CORPORATION

LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

BY-LAWS

I. Nature and Functions:

The power to adopt by-laws is an inherent power on the part of

By-laws are intramural in nature and not meant to bind parties

outside the corporate family.
o

One point of view is that since by-laws operate merely

as internal rules among the stockholders and corporate
officers, they cannot affect nor prejudice third persons
who deal in good faith with the corporation, unless they
have knowledge of the same; and that strangers are not
bound to know the by-laws of a corporation which are
merely provisions for the government of a corporation
and notice of them will not be presumed.

Under such theory, since by-law provisions are

intramural in nature and are not meant to bind parties
outside the corporate family, it stands to reason that
the public dealing with the corporation is not supposed
to be interested in the provisions of the corporation's
by-laws, and therefore should not be bound thereby. 1

those forming a corporation or any other form of association.

Gokongwei v. SEC, 89 SCRA 337 (1979).

As the rules and regulations or private laws enacted by the

corporation to regulate, govern and control its own actions,
affairs and concerns and its stockholders or members and
directors and officers with relation thereto and among
themselves in their relation to it, by-laws are indispensable to
corporations. These may not be essential to corporate birth but
certainly, these are required by law for an orderly governance
and management of corporations. Loyola Grand Villas
Homeowners v. CA, 276 SCRA 681 (1997).
o By-laws have traditionally been defined as regulations,
ordinances, rules or laws adopted by an association or
corporation or the like for its internal governance,
including rules for routine matters such as calling
meetings and the like. If those key by-law provisions on
matters such as quorum requirements, meetings, or on
the internal governance of the local/chapter are
themselves already provided for in the constitution,
then it would be feasible to overlook the requirements
for by-laws. Indeed in such an event, to insist on the
submission of a separate document denominated as
By-Laws would be an undue technicality, as well as a
redundancy. San Miguel Corp. v. Mandaue Packing
Products Plants Union- FFW, 467 SCRA 107 (2005).

A. Common Law Limitations on By-Laws (Requisites of Valid By-Laws)
1. By-Laws Cannot Be Contrary to Law and Charter

By-laws are intended merely for the protection of the

corporation, and prescribe regulation, not restrictions; they are
always subject to the charter of the corporation. Rural Bank of
Salinas, Inc. v. Court of Appeals, 210 SCRA 510 (1992).

Although the power of the corporation to adopt by-laws is an

inherent right, and it exist even without the law expressly
granting such power, nevertheless, Section 36 of the
Corporation Code expressly enumerates as one of the powers of

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.

(2013 ed.). Manila, Philippines: Rex Book Store.

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

a corporation, the power to adopt by-laws "not contrary to law,
morals or public policy." Jurisprudence has long before
established that by-law provisions cannot contravene the law.1

amending its by-laws and providing that his/her position shall

cease to exist upon the occurrence of a specified event.
Salafranca v. Philamlife (Pamplona) Village Homeowners, 300
SCRA 469 (1998).
2. By-Law Provisions Cannot Be Unreasonable or Be Contrary to
the Nature of By-laws.

The corporation being a creature of the law, its by-law

provisions cannot prevail over legal provisions and the lawful
court orders and processes.2
Examples:

A by-law provision that empowers the Board of Directors to

cancel the shares of any member and return to the owner
thereof the value thereof was declared void for being in
violation of the provision in the Corporation Law that provided
that capital can only be returned after dissolution. Government
of P.I. v. El Hogar Filipino, 50 Phil. 399 (1927)

articles of incorporation to the contrary would supersede the

similar provision in the by-laws of a corporation. In other words,
any provision in the by-laws which contravenes the provision in
the articles of incorporation must give way to the article
provision, even when the nature of the subject matter is
something that would normally find it provided in the by-laws
rather than in the articles of incorporation.3

A by-law provision granting to a stockholder permanent seat in

the Board of Directors is contrary to the provision in
Corporation Code requiring all members of the Board to be
elected by the stockholders. Even when the members of the
association may have formally adopted the provision, their

Authority granted to a corporation to regulate the transfer of its

stock does not empower the corporation to restrict the right of
a stockholder to transfer his shares, but merely authorizes the

The by-laws provisions cannot be such or be amended to be

adoption of regulations as to the formalities and procedure to

be followed in effecting transfer. Thomson v. Court of Appeals,
298 SCRA 280 (1998).
3. By-Law Provisions Cannot Discriminate.

