocks are issued as payment for
property acquired by the corporation,
the value of which is less than the par
value of the shares issued;
Stocks are issued as dividends, the par
value of which is not supported by
amount of profits taken from retained
warning account and transferred to
stated capital.

Note: liability of directors for

watered stock: directors or officers
who consent to the issue of watered
stocks shall be solidarily liable
together with the stockholder who
receives the watered stocks, to the
corporation and the corporate
creditors for the difference between
the fair value received at the time
of issuance of the stock and the par
or issued value of such stock. (Sec.
65)

What are the things important in the Articles

of Incorporation to an Accountant?
The life of the corporation to determine if it
still validly exists.
The purpose of the corporation to
determine if it is operating within its
powers and objects.
The amount of its Authorized Capital Stock
and its equivalent in terms of shares, the
part value of each share.
The amount of its 25% Subscribed Capital
Stock and its 25% Paid-up.
The treasurers Affidavit certifying that the
Authorized Capital Stock has been
subscribed and 25% of the subscribed
capital stock is paid-up which is not less
than P 5,000.

 Amendment of the articles of incorporation

may be approved by a majority vote of the
Board of Directors and the vote or written
assent of the stockholders constituting 2/3
of the outstanding capital stock, (Sec. 16).
The amendment of the articles of
incorporation takes effect upon the
approval of SEC or from the date of filing
with SEC if not acted upon within 6 months
not due to the fault of the corporation.

Outstanding capital stock- the total shares

of stock issued to subscribers or
stockholders fully or partially paid as long
as there is a binding subscription
agreement.

Grounds for rejection or disapproval of the Articles or

Amendment of Articles (Sec. 17)

When the articles or amendments are not in the

prescribed form;
When the purpose/s are patently unconstitutional,
illegal, immoral or contrary to government rules and
regulations;
When the treasurers affidavit is false;
When ownership of capital stock by Filipino citizens is
not in accordance with the Constitution or existing laws;
No Articles or Amendments of banks, financial
institution, etc., shall be accepted or approved by the
SEC unless accompanied by a favorable
recommendation of the appropriate government agency
such Articles or Amendments are in accordance with
law.
Corporate existence commences from the time the SEC
approves the Articles of Incorporation and issues a
Certificate of Incorporation. The corporation thus
acquires juridical personality, (Sec. 19).

Persons acting as a Corporation by

Estoppel shall be liable as general
partners for all debts, liabilities and
damages incurred. The Corporation by
Estoppel shall not be allowed to put up
as a defense its lack of corporate
personality. Neither can a third party
dealing with the corporation refuse
performance or escape liability on the
ground that he was not dealing with a
valid corporation, (Sec. 21).

Meaning of De Facto Corporation

A De Facto corporation is one, which
actually exists for all practical purposes as a
corporation but which has no legal right to
corporate existence as against the State.
Requisites of a de facto corporation.
A valid law under which the corporation
might be incorporated;
A bonafide attempt to organized under such
law;
Actual user or exercise in good faith of
corporate powers conferred upon it by law;

Examples:
Name of corporation closely resembles that of a
pre-existing corporation that will tend to deceive
the public;
The incorporator or a certain number of them
are not residents of the Phils.;
The acknowledgment of the articles of
incorporation or certificate of incorporation is
insufficient or defective in form or it was
acknowledged before the wrong officer.
Name of corporation closely resembles that of a
pre-existing corporation that will tend to deceive
the public;
The incorporator or a certain number of them
are not residents of the Phils.;
The acknowledgment of the articles of
incorporation or certificate of incorporation is
insufficient or defective in form or it was
acknowledged before the wrong officer.

