Midterm WWW Compiled 2016 - Atty. Espedido

!!!
NOTES
!
CORPORATION LAW
(based on Atty. E. Espedidos
Discussions)
By: Batch Batang Sip-onon

Compiled WWWs of 3rd Year - LLB
(Pelaez Moot Court)Class
S.Y. 2015 2016
Compiled by:
Rheland Servacio
&
Dana Mae de Lira
As of February 4, 2016.
Corporation!Law!
Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWWs&of3rd&Year&LLB&Pelaetch&class:&2015&&2016]&
&
Differences between Corporation and Partnership.

Partnership
As to creation
Number of incorporators
Commencement
of
juridical personality
By mutual agreement
At least two or more
Execution of contract of partnership
Powers
Effect of mismanagement
Any powers authorized by the partners

provided it is not contrary to law,
morals, customs, public order, or public
policy
Every partner is an agent of the
partnership
A partner can sue a co-partner
Right of succession
None; dissolution if a partner dies
Liability to 3rd persons
Liable personally and subsidiary
Transferability of interest
Requires consent of all the partners

(delectus personarum)-right to select
their partners
Depends on the agreement by partners
Management
Duration
Firms name
Dissolution
In a limited partnership, there must be

Ltd. added
May be dissolved any time
Governing Law
Civil Code
Corporation
By a law creating the corporation
At least five
Date of issuance of certificate of
incorporation by the Securities
and exchange commission (SEC)
Exercise
powers
expressly
granted by law or impaired from
those granted or incidental to its
existence
Vested in the board of directors or
trustees
Suit against a member of the
board of directors/trustees must
be in the name of the corporation
Heirs may succeed rights of the
stockholder
Stockholders are liable only to the
extent of the shares subscribed by
them
Does not require prior consent of
the other stockholders
A corporation must not exceed 50
years
Any name provided it is not the
same to any registered firm name
Can only be dissolved w/ the
consent of the state
Corporation Code
Advantages and Disadvantages.

Partnership
Corporation
More personal relations among the people, based

on the principle of trust and confidence
Not based on such principle and may admit any

person to have a share without the need of consent
of other shareholders
Liable up to the separate properties
Shareholders liable only up to the extent of their

investment
Less people to deal with
No limit
Limited capitalization because of the principle of

trust and confidence, only chosen may invest or be
a partner
Acquire more investments by mere subscription of

shares up to the extent of authorized
2"
"
Compiled)by))R.)Servacio)and)D.M.)de)Lira.)
Corporation!Law!
&
potential liability would be, one would rather
opt to invest in a corporation.
Advantages of a Business Corporation.
(4) Corporation has a legal capacity to act and

contract as a distinct unit in its own name
(1) Right of Succession
In a corporation it has the right of succession, when a
partner dies, partnership will be dissolved, in a
corporation, when a shareholder dies, their heirs will
succeed. Hence, there is more stability.
E: if you are a creditor, you don't have to take care of
all the stockholders, just because when a stockholder
dies, they might not be able to pay anymore;
whereas in a partnership, the moment partner dies,
the creditor should be quick enough to collect,
otherwise, partnership will be dissolved upon the
death of a partner therefore if he is not quick enough,
he might be unable to collect what the partnership
owes him.
(2) Credit is strengthened
continuity of existence.
by
virtue
of
(5) Its creation, organization, management, and

dissolution are standardized as they are
governed under one general incorporation law.
(6) It makes feasible gigantic financial undertakings
since it enables many individuals to invest their
separate funds in the enterprise to produce large
amounts of capital which of course big
businesses depends on.
(7) Shareholders are not general agents of the
business
(8) Shares of stocks can be transferred even without
the consent of the other shareholders. Delectus
personarum does not apply.
such
Incorporator - Requirements.
(3) The shareholders have limited liability

A limited partnership is one formed by two or more
persons under the provisions of the following article,
having as members one or more general partners
and one or more limited partners. The limited
partners as such shall not be bound by the
obligations of the partnership.
The law requires at least 1 general partner
The problem comes now because an entrepreneur
may not want to become a general partner. There is
a small chance of having a brave soul of assuming all
the liabilities of the partnership personally
Having decided the corporation route, do you think you can be

a incorporator, how do you know?
Yes, provided that they are at least 5 incorporators, majority of
whom are residents of the Philippines.
SITUATION:
Together with you are 4 Iranian who wanted to form a
corporation here in the Philippines.
With you only as a Filipino, 80% of capital of such
corporation to be owned by foreign citizens, could
you from a corporation?
A: Yes, as long as the other 4 are residing in the
Philippines.
Such that all the other 4 are
residents of the Philippines. Or the majority
should residents of the Philippines.
Difference
between
limited
partnership and a corporation.
Sir: In limited partnership, liability of the LP
could be to the extent of their investment.
However, since the law requires not only
limited partners but also at least one general
partner, the GP will have unlimited liability.
The GP would have to shoulder the liability
of the other partner insofar as the limited
partnership is concerned, and because of
this concept people might be scared
because no one is brave enough to assume
the position of a general partner. Because
the bigger the business, the bigger the
Q: I thought the Constitution does not allow the

corporation to engage in businesses unless 60% are
owned by a Filipinos. Do you remember that
requirement? Do you think you could still form that
corp. and how come could you form without violating
the Constitution?
Article 12, Section 2 of the Constitution provides:
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1
See De Leon, p. 54 (2013 ed.)
3"
"
SECTION 2. All lands of the public domain,

waters, minerals, coal, petroleum, and other
mineral oils, all forces of potential energy,
fisheries, forests or timber, wildlife, flora and
fauna, and other natural resources are owned by
the State. With the exception of agricultural lands,
all other natural resources shall not be alienated.
The exploration, development, and utilization
of natural resources shall be under the full
Corporation!Law!
&
control and supervision of the State. The State
may directly undertake such activities, or it
may enter into co-production, joint venture, or
production-sharing agreements with Filipino
citizens, or corporations or associations at
least sixty per centum of whose capital is
owned by such citizens. Such agreements may
be for a period not exceeding twenty-five years,
renewable for not more than twenty-five years,
and under such terms and conditions as may be
provided by law. In cases of water rights for
irrigation, water supply, fisheries, or industrial
uses other than the development of water power,
beneficial use may be the measure and limit of
the grant.
A: Yes. The number of the incorporators should not

be less than 5 and the majority should be residents of
the Philippines.
GR: As a GENERAL RULE, for the purposes of
organizing no citizenship is required - only
residence
different language such as Arabic, because no one

would mandate them to what to do because they are
the owners. That is why when it comes telecom,
education, naturals devt, these are reserves for
Filipinos, retail trade, imagine if they were no such
provision, such as retail/ukay2x would be owned by
foreigner.
Q: So can they form a corp. with the Iranians?
A: YES, provided that 60% of the stock is owned by
Filipinos.
Can partnership be an incorporator?

No because incorporators are natural persons?
Can a corporation be a partner?
No.
XPN: Citizenship is material in NATIONALIZED

corporations as when a certain minimum
percentage of the total capital stock is required
by law or the Constitution to be owned and
reserved only for Filipinos.
1.
Nationalized Corporations:
2.
These are corporations reserved for Filipinos. Here,

the Corporation must be composed of incorporators
whose controlling shares are Filipinos citizens - that
is the requirement to engage in nationalized business
(see De Leon, p. 133, 2013 ed.)
With regard to the 60% provision of the Constitution:
it only applies where the industry so involved is for
exploitation, development, and utilization of
NATURAL resources.
3.
4.
A corporation can only act thru its duly authorized

and elected directors and officers, and no one else.
If it is allowed to enter into a partnership, then it is
allowing the corporation to be bound, directed, and
governed by the hands of other persons not
sanctioned by the law to do so.
It is repugnant to public policy. It shall be bound by
the acts of the other partners which is inconsistent
with the policy of the law that the corporation will be
exclusively managed by its BOD and corporate
officers.
The corporation shall be exposed to risks and
liabilities not contemplated by the stockholders at
the time they bought shares of stocks issued by the
corporation.
It cannot participate in the management because it
does not act as individuals; rather it acts as a
unit, as a corporation because of the veil of
corporate
entity
SITUATION:
If that were so do your corp may engage in
telecommunications?
A: If we assume that each incorporator will have
equal number of shares in the corporation, then NO.
Art. 12, Sec. 11 of the Constitution requires for Public
Service Corporations to have at least 60% of their
capital owned by Filipinos.
In this case, only 20% is owned by a Filipino citizen.
The controlling interest is composed of foreign
citizens (80%).
Because they are industries that are reserve for
Filipinos, because if we allow that the corp of yours
and they decided to engage in telecomm would that
all the tv channels and radio stations would be using
4"
"
Can a partnership be a stockholder?

We distinguish.
If the partnership is becoming a stockholder by being an
incorporator, then NO.
However, if the partnership merely buys shares of stocks as
an ordinary stockholder, then YES - the limitation imposed as
who can be an incorporator is not available to those who can
be a stockholder. An incorporator must be a natural person
Can a partnership be elected to the board? If yes who sits
on the board?
NO, to become a member of the board you must have a
working mind which a juridical person does not have
Corporation!Law!
&
because in the board there are deliberations which require
thinking.
Who compose the corporation?

1.
2.
3.
4.
5.
6.
Incorporators - these are the persons that appear

in the articles of incorporation as the persons that
started or initially subscribe on the shares of the
corporation. Their names will FOREVER be there.
Stockholders stockholders are persons that own
at least one share of stock in a stock corporation.
Subscribers subscribers are persons that make
themselves liable to invest in the corporation up to
the amount they subscribe.
Members - members are persons that own an
interest in a non-stock corporation.
Promoters - persons who bring about or cause to
bring about the formation and organization of a
corporation by bringing together the incorporators.
Underwriters a person usually an investment
banker, who has agreed, alone or with others, to buy
at stated terms an entire issue of securities.
How about the underwriters?

-They will market the shares. They will assure the corporation,
give us the authority to sell your shares and we will go around
the entire market and we will be selling this to the people.
They are actually brokers, they are agent who has the
authority to sell the shares of a corporation.
But they are special type of brokers, because they assure the
corporation that they would sell the shares but if they cannot
sell it to another people, and then they have to buy it. Alright,
there is a commitment.
They tell the corporation, give us the authority to sell. We will
be acting as your agent or broker but for every share we sell,
you have to pay us. The agreement is for a fee.
This is done usually by the banks because banks have a
complete record of those people who have idle funds in the
bank. They have a list of the people who have money and
capacity to buy. And on big corporations who also share
abroad looking for capital. If they cannot sell, they will buy
themselves.
The underwriter therefore guarantees sale of the shares of
2
stocks.
Rights of a Corporation.
What rights do persons enjoy?
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2
This is just one kind of underwriting agreement, called a Firm

Commitment. In Finance courses, we would know that in reality there
are also other forms of underwriting agreements. We also have Best
Efforts Commitment, All-or-Nothing Commitment, and Standby
Commitment (see De Leon, p. 123, 2013 ed.).
5"
"
Natural: All enumerated in the bill of rights

Juridical: property, to sue and be sued, due process and
equal protection of the laws, against unreasonable search and
seizure
Q: Does it enjoy the right to life?
No. It is only accorded to natural persons who are a product of
biological birth.
Q: In what way do corporations have life?
That it has juridical personality which has a term of 50 years
Q: How about right to liberty?
Likewise, it is not accorded to corporations because such right
means that a person shall not be detained arbitrarily and a
corporation, not being a corporeal being, cannot be
detained.
A Corporation, as a General Rule, cannot

Commit a Felony.
Q: Since it does not enjoy the right to liberty, do you think
it could commit a crime? Why?
GR: No, it cannot because to be guilty of a felony, the
criminal intent (mens rea) must be established and this
criminal intent only comes from the mind. A corporation,
being a juridical person, does not have a mind of its own.
XPN: It could commit when:
1.
2.
3.
The crime is a mala prohibita (special laws)
Here, criminal intent is immaterial.

If the crime is punishable only by fines
Under the Anti Money Laundering Act (AMLA)
(specifically provides that any person, whether
natural or juridical, may commit a violation of said
statute)
Q: If you penalize a corporations officers for crimes the

corporation committed will that case prosper?
A: NO, because the officers are separate and distinct from the
corporation and in criminal law, guilt of the accused must be
proven beyond reasonable doubt. Furthermore if the law does
not provide that you can prosecute the officers, then you must
move to dismiss
There are acts which, even if there was no intention,
resulted in the injury or damage of someone else which a
person could be liable, under what circumstance?
Negligence
Negligence is punishable so beware. So goes back to the
corporation, since it has no mind on its own, so generally it
Corporation!Law!
&
cannot commit a crime. A corporation cannot act, it cannot
drive a car, hold a car, and if something explodes and
someone dies, there could be negligence there and since it
does not have a mind on its own, it cannot act and commit
negligence.
Q: However there are instances where a corporation can
be criminally liable, and these are?
A: Instances are: (exception)
1. If penalty is a fine;
2. If punishable by a special law; (mala prohibita)
3. If the law violated is Anti-Money Laundering Act
(AMLA);
Under many laws it provides any person could be held
criminally liable, however under AMLA it specifies that
any person, natural or juridical shall be liable so
another exception again. So a corporation can be held
liable under this law and the fines is huge, the penalties
are sometimes non bailable.
Corporation, defined.
Sec. 2. Corporation defined. - 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.
Q: Alright, artificial being as distinguished from a natural

being, so what is an artificial being?
Q: So if it enjoys certain rights and privileges, on the

other hand, corollary to those rights what is the reverse
side?
It could assumes obligations, and incur liabilities and these are
distinct and separate from those of the stockholders and
members
Q: So the moment it exists, it assumes separate
personality, enjoys certain rights, incurs liabilities
separate and distinct from the natural person, and this is
what we called?
A: Corporate fiction
It is a fiction so this is not really true, these are the same
people who organize, the only thing is because of the law, the
law creates a fiction pretends that it is a separate person
where in fact they are exactly the same. And when you say it
is a fiction, it refers to a VEIL, the law places a veil on top of
the heads of the stockholders so that the people could not see
who the stockholders are, they only have to deal with that
group (aggregation) covered by that corporate veil. So there
is no way we could deal directly with those people covered by
the veil, so we only have to deal with the group as a juridical
person. So thats the corporate fiction. Although we deal with
the stockholder who is a natural person the law deals with
them as a corporation.
As Distinguished from a person, Juridical persons are
created by whom?
They are created by operation of law
Natural Persons?
An artificial being is a person created under the fiction of the

law, and has a juridical personality distinct and separate from
the one who organize it.
By God.
Q: So that if there were 5 incorporators and the

corporation now exist, how many corporation do we now
have?
There are natural rights from God, while there are also civil
rights from law. And since a juridical person is created by law,
the rights thereof can only be determined through law. And
only the law can take back such juridical personality.
6 sir --- namely: the 5 incorporators and the corporation