Government of the Philippine Islands v. El Hogar Filipino, 50 Phil. 399 (1927).
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
(2013 ed.). Manila, Philippines: Rex Book Store.
2

Example:

action would be of no avail because no provision of the by-laws

can be adopted if it is contrary to law. Grace Christian High
School v. Court of Appeals, 281 SCRA 133 (1997).
able to go around the security of tenure clause of employees
nor impair the obligation of existing contracts or rights
otherwise, it would enable an employer to remove any
employee from his employment by the simple expediency of
1

Under Section 47 of the Corporation Code, even specified

provisions of the by-laws are "subject to the provisions of the
Constitution, this Code, other special laws, and the articles of
incorporation." That would mean that any provision in the

B. Binding Effects on By-laws on the Dealing Public:

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.

(2013 ed.). Manila, Philippines: Rex Book Store.

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

The rule is that by-law provisions must be reasonable and

calculated to carry into effect the objects of the corporation
comes from the theory that by-laws, as a basic contract
document, has the sole purpose of regulating the relationship
between and among the parties within the intra-corporate
relationship. Consequently, any by-law provision that does not
fulfill such objective is deemed to be unreasonable and void.
o General Rule: The validity or reasonableness of a by-law
provision is a question of law.
o Exception: This rule is subject to the limitation that
"where the reasonableness of a by-law is a mere matter
of judgment, and one upon which reasonable minds
must necessarily differ, a court would not be warranted
in substituting its judgment instead of the judgment of
those who are authorized to make by-laws and who
have exercised their authority."1
Example:

By-law provisions on the required quorum for special meetings

of the Board have the force of law and are binding even on
third-parties who deal with the properties of the corporation.
Pea v. Court of Appeals, 193 SCRA 717 (1991).

Pea v. Court of Appeals

Facts: Pampanga Bus Co. (PAMBUSCO) owned several mortgaged lots.
The lots were foreclosed and were sold to Rosita Pea, as highest

Ibid, at pp. 361-362, citing People ex rel. Wildi v. Ittner, 165 Ill. App. 360, 367
(1911).

bidder. PAMBUSCO through 3 of 5 directors (the only ones present at

that meeting) resolved to authorize Briones (one of the directors) to
execute a deed of assignment of their right of redemption in favor of
Marcelino Enriquez, who thereafter sold the same to Spouses Yap. Pea
contends that there could be no valid sale to the spouses Yap because
the deed of assignment in favor of Enriquez was void for being executed
ultra vires and against the by-laws of the corporation which provided
that a quorum requires that at least 4 directors be present at the
meeting, otherwise the meeting may be invalidated by failure or
irregularity of notice.

Issue: Whether or not the act of the board was against the corporations
by-laws, and consequently, void.

Held: YES. Section 4 of PAMBUSCOs by-laws provided that at least four
directors should be present to constitute a quorum. According to the
Corporation Code any action resolved by the board with less than the
number provided in the by-laws of the corporation to constitute a
quorum would not bind the corporation. When a quorum is not
reached, all the present directors could do is to adjourn. Moreover, the
purported directors who attended the meeting and voted in favor of the
assignment were bogus directors as they were not listed in the SEC as
directors, nor were they stockholders of the company.

Doctrine: The by-laws of a corporation are its own private laws which
substantially have the same effect as the laws of the corporation. In this
sense they become part of the fundamental law of the corporation with
which the corporation and its directors and officers must comply.

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

WHAT IF: Atty. Hofilea if the other two directors showed up and
agreed to what the three others had initially made, would judgment
have been different? NO.