State some basic rules on the board of directors

trustees.
They are:
The board of directors or trustees conducts all the business
and controls and holds all the property of the corporation
(Sec. 23.) but the task of actual management and carrying
on the details of business operations are delegated by it to
administrative officers over whom it exercises supervision;

It is generally composed of not less than five (5) but not

more than 15 members elected from the stockholders, or
where there is no stock, from the members of the
corporation ;

 It elects, in turn, the administrative

officers of the corporation such as
the president, treasurer, secretary,
and such other officers as may be
provided for in the by-laws (Sec. 25.);
The directors or trustees are elected
to hold office for one (1) year and
until their successors are elected and
qualified Sec. 23.);
The directors of a stock corporation
are elected by cumulative voting
(Sec. 24.);

 The directors or trustees must act as a

board in order to bind the corporation by
their acts. (Sec. 25.) Exceptions established
by decided cases are, among others:
where the directors are themselves the sole
stockholder;
where the contract is entered into by a
corporate officer (e.g., general manager)
authorized by the board of directors;
where the transaction is ratified at a
subsequent board meeting;
where all the stockholders or trustees
consent;
where the corporation is guilty of estoppel;

 The directors or trustees cannot delegate

discretionary powers vested exclusively in them
by law, or by the by-laws, or by the vote of the
stockholders or members, or are especially
delegated to them, like the delegated power to
adopt or amend the by-laws;
The directors or trustees cannot validly act by
proxy as they are required to exercise their
personal judgment (Sec. 25, last par.);

The directors are agents of the corporation and

they occupy fiduciary relation (i.e., one involving
trust and confidence) to it; and

The qualifications, duties, and compensation of

directors or trustees are those prescribed by the
law or by the by-laws. (Sec. 47 [5].)

May a corporation enter into a

contract of partnership?
Generally no. Reasons:
The partner would have authority to bind
the corporation thus sharing with the
board of directors or trustees the powers
of management entrusted to it exclusively
by the stockholders or members; an
The partnership may engage in a
business which is outside the corporate
purpose.
The answer is yes, where the entire
management of the partnership, by
agreement, is entrusted to the
corporation.

Give the requisites for a valid

board meeting.
They are:
Meeting of the directors or trustees
duly assembled as a board;
Existence of a quorum (majority of
the directors or trustees);
Decision of the majority of the
quorum (Sec. 25.), or in some cases,
a majority of the entire board; and
Meeting is held at the time, place
(Sec. 51.), and manner provided in
the by-laws. (Secs. 47 [2], 63, 101.)

Give the qualifications required by the

Corporation Code of directors in a stock
corporation.
They are:
Every director must own at least one (1)
share of the capital stock;
The share of stock held by the director must
be registered in the books of the corporation;
Every director must continuously own at
least a share of stock during his term,
otherwise, he shall automatically cease to be
a director; and
A majority of the directors must be residents
of the Philippines. (Sec. 23.)

Note:
The requirement regarding stock ownership
applies to incorporating directors.
Under special laws, citizenship may be
required. For instances, in case of bank and
banking institutions and common carriers,
2/3 of the directors must be citizens of the
Philippines; and in case of rural banks,
every member of the board must be a
citizen of the Philippines.
No person convicted by final judgment of an
offense punishment for a period exceeding
six (6) years, or a violation of the Code,
committed within five (5) years prior to the
date of his election of appointment

Give the qualifications required by

the Corporation Code of trustees
in a non-stock corporation
They are:
They must be members thereof; and
At least two (2) of them must be
residents of the Philippines. (Sec.
23.)

May additional qualifications for

directors be prescribed by the bylaws?
Yes. Thus, the by-laws may provide, for
example, that before one can be a
director, he must own at least 10
shares. This is not inconsistent with
the law because the "at least one
share" ownership requirement means
one or more shares. But the by laws
cannot dispense with any of the
qualifications prescribed by law.

May a director be removed without cause?

Yes. Removal may be with or without cause,
but a director or trustee elected because of
the vote of minority stockholders or members
who united in cumulative voting may not be
removed, without cause. (Sec. 28, last
sentence.)
May the board of directors remove one of
its members as director?