Q: So the moment therefore, the corporation begins to
exist, what could happen?
It has now a separate and distinct juridical personality and act
as a corporation, thus, entitled to enjoy those:
1. certain rights;
2. privileges;
3. assumes obligations;
4. incur liabilities
So who decides what rights to give to a natural person?
So therefore you can only exist within the limits of the law
and a juridical person cannot assume powers which the
law did not give.
And what what did we say about these incorporators?
They are the persons who initiate the creation of a
corporation.
Doctrine of Piercing the Veil of Corporate

Entity:
Doctrine of Corporate Entity (Fiction).3

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3
p. 15 onwards, De Leon (2013 ed.)
6"
"
1.When it is used to defeat public convenience, as when the

corporate fiction is used to avoid and existing obligation
Corporation!Law!
&
2.Fraud cases or when the corporate entity is used to justify a
wrong, protect fraud, or defend a crime.
Examples where the corporate veil was pierced:

1.
3.) Alter ego cases, as when the corporation is a mere farce

since it is a mere alter ego or business conduit of a person, a
mere instrumentality, agency, conduit, or adjunct of another
corporation.
2.
Three-Pronged Test in Corporate Alter

Ego cases
3.
4.
In alter ego cases, the Supreme Court applied the

three-pronged test to determine the applicability of
4
piercing the corporate veil.
NOTE that absence of ANY of the three will cause
the piercing to fail.
1.
Instrumentality or control Test COMPLETE

dominion or domination of the finances, policymaking and business with respect to the
transaction attacked, the conduit corporation
having no separate mind and existence on its
own.
2.
Fraud Test such control was used by the

defendant to commit the fraud or wrong.
3.
Causal Connection Test - the control must be

the proximate cause of the injury, the wrongful
act being made possible thru the instrumentality
of the corporate alter ego.
An example would be a situation where there are two

corporations owned by exactly the same shareholders,
wherein probationary employees in one corporation are
transferred to the other corporation on the fifth month i.e. prior
to regularization (and transferred again back to the prior
corporation after the same period of time). In this case, both
corporations could be treated as a single entity in order to
allow regularization to the employees concerned. Thus, the
veil of corporate fiction can be lifted since the goal of having
such corporations was to violate the law. In this case, the
shareholders can be held liable.
As was held in Bogo-Medellin Sugarcane Planters Assoc. v.
NLRC, In cases of illegal dismissal, corporate directors and
officers are solidarily liable with the corporation, where
terminations of employment are done with malice or in
bad faith.
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4
See PNB v. Hydro Resources Contractors Corp (2013) (cited in De

Leon, p. 42).
7"
"
5.
6.
7.
8.
Where the transaction was entered into by the

President who was also the treasurer and general
manager of a Closed Family Corporation (wherein
the incorporators and directors just belong to one
single family)
Where a corporation functions for the benefit of a
single person who has complete dominion over the
6
funds and that said person is the sole owner thereof.
Where the corporation is a mere instrumentality of
the individual stockholders
Where the corporation is a mere instrumentality, a
business conduit, or alter ego of another corporation.
! to evade taxes
! to avoid regularization of employees
and circumvent labor laws
! illegal dismissal
where a corporation is dissolved and its assets are
transferred to another corporation to avoid a financial
liability of the first corporation to its employees and
defraud its creditors, both firms being owned and
controlled by the same persons with the result that
the second corporation should be considered a
continuation and successor of the first entity.
All stockholders acting as individuals, and not under
a formal corporate action, enter into an illegal act
Where properties of the estate are transferred to a
corporation to avoid payment of estate taxes.
To confuse legitimate issues
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 stock.
In a partnership, what happens when a partner dies?
The partnership is dissolved.
In a corporation?
If a stockholder dies, his heir/s will replace him and the
corporation continues to exist.
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5
"De"Leon,"p."29."
"Be"careful"though.""The"mere"fact"that"all"of"the"capital"
stock"is"owned"by"a"single"stockholder"does"not"necessarily"
follow"the"piercing"of"the"corporate"veil"in"corporate"alter"
ego"cases.""To"properly"invoke"it,"the"threeEpronged"tests"
must"be"complied"with."
6
Corporation!Law!
&
2.
Articles of incorporation the agreement between

and among the
! incorporators and the State;
! stockholders/incorporators themselves;
! incorporators and third parties/public
3.
By-laws internal rules and regulations that bind the

stockholders themselves and in certain
instances, bind third parties
Ex: Meeting, Manner by which
directors are elected
SITUATION:
5 stockholders went on vacation in Palawan.
While they are inside the cave somebody closed
the cave and nobody see them again. What
happens to the corpo?
A: The Corporation will continue to exist because
their heirs will succeed. If they are minors, they will
be represented by guardians.
Corporate Powers.
Test in determining whether the power could

be consider incidental:
In partnership - powers of the partners are agreed by partners

provided it is not contrary to law, morals, customs, public
order, or public policy
In a Corporation - powers are expressly granted by law
(express powers) or incidental to its existence (implied
powers)
Express
powersincorporation(AOI)
You just have to check the AOI to know the purpose of the
corporation. If not within the purpose, ULTRA VIRES ACT!
SITUATION:
USC, to maximize assets and gain more
profit, hold other classes after the 8:30 classes,
holding ballroom classes in every room.
Answer:
Check the purpose of the University if the dance

lessons are expressly provided within the stated
purpose in the articles of incorporation
If the dancing lessons can be aligned in the
educational/academic purpose of the University,
then can be allowed as incidental activity.
However, since the University is an
educational/academic institution, the dance
courses pertain solely to academic, not
purely
for
social
and
entertainment
objectives. Hence, in the example, ballroom
dancing is not allowed.
2 powers of the Corporation:

1. Expressly provided by law
2. Incidental to its existence (see p. 46, De Leon)
Powers are defined in:
1.
The Law the Corporation Code.
"
2.
Whether it is necessary to pursue the business
Necessity of the business vs. Furtherance of

business7
Necessity of business- In the articles of incorporation, it is
stated therein the primary purpose of the corporation. And so,
the corporation is authorized to do those activities that are
necessary to carry on the business and achieve the primary
purpose. (Capital Maintenance)
Furtherance of business- When the corporation is planning
to expand its operation, it is allowed to exercise powers which
may not be in line with the primary purpose in order to expand
its business. (Expansion & Growth)
Situation: A corporation put up a factory far from the city and
there was a necessity in maintaining a power plant. In setting
up the power plant, the local power supplier protested
because the corporation does not have the authority to
operate a power plant (corporation is engaged in mining
business). The power plant is for the operation of the
business and is given freely to the employees residing within
the compound.
Answer: The electricity provided by the mining company is
limited only to the employees living within the compound of the
company. Even in taxation, a corporation giving housing
benefits to its employees within a specific radius from the
company is not taxable because the law considers it as
necessary. By analogy, the electricity provided by the
corporation is also necessary.
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7
8"
Whether it is for the furtherance of the business

EX: engaged in agricultural business, you
have the power to buy agricultural lands
EX: engaged in agricultural business, you

have the power to buy heavy equipment, fertilizers
and other similar expenses
stated in the law or articles of
Incidental powers those related to the business
1.
For more examples, see p. 46, De Leon (2013 ed).
Corporation!Law!
&
Classes of Corporations.8
Public v. Private Corporations.
[Sec. 3. Classes of corporations. - Corporations formed or

organized under this Code may be stock or non-stock
corporations. Corporations which have capital stock divided
into shares and are authorized to distribute to the holders of
such shares dividends or allotments of the surplus profits on
the basis of the shares held are stock corporations. All other
corporations are non-stock corporations.]
Public Corporations - formed by the government for the

common good and public welfare; Made by or is instituted by
the government or the state to govern a portion of a state
such as municipality, cities, and barangays.
1. Under the Corp. Code:

Stock Corporation has capital stock divided into shares
and are authorized to distribute to the holders of such shares
dividends and allotments of surplus profits on the basis of the
shares held;
Non-stock Corporation all other corporations are non-stock
corporation.
Q: What about PAGCOR?
2. As to number of corporators:
Corporation Sole one member or corporator;
Corporation Aggregate consisting of more than one
corporator or member.
3. As to legal or corporate existence:
De jure Corporation corporation existing in fact or in law;
De facto Corporation existing in fact but not in law.
4. Whether it is private or public:
Private Corporation formed for some private purpose;
Public Corporation formed to organize for the government
of a portion of the State.
5. Whether it is open or close:
Open Corp open to any person who may wish to become
SH;
Close Corp limited to selected persons or members of a
family.
6. Whether it is for religious purposes or not:
Ecclesiastical Corp for religious purposes;
Lay Corp purpose other than religion.
7. As to formation:
Domestic Corp incorporated under the laws of the
Philippines;
Foreign Corporation formed under any laws other than
those of the Philippines.
8.As to purpose:
Public Corporations - formed by the government for the
common good and public
Welfare;
Private Corporations - are those organized for private
purposes and/or profit.
9. As to Existence:
True Corporation
Quasi Corporation
a.
By Prescription
b.
By Estoppel
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8
A: PAGCOR is a GOCC and is a private corporation.

PAGCOR has a special charter.
Province, municipality and barangays, these are public
corporations. And what is the purpose? The purpose is
intended for the general welfare of the public.
What about PSCO? PCSO is a GOCC and is a private
corporation. Like PAGCOR it has a special charter and it is a
special corporation.
Q: What about the Dept. of Agriculture?
It is a government agency, it is not a public corporation. Like
DENR & DEP-ED these are branches of agencies of the
state, they carry out the executive functions and it is a part of
the state and of the executive department. It does not govern
a portion of a state.
The Legislative department and the judiciary departmentthese are branches or agencies of the state. These are not
corporations.
Land Bank of the Philippines. It is privately owned by the
government. It is a Government-owned and controlled
corporation (GOCC) which the government owns majority of
the shares of the corporation. GOCCs are private
corporations.
GOCCs and Corporations made thru Special

Charters are governed by the law that created
them; Corporation Code applies Suppletorily.
Q: Do we take them here? Do we discuss them here?
A: No, because these are covered by their special
charters, the Corporation Code is important because it can be
applied suppletorily , anything missing in their special charters,
the provisions of the Corporation Code will apply.
The charters do not provide much; these simply provide for
how they earn, where do they get their capital and how much
do they pay their director. If you are an officer of PAGCOR,
PCSO , MCWD, they are enjoying huge amount of bonuses.
But when Pnoy came over, he cut all these benefits.
See Sec. 3, Corp. Code; p. 55, De Leon (2013 ed).
9"
"
Private Corporations - are those organized for private

purposes and/or profit.
Corporation!Law!
&
GSIS, SSS, these are government owned corporations. They
are special corporations governed by their special charters
although the provisions of the Corporation Code will be
applied suppletorily.
Quasi-Public Corporations
A: P125K paid up x 5 inc. = P625K Paid up capital

Total Capital of that corporation is 2.5M because although you
were only required to pay 25% (P625K ) of subscribed capital,
you are liable for the balance because you committed to pay
that amount.
To Summarize:
A: They are private corporations performing public functions.

An example would be VECO, MERALCO, MCWD, Smart,
PLDT, SkyCable. They are private corporations which have
accepted from the State the grant of franchise or contract
involving the performance of public duties, but which are
organized for profit.
Publicly-listed Corporations.
Publicly-listed corporations are corporations which are listed in
the Philippine Stocks Exchange where the shares are being
sold in that stock market. Thats why theyre called as such
because they are listed there. Some people, however, simply
call them, public corporations. You now know, as good
corporate lawyers, that its not actually the right term because
we learned that public corporations are those intended to
govern a portion of the State. Here, they are just publicly
listed corporations. You will see in your TV tonight the gainers
and the losers. The gainers are those whose shares of stocks
went up; it started with a low price in the morning and went up
in the evening. The losers are the reverse.
Now, we have public corporation, quasi-public corporation,
and publicly listed corporation. You should be able to
distinguish one from the other.
Stock Corporations.
Stock corporation- a corporation where the capital stock is
divided into shares and is authorized to distribute dividends.
A stock corporation has authorized capital stock which is the
amount specified in the articles of incorporation wherein the
stockholders may subscribed wholly or partially.
ACS. 10,000,000
Subscribed CS. 2,500,000 (Min)
Paid-up capital... 625,000 (Min)
[NOTE: Per Sec. 13, the Paid-Up Capital
should not be lower than Five Thousand Pesos
(P5,000.00)]
Q: When must it be paid?
-The date indicated in the subscription agreement
-If no agreement, board can decide when ( will be paid later
or when needed).
Q: Why does a Stock corporation divide Capital into
shares of stocks?
A: To be able to measure how much your share of the profit is
- DIVIDENDS.
That is why once the Corp is profitable and authorized to
distro div, the board will declare dividends and your dividends
will depend on the number of shares you have so that if its
cash dividends:
amount of dividends per share X No. of shares
Non-stock corporations NO DISTRIBUTION OF PROFITS
AND DIVIDENDS among its members, hence, no need to
measure the number of shares. - the profits earned are used
to expand or improve its facilities for the benefit of its
members. - also called non-profit corporations. - ex:
membership clubs - other non-profit corporation for other
purpose: Church - religious.
Q: Why divide the corporation into shares?

A: basis for the distribution of the dividends.
SITUATION:
Corporation has 10M authorized capital stock
(maximum amount that corporation could invest). But
it need not be fully subscribed (investing). The
Corporation Code only provides to have an initial
investment of 25% or 2.5M. As a matter of fact, the
2.5M did not be fully paid immediately. The initial
payment required is only 25% of the subscribed
capital stock which is 625T.
Q: So if the SHs agreed to equally invest how much
do you think will the paid up capital that must be paid
by the incorporators?
10"
"
Classification
relationship.
of
corporations
as
to
Holding/Parent a corporation which has the power, either

directly or indirectly, through one or more intermediaries, to
control or to elect the majority of the directors of such other
corporations (called subsidiaries)
Subsidiary a corporation whose majority of its directors can
be elected either directly or indirectly, by such other
corporation which thereby becomes its parent corporation.
Corporation!Law!
&
What the holding Company wants, the holding Company gets,
because it controls the subsidiarys majority directors.
Example:
You are a shipping company. Once you arrive in port,
kargadors/stevedores try to board vessels and grab cargoes
of passengers. This might cause disorder or trouble because
these people will just carry the cargoes without agreeing on
the price and afterwards, charge the passengers with huge
fees. So its a must for the shipping company to impose order,
and it can only do that if it can organize the people there. So
how may the shipping company organize?
It may have to organize an Arrastre Company wherein all the
kargadors will become employees of the company. Once you
become an employee, you are under rules and regulations of
Arrastre Company. Only employees could get inside the pier.
So you have imposed discipline and order inside the pier
because the shipping company controls/organized the
corporation. To make sure that management of Arrastre
Company is controlled by shipping company, the shipping
company must own the majority, if not all stocks of that
Arrastre Company. If you have enough shares of stock to elect
the board, then shipping company could be sure that that
Arrastre Company would follow its orders.
Parent Company
Subsidiary Company
- shipping corporation
- arrastre corporation
Every time they are in port, they will have to make repairs
within a limited time. But every time, the marine engineers are
busy with the other vessels. We resolve this by making
another corporation composing of marine engineers and
dealing with repairs and improvements of the vessel. Now,
you have TWO SUBSIDIARIES and ONE PARENT.
What do you call this group of company?
They are all affiliates. They have a relationship
among the three of them.
Relationship between the Arrastre Corporation and the
corporation composing of engineers?
They are sister companies because they have a
common parent.
De Jure v. De Facto Corp.