Non-Binding Effects of By-Laws to Outsiders. The nature of

by-laws being intramural instruments would mean that they are
not binding on third- parties, except those who have actual
knowledge of their contents. China Banking Corp. v. Court of
Appeals, 270 SCRA 503 (1997).

China Banking Corp. v. Court of Appeals

Facts: Galicano Calapatia, Jr. is a stockholder of private respondent
Valley Golf & Country Club, Inc. (VGCCI). He pledged his Stock Certificate
to petitioner China Banking Corp. (CBC) to secure a debt. This was
recorded in the corporate books with VGCCIs consent. Calapatia failed
to pay his obligations, so CBC filed a petition for extrajudicial foreclosure
and informed VGCCI asking that the pledged stock be transferred to
CBCs name. However, VGCCI also informed CBC that it will not be able
to do so because Calapatia has unsettled accounts with the club.
Subsequently, because of Calapatias unsettled accounts with the club,
VGCCI sold the stocks in a public auction in accordance with Section 3,
Article VIII of its By-Laws. Three years after, CBC informed VGCCI that it
was the new owner by virtue of the auction sale, however, VGCCI
replied that for reason of delinquency, the same share of stock was sold
at the public auction. So of course, CBC protested and filed a case with
the RTC of Makati for the nullification of the auction sale and the
issuance of a new stock certificate in its name.

Issue: Whether or not the by-laws of VGCCI can affect CBC.

Held: NO. VGCCI only began sending notices of delinquency to Calapatia
after it was informed by CBC of its foreclosure proceedings. Also, even
though VGCCI acknowledged the pledge agreement between Calapatia
and CBC, it completely disregarded CBCs rights as a pledgee by not
informing it of the public auction it initiated.

VGCCI contended that CBC had actual knowledge of the clubs by-laws
and therefore must be bound. However, in order to be bound, the third
party must have acquired knowledge of the by-laws at the time the
agreement was entered into between him and the shareholder. In the
case at bar, CBC was only informed of the by-laws after it informed
VGCCI of the public auction. Also, VGCCI could have easily informed
petitioner of its by-laws when it sent notice formally recognizing CBC as
pledge of one of its shares registered in Calapatias name.

Doctrine:
General Rule: Third persons are not bound by the by-laws of a
corporation since they are not privy thereto.
Exception: When third persons have actual knowledge or constructive
knowledge of the same. However, this knowledge of the by-laws must
be present at the time of the perfection of the contract, and not only
during the proceedings.

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

Neither can we concede that such contract would be invalid

just because the signatory thereon was not the Chairman of the
Board which allegedly violated the corporations by-laws. Since
by-laws operate merely as internal rules among the

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

stockholders, they cannot affect or prejudice third persons who
deal with the corporation, unless they have knowledge of the
same. PMI Colleges v. NLRC, 277 SCRA 462 (1997).

C. Principle of Waiver of Applicable to By-Laws

A by-law may be waived by a stockholder or member when it is

he whose individual rights are advanced or protected by its
provisions. If a corporation acts or contracts in disregard of a by-
law with the consent or acquiescence of the stockholders or
members, there is a waiver of the by-laws, at least pro hac vice,
whether it is afterwards sought to set up the by-laws against
strangers or as against its stockholder or members.1

II. Adoption Procedure (Section 46)

Section 46. Adoption of by-laws.
Every corporation formed under this Code must, within one (1) month
after receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission, adopt a
code of by-laws for its government not inconsistent with this Code. For
the adoption of by-laws by the corporation the affirmative vote of the
stockholders representing at least a majority of the outstanding capital
stock, or of at least a majority of the members in case of non-stock
corporations, shall be necessary. The by-laws shall be signed by the
stockholders or members voting for them and shall be kept in the
principal office of the corporation, subject to the inspection of the

stockholders or members during office hours. A copy thereof, duly

certified to by a majority of the directors or trustees countersigned by
the secretary of the corporation, shall be filed with the Securities and
Exchange Commission which shall be attached to the original articles
of incorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws
may be adopted and filed prior to incorporation; in such case, such by-
laws shall be approved and signed by all the incorporators and
submitted to the Securities and Exchange Commission, together with
the articles of incorporation.