No. The directors derive their positions from the

stockholders. Hence, only the stockholders
can remove them. If the president of the
corporation is also a director, for example, the
board may remove him as president but not
as director.

What are the requisites for the removal

of directors or trustees?
They are:
The removal must take place either at a
regular meeting or a special meeting called
for that purpose;
There must be previous notice to the
stockholders or members of the intention to
propose such removal at the meeting; and
The removal must be by a vote of two-thirds
of the stockholders holding or representing
two-thirds of the outstanding capital stock,
or if the corporation be a non-stock
corporation, by a vote of two-thirds of the
members entitled to vote. (Sec. 28.)

Give the rules for filling vacancies in the office of

director or trustee.
A vacancy in the office of director or trustee shall be
filled as follows:
By the stockholders or members. - In any of the
following cases:
If the vacancy results from the removal by the
stockholders or members or the expiration of term;
If the vacancy occurs other than by removal or by
expiration of term (see Sec. 23. Par. 1.), 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;
If the vacancy may be filled by the remaining directors
or trustees but the board refers the matter to the
stockholders or members; or
If the vacancy is created by reason of an increase in
the number of directors or trustees.

 By the members of the board. - If still

constituting a quorum at least a
majority of them are empowered to
fill any vacancy occurring in the board
other than by removal by the
stockholders or members or by
expiration of term. The board has no
power to fill any directorship or
trusteeship by reason of an increase
in the number of directors or trustees.
The person elected to fill a vacancy
holds office only for the unexpired
term of his predecessor. (Sec. 29.)

When may compensation be paid to

directors?
Only in two cases:
When authorized in the by-laws; or
When granted by the vote of stockholders
representing at least a majority of the
outstanding capital stock. (Sec. 30.)

Note:
In no case shall the total yearly
compensation of directors, as such
directors, exceed 10% of the net income
before income tax of the corporation during
the preceding year. (Ibid.)

May directors fix their own

compensation?
No. The directors have no authority to grant
compensation to themselves.

As a general rule, when directors perform

nothing more than the usual and ordinary
duties of their office, they are not entitled
to salary or other compensation. The
reason is that directors render services
gratuitously and that the return upon their
shares adequately furnishes the motives
for services without compensation. (SEC
Opinion, Sept. 8, 1975.)

Are directors entitled to receive per diems?

Yes. Whether or not authorized by the by-laws or

by the stockholders, directors are entitled to
receive reasonable per diems. In view of the real
distinction between per diems and
compensation, the per diems granted to
directors should not be included in their total
yearly compensation for purposes of the 10%
limitation.

Section 30 does not specify, however, who is to set

the amount of the per diems and what amounts
shall be considered "reasonable" under the
circumstances. If normal corporate practice
were to be followed, the matter shall be decided
by the directors themselves. Thus, they may
easily circumvent the 10% limitation.

CORPORATE POWERS:

Classification of Corporate Powers:

1. Express Powers those conferred by law
or its charter.
2. Implied Powers - those powers incidental
to the corporations existence or
necessary to execute the express powers.
3. Incidental Powers those which a
corporation can exercise by the mere fact
of its being a corporation. They are
powers inherent in a corporation and exist
independently of the express powers.

State the general limitations on the powers

of the board of directors or trustees
Board as it is, the managerial authority of the
board of directors or trustees, however, is
subject to at least three (3) limitations. They
are as follows:

Limitations or restrictions imposed by the

Constitution, statutes, and rules and
regulations having the force of law, the articles
of incorporation, and by-laws of the
corporation;
It cannot perform constituent acts, that is, acts,
involving fundamental changes in the
corporation (such as amendment of the articles
of the articles of incorporation under Sec. 16.);
and
It cannot exercise powers not possessed by the
corporation.