1.
2.
11"
"
De jure existing in fact and in law; one created in

strict or substantial conformity with the mandatory
statutory requirements for incorporations and the of
which to exist as a corporation cannot be
successfully attacked or questioned by any party
even in a direct proceeding for that purpose by the
State
De facto existing in fact but not in law; one which
has 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
Requisites:
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
3. Actual use or exercise in good faith of corporate
powers.
What is the importance in complying with the law when,

after all, you will still be recognized as a corporation?
The government can attack or question the existence
of the corporation since such a corporation did not comply with
requirements provided for by law under a quo warranto
proceeding.
However, a private third person cannot invoke, as a
defense, the fact that a corporation is a de facto corporation to
avoid complying with its obligations to the latter.
Since the de facto corporation failed to comply with the

government requirements then it is only the government
or the state that can question its existence, no one else.
As a matter of fact if a case were filed against or by a de
facto corporation to demand payment of an obligation can
the defendant say motion to dismiss on the ground that
the plaintiff has no personality to sue? May the court
dismiss?
No, since the law still recognizes a de facto corporation as
possessing its own juridical personality and, as such, in such a
case, its personality cannot be subjected to collateral
attack by the defendants. Only the state can ask that the
said de facto corporation comply with the requirements since it
is only the state which is aggrieved or offended.
Corporation by Estoppel v. De Facto.

Corporation by estoppel happens when persons assume to
act as a corporation even if they knew that they do not have
the power to do so. They pretend to possess that power and
that is why they are now prevented from denying the fact of
their being a corporation
Corporation de Facto former acted as a corporation even
though from the beginning that they were not a corporation
and did not possess the power to act as such while the latter
acted as a corporation because they honestly thought that
they have the authority and the power. If a case will be filed by
that de facto corporation, the other party cant seek the
dismissal on the ground that there is no personality. It has. As
a matter of fact, the law recognizes the de facto corporation as
existing. And as to intents and purpose, very close to a de jure
corporation. Only the state can question its existence and not
Corporation!Law!
&
anyone else. Otherwise, if anyone can question, there will be
disruption of the flow of business. Every person might ask to
see and ask for documents required by law in order to exist as
a corporation, although this level of scrutiny and precaution is
exercised in big transactions.
Corporation by estoppel - only exercises corporate powers
without any law authorizing or vesting them
It exist when persons who does not have the
authority to act as a corporation acted as such. This also
happens when a de facto corporation does not comply with
the requirements provided by law.
Requirements to exist as corporation by estoppel
1.
2.
3.
Representation by a group to the public

Knowing that they do not have the authority to act as
a corporation
Third parties contracting with them are induced to
believe that they have the authority to act as a
corporation
Can that existence of the corporation by estoppel

attacked collaterally?
YES. The state and the third parties can attack them
collaterally since the law did not recognize their existence.
The SEC may have the authority over these corporations.

What could the powers of the SEC be? What can they do
on these corporations?
There are reportorial requirements. You have to make a
report to the SEC from time to time. Usually every year you
submit to the SEC the general information sheet (GIS), for
example, where it is indicated among others that there are
changes in the stockholders, changes in the officers, changes
in the directors, if there was any amendment to the articles, or
the results of the election. So, the SEC has the authority to
monitor, supervise, administer.
In consonance with this authority, what can SEC do to
corporations who failed to comply?
They do not immediately dissolve the corporation, but they
may suspend or impose a fine, maybe for 150 pesos per day.
It may even dissolve if the violation is very serious.
NOTE: Dissolution may also be imposed if the corporation
was granted certificate of incorporation and it failed to operate
as a business within 2 years. It can also be dissolve if the
corporation has started operating its business, but it did not
9
operate for continuous period of 5 years.
(NOTE: Corporation by estoppel exist only between

the contracting parties with regard to a particular
transaction.)
SITUATION:
Classes of Shares.
There is a group of 5 individuals

representing themselves as corporation and went to
a supplier. The supplier extended credit and gave
them the stocks and start with their business,
however they never paid the supplier. Supplier filed
a case for collection. If you were the lawyer of that
group, what would you do? Can you also move for
the dismissal of the case on the ground that the
corporation does not exist?
A: No, because there is a corporation by
estoppel which binds the contracting parties insofar
as that particular transaction is concerned. They are
estopped from denying that they are a corporation for
it was they themselves who represented that they are
a corporation. No one under the law on equity can
take advantage from their own folly. There was fraud.
They were guilty. Why would the law allow the
deception of the party? This is the concept of
estoppel. This was taken from the law of equity. Only
the contracting parties are involve in the concept of
estoppel. If no one was damaged, there is no
estoppel at all.
12"
"
1.
2.
3.
4.
5.
6.
7.
Par value or no par value

Voting or non voting shares
Common or preferred shares
Promotion shares
Founders share
Redeemable share
Treasury share
Par Value Shares; Non Par Value Shares.

Par Value Shares are those that carry with it a value of a
particular share.
Non par value shares do not carry with them a fixed value of
a particular share.
Section& 6.& & Shares& of& capital& stock& issued&

without&par&value&shall&be:&&
"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""
9
"Administrative"power"given"to"the"SEC"by"Sec."22"of"the"
Corporation"Code."""
Corporation!Law!
&
1.
2.
3.
deemed& fully& paid& and& non3assessable& and&

the&holder&of&such&shares&shall&not&be&liable&to&
the& corporation& or& to& its& creditors& in& respect&
thereto:&&
Provided;&That&shares&without&par&value&may&
not&be&issued&for&a&consideration&less&than&the&
value&of&five&(P5.00)&pesos&per&share:&&
Provided,) further,& That& the& entire&
consideration&received&by&the&corporation&for&
its& no3par& value& shares& shall& be& treated& as&
capital& and& shall& not& be& available& for&
distribution&as&dividends.&
Here, the shares do not represent a fixed
proportionate interest in the capital stock measured
in value, but rather expressed in an aliquot part of
the entire number of shares of the issuing
corporation.
They have no stated value appearing on the face of
the certificate of stock but they always have an
10
issued value which is the consideration fixed by
the corporation for its issuance.
Once NPV shares are issued, they shall be deemed
fully paid and non-assessable and the holder of
such shares shall not be liable to the corporation or
its creditors insofar as the unpaid portion of the
subscription is concerned.
o
If there is a non-par value share issued,

creditors could no longer expect that there
are
some
receivables
from
the
shareholders.
There
are
no
more
receivables because it is deemed fully paid.
13"
"
Voting and Nonvoting Shares.

Voting Shares- those shares with right to vote.
Non Voting Shares- shares with no voting rights.
As an owner of the thing, what are your rights over such?
Right to dispose it
Right to use
Right to sell
Right to the fruits of the thing
The Fruits of the thing (share of stock) is called the

DIVIDENDS.
And by exercising his right to vote, a
shareholder exercises his right to the fruits of his property - his
right to dividends.
! You invest because you expect fruits and your
expectations to these fruits will depend on how the
corporation is organized and managed. (Otherwise
if you put this corporation into the hands of crazy
directors, do you think the corporation will earn
profits? So you have to make sure that before the
directors will be able to manage this corporation,
they are those that are qualified and competent.
You should vote only those that are qualified and
competent directors. The only way to ensure that
your share will bear fruit is to make sure that the
corporation will be managed in the hands of good
BOD and corporate officers.
Furthermore, the minimum issued value as required

11
by law is P5.00. It cannot go lower than that.
The entire consideration received by the

corporation for its no par value shares shall be
treated as capital, and therefore cannot be used for
12
dividend distribution.
Banks, trust companies, insurance companies, and

building and loan associations are prohibited from
issuing NPV shares
Preference shares always have a stated par value.

There is no such thing as NPV Preference shares.
*****
SITUATION
Apart from the right to votes, there are also other issues in
Corporation which may involve the SH themselves. Although
we said generally directors manage the corporation, there are
issues that must be referred back to the SH for ratification and
approval. It is during this instance that the SH could participate
directly in the Management of the Corpo.
"Sec."62,"Corp."Code;"see"De"Leon,"p."82"(2013"ed.)"
"Sec."6,"par."3,"Corp"Code;"see"statutory"restrictions"
regarding"issuance"of"NPV"shares,"De"Leon,"p."91"(2013"ed.)"
12
"The"theory"is"that"the"shareholders"intended"that"all"of"the"
paid"up"capital"for"the"no"par"value"shares"are"to"be"
employed"permanently"for"the"execution"of"the"business"
venture"(see"De"Leon,"p."91)"
11
Q: If we issue such NPV share, will that share have

any value?
A: Yes, called the issued value as agreed by the
issuing corporation and the subscriber, provided that
it will not be less than P5.00.
"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""
10
If we have 10 million authorized capital stock divided

into 10 Million shares. No par value was mentioned
in the Articles of Incorporation.
Q: , do we have a par value of 1 peso?
A: No. what is being issued by the corporation is a
Non Par Value Share.
GR: The Board of Directors have the sole discretion and

control over the management of the corporation.
XPN: When it involves issues that need to be referred
back to the stockholders for ratification and approval.
Corporation!Law!
-
&
Decisions made by the board are controlling whether
or not the stockholders agree. But there are
instances when the stockholders can directly
participate in the management by way of exception.
performance of certain condition (usually payment of

full subscription price) or happening of certain event
contained in agreement
Certain shares are transferred from one party to
another. The transferee might not be ready for the
payment or might have to inquire to some other
matters related to the ownership of the share. So
pending final verification or pending payment of the
balance, the shares cannot be transferred yet to the
assignee because of some concerns. While waiting
for these concerns to be verified, parties agreed to
deposit the share to the bank. Such share cannot be
released by the bank unless the parties agree. These
shares should be held by the bank in trust or under
escrow.
Remedy of the stockholder when the BOD's decision is

not to his liking:
If not profitable: Sell his shares and get out of the
corporation (appraisal right).
If profitable: Stay in the corporation but not vote for
the said director(s) in the annual election of BODs.
GR: Whenever a vote is necessary to approve a particular
corporate act, such vote refers only to stocks with voting
rights.
XPN: Cases when even non-voting shares may also
13
vote :
1.
2.
3.
4.
5.
6.
7.
8.
Amendment of the articles of incorporation;

Adoption and amendment of by-laws;
Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the
corporate property;
Incurring,
creating
or
increasing
bonded
indebtedness;
Increase or decrease of capital stock;
Merger or consolidation of the corporation with
another corporation or other corporations;
Investment of corporate funds in another
corporation or business in accordance with this
Code; and
Dissolution of the corporation
Once the conditions are fulfilled, then the transfer

may be completed. Meanwhile, while under escrow,
nobody has the right to withdraw. If there are
dividends meanwhile, they are to be placed too under
escrow.
3.
Promotion Shares shares issued to promoters or

in some way interested in the company, for
incorporating the company or services rendered for
launching or promoting welfare of company such as
advancing fees for incorporating, advertising, attys
fees, surveying, etc.
4.
Founders Shares shares issued to organizers

and promoters (simply, the founders) of corporation
where they enjoy certain privileges such as the right
to vote and the exclusive right to be voted for. This
right is limited only for a period of 5 years from the
existence of the corporation and preference in case
of dissolution of the corporation.
In other words, even if your share is a non-voting share, you

still have that right to vote if it involves the issues above.
These issues are so important that a stockholder should
exercise his right to vote.
Because being founders of the

corp, they must have in mind the plans of
the corp. the concept of the corp that it
entails to pursue, how should the business
be managed, what is supposed to be done.
So these are the people who knew the plan.
So the law requires that they be given
enough time to make the corp stand on its
feet, start in a right manner and pursue the
way it was planned so that it will be
profitable.
*****
Other shares:
1. Common or Preferred Shares
Common Shares entitle holder to pro rate division
of profits without any preference over other
stockholders or class of stockholders but equally with
all except preferred stockholders
Ordinary shares entitled to basic rights under the
Code
Preferred Shares entitle holder certain
preferences over holders of common stock (division
of dividends/profits or rate of dividends, priority of
payment of dividends) (depends on type of share you
subscribed)
2.
Shares in escrow shares subject to agreement by

virtue of which share is deposited by grantor or his
agent with third person to be kept depository until
"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""
13
5.
Treasury Sharesshares lawfully issued by

corporation and fully paid for and later reacquired by
it either by purchase, redemption, donation, forfeiture
or other lawful means
6.
Redeemable Shares shares usually preferred

which are redeemable at fixed date or at option of
either issuing corporation or stockholder or both at
certain redemption price
"Par."6,"Section"6,"Corp."Code."
14"
"
Corporation!Law!
&
Sources of Capital.
corporation) to pay the amount you lent plus interest at the full
amount, whether the corporation enjoys profit or not.
IOWs, when the corporation is in need of cash or capital, the

options of the corporation are:
1.
2.
3.
4.
LOAN - Get a loan from the bank;

BOND ISSUANCE
STOCK ISSUANCE - Encourage the existing
stockholders to subscribe for more, so that they will
invest some more; or
The
corporation
will
issue
REDEEMABLE
SHARESIf the existing stockholders are no longer
interested or no longer in the position to invest some
more, they will encourage capital from the public.
Redeemable Shares, Advantages.