In all cases, by-laws shall be effective only upon the issuance by the
Securities and Exchange Commission of a certification that the by-laws
are not inconsistent with this Code.

The Securities and Exchange Commission shall not accept for filing the
by-laws or any amendment thereto of any bank, banking institution,
building and loan association, trust company, insurance company,
public utility, educational institution or other special corporations
governed by special laws, unless accompanied by a certificate of the
appropriate government agency to the effect that such by-laws or
amendments are in accordance with law. (20a)

SEC Opinion No. 22, series of 2003, addressed to Flores Ladia Bacalla Law
Firm as cited in Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine
Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

There can be no automatic dissolution simply because the

incorporators failed to file the required by-laws under Section
46 of Corporation Code. There is no outright demise of
corporate existence. Proper notice and hearing are cardinal
components of due process in any democratic institution,

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

agency or society. In other words, the incorporators must be
given the chance to explain their neglect or omission and
remedy the same. Loyola Grand Villas Homeowners v. CA, 276
SCRA 681 (1997).

A corporation which has failed to file its by-laws within the

prescribed period does not ipso facto lose its powers as such,
and may be considered a de facto corporation whose right to
exercise corporate powers may not be inquired into collaterally
in any private suit to which such corporations may be a party.
[?] Sawadjaan v. Court of Appeals, 459 SCRA 516 (2005).
o

There is a matter of compliance with the requirements

so there is a corporation, but it is simply defective.

III. Contents (Section 47)

A. Matters Usually Found in the By-Laws

Section 47. Contents of by-laws.
Subject to the provisions of the Constitution, this Code, other special
laws, and the articles of incorporation, a private corporation may
provide in its by-laws for:

1. The time, place and manner of calling and conducting regular or
special meetings of the directors or trustees;

2. The time and manner of calling and conducting regular or special
meetings of the stockholders or members;

3. The required quorum in meetings of stockholders or members and

the manner of voting therein;

4. The form for proxies of stockholders and members and the manner
of voting them;

5. The qualifications, duties and compensation of directors or trustees,
officers and employees;

6. The time for holding the annual election of directors of trustees and
the mode or manner of giving notice thereof;

7. The manner of election or appointment and the term of office of all
officers other than directors or trustees;

8. The penalties for violation of the by-laws;

9. In the case of stock corporations, the manner of issuing stock
certificates; and

10. Such other matters as may be necessary for the proper or
convenient transaction of its corporate business and affairs. (21a)


B. Other Matters that May Be Included in By-Laws

The by-laws relate to the internal affairs of the corporation.

o

It may contain the duties and responsibilities of the

people comprising the corporation.

Other matters which under the Corporation Code may be provided for

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

in the by-laws are as follows:

(a) Designation of time when voting rights may be exercised by
stockholders of record;1

(i) Providing for interest on unpaid subscriptions;9

(j) Entries to be made in the stock and transfer book;10 and

(b) Providing for additional officers for the corporation;2

(c) Provisions for the compensation of the directors;3

(d) Creation of an executive committee;4

(e) Date of the annual meeting or provisions of special

(k) Providing for meetings of the members in a non-stock

corporation outside of the principal office of the corporation.11

C. Matters That May Be Found in Articles of Incorporation and By-Laws

incorporation vis--vis the by-laws?

o Those expressly stated in the Corporation Code must be
placed in either document accordingly.
o However, with regard to information that is not in the
articles of incorporation, then it is left to the discretion

meetings of the stockholders or members of the corporation;

(f) Quorum on meetings of stockholders or members of the
corporation;6

(g) Providing for the presiding officer at meetings of the
directors or trustees, as well as of the stockholders or
members;7

(h) Procedure for issuance of certificates of shares of stock;8

Section 24, Corporation Code.

Section 25. ibid.
3
Section 30. ibid.
4
Section 35. ibid.
5
Sections 50 and 53. ibid.
6
Section 52. ibid.
7
Section 54. ibid.
8
Section 63. ibid.
2

How do you determine what goes into the articles of

of the directors/incorporators where to place the

information. Provided, that what is in the articles of
incorporation cannot be contained in the by-laws(?)