What books and records are required to be

kept by corporation under the Corporation
Code?
They are:
Record of all business transactions;
Minutes of all meeting of stockholders and
members;
Minutes of all meetings of directors and trustee;
and
Stock and transfer book.
In addition, corporation must keep:
Other books and records required by special laws
like the Public Service Act, General Banking Act,
National Internal Revenue Code, and others.
Corporations may also keep:
Such optional records and subsidiary books as the
needs of their business may require. (sec. 51, 52)

GENERAL POWERS EXPRESSLY GRANTED TO

CORPORATIONS (Sec. 36)
To sue and to be sued in its corporate name;
Of succession by its corporate name for a period
of time stated in the articles of incorporation and
the certificate of incorporation.
To adopt and use a corporate seal.
To amend its articles of incorporation in
accordance with provision of the corporation
Code.
To adopt by-laws, not contrary to law, morals or
public policy and to amend and repeal the same
in accordance with the Code;
In case of stock corporations, to issue or sell
stocks to subscriber and to sell treasury stocks
in accordance with provision of the code; and to
admit members to the corporation, if it is a nonstock corporation.

 To purchase, receive, take or grant,

hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such
real and personal property, including
securities and bonds of other
corporations, as the transaction of the
lawful business of the corporation may
reasonably and necessarily require,
subject to the limitations prescribed by
law and the Constitution.
To enter into merger or consolidation
with other corporations as provided in
the Code.

 To make reasonable donations, including

those for public welfare or for hospital,
charitable, cultural, scientific, civic,
similar purposes. However, no
corporation, domestic or foreign, shall
give donation in aid of any political party
or candidate for purpose of partisan
political activity.
To establish pension, retirement and other
plans for the benefit of its directors,
trustees, officers and employees; and
To exercise such other powers as may be
essential or necessary to carry out its
purpose or purposes as stated in its
articles of incorporation.

OTHER POWERS EXPRESSLY CONFERRED

BY THE CODE:

Power to extend or shorten corporate

term (Sec. 37)
Power to increase or decrease capital
stock (Sec. 38)
Power to incur, create or increase bonded
indebtedness (Ibid)
Power to deny pre-emptive right (Sec. 39)
Power to sell, lease, exchange, mortgage,
pledge or otherwise dispose all or
substantially all of its property or assets
(Sec. 40)

 Power to acquire or purchase its own

shares (Sec. 41)
Power to invest corporate funds in
another corporation or business or for
any other purposes (Sec. 42)
Power to declare dividends (Sec. 43)
Power to enter into management
contracts.

Implied Powers
1. Acts in the usual course of business borrowing
money, making ordinary contracts, executing
promissory notes etc, necessary under ordinary;
2. Acts to protect debts owning to the corporation
A corporation has the right to protect its right as a
creditor. Thus, it may purchase property or even
run a business temporarily to collect a debt;
3. Acts which involve embarking in a different
business but only those which can be legally
combined.
4. Acts which are in part or wholly to protect or aid
employees. This include such acts as building
houses, place of amusement, hospital, etc. for
employees
5. Acts to increase business This includes acts of
advertising its business, promoting goodwill,
public relations and the like

Examples:
Powers inherent in a corporation and
can exist independently of express
powers:
1.Power of succession
2. Power to sue and be sued;
3. To have a corporate name;
4. To own, hold or convey properties
5. To make by laws;
6. To contract
7. To have common seal

APPRAISAL RIGHT
It is the right of the stockholder to
dissent against certain corporate
actions and to demand payment of
the fair value of his shares.

What corporate actions can a stockholder

exercised appraisal right?

Amendment to the articles changing or

restricting the rights of any stockholder or
class of shares;
In case of amendment extending or
shortening the corporate term
in case of sale or other disposition of all or
substantially all assets of the corporation;
In case of merger and consolidation
In case of investment of corporate funds in
another corporation
Any stockholder in a close corporation, may
for any reason, compel said corporation to
purchase his shares under Sec. 105)

PRE-EMPTIVE RIGHT
Unless denied by the articles of
incorporation, a stockholders preemptive right is the stockholders
privilege to subscribe to all issues or
disposition of shares of any class in
proportion to his shareholdings,
before sold to non-stockholders.