Stockholders Viewpoint:
Remember, when you are a stockholder you invest in a
corporation but you cannot just get back your investment
anytime you want you have to go through the corporation, to
stay with the corporation thru thick and thin. So once you put
your money there, then that money should remain, you
cannot get it back.
That investment will become petrified and untouched, being
placed permanently in the Trust Fund of the corporation to
secure the payment of its obligations. So that, because this is
offered as a security of whatever the corporation has
borrowed from third parties or offered as security to answer for
any liability, stockholders cannot any longer withdraw their
investment - these are reserved for the creditors; otherwise if
you are allowed to withdraw your investments anytime and all
the stockholders are getting poorer every day and more
liabilities than assets now, what could happen to the creditors
rd
rd
or 3 parties? The 3 party-creditors will be jeopardized. Dont
rd
touch it because these are reserved for the 3 party- creditor.
And this is what we call the Trust Fund Doctrine.
When you buy shares, you are an investor and you will have a
share in the corporation unlike being a creditor. However,
investing involves risk and you cannot get back the money
which you invested because of the Trust Fund Doctrine;
However, there is a compromise between lending and
buying shares and that is through availing of redeemable
shares. Through availing of redeemable shares, you can
still compel the corporation to buy back the redeemable
shares within a certain period plus a premium (like a
creditor) , while being entitled to dividends (like an
investor)
An investor takes a risk but let it be noted that it is a
compromise between the lender and an investor, while an
investor takes the risk and the lender does not, while the
investor enjoys the profit, unlimited or not fixed
dividends, but the lender has a fixed interest, there is a
compromise in between, and what is that compromise?
Redeemable shares is a compromise. Why?
In redeemable shares, the shareholder is both an investor and
a creditor because a certain period the stock holder is assured
that he is paid for he fixed period on a certain price.
It also is an exception to the Trust Fund Doctrine.
Because this doctrine protects the creditors and holders of
redeemable shares are all intents and purposes, creditors.
They did not really intend to become stockholder this is merely
an incident to the transaction. In the strict sense of the word
they are not stockholders they are creditors.
IOWs, the assets of the corporation should be left there in

trust for third party-creditors because you cannot catch
them (refers to stockholders, I think).
Treasury Shares.
If you are offered to be a stockholder, would you easily agree?

You have to think twice. Unless you are really convince that
the business of the company is very profitable then to think
twice.
Once reacquired the redeemable share will be

considered as part of the treasury share of the corp.. They will
become therefore treasury shares.
Q: Which of the options would be attractive to you?

Would you like to lend to the corporation? Or invest as a
stockholder? Or buy redeemable shares?
They are called as Treasury Shares because they

are already issued by the corp and later on are back in the
treasury or coffers of the corporation. It now again forms
part of the asset of the corp.
To avail or buy Redeemable shares.

Why? What is the advantage of buying redeemable
share?
In lending, it is a debtor-creditor relationship. if you are a
creditor you can[not immediately] compel the debtor (i.e. the
15"
"
Treasury Shares have NO voting rights.

The
treasury share has no voting rights, because treasury share
are now within the corp; if such is given voting right, the BOD
might abuse their position, using these TS as a means to
perpetuate their position in the corp.
Treasury Shares cannot receive any dividends while
still being held by the Corporation. The treasury share has no
Corporation!Law!
&
voting right and dividends. Because it is owned by the corp, it
is as if putting money to another pocket.
Articles of Incorporation.
It constitutes the agreement of the incorporators
between themselves, between the state, and
between the public. It contains the following14:
1. The name of the corporation;
2. The specific purpose or purposes for which the
corporation is being incorporated. Where a
corporation has more than one stated purpose, the
articles of incorporation shall state which is the
primary purpose and which is/are the secondary
purpose or purposes: Provided, That a non-stock
corporation may not include a purpose which would
change or contradict its nature as such;
3. The place where the principal office of the
corporation is to be located, which must be within the
Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the
incorporators;
6. The number of directors or trustees, which shall
not be less than five (5) nor more than fifteen (15);
7. The names, nationalities and residences of
persons who shall act as directors or trustees
until the first regular directors or trustees are duly
elected and qualified in accordance with this Code;
8. If it be a stock corporation, the amount of its
authorized capital stock in lawful money of the
Philippines, the number of shares into which it is
divided, and in case the share are par value shares,
the par value of each, the names, nationalities and
residences of the original subscribers, and the
amount subscribed and paid by each on his
subscription, and if some or all of the shares are
without par value, such fact must be stated;
9. If it be a non-stock corporation, the amount of its
capital, the names, nationalities and residences of
the contributors and the amount contributed by each;
and
10. Such other matters as are not inconsistent with
law and which the incorporators may deem
necessary and convenient.
"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""
14
"Sec."14,"Corp"Code."
16"
"
The AOI must be filed with the SEC together with sworn
statement of the Treasurer elected by the subscribers showing
that
a.
b.
c.
at least twenty-five (25%) percent of the authorized

capital stock of the corporation has been subscribed,
and;
at least twenty-five (25%) of the total subscription has
been fully paid to him in actual cash and/or in
property the fair valuation for;
which is equal to at least twenty-five (25%) percent of
the said subscription, such paid-up capital being not
less than five thousand (P5,000.00) pesos.
Once found in order?

The SEC will now issue a certificate of incorporation. It is
important because it is the time the corporation will acquire its
separate and distinct juridical personality. Thus can now
engaged in business
Corporate Name.
The name is important because the corporation acts
under this name (enters into contracts under said name) and
also for identity purposes because it is a juridical entity thus it
needs to be identified with particularity. It is the identification of
the corporation which should be established as early as the
filing of the filing of the articles so that should any liability
accrue the public will be able to pursuit the right person. The
name of the corporation must be approved by the SEC and
must be checked and compared with the other names of
existing corporations whether or not the proposed name is
being used by other existing corporations.
The purpose is important because at the moment the
corporation acquires its personality it can only act within its
purpose. It will be pursuant to that purpose that the
corporation acquires its powers expressly through the law or
incidental to its existence, otherwise, it will be considered as
an ultra vires acts and it will not bind the corporation. The
intention of providing the purpose in the articles is to guide the
public and the State (and monitor) to determine whether or not
a particular act performed still falls within its power and
authority as granted by the State otherwise if the act is no
longer within the authority granted by law it may not bind the
stockholder or the parties to a particular transaction
One of the things that SEC will examine is the name
of the corporation and the law requires that it must not be
identical or confusingly similar with the name of the other
corporation. So the law on patents and its principle that we
learn might be applied since there are case in the past that the
SC will intervene in determining whether or not such particular
Corporation!Law!
&
name has violated the copyright or patent of another. One
case for example is Planters Peanuts the best peanut until
somebody else that it is making a lot of money, somebody
came out like Planters Growers which came out a little late but
crunchier so the Planters Peanuts wasnt able to catch up.
Also EFFICACENT OIL and the other is EFFICIENT OIL,
same bottle, form and color.
Address.
It is necessary to facilitate governmental monitoring
of corporations and sending of notices. It should be specific
and easily located so that the SEC would be able to
communicate with them, being subject to supervision, control
and administration of the SEC.
SITUATION
Purpose Clause.
In case for its purpose, the AOI must clearly and
specifically determine the purpose of the corporation in order
for the public to be appraise whether or not the corporation is
acting within the bounds in which it was created and
determine if they perform an ultra vires act which is beyond
the scope of their authorized powers. The purpose clause
defines the extent and limitations of the powers which a
15
corporation may exercise.
SITUATION:
So if the purpose of the corporation said we deal,
sell, trade, promote joy, fun, and happiness what
do you think?
A: It is not allowed because it so broad and joy, fun
and happiness is subjective. It is so broad that it
might cover large varieties of activities.
The purpose should be definite and
concrete. It did not specifically state the purpose of
its creation and joy, fun and happiness is not
concrete.
The purpose must be concrete in order for
the SEC to determine whether or not if you enter into
transactions it can easily be determined if you are
acting within its purpose. If it is not concrete there is
no way that SEC could determine whether you are
acting within the bounds of the purpose. That is why
the NAME and PURPOSE is very important.
So the name of your corp is Abusayaff,

Incorporated.
Address: somewhere in the
interlands of Mindanao, would that be ok?
A: No, because the address is not specific.
Amendments to AOI
Once the articles of incorporation have been filed, you
will be issued the certificate of incorporation. It is
essential for the life of the corporation to begin. Does it
stay like that forever?
No. The life of a corporation must be extended. To put this
into effect, the AOI must be amended to extend the corporate
term, approved by the majority vote of the VOD and ratified at
a meeting of the stockholders representing at least 2/3 OCS
16
[Maj. BOD, 2/3 OCS].
The amended AOI is submitted to
SEC for approval.
Management is vested to the board. How come this

(referring to amendment) is presented to the stockholders
for their approval?
Because this amendment results to a change of several
agreements made by the corporation. Even non-voting shares
can decide the amendment of AOI because it does not only
affect the BOD but the corporation as a whole including
stockholders. The stockholders who are parties in the
articles should be consulted because this is now a change in
their fundamental agreement.
SITUATION:
One of the purpose is to provide WELLNESS to
the customers and clients, what do you think?
Articles of Incorporation is a contract among whom?
A: It still too vague and broad because WELLNESS

could be emotional, social, physical, psychological,
etc. It is not definite and concrete.
Q: must it be in English or what?
A: It must be in official languages, English or Filipino
State and the Corporation
Corporation and stockholders
Stockholders and other stockholders
What does novation mean?

It is the change in the subject matter of the contract
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15
"De"Leon,"p."157."
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16
"Sec."37,"Corp."Code."
Corporation!Law!
&
What are the 2 kinds of novation?
These are the rare occasions when the stockholders are

consulted and are given opportunity to review and
approve decision of the board. Otherwise?
1.
Real change in the res (thing)
2.
Personal change in the persons involved

rd
Here we said that there is a 3 contract, one between the

stockholders. If there is any change, we will have to require all
the parties to participate in the change. The changes will have
to affect all the stockholders. The board exercises the powers
of the corporation. However, there are occasions when these
directors cannot just decide among themselves.
Generally, the stockholders do not have the right to
investigate, intervene, or interfere or even change the
decision of the BOD because it is the BOD which is given
the sole discretion by law to manage the affairs of the
corporation. Also, the power of the board is not given by
the stockholders; the latter merely placed/elected the
former to their positions.
Who gave them the powers?
The law defines the powers of the board. It is, therefore, not
appropriate to claim that they got their power from the
stockholders. They got their power from the law itself. And,
thus, it is only the law that can change that power
XPN: However, there are occasions when the board will
have to consult the stockholders. What are these
occasions?
Decisions of the board are to be respected because they are

the ones given the authority to manage the business of the
corporation and their power is derived from the law itself
Once the directors are there, there is nothing the
stockholders can do and their only remedy is?
Not to elect the same persons in the next elections
So the law requires every corporation to conduct an annual
meeting for the purposes of electing new members of the
board of directors.
Concept of Capital.
In ACCOUTING PARLANCE it is the assets minus the
liabilities
Assets = Liability + Capital (or Shareholders Equity)
So you are now talking about the legal capital, is it the
same capital you mentioned assets minus liabilities?
No. That is simply Capital (Capital per se).
How do we now distinguish legal capital and capital?
1.
amendment of the AOI
2.
adoption and amendment of the by-laws
3.
sale, lease, exchange, mortgage, pledger or other

disposition of all or substantially all of the corporate
property
While capital per se, fluctuates as it varies with the current

financial standing of the corporation. It may also be increased
by the appreciation of the fair value of its assets or the
depreciation of the same.
4.
incurring,
creating
indebtedness
Sir: all right the legal capital is fixed unless of course?
5.
increase or decrease of capital stock
6.
merger or consolidation of the corporation with

another corporation or other corporations
7.
investment of corporation
corporation or business
8.
dissolution of the corporation
or
The legal capital, it is fixed.
increasing
funds
bonded
They sell and issue more shares of stock.
in
another
[NOTE: Legal Capital is the amount that cannot be touched

by the Corporation because this forms part of the Trust Fund
for its creditors. It cannot be used for dividend distribution.
The amount of the Legal Capital will vary, depending on
whether the shares are issued with par or without par.
a.
b.
Merger.
With Par: LC = only the Aggregate PAR value

(consideration in excess of par is not added).
Without Par: LC = ENTIRE consideration (both
17
issued value + in excess of issued value) ]
Two corporations are combined and only one corporation

survives
XXX
Consolidation.
Two corporations combine wherein they create a new
corporation
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17
"De"Leon,"p."75."
18"
"
Corporation!Law!
&
In the articles you will the authorized capital stock (ACS) of the
corporation that at least 25% of ACS is subscribed and at
least 25% of the subscribed is paid up, provided it is at least
P5,000.00.
Which is the FIXED capital?
concern. And since capital fluctuates book value also

fluctuates.
Alright so we divide this into number of shares and
then we get the book value. So that if you intend to buy shares
of stock from another person you may buy it according to its
par value or you may buy it according to its book value.
It is the 1.) authorized capital if the articles of incorporation is

not amended and also the 2.) subscribed capital
On the other hand, the PAID-UP capital?
On the other hand the paid up capital is the amount that the
subscriber has paid upon subscription which is at least 25% of
the subscribed capital and the remaining balance to be paid:
a.
b.
according to their agreement

and in the absence of which, upon the decision of the
board of directors
So if you intend to buy, on what value will you buy it in

accounting parlance?
I will buy it in par value or fair market value because it would
depend on the agreement of the parties. If the share is initially
issued by the corporations you cannot buy it lower than the
market value.
Of course it cannot be sold lower than par value if it is
initially issued by corporation, otherwise?
It becomes a watered stock.
Capital Per Se.

The capital in accounting parlance is fluctuating depending on
the performance of the corporation.
Alright it may fluctuate daily, try to look at your books
capital may rise or fall depending on the performance of
the corporation or the business of the corporation. So we
also have par value and non-par value share. What do we
mean?
PAR VALUE SHARES have a specific value fixed in the
Articles of Incorporation and appearing in the Certificate of
Stock. (NOTE: it may be issued for less than P5.00.)
NON PAR VALUE SHARES do not have a fixed capital
stated in the certificate of stock but it should be issued not less
than 5 pesos.
So where can we find the price of the par value of the

share?
It can be found in the AOI
Indeed it can be found in the AOI because as we said the
authorized capital can be divided into shares of stock and
the par value should be indicated there. Of course par
value in accounting parlance is not the same as book
value. Why?
Par Value is fixed in amount as stated in the AOI, while;
Book value fluctuates; it is the value which is capital over no.
of shares. This is more accurate because it indicates the
actual situation of corporation so far as the assets are
19"
"
It may become a watered stock and it might affect the

capital of the corporation in what way?
It might deceive the public; a buyer might believe that the
value of the shares is 1 peso but in fact the amount that the
subscriber paid is only 50 cents so what goes to the
corporation is only of the stated par value, where in fact
under the trust fund doctrine, the funds of the corporation is
reserved to the creditors and here the trust fund doctrine is
being violated because the capital of the corporation is not
really there because the truths is the subscriber only paid the
lesser amount.
Alright it did not only reflect the real value of the share rather it
allows the share to presumed paid or fully subscribe where in
fact it was issued by the corporation lesser in par so that here
we cannot buy the share lower than par.
Subsequent Sale or Transfer of Shares.