In addition, the Corporation Code expressly allows certain matters to
be provided for either in the articles of incorporation or the by-laws of
the corporation, thus:

(a) Providing for cumulative voting in non-stock corporations;12

Section 66. ibid.

Section 74. ibid.
11
Section 93. ibid.
12
Section 24. ibid.
10

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

(b) Providing for a higher quorum requirement for a valid
board meeting;1

(c) Limiting, broadening or denial of the right to vote, including
2

voting by proxy, for members in non-stock corporations;

(d) Transferability of membership in a non-stock corporations;3

(e) Termination of membership in non-stock corporations;4

(f) Manner of election and term of office of trustees and
5

officers in non-stock corporations;

(g) Manner of distribution of assets in non-stock corporations
upon dissolution;6 and

(h) Providing for staggered board in educational institutions;7

In a close corporation, restrictions on the right to transfer shares must
appear both in the articles of incorporation and in the by-laws, as well

Section 25. ibid.

2
Section 89. ibid.
3
Section 90. ibid.
4
Section 91. ibid.
5
Section 92. ibid.
6
Section 94. ibid.
7
Section 108. ibid.

as in the certificate of stock; otherwise, the restriction shall not be

binding on any purchaser thereof in good faith.8

D. Matters That Cannot Be Provided for in By-Laws

On the other hand, under the provisions of the Corporation Code, the
following matters must be provided for in the articles of incorporation,
and consequently cannot be governed by the corporation's by-laws:

(a) Classification of shares of stock and preferences granted to
preferred shares;9

(b) Provisions on founder's shares;10

(c) Providing for redeemable shares;11

(d) Provisions on the purposes of the corporation;12

(e) Providing for the corporate term of existence;13

(f) Capitalization of stock corporations;14

(g) Corporate name;1 and

Section 98. ibid.

Section 6, Corporation Code.
10
Section 7, ibid.
11
Section 8, ibid.
12
Sections 14, 15, 36(11) and 45, ibid.
13
Sections 11, 14 and 37, ibid.
14
Sections 13 and 14, ibid..
9

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

(h) Denial of pre-emptive rights;2

IV. Amendments and Revisions of By-Laws (Section 48)

Section 48. Amendments to by-laws.
The board of directors or trustees, by a majority vote thereof, and the
owners of at least a majority of the outstanding capital stock, or at
least a majority of the members of a non-stock corporation, at a
regular or special meeting duly called for the purpose, may amend or
repeal any by-laws or adopt new by-laws. The owners of two-thirds
(2/3) of the outstanding capital stock or two-thirds (2/3) of the
members in a non-stock corporation may delegate to the board of
directors or trustees the power to amend or repeal any by-laws or
adopt new by-laws: Provided, That any power delegated to the board
of directors or trustees to amend or repeal any by-laws or adopt new
by-laws shall be considered as revoked whenever stockholders owning
or representing a majority of the outstanding capital stock or a

the same to be attached to the original articles of incorporation and

original by-laws.

The amended or new by-laws shall only be effective upon the issuance
by the Securities and Exchange Commission of a certification that the
same are not inconsistent with this Code. (22a and 23a)

SUMMATION
Although the law provides a 1-month lee-way where a corporation
can submit their by-laws.

articles of incorporation. This practice has been around so

much that the SEC may sometimes reject your application if the
by-laws are not attached.

Articles + By-Laws = Companys Constitutive Documents

majority of the members in non-stock corporations, shall so vote at a

regular or special meeting.

Whenever any amendment or new by-laws are adopted, such
amendment or new by-laws shall be attached to the original by-laws in
the office of the corporation, and a copy thereof, duly certified under
oath by the corporate secretary and a majority of the directors or
trustees, shall be filed with the Securities and Exchange Commission

1
2

Sections 14 and 18, ibid..

Section 39, ibid..

However, in practice, the by-laws are submitted with the

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

Hierarchy: Law Articles of Incorporation By-Laws