Pre-emptive right shall not extend to

the following:
Shares issued in compliance with law
requiring stock offerings or minimum stock
ownership of the public;
Shares to be issued in good faith with the
approval of the stockholders representing 2/3
of the outstanding capital stock for exchange
for property needed for corporate purpose;
or in payment of previously contracted debt.

CLOSE CORPORATIONS
Define a closes corporation.
A close corporation has been defined as
a corporation in which the stock is held
in a few hands, or in few families, and
which stock is not only rarely dealt in
buying or selling.
Within the meaning of the Code, it is one
whose articles of incorporation provide
the following:
All its issued stock, exclusive of treasury
shares, shall be held of record by not
more than a specific number of persons,
not exceeding 20;

 All its issued stock shall be subject to

one or more restrictions on transfer
permitted by the Code; and
Any of its stock shall not be listed in any
stock exchange or offered it to the
public.
Where, however, 2/3 of the working
stock or voting rights of a corporation as
defined above is owned or controlled by
another corporation which does not fall
within the definition of a close
corporation, the former shall be deemed
not a closed corporation. (sec. 96 par. 1)

What matters are allowed by the Corporation

Code to be provided in the articles of
corporation of a close corporation?
The article of incorporation may provide:

for a classification of shares or rights and the

qualification for owning or holding the same and
restrictions on their transfers as may be stated
therein;
for a classification of directors into one or more
classes, each of which be voted for and elected
solely by a particulars class of stock, and
for a greater quorum or voting requirements in
meeting of stockholders or directors than those
provided in the Code.
It may provide that the business of the
corporation shall be managed by the
stockholders of the corporation rather than by a
board of directors, So long this provision
continues in effect:

 No meeting of stockholders need be called

to elect directors;
Unless the context clearly requires
otherwise, the stockholders of the
corporation shall be deemed to be
directors for purposes of applying
provisions of the Code; and
The stockholders of the corporation shall
be subject to all liabilities of directors.

It may likewise provide that all or certain
specified officers or employees shall be elected
or appointed directly by the stockholders,
instead of the board of directors, (sec. 97, last
par.) IN the ordinary stock corporation,
corporate officers are elected by a majority of
all the members of the board of directors. (sec.
25)

State the two (2) conditions imposed

by the Code for the validity of
restriction on the right to transfer
share in a close corporation:
They are:
Such restriction must appear in the articles
of incorporation and in by laws, as well as in
the certificate of stock, otherwise they shall
not be binding on any purchaser thereof in
good faith; and
They shall not be more onerous than
granting the existing stockholder or the
corporation the option to purchase the
shares of the transferring stockholders with
such reasonable terms, conditions or periods
stated therein. (sec. 98)

Define an education corporation.

An educational corporation is a
stock or non-stock corporation
organized to provide facilities for
teaching or instruction. Such
corporation normally maintain a
regular faculty and curriculum and
normally have a regular organized
body of pupils or students, or
attendance at the place where the
educational activities are regularly
carried on.

What are the rules provided by the

Corporation Code regarding the board
of trustee of an educational
corporation?
They are:
For non-stock educational corporations

The number of trustee shall not be less than

five (5) nor more than fifteen (15);
It shall be in multiples of five (5) i.e. their
number shall be five (5) , ten (10), or fifteen
915);
Unless otherwise provide in the articles of
incorporation or the by-laws, the terms of
office of the trustee shall be staggered with
one (1) year interval.
Trustee subsequently elected shall have a
term of five (5) years;

 Elected to fill vacancies occurring before

the expiration of a particular term, shall
hold office only for the unexpired period;
A majority of the trustee shall constitute a
quorum for the transaction of business;
and
The powers and authority of trustees shall
be defined in the by-laws.