On the other hand if it is subsequent sale or transfer you
can now sell it to another lower than par depending on
your agreement. You can even give it away or donate it.
Would it affect the capital?
No, it will not because at the time it was issued, its par value
has already been paid in full. The statutory prohibition of
selling it at a price lower than the par value applies to first-time
issuances of shares of stocks.
So the money is already in or even if it is not in at least
the subscriber is bound to pay it afterwards.
Corporation!Law!
&
So finally if you were to sell or buy a share and the
corporation is profitable, you will not even sell it in par
value or book value. At what value would you sell it?
I would sell it in fair market value which means the value
which a seller is willing to sell and the buyer is willing to buy
depending on the market circumstance.
Power of the BOD is granted by law. Law is the source of the

power.
Delegation of Powers by the BOD

Can the BOD delegate its power?
Non-use of Corporate Franchise
General rule: The BOD cannot delegate its power.

Exceptions: Those powers that involves:
Once you received the certificate of incorporation, what

should be done?
The Corporation should operate and formally organize as
early as possible, because if a corporation does not formally
organize and commence the transaction of its business or the
construction of its works within two (2) years from the date of
its incorporation, its corporate powers cease and the
corporation shall be deemed dissolved. However, if a
corporation has commenced the transaction of its business
but subsequently becomes continuously inoperative for a
period of at least five (5) years, the same shall be a ground for
the suspension or revocation of its corporate franchise or
certificate of incorporation.
Board Of Directors
Qualifications
Can you be a director?
Yes provided that I hold at least one share of the Companys
stocks, legally capacitated and a natural person.
So why are you required to be a holder of at least of least
one share? This applies only insofar as stock
corporations
are
concerned
because
non-stock
corporations do not have shares of stocks. It is required
only that one be a member of the non-stock corporation.
It is important that a director of a corporation be a holder of at
least of least one share because it would encourage him to
perform better his task as a director since has a vested
interest in the corporation.
How does one become a director?
Upon election by the stockholders in the annual stockholders
meeting. Members of the BOD are elected by SH themselves.
Management is vested in the BOD. From whom did the
Board derive its power?
20"
"
1.
2.
Exercise of purely ministerial functions

Matters relating to day to day activities and does not
need any discretion
So that, if you are part of the BOD and you got sick. The
by-laws requires you to submit a medical certificate, can
you send someone else to participate in the Board
meeting, bringing with him the medical certificate.
No, proxy is not allowed.
Is there any instance wherein a director can delegate his
power?
No. There is an absolute prohibition. A director cannot
delegate because his function and duty is purely personal.
One is elected precisely because of his skills, values, integrity,
credibility and even ones relationships.
Sir: BOD can delegate in instances where the delegated
power is merely ministerial or matters relating to day to
day activities and does not need discretion. So when the
BOD appoints Ms. Yap to decide whether the corporation
should sell 50% of the corporation properties, it is not
allowed since it is not ministerial, it requires discretion.
But if the BOD delegates to Ms. Yap the act of signing the
Deed of Sale of 50% of the property of the corporation, it
is a valid delegation because the act of signing is merely
ministerial. The BOD has already deliberated and decided
to sell the property and whats left for Ms. Yap to do is to
sign the Deed- purely ministerial.
So if the corporation intends to have telephone lines for
its office with PLDT, and PLDT requires the corporation to
submit a Board Resolution containing that the
corporation in fact is subscribing with PLDT, and the BOD
appoints in the Board Resolution that the BOD designates
Mr. Tejano, the corporations janitor, to sign in behalf of
the corporation, is that allowed?
YES. The law only requires the nature of the delegated power
and not the person to whom it is delegated. As long as the
power is ministerial it does not matter that the person
delegated is not an officer of the corporation, as long as the
BOD appoints him/ her as such.
Corporation!Law!
&
Situation: Authorizing to engage services of a janitorial
company
The board need not meet for matters that pertain to day to day
activities, otherwise, they will not be able to discuss on the
more important matters. The Vice President for Sanitation and
Environmental Activity is in a proper position to be delegated
as such. This can be delegated because these are simple
matters; these are day to day activities like janitorial services.
However, authorizing a Vice President for Financial Concern
to borrow 10 Million from the Land Bank of the Philippines, it
cannot be delegated because it involves a huge amount of
money and involves a contract that a corporation would enter
into.
Management of a Corporation
Again the law says management is vested in the board,
where there are 50 stockholders and the board is
composed of 5, does it now protect the interest of the
corporation if the management of the corporation
composed of 50 stockholders is vested in the board
composed of 5 members?
For proper management of the corporation, it needs to be
given to a certain number of people; it might create chaos in
creating decisions if they are too many. The main purpose of
this is efficiency.
What do we consider as the power of the board, as part of
the management?
1.
2.
3.
Administer the properties and assets of the

corporation
Determine the conduct of the corporation
Represent the corporation. (Exercise the powers of
the corporation itself; only the board can act for the
corporation)
To be a member of the board, you must own at least one

stock in that corporation. The purpose of the requirement
is the member may have a desire to make the corporation
profitable. And if you are part-owner, you will be serving
better. The moment you cease to be a stockholder?
You cease to be a director
Situation: You are a holder of one share. You went to the
bank to loan money. The bank is asking you to assign
your share. If you did?
If you assign your only share, you are no longer a shareholder
and can be ousted as a director.
Situation: You bargain with the bank and ask that youll
just pledge your share.
In pledge, you remain to be the owner of the thing. However,
possession of the certificate is transferred to the bank. The
21"
"
pledgee cannot cast his vote during the elections. In other

words, in case of pledge, the pledgor still votes.
In case of trust, who becomes the legal owner?
The legal trustee, because in a trust, legal ownership is
transferred to the trustee although beneficial ownership is
retained by the trustor. He may now be nominated in the
board and legal ownership is transferred to trustee but
beneficial ownership like payment of dividends retains in the
trustor.
Situation: There are occasions where you have to execute
a deed of trust over your shares. For example, a
stockholder cannot occupy a government position, just to
illustrate. Because he cannot occupy a government
position, being a stockholder of a particular corporation,
what he has to do is to transfer his shares of stock to
another person. So for all intents and purposes, for the
record, the owner is already the third person. However, to
protect the interest of the real stockholder, they will
execute a deed of trust. This document is treated as
confidential. The trustee signs, and acknowledges the
fact that hes not the true owner that and hes only
holding the certificate in behalf of the true owner. And
when the time comes that the true owner will demand the
return of the shares, the trustee is willing to immediately
and voluntarily return the share.
Who is now the legal owner in the story?
The third person. Therefore during elections in the
corporation, it is the trustee who is entitled to vote because in
this case he is the legal owner of the share.
Situation: If the corporation needs additional capital, what can
they do?
1.
Obtain a loan from the bank
2.
Ask investors to subscribe to more shares
3.
Issue redeemable shares
One option is to borrow money, and this might involve

several millions of loan but the bank is willing. The bank
extends P200M loan however the bank wants to be sure
that the P200M will be devoted to the projects the
corporation has presented. The bank is not interested to
recover your property or to foreclose the collateral, the
bank is interested to let the money grow and earn interest
so that whenever the bank extends or grants a multibillion loan, it wants to be sure that the amount granted
by the bank is used for the purpose for which the loan
was granted. To be sure that the corporation will
prudently use that money for the purpose it was granted,
the bank will have to require the corporation to provide a
seat in the board for the bank to represent. That is a bank
requirement whenever a huge loan is granted and to be
sure that the bank could monitor the application of the
money, the bank says that the corporation will have to
provide one seat in the board for its representative so that
Corporation!Law!
&
every board meeting, the bank will send its
representative. How do you think does that bank
representative sit in the board?
persons or corporation as trustee or trustees voting or other

rights pertaining to the shares for a certain period not
exceeding that fixed by the Code and upon terms and
conditions stated in the agreement)
By getting at least one qualifying share in his name.

Sir: The corporation necessarily will have to issue one
share for that bank representative with the agreement that
during election, that bank representative should represent
the bank. So he now sits in the board, every board
meeting, he receives the report, he has access to the
financial status of the corporation, he has access to the
application of the borrowed money where it went, access
to records on the development and progress of the
corporation. So the bank will be able to know whether or
not the money was used for the purpose for which it was
granted. To be sure that the project is carried out so that
if it is carried out the expected profits of that project will
be realized. And if realized, the bank can be assured of
being able to collect the amount that was loaned.
The bank representative can vote in board meetings, he is
a real member of the board. Hence, he will be there so
long as the loan remains outstanding. Once, the borrowed
amount is fully paid however, the bank has no more
interest in the corporation so the bank will now return the
share that was lent to it and the bank representative may
now resign from the board. So that when there is now
vacancy in the board, a special election will be held for
the purpose.
How long shall the director sit in the board?
1 year, thats why there is an annual election so that the board
will be subjected again to the decision of the stockholders.
And during the annual election, this is the time that the
stockholder may replace a member of the board who
misbehaves. Thats the only way that the stockholders may
control the management of the corporation because they
cannot intervene with the decision of the board.
So we have the powers of the board. What are the
limitations of such powers?
Those that may be found in the laws, articles of
incorporations, by-laws, and the corporation code. Beside
these limitations, the board has the absolute right to manage
the corporation.
Voting Trust Agreement

The trust agreement is different from a voting trust
agreement. What is a voting trust agreement?
It is an agreement among some or all of the stockholders on
how they will vote on a particular issue.
(Defined as an agreement in writing whereby one or
more stockholders of a stock corp transfer their shares to any
person or persons or to a corporation having authority to act
as trustee for the purpose of vesting in such person or
22"
"
The stockholder remains the holder of the stocks but he has

surrendered his right to vote.
Since he remains to be the owner, who can exercise the
right to vote.
It is the trustee who may exercise the right to vote, because in
so far as the corporation is concerned, he is the stockholder
although the beneficial ownership is retained by the original
18
stockholder or the trustor)
(Besides, Sir, himself, said that the stockholder remains to be
the holder of the stocks but the right to vote is surrendered.
So logically, it is the one upon whom the right to vote was
surrendered who should be allowed to exercise the right to
vote.)
The law requires that the stockholder must hold at least
one share of stock. Can the by-laws require that a
stockholder may be elected as a director only if he owns
15 shares of stock?
Yes. Such provision does not violate the Code because the
Code only requires that the director must hold at least 1
share, so the by-laws may require for more.
He tried to organize another corporation also to
manufacture the best beer. After operating for quite a
time, the best beer that he promoted was actually not the
best because the old one remained the best. So he asked
himself, what he should do to defeat the old one. His
consultants told him that the best thing to do is to buy
shares of stocks of that old beer company and make sure
that hell be elected to be a member of the board. So he
did. The other members of the current board noticed that
hes buying a lot of shares of stock which would give him
a sure seat in the board. So before he could even start
campaigning for the board, the members of the board in
the old beer company wanted to amend the by-laws. Can
the board amend?
Yes, provided it is ratified by the stockholders by a vote of 2/3.
So the amendment was passed. The amendment said that
no stockholder, who is at the same time, a stockholder of
up to 10 percent of any beer company in competition to
our company, can qualify as a director of our company.
So the director of the new beer company questioned this.
He went to court, and said that he has a lot of shares of
stock in the new company but they amended the by-laws
in such a way that he could no longer use his shares of
stock to protect his right to vote and be voted upon in
that board of the new corporation. It is unfair, according
to him, and thus violates his right as a stockholder. So he
went to the SC contending that the amendment was for
him alone because theres no other person who holds 10
percent of a company that competes with their company.
He said hes singled out, thus theres no equality. If you
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18
"De"Leon,"p."230,"2013"
Corporation!Law!
&
were the SC, would you allow the amendment or would
you agree with the director of the company so that the
amendment would be considered illegal?
The amendment should be allowed. Otherwise, to sustain the
contention of the director of the new beer company will
endanger the old beer company. Thus, it would be for the best
interest of everyone if the amendment of by-laws will be
retained.
Sir: Imagine if the new director of the new corporation
would be a director of the old corporation. During one
board meeting, he can summon the brew master, an
expert insofar as the mixture of the beer is concern, and
asked for the formula of the beer or asked for the list of
the top customers of the old corporation. Thus, the
Supreme Court says that is a valid amendment of the bylaws. It just happened that such person was affected by
the provision but it was not intended for him alone. It
could apply to anyone who is in the same situation.
Amendment to the by-laws can be done and approved by
the board with the ratification and confirmation of the
stockholder.
First, there will be a meeting, the time the elections will be

held.
Requirement of a valid meeting:
1. Quorum required number of persons to hold a valid
meeting.
If there are 10, quorum is 6.
(50+1: stock, majority of the outstanding capital stock;
non-stock, majority of the members)
Question: Can 5 hold a valid meeting in a group of 10?
Yes, if it is provided in the by-laws that such will constitute the
quorum.
Simple majority- the minimum majority, one-half plus one
Qualified majority that majority reflected in the articles of
incorporation or the by-laws (based on de Leon) that is higher
than simple majority. It is not only what the parties agreed
upon but even the code sometimes refers to it as 2/3, 3/4
(5/6).
Plurality it is the highest number acquired of a given
situation. It could either be lower or higher than majority
Where would the directors derive their power?
The directors derived their power from the law
Election of the Board of Directors

Section 24. Election of directors or trustees. At all elections
of directors or trustees, there must be present, either in
person or by representative authorized to act by written proxy,
the owners of a majority of the outstanding capital stock,
or if there be no capital stock, a majority of the members
entitled to vote. The election must be by ballot if requested
by any voting stockholder or member. In stock corporations,
every stockholder entitled to vote shall have the right to vote in
person or by proxy the number of shares of stock standing, at
the time fixed in the by-laws, in his own name on the stock
books of the corporation, or where the by-laws are silent, at
the time of the election; and said stockholder may vote such
number of shares for as many persons as there are directors
to be elected or he may cumulate said shares and give one
candidate as many votes as the number of directors to be
elected multiplied by the number of his shares shall equal, or
he may distribute them on the same principle among as many
candidates as he shall see fit: Provided, That the total number
of votes cast by him shall not exceed the number of shares
owned by him as shown in the books of the corporation
multiplied by the whole number of directors to be elected:
Provided, however, That no delinquent stock shall be voted.
Unless otherwise provided in the articles of incorporation or in
the by-laws, members of corporations which have no capital
stock may cast as many votes as there are trustees to be
elected but may not cast more than one vote for one
candidate. Candidates receiving the highest number of votes
shall be declared elected. Any meeting of the stockholders or
members called for an election may adjourn from day to day
or from time to time but not sine die or indefinitely if, for any
reason, no election is held, or if there are not present or
represented by proxy, at the meeting, the owners of a majority
of the outstanding capital stock, or if there be no capital stock,
a majority of the member entitled to vote.
23"
"
In other words they are elected by the stockholders but once

elected, it is not the stockholders who give them power its the
law that gives them power.
Business Judgment Rule

Likewise we said that the stockholders cannot review the
decision of the board because?
This is the business judgment rule. And so far as the business
is concerned, they decide.
That is their decision, their judgment and so far as
business judgment is concerned it cannot be reviewed by
the stockholders.
However, there may instance wherein stockholders may
review the decision of the BOD?
1. Changes in the AOI
2. Amendments or adoption of the by laws
3. Merger of one corporation to another corporation
4. Increase of capital stock
5. Increase of bonded indebtedness
6. Dissolution of corporation
7. Disposition of all or substantially all corporate
properties
So that if you are one of the members of the board and
there was already a resolution drafted because the
president instructed the secretary to draft a resolution
which was urgent. He wanted to borrow 5 million from the
bank because there was an immediate need for cash. But
there are directors who did not signed yet and so it was
very urgent and almost (10) ten o clock the bank were
Corporation!Law!
&
already open. The secretary went to your hows early in
the morning and you were in the shower at that time. And
miingun ang secretary, Mr X. ang secretary ni naa koy
papirmahan. Tubag pod kag unsa mana hala basaha.
Manghuwam kuno ug 5M sa banko. So you signed and in
fact all the directors signed. And so the secretary was
able to borrow money from the bank, 5 million. Until the
day some of the stockholders questioned, there was no
need, in fact no meeting was done how come the
resolution was approved.
So was the resolution valid?
Not valid because in order to pass a resolution, it needs a
deliberation between the members of the board, deliberations
of the body is necessary because it allows the directors to
discuss and exchange ideas between themselves.
Valid or not?
Not valid
Why not?
There should be a meeting
Because there has to be a deliberation for there to have a

valid resolution
What happens during deliberation?
There will be exchange of ideas; they share their expertise,
ideas, to choose the best option for the company
Thats why in every meeting, there has to be the minutes,
so that the various ideas presented may be reviewed. Of
course, is this an absolute rule?
No there are, however, exceptions to the rule:
director happens to be the sole stockholder
a matter of general practice, custom and policy
ratification of acts in a subsequent board meeting
apparent authority
inherent authority
waiver
delegation of management to the
creation of an executive committee
entering into a management contract
close corporations
So if the directors themselves are the stockholders?

There is no need to protect the interest of the shareholders
because they themselves are the shareholders.
So that if a stockholder subsequently questions the
passage of that resolution, can that stock holder object if
directors themselves are the stockholders? Master cogue
says! I object, others says, but master cogue, during the
meeting, you approved the resolution, master cogue says
24"
"
No
In a family corp for example, SH are the directors, ther will
be no need of that meeting, so that if father mother son
and 2 daughters are SH themselves, during breakfast, can
the father just say primahi! Meeting sa ta pa! Aassssosss
meeeting2x ba oi! -its ok!
How Voting is Conducted

In an election, how is voting conducted?
Voting by the directors may be done by the show of hands or
by ballot if such was requested by the stockholders. If done by
ballot, the stockholders will vote in a piece of paper and there
will be ballot box. After all stockholders who are present have
voted, then the presider will now determine who won the
elections.
If there are only 6 stockholders and 5 are to be elected as
directors, how many votes are required to win?
Why?
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
"yes i approved as a DIRECTOR, now I object as a

STOCKHOLDER!" can you do that?
It depends if it is a stock corporation or a non-stock

corporation. If it is a stock, the number of votes will depend on
the number of directors to be voted for each share. So 1 share
has to be multiplied by 5 (number of directors to be voted),
and he can vote by straight voting or he can have cumulative
voting to one candidate or cumulative voting by distribution.
If it is a non-stock corporation, cumulative voting does not
apply.
Cumulative voting allowed only in Stock Corporation.
So if there are 6 stockholders to elect 5 directors, how
many votes needed to win as a director?
It will depend on the number of shares. Example, if the a SH
has 100 shares of stock and there are 5 directors to be voted
upon, he has a total of 500 votes. He has the option on either
to distribute that vote by straight voting (100 votes for each of
the 5 directors), or he can have a cumulative vote for 1
candidate (500 votes to just 1 candidate), or he can have
cumulative voting by distribution (500 votes will be distributed
to maybe only 3 directors).
The intention of the law in cumulative voting is to have the
minority stockholders to have a say in the policy or that they
can have a seat in the board. If there is no cumulative voting,
they can always be overpowered by those who have
controlling interest.
Illustration: There are only 100 shares, the owner of the 60
shares pertaining to the majority SH and the 40 shares
pertain to the minority. The minority shares are
distributed to several individuals. During the election, the
minority can only vote as much. They will always lose
Corporation!Law!
&
because they only have less than the majority of shares if
there is no cumulative voting.
No, he is not. It is only optional for the corporation to have a

Vice President.
(Please refer to your notes for the illustration nga gisuwat ni

sir.pasaylua kai wala ko nakacopy)
However, it is always almost in every corporation that a

Vice President is present. Why is that?
100 shares, 5 SH. Each has 20 shares. If there are 5 directors

to be elected, how many votes do each need to win? There is
no problem here. Everybody can be a director. The problem is
if A, B, C, D, does not like the face of E. And so they agreed to
exclude E (who only have a total of 100 votes, so as ABCD)
as director and include S, a stranger, to become a director.
He is a president in waiting. He succeeds the President when

he dies, resigns, abandons, is removed or becomes
incapacitated to conduct his duties.
Can S become a director?

No. If they want S to be a director, they will give S 1 share
each. S now has 4 shares for a total of 20 votes.
Sir changed the number of shares in an attempt of A, B, C and
D to exclude E
Do you think S could now qualify? Can he win?
Yes. Him alone, he cannot win. ABCD will have to give him
some more shares.
How many more?
A, B, C, and D can give 5 each to S. Or total of 20 shares. He
now has 100 votes. He now has very good chance to win. A,
B, C, and D now has 75 shares.
Where is the Vice president? Does the law mention about

the VP?
No, because it is optional on the part the corp if it is provided
in the by-laws, IOW it is not necessary. He is like a president
in waiting, he succeed when the president dies or
incapacitated or abandoned his position or removed.
Vice president but not a holder of a single share does he
become a president?
No, he does not become the president because as provided
by the corp code that the president must own at least one
share, IOW no person shall be a president at least she holds
one share.
Sir: what section is that that provides that the president
shall have at least one share?
The corp law does not provide.
Can E still win?

Yes. His 100 votes are solid. He is the minority of the 5. Even
if the 4 will do something, he is still assured. That is the
purpose of cumulative voting. To make sure that the minority
will be represented in the Board.
Who will the stockholders elect in the stockholders
meeting?
The Board of Directors. Once instituted, they will now elect
for the officers. It is not the stockholders will elect the officers.
(transcriber own opinion: as provided by the section 25 of the

corp code, that the president, who shall be a director, it is
interesting to note that to be a director you must have a legal
ownership of at least one share, and applying it by analogy
that you cannot be appointed as president if you are not a
director of which a holder of at least one share.) Please
correct if mali.. hahaha ktnxbye
3 Steps for the VP to succeed as President:
IOW the vice-president must:
i.
Officers
Who are the officers?
ii.
As provided in the code, the officers are the President,

Treasurer, and the Secretary.
If you are the Secretary, can you be at the same time the
Treasurer?
Yes, there is no prohibition. What are prohibited is being the
President and Secretary or President and Treasurer at the
same time.
Where is the Vice President in the Code? Is he mentioned
there?
25"
"
19
iii.
must be a member of the board because the law

provides that the president must be a director;
have at least on share because you cannot be
elected as a member of the board without having at
least one share;
and the board shall elect him as a president, you
must have all these so that there will no legal
"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""
19
"See"however"Sec."25"of"the"code,"it"provides"that"for"one"
to"be"a"member"of"the"BOD,"he"must"be"a"holder"of"at"least"1"
share"of"stock,"and"one"cannot"be"elected"as"President"if"he"
is"not"a"member"of"the"BOD."So,"logic"dictates"that"a"
President"must"be"a"holder"of"at"least"1"share"of"stock."
Corporation!Law!
&
impediment for you, once you succeed as president
when such situation arises.
Was it proper for him to be elected as VP without having

at least one share?
Yes, because there is no law that requires the VP to be

stockholder and there is no law either requiring him to be
director. But the corp is not precluded of requiring these under
the by-laws.
De Facto and De Jure Officer/Director

However in electing a director or officer, one might not be
qualified but yet erroneously or otherwise somebody was
not qualified but was elected as a officer?
He is considered as a de facto officer, since he was
erroneously voted to be director or officer, to distinguished a
de jure vis--vis de facto, the de facto officers position can be
questioned in a quo warranto proceeding while that of a de
jure officer, his position cannot be question.
What is the effect of the action or decision de facto
officer?
The decision or action of the de facto officer will bind third
persons or the corporation, that is, it is as if he still considered
as a de jure officer.
Vacancy in the Board; how filled

How does vacancy occur in the board?
1.
2.
3.
4.
5.
6.
Death;
Abandonment;
Resignation;
Removal;
Incapacity; and
Disqualification.
2.
If the vacancy occurs other than by removal or by

expiration of term, 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.
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 the
members 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 power of the BOD/BOT is not suspended by
vacancies in the board unless the number is reduced
below a quorum.
The phrase may be filled in Section 29 indicates that the
filling of vacancies in the board by the remaining directors
constituting a quorum is merely permissive. Corporations
may choose how vacancies in their boards may be filled
up, either by the remaining directors or trustees
constituting a quorum or by all stockholders or members
in a meeting called for the purpose. However, if the bylaws prescribe the specific mode of filling up existing
vacancies, the provisions of the by-laws should be
followed. It is well-settled that the bylaws are part of the
fundamental law of the corporation and its directors,
officers, and members are bound to comply with them.
If there is vacancy, what shall we do?

2 ways to fill in vacancies
1.
If vacancy occurred through:
Expiration of term
Removal was by the stockholders
Increase in the number of slots for directors
It is filled by the stockholders in regular or special
meeting called for that purpose
How can an increase in the number of seats for directors

happen?
Happens when the AOI is amended, increasing the number of
seats for directors
So if vacancy occurs, what do we do?
2.
1.
2.
3.
4.
If vacancy occurred through:

Death
Abandonment of office
Incapacity
Resignation
It is filled by the vote of at least a majority of the
remaining directors or trustees, if still constituting a
quorom
2 ways of filling up vacancies:
How should that meeting be done?
1.
It is done in a regular or special meeting called for that

purpose.
By the stockholders or members
26"
"
If the vacancy results from the removal by the

stockholders or members or the expiration of term
So a vacancy can be filled up by the stockholders or filled

up by the remaining board of directors if still constituting
Corporation!Law!
&
a quorum depending on how the vacancy was created.
So, if it is to be filled up by the stockholders, how would
that vacancy be filled up?
Call a regular or special meeting, and, before the meeting is
convened, there should be a proper notice to the stockholders
or members. And when we say proper notice this means that it
should contain the date, place and purpose of the meeting.
This is necessary to indicate the agenda and what is to be
discussed in the meeting.
(Maybe called by any stockholder or member of the

corporation signing the demand)
Will the president be removed from office even in the

absence of demand or notice from the stockholders?
No. The following must be carried out:
a. Notice from the stockholders for a meeting
So that if the purpose is to remove the president, do you

think the president will send that notice?
b. Meeting must be attended by at least majority of the

stockholders
No. He will not.
c. A temporary or acting president can be elected among the

stockholders to preside the meeting in the absence of the
officer of the Company (i.e., president, vice president),
wherein the role of the acting president is limited to the
purpose agreed among the stockholders.
So what do we do? If the purpose is to remove the

president and the secretary.
A notice can still be sent on the written demand of the
stockholders representing or holding at least a majority of the
outstanding capital stock, or if it be a non-stock corporation,
on the written demand of a majority of the members entitled to
vote.
So if there is no written demand by the majority
stockholders or members, would there still be a chance?
Sec. 28. Removal of directors or trustees. - Any
director or trustee of a corporation may be removed
from office by a vote of the stockholders holding or
representing at least two-thirds (2/3) of the
outstanding capital stock, or if the corporation be a
non-stock corporation, by a vote of at least two-thirds
(2/3) of the members entitled to vote: Provided, That
such removal shall take place either at a regular
meeting of the corporation or at a special meeting
called for the purpose, and in either case, after
previous notice to stockholders or members of the
corporation of the intention to propose such removal
at the meeting. A special meeting of the stockholders
or members of a corporation for the purpose of
removal of directors or trustees, or any of them, must
be called by the secretary on order of the president
or on the written demand of the stockholders
representing or holding at least a majority of the
outstanding capital stock, or, if it be a non-stock
corporation, on the written demand of a majority of
the members entitled to vote. Should the secretary
fail or refuse to call the special meeting upon such
demand or fail or refuse to give the notice, or if there
is no secretary, the call for the meeting may be
addressed directly to the stockholders or members
by any stockholder or member of the corporation
signing the demand. Notice of the time and place of
such meeting, as well as of the intention to propose
such removal, must be given by publication or by
written notice prescribed in this Code. Removal may
be with or without cause: Provided, That removal
without cause may not be used to deprive minority
stockholders or members of the right of
representation to which they may be entitled under
Section 24 of this Code.
27"
"
The officers of the Company, particularly the secretary,

refuse to send the notice, given that the officer in
question is the president. Hence, a few of the
stockholders agreed to send notice to all stockholders.All
summoned stockholders attended the meeting. A
temporary or acting president was elected among the
stockholders in order to preside the meeting and carry on
the motions being decided. Will the motion to remove the
president from office be carried out if the stockholdersattendees do not reach majority?
No. The law provides the minimum requirement of at least
majority of the stockholders. Non-appearance means no
election to carry out the motion.
Can the board of directors put into effect any decision
(i.e., termination of all employees who are on strike) in its
collective authority of the corporation?
No, if the decision of the board of directors violates the law or
the Code.
Whether or not the stockholders can review/inquire into

the decision of the corporation?
Answer:
No, it is the courts jurisdiction to review such act. Probably,
the stockholders can file a case in court in behalf of the
corporation. It is the court who will ultimately determine
whether the action of the directors is unlawful. In our problem
(termination of all employees), it is unlawful so the court may
consider that act as invalid.
Liability of Directors
When are directors liable?
Answer:
Corporation!Law!
&
The directors are jointly and severally liable for all damages if
they:
1. willfully and knowingly vote for or assent to patently
unlawful acts of the corporation; or
2. who are guilty of gross negligence or bad faith in directing
the affairs of the corporation;
3. acquire any personal or pecuniary interest in conflict with
their duty as such directors or trustees
In another instance, the board came up with a resolution

that it will postpone the payment of its loan of P5 million
so that the directors who approved this resolution were
sued and their justification was that they cannot pay at
that time. Are they liable for postponing the payment?
No. They had to postpone because they had no other choice
because they had no funds to pay the said loan. There was no
negligence nor bad faith in this case, therefore they cannot be
made liable for their decision to postpone the payment.
So if the bank sues the BODs for approving the act of
postponing the payment, do you think they can be made
liable?
No. There was no showing of bad faith or gross negligence
when the BODs made their decision. Also, it was the
corporation who took that loan and benefited thereof and since
it is a separate juridical entity, the bank cannot go after its
BODs directly.
Alright. So this particular provision on the liabilities of