For stock educational corporations- The

number and term of directors shall be
governed by the provisions on stock
corporations.

Educational corporations may, through

their articles of incorporations or their by
laws, designated their governing boards
by any name than as board of trustees.

Define a religious corporation.

A religious has been defined as a
corporation composed entirely or
spiritual persons and which is erected
for the furtherance of a religion or for
perpetuating the rights of the church
or of the administration of church or
religious work or property.

What are the classes of religious

corporations?
They may be classified into:
Corporation sole- It is incorporated by one
person and consist of one member or
corporator only and his successors, such as
a bishop, It may be formed by the chief
archbishop, bishop, priest, minister, rabbi or
other presiding elder religious denomination,
sect or church for the purpose of
administering and managing, as trustee, the
affairs property and temporalities of such
religious denomination, sect or church (sec.
110) and;

Corporation aggregate- It is incorporate by an

aggregate of persons. (sec. 109, par. 1) Under
the code, any religious society or religious
order, or any diocese, synod, or district
organization of any religious denomination,
sect or church, unless for bidden by the rules
of the letter or by complement authority, may
upon consent and / or by an affirmation vote at
a meeting called for the purpose of 2/3 of its
membership, incorporate for the
administration or management of its
temporalities, affairs and property by filing
with the Securities and Exchange Commission,
a verified articles of incorporation setting forth
the matter mentioned in Sec. 116 of the Code.

DISSOLUTION
Define dissolution as applied to a
corporation.
Dissolution signifies the
extinguishments of its franchise to be
corporation and the termination of its
corporate existence.

Give the two legal steps involved in

dissolution.

They are:
The termination of the corporate
existence at least as far as the right
distribution to go on doing ordinary
business is connected; and
The winding up of its affairs, the
payment of its debts, and the
distribution of its assets among the
stockholders or members and other
persons in interest.

 Enumerate the methods or cause of

corporate dissolution.

Every private corporation organized under the

law may be dissolved either voluntarily or
involuntarily. (sec. 117) These two method of
dissolving corporations may be outlined as
follows:
Voluntary, which may be effected:
By the vote of the board of directors/ trustee
and the stockholders/ members, where no
creditors are affected (sec. 118);
By judgment of the Securities and Exchange
Commission after hearing of petition for
voluntary dissolution, where creditors are
affected (sec. 119) or
By amending the articles of incorporation to
shorten the corporate term (sec. 120); and

In the case of a corporation sole, by

submitting to the Securities and
Exchange Commission a verified
declaration of dissolution for approval.
(sec. 115)
Involuntary, which may be affected:
by expiration of term provided for in
the original articles of incorporation
(sec. 11)
by legislative enactment (infra)
by failure to formally organize and
commerce the transaction of its
business within two (2) years from
the date of incorporation (sec. 22)

By judicial; decree of forfeiture

on grounds provided by law
(sec. 20 see Title II question
No. 7) such as misuse or nonuser of its franchise, violation
of law, etc., (see Rules of
Court, Rule 66, Sec. 22) or
By order of the Securities and
Exchange Commission (sec.
121)

State the limitation on the power of

the legislative to dissolve a private
corporation.
Under the Constitution, the amendment,
alteration or repeal of the corporate
franchise of a public utility shall be made
only when the common good so requires.
(art. XII, Sec. 11, thereof); and

Under section 145 of the Code, it is

provided that:
No right or remedy in favor or accrued any
corporation, its stockholders, members,
directors, trustee, or officer nor any liability
incurred by any such corporation, its
stockholders, members, director, trustee or
officers, shall be removed or impaired either by
the subsequent amendment or repeal of this
code or any part or portion thereof.
The statutory authority of Congress to dissolve a
corporation is also subject to the prohibition of
the Constitution (art. III, Sec. 10 thereof) against
laws impairing the obligation of contract.
However, with respect to the franchise of a
public utility the only limitation is that the power
only when the common goods so requires.