BODs would refer to what situation?
Under the law, the directors are jointly and severally liable for
all damages if they:
1. willfully and knowingly vote for or assent to
patently unlawful acts of the corporation; or
2. who are guilty of gross negligence or bad faith in
directing the affairs of the corporation;
3. acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees
there might be more problem caused to that corporation and if

they agreed to that situation, then they will be considered as
acting with gross negligence because of the fact that they
were just adding more problems to the corporation.
Atty: In other words, this liability is not the liability of the

corporation , rather it is the personal liability of the
director, therefore, even if the resolution is disapproved
or approved, it is immaterial. The thing is, if a director
votes for something that is patently unlawful, then he
should be personally liable for his acts. Thats the point
here; we should not refer to the liability of the corporation
because as you said, what is contemplated under the law
is the personal liability of the directors.
Atty: You were a director in a company and you have 5000

employees and you are now deciding to have a party for
the employees as well as their families. Your board
appropriated P 5,000 per head for the Christmas party
alone. Thats excluding give awaysand raffles. It will cost
a total of P25Million. After the meeting, you contacted
your friend who was engaged in catering. Party mi, 5000
katawo. Why dont you bid and offer your services as a
catering service business? Following the business
requirements your friend bid. The board required tasting.
We dont want anyone complaining about food, so the
testing done in the Board Room heard you are while
tasting. You are the most talkative, oikalami!Because of
your comments, the board decided, then we engae the
service of this catering. We would like to make it on
record to thank director Menesesto clap their hands for
introducing this caterer. However, after the board decided
to hire your friend for the catering, you called up your
friend.
Oi,
sakobayanakwartaha.Akobayanagpailailanimodidto.
Ayawjudkokalimti ha, 10% . Is there anything wrong with
the contract?
As regards the phone call made by Director M., I would
consider that as a disloyalty sir because she obtained a
business opportunity that belongs to corpo. She should
account secret profits to corpo even when sourced from acts
not harmful to the corpo or when its acts are ultra vires.
Lets try to hear another Director
Is there a business opportunity?
So, in that resolution of the 10 directors, only 7 approved

to postpone the payment and the reamaining 3 did not
approve it but instead suggested that they pay the said
loan by borrowing from a bank. That was the business
judgment and yet the bank still insists that the 7 be held
liable because not paying an amount due is patently an
unlawful act.
It is not unlawful not to pay if you really dont have the means.
Regarding with the means Sir, the other three Board of
Directors suggesting to borrow from another bank. In the first
instance, it might sound a good idea but if they agreed to it sir,
28"
"
Yes. There is a business opportunity. That telephone call

asking for commission would have been converted to
discounts, and in that way, the corporation could have saved
money.
S: According to De Leon's Commentary: Secret profit, even if
it was sourced from an act which is harmful or not harmful to
the corporaion or even if it came from an ultra vires act, it
would all go to the profits of the corporation.
Corporation!Law!
&
T: But how did de Leon relate it to our answers now? De
leon cannot just come out with the law. He could only
speak for the law.
S: He was trying to explain in connection with secret profits
because the law provides that the director acting adversely to
the interest of the corporation, if he has acquired profits from
such transactions, he must surrender these profits to the
corporation.
T: Yeah. But when you say adversely, R said there was a

tasting session, there was a bidding, everybody was
given the opportunity, and you were even applauded by
them. Now suddenly they say: "Hoy! Hoy! Return the
profits! Kadawat man diay ka. That's the problem now.
See? So, would you return or would you be liable for any
disloyalty according to R? Or conflict of interest?
S: I think it is neither disloyalty nor conflict of interest because
there was no duty to begin with to find a catering service. As I
have mentioned earlier, in fact there was a bidding,
particpated by catering services and the BODs gave their
comsent to.chose the catering service of my friend. So there is
no conflict of interest.
T: So where would that secret profit go? If there was no

violation, why give that secret profit according to de
Leon? How can he now say you return the secret profits
and yet not cite any law? What law or provision should I
be advised?
He merely went back to the 2nd paragraph of Sec. 31 which
says that when a director, trustee or officer attempts to acquire
or acquires in violation of his duty any interest adverse to the
corporation in respect with any matter which has been
reposed in him in confidence, to which equity imposes a
disability upon him to deal in his own behalf, he should be
liable as a trustee for the corporation, and must account for
the profits which would have otherwise accrued to the
corporation.
In other words?
S: IOW, if I were to give my meager interpretation, I would
heed to de Leon's commentary. The law is clear that secret
profits must stem from the transaction that was the source of
the conflict of interest. But since in this situation that we have
been discussing, there was no conflict of interest to begin with.
So the secret profit is not really a secret profit because it was
earned due to my diligence or initiative to find a catering
service that, business-minded as I am, would give me an
advantage.
T: So you say: "Ako pay business-minded, unya sala ni

nakong magkakwarta ko sa ako pagka business-minded?
So, I'll keep this 2.5M (10% of 25M). I could go back to
Guam and spend the money there! Very cheap! Isaw a
Samsonite bag and I have to buy that...(chika minute).
But, you will agree with me, something is wrong. Was
something wrong?
S: Yes.
T: Were you ever loyal to the corporotion whom you are
to help?
S: No.
T: You were not loyal. Yet disloyalty, would it fall under

disloyalty?
S: In my opinion, disloyaty would be tantamount to a director
grabbing a business opportunity that could have accrued to
the corporation.
Would it fall under disloyalty? Was there a business
opportunity?
-Yes, there was a business opportunity. Discount is a
business opportunity and any amount or benefit that you
acquired because of that, which should have gone to the
corporation. Because, business opportunity does not only
mean that there was a business and we took that business
away. Business opportunity could refer to discounts,
negotiations, bargaining, these are business opportunities, not
just a particular business that was intended for a corporation,
any matter which you think would benefit the corporation is a
business opportunity. So here, Atty. Espedido humbly
believes, that this is a business opportunity so that this is
disloyalty to the corporation.
SELF-DEALING DIRECTOR.
Youre still a director and youre dealing in batteries and
tires and this is so much related to the corporation in
which you are also a director so that every time your
corporation, corporation in which you are a director,
needs tires, they call on you for the supplies. Do you
think that is improper to do business?
-No, there is nothing improper. He can be the supplier; a
director can deal with his own corporation.
So if youre a supplier of flour and your corporation in

which you were a director was engaged in bakery. Can
you supply flour to the bakery of the corporation?
-Yes, he can act as supplier. The law does not prohibit any
director to deal with the corporation of which he is a director.
T: There is nothing wrong with a director dealing with his
own corporation. However?
29"
"
Corporation!Law!
&
S: In that matter, the transaction can be considered voidable
unless the presence of the director is not necessary to have a
quorum in a meeting wherein such transaction was approved
and the vote of said director is not needed for the approval of
such transaction and that said transaction was fair and
20
reasonable.
T: Can we illustrate that in the flour supply?

S: In the example, in order to have that transaction-to supply
flour, there must be approval by the Board. There should be
quorum even if my presence is not counted and the
transaction or contract is approved in that quorom and the
details to said transaction can be considered fair and
reasonable then such transaction or contract can be
considered as valid.
T: So if there were only 5 of you as directors and that

contract was presented, where you, Mr. M was allowed to
supply flour to the corporation. Only 3 of you were
present. Was there anything wrong?
S: It depends. If the quorum is 3, and I am one of those 3,
then such transaction is voidable.
T: But in fairness to you, the resolution was presented

and you said:"Di lang ko mu butar ha? Kamo lng kay ako
man ang supplier." The 2 remaining voted in favor of the
transaction. It was approved. You will be the supplier. You
were there but you did not vote. Is there anything wrong?
S: Yes. Since my presence was counted to attain the quorum
of 3, and without me there would only be the 2 of them, then it
is as if no quorum was attained to validly hold the meeting.
given situation there were only 3 directors including M. Hence,

his presence was required to constitute the quorum.
T: I thought you said he passed the test?

S: He passed the 2nd test because the necessary vote
required is only 2 votes but not the 1st test because his
presence was necessary to constitute the quorum. So taking it
all together, he did not pass the whole test. Therefore, the
contract is voidable. It is still valid and enforciable until and
unless the contract is nullified by the corporation.
What happens to the contract?
The contract is ineffectual because the law requires that there
should be a quorum to hold a valid meeting. Since it did not
meet the required quorum, the contract is in itself void not
even voidable. Exception: if the quorum has already been
satisfied, then the meeting will be held even without the said
director. To add, his votes are not required in the meeting
during the execution of the contract.
In self-dealing directors, there is nothing wrong. He may deal

with the corporation. However, the contract may be voidable if
it cannot pass the test provided in the law:
First Test: Presence of the director must not be counted for to

constitute a quorum for the meeting.
Second Test: The vote of the director is not even to constitute
the majority to approve the contract.
Third Test: It must be reasonable and fair.
Fourth Test: If he is an officer of the corporation, he must be
previously authorized.
T: Did you here that S?

S: I think that in the 2nd problem that you presented, he has
passed the 2nd requirement that his presence is not required
to obtain the valid vote since what is needed is the majority
vote of the members who are present constituting the quorum.
T: He has passed the test. But he said he did not pass the
test because although he was there he did not vote, it is
as if he was not there, therefore there was no quorum. (I
think na misunderstood ni sir ang answer ni M.) What do
you think?
S: I think there would still be a quorum but it failed the first test
because under the first requirement, the presence of such
director is not necessary to constitute the quorum and in the
INTERLOCKING DIRECTORS.
Interlocking Director is a director of two or more corporations
doing business with each other. There is nothing wrong when
a person is a director of more than one corporation.
Something wrong happens if such person has a substantial
interest in one corporation and a nominal interest in the other
corporation. Such person may give importance in the
corporation which he has substantial interest. The Corporation
Code believes you cannot serve two masters at the same
time. In such case, the rules required in the previous example
will apply.
Corporation
Scenario
"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""
20
""See"Sec"32"of"the"Code."
30"
"
Hotel
and
Corporation
Travel
Agency
Corporation!Law!
&
A person is a director in both the hotel and travel agency
corporations. Every time the travel agency gets tourists, it
is usually booked in the hotel.
Is there anything wrong?
A. No, there is nothing wrong. In fact, this is scenario that
normally happens. There is a complimentary service that
happened between corporations. At least each corporation
knows each other; any problem will be addressed
immediately.
2.
Of succession by its corporate name for the period of

time stated in the articles of incorporation and the
certificate of incorporation;
3.
To adopt and use a corporate seal;
4.
To amend its articles of incorporation in accordance

with the provisions of this Code;
5.
To adopt by-laws, not contrary to law, morals, or

public policy, and to amend or repeal the same in
accordance with this Code;
6.
In case of stock corporations, to issue or sell stocks

to subscribers and to sell stocks to subscribers and
to sell treasury stocks in accordance with the
provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;
7.
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;
8.
To enter into merger or consolidation with other

corporations as provided in this Code;
9.
To make reasonable donations, including those for

the public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, That
no corporation, domestic or foreign, shall give
donations in aid of any political party or candidate or
for purposes of partisan political activity;
Compensation of directors.
The directors shall not receive any compensation, as such
directors, except for reasonable per diems. Provided,
however, That any such compensation other than per diems
may be granted to directors by the vote of the stockholders
representing at least a majority of the outstanding capital stock
OR when there is a provision in the by-laws fixing their
compensation.
*In no case shall the total yearly compensation of directors, as
such directors, exceed ten (10%) percent of the net income
before income tax of the corporation during the preceding
year.
While we said that the board will only act as a deliberate
body, there are instances when a smaller group may be
delegated the power to act as the board. What could this
refer to?
Executive Committee- is composed of at least three directors
appointed by the board. This would come only in existence if it
is specifically stated in the by-laws that it may be created. The
powers that the executive committee may exercise are so
broad. However, the law limits these powers as to exclude
those:
a. approval of any action for which
shareholders' approval is also required;
b. the filing of vacancies in the board;
c. the amendment or repeal of 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 amendable or repealable; and
e. a distribution of cash dividends to the
shareholders.
10. To establish pension, retirement, and other plans for

the benefit of its directors, trustees, officers and
employees; and
11. To exercise such other powers as may be essential
or necessary to carry out its purpose or purposes as
stated in the articles of incorporation.
Situation: There was case filed in court and you were the
counsel of the defendant. During the initial hearing, you
have to find out whether or not the case was duly
authorized by the corporation. What will you ask for?
A: I will ask for the board resolution authorizing them to sue for
the corporation.
POWERS OF THE CORPORATION

A:Sec. 36. Corporate powers and capacity. - Every
corporation incorporated under this Code has the power and
capacity:
1. To sue and be sued in its corporate name;
31"
"
Situation: There was a corporate certificate which

certifies that in a meeting a resolution was passed by the
corporation allowing the president to file a case in court.
Upon examination, you discovered that there was no
certification for the authority to sign the verification as
well as the certificate of non forum shopping.
Corporation!Law!
&
A: I will raise as argument that he has no authority to sign the
verification as well as the certificate of non forum shopping.
While he may be given the authority to file the case in behalf
of the corporation, said authority does not include signing in
behalf of the corporation the verification and certificate of non
forum shopping. Said acts require another authorization.
According to Atty E.: The law provides that the authority
of the officer, here the President, should be explicitly
granted in the Board Resolution. Mere grant of authority
to file a case does not grant the authority to sign. (MAO
LANG NI ATUNG I.SUNOD PARA SAFE KAY NI
EMPHASIZE MAN C SIR ANI)
*According to De Leon, Citing jurisprudence decided in 2008
and 2010: The SC has declared officers of the corporation
who can sign the verification and Cert of Non-forum shopping
without a need for a board Resolution. This could include the
Chairman, the president, or the general manager. The list is
not exclusive, the main reason why such officers or
employees do need an explicit authorization by the board is
because these officers are in a position to be able to verify the
truthfulness of the allegations in the complaint.
Situation: Pre-trial. Supposing the President again
appeared in the pre-trial of the case filed. But when you
looked at the Board Resolution that authorized the
President to file a case, it did not contain any
authorization given to the President to appear in pre-trial
in behalf of the corporation. Is there anything wrong with
this? What is done doing pre-trial?
Sec. 2.of the 1997 Rules of Court provides that in a pre-trial
the court shall consider the following:
(a) The possibility of an amicable settlement or of a
submission to alternative modes of dispute resolution;
The objective of the pre-trial is to expedite. And one of the
best ways of expediting the resolution is to enter into
compromise agreements. In compromise agreements,
what could happen? There is the give and take process.
You give some, you take some, you waive some, and you
admit some. This is an act where waivers could be
required. Instead of paying 10 Million, you lowered it
down to 5 M and it is important. If you dont have the
authority, do you think you can appear on pre-trial? You
cannot. Otherwise, if you will encounter smart lawyers, he
will ask for the dismissal of the case because the
authority does not give you the power to perform certain
acts especially during a pre- trial conference.
What are other powers of the corporation

A: *Those mentioned in Article 36* as well as those mentioned
in :
Art. 37 (Power to extend or shorten corporate term);
Art. 38 (Power to increase or decrease capital stock; incur,
create or increase bonded indebtedness);
32"
"
Art. 39 (Power to deny pre-emptive right); and

Art. 40 (Sale or other disposition of assets).
Power to extend or shorten corporate term

How is the power to extend or shorten corporate term
done?
Sec 37 provides :
! Majority vote of the directors, AND
! Ratified at a meeting by the SH representing
at least two thirds of the outstanding capital
stock or in the case of non-stock
corporation, 2/3 of members.
Provided, that the dissenting stockholders have the appraisal
right which is the right granted by law to SH to demand
payment of the fair market value of his shares.
(A stockholder who dissents from certain corporate actions
has the right to demand payment of the fair value of his or her
shares. This right, known as the right of appraisal, is expressly
recognized in Section 81 of the Corporation Code, to wit:
Section 81. Instances of appraisal right. - Any stockholder
of a corporation shall have the right to dissent and demand
payment of the fair value of his shares in the following
instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or restricting the rights
of any stockholder or class of shares, or of authorizing
preferences in any respect superior to those of outstanding
shares of any class, or of extending or shortening the term of
corporate existence;
2. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or substantially all
of the corporate property and assets as provided in the Code;
and
3. In case of merger or consolidation. (Turner V
LORENZO SHIPPING CORPORATION,G.R. No. 157479)
Merger and Consolidation

Merger One corporation is dissolved, the other survives.
Consolidation There is a formation of a new entity which is
distinct and different from the two corporations which formed
it. The two corporations are dissolved.
Increase and decrease of capital stock

Question: Increase and decrease of capital stock.
A: It has the same procedure with the extension or shortening
of the corporate term.
1.
2.
Majority vote of the directors, AND

Ratified at a meeting by the SH representing at least
two thirds of the outstanding capital stock
Corporation!Law!
&
Decrease in the Authorized capital stock
st
1 : Meeting by the board, and voted by majority of the BOD;

nd
2 : Submitted for ratification to the 2/3 votes of the

outstanding capital stock;
rd
3 : since it is only a decrease- no need to file Treasurers

Affidavit. There should be certification from the SEC
authorizing the decrease.
The decrease wont be allowed if there are outstanding debts
that will be prejudiced by the decrease. In effect, it wont be
allowed by the SEC.
Bonded indebtedness
If the corporation is in need of funds, what will the
corporation do?
1. Borrow from banks.
2. Ask the SH to invest more
3. Issue redeemable shares holders of redeemable
shares are both creditors and stockholders of the
corporation, which is actually beneficial to the holder.
Bonded indebtedness- Here the corporation undertakes to
pay the price at a specific time with a specific rate.
Question: Why is it required to be registered in the SEC?
A: You have to register it because it is SEC who is duty bound
to protect the interest of the public. In a bonded indebtedness,
there are no specific creditors. The bonds are issued by the
corporation and whoever is interested may buy those bonds.
Those bonds are merely promissory notes with a maturity
date and a guaranteed interest. And because these are
promissory notes and are not secured by any collateral,
unlike loans from a bank, the State is interested to protect
the interest of the public through SEC by determining the
financial capacity of the corporation who will issue the
bonds. Once approved by SEC, the corporation can start
issuing the bonds. At times it is not the corporation who
will directly deal directly with the individuals; they may
have to appoint a broker or an agent to sell these bonds
like through the bank. Upon maturity of the bonds, the
bank will recall the bonds and the holder thereof may get
their capital as well as the interest guaranteed by the
promissory notes. So, these are not ordinary loans
because loans are usually secured by collaterals. Bonds
are usually without any security because we do not know
who will be the buyer.
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 who are 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
subscription are received from the general public.
When you say pre-emptive right what is its purpose?
The purpose is to protect the existing SH of the corporation so
that if theres any increase in the number of stocks, their
shares will not be diluted. (To safeguard the right of a SH to
preserve unaltered and unimpaired his proportionate influence
and interest.)
Illustration: If the present Authorized capital stock wholly
subscribed is 100 M and there are 10 SH who own 10M
each. So that if the corporation decides to issue another
100 M Shares of stocks, what will happen?
The existing 10M which is 10% of the original 100M is now
down to 5% of what is now 200M. So your shareholding now
is down to 5%.
So that if the new 100M will be fully subscribed by a 11
new incoming SH who now owns the entire new 100M.
What happens?
The old SH will be less powerful in the decision making.
The original 10 SH owning original 100% of the 100M now
only hold 50% of the new 200M which is what the law
does not want to happen.
So what does the law now requires?
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 existing SH.
Question: So here, when can those 11 stock holders
come in? (The new stockholders in the preceding
example.)
A: They may come in when the old stockholders waives their
pre-emptive right. So they will have to wait and they will have
to present a proof to the Securities and Exchange
Commission that these existing stockholders have waived
their rights. Otherwise, the S.E.C will not allow any new
stockholder to subscribe to any new share. Before allowing a
stockholder to subscribe to a newly issued share, the existing
stockholders MUST be given that right.
Instances that where the Pre-emptive right is NOT given
to the Stockholders (sec. 39):
1.
Such right is denied by the articles of incorporation or

an amendment thereto;
!
Preemptive right
What is preemptive right?
33"
"
When a new issuance of shares are made,

the existing shareholders cannot claim
because in the first place the AOI provides
that you do not have such right.
Corporation!Law!
2.
&
Shares to be issued in compliance with laws
requiring stock offerings or minimum stock ownership
by the public;
!
IOWs, there are occasions when the law

requires that a certain portion of the
shareholdings should be owned by the
public.
If for example, you want to trade your

shares of stocks in the stock market, well
the stock market says that at least a portion
of your shares should be sold to the
market, you cannot register in the stock
market and still prevent the public from
buying. How could you sell in the stock
market and every time you do not give the
opportunity to the public to give any share,
so I think it is 20% at this time, at least 20%
of your existing shares must be offered to
the public before you are allowed to trade
publicly your shares of stocks.
3.
Another example is when you want to go to

the public, you want to go to the Securities
Stock Market when you apply to be a
publicly listed corporation, there is a
requirement that at least a portion of your
shares of stocks must be sold to your
employees, at least 10% of your total stock
holdings must be offered to your employees
before you could start to be an IPO (Initial
Public Offering) or a publicly listed
corporation.
The idea is to make your EEs owners of
their own company, so that it is believed that
an EE who is a part-owner of the company
where he works, he is expected to work
harder, he is expected to make effort to
make his own company more profitable.
And that is the intention of the law in
requiring publicly listed corporation. And the
law even requires installment payment for
the shares of these EEs, not only
installments, but also liberal terms, they may
buy their shares through salary deductions
just to induce or encourage them to buy
these shares.
IOWs, the existing shareholders cannot say
do not sell to the employees yet before
giving us the authority to buy because that
is an exception.
Shares to be issued in good faith with the approval of

the stockholders representing two-thirds (2/3) of the
outstanding capital stock, in exchange for property
needed for corporate purposes;
! There
somewhere
this is the
corporation
34"
"
is a very attractive property

and the corporation believes that
best tactical move to make the
more profitable, we do not have
money to buy that property but the owner of that

property is interested to buy shares. So here the
corporation is authorized to issue shares without
objecting these shares to the pre-emptive rights
of the existing stockholders because it is for the
better interest of the corporation itself. So here,
the stockholders cannot say that they wanted to
invest more because this is an exception.
4.
Shares to be issued in good faith with the approval of

the stockholders representing two-thirds (2/3) of the
outstanding capital stock in payment of a
previously contracted debt.
!
Dako tag utang, way gustong mu bayad.

Sugot ang debtor na bayran lang natu cya
ug shares, WHY NOT? So, ay lang mug
reklamo sa pre-emptive2x ninyo, di lang sa
ta mag pre-emptive right, basta maka bayad
lang ta sa utang.
Sec. 39. Power to deny pre-emptive right

"
We said that there are some occasions that this preemptive right can be denied, what are these occasions?
1. When denied by the AOI; or
2. The AOI is amended to deny such right
Sec. 40. Sale or other disposition of assets

"
SITUATION
Heres a corporation engaged in public
transportation. It operated 10 buses but it
became necessary, to be able to pay off their
obligations, to sell 4 out of the 10 buses.
Q: What is necessary to be able to sell the 4?
A: Since the sale is not of all or substantially all of the
corporations assets then only a board resolution is
necessary
Q: When would it be considered a sale of
substantially all of the assets?
A: When what is sold is at least 80% of the assets
Sec. 41. Power to acquire own shares

"
Q: Why, as a general rule, is a corporation prohibited from
acquiring its own shares?
Corporation!Law!
&
A: Because it would violate the trust fund doctrine
income of 1,000,000. So if there are 900,000 as

losses, then the net income would be 100,000.
In what way would such doctrine be violated?

So what will they do with the net profit?
Because in acquiring its own shares, the corporation would be
using its capital which ought to be reserved for the corporate
creditors
When can a corporation acquire its own shares?
When there exists unrestricted retained earnings and it is for a
legitimate purpose such as:
1. To eliminate fractional shares;
2. To pay a dissenting stock holder;
3. To repurchase delinquent shares;
4. Redemption of redeemable shares
Other than violating the trust fund doctrine, why should a
corporation be prohibited from reacquiring its own
shares?
It can also prejudice the other stock holders because a partial
liquidation of assets would occur
Why should they shoulder?
Because stock holders are investors, so they invest and if
some shares of SH will be reacquired, only few stick holders
will be left
What will happen to the remaining stockholders?
They will be at a disadvantage
(They will be the only ones left shoulder the obligations
(doubtful answers from classmates on red font)
What does that mean? Does it mean remaining SH will be
liable for obligations of the corporation?
No, the SH are only liable only up to the extent of their
investments and no more)
SITUATION:
There are 5 Shareholders
Year 2015 Financial Performance
Income @ 1 million
expenses @ 900,000
profit
@ 100,000
The remaining 100,000 which could have been a
dividend to the remaining Stock holders.
For example, we have a working capital (subscribed
capital stock) of 5,000,000 with 5 stockholders at
1,000,000 each. In 2015 the corporation earned an
35"
"
Declare as dividends.
So, if the shares of 1 of the stockholders were reacquired,
then only the remaining 4 would share in the dividends or
in the profit of 100,000. In this case it is advantageous to
the remaining stockholders (because instead of 100,000
divided by 5 shareholders or @20,000 div per SH, the
denominator will just be 4 or @25,000 div. per SH)
Q: But if there were losses, and instead, in the same
example, there was a loss of 1,000,000, supposedly there
were 5 stockholders who would have to share in such
losses. But now there are only 4, so will the remaining
stockholders have to share more in the losses?
A: No.
And thats where the confusion arises. Some authors
forgot that the stockholders do not share in the losses.
This is not a partnership. Whatever happens to the
corporation the stockholder is no longer responsible for
it.
Maybe what the authors are referring to is that the shares
corresponding to a stockholder would suffer a little. But
that is not a direct loss to the stockholders anymore.
They do not suffer that loss personally. Maybe they share
in it indirectly but its too far.
But one thing is clear: reacquisition of shares is an
advantage insofar as the distribution of dividends is
concerned.
What else? Why would a corporation be prohibited in

reacquiring its shares?
Insofar as the owner of the acquired share is concerned, such
owner is deprived of his property right to acquire profits arising
from that share because buying back the share would only be
a one-time transaction.
If you are a stockholder, why would want the corporation
to reacquire your share? Give me a good reason.
1.
2.
If corporation offers a good price (above par?)

If there is a danger that the corporation will suffer
losses in the future and be dissolved
Discussion: And so the law does not allow that because if

allowed, all the stockholders will sell their shares and no
more investments will remain in the trust fund of the
Corporation!Law!
&
corporation and consequently, it will prejudice the
creditors.
If you buy back the shares of all?
Its a disaster to the creditors
If you buy back the shares of only one or two SHs, who
will complain?
The remaining SHs. There is already partial liquidation. And
during liquidation, you should settle first your third party
obligations.
If shares of other SHs are reacquired, what are the other

effects?
The shares becomes idle and forms part of treasury shares
So just like in the previous example, if the corp. has 100K
profit but this was used to reacquire shares. If you are
remaining SH will you be happy?
No. it was a potential dividend but was used to reacquire
shares.
A corporation in reacquiring its own shares is allowed

especially if these are redeemable shares.
So that these redeemable once redeemed becomes
treasury shares. And since we have a lot of treasury
shares and profits at the same time, can the corporation
declare dividends with these profits?
Yes, upon the discretion of the board.
If we have 1M profit, we are supposed to pay off to the SH
1M worth of cash. But because the corp needed the cash,
it instead decided to distribute the treasury shares which
are in their possession. So, they distributed the treasury
shares, what do we have cash, property, or stock
dividends?
E
The treasury shares distributed are considered
property dividends because these treasury shares
are property of the corporation when they are
reacquired by the corp.
What are dividends?
They are portion of the profits that the Board has decided
distribute.
Improperly Accumulated Earnings (Surplus)

Investing Corporate Funds in another Business
Venture
May a shipping company invest in a lotto business?
Yes, if it is a secondary purpose provided it is approved by
majority of the BODs and ratified by SHs representing 2/3 of
the outstanding stock
Dividends
What are dividends?
Dividends are portions of the profits that are allowed and
declared to be given to the stockholders based on their
number of shares.
Requirements:
1. Unrestricted Retained Earning
2. Distinguish if cash, stock or property
a.) Cash: approval of the board
b.) Stock: Approval of the board and approval
of stockholders with 2/3 outstanding capital
stocks
Property dividends issued by the corporation to SHs if it
has available real or personal properties (e.g. warehouse
receipt, stocks in another corporation)
36"
"
Since cash dividends are distributed to the SH, they are

income of SH. As income, these are taxable. The corp will
hesitate to declare cash dividends because this will in effect a
double taxation. When the corporation acquires income, it will
be taxable as corporate income and when it will be distributed
to SH as cash dividends, it is income to SH and taxable as
individual income tax. So, even if they have cash they will not
distribute it as cash dividends. Instead, every Christmas time
they will tell the SH that the next SH meeting will be in
Singapore and proceed to HK, they can also bring their
families. So, no cash dividends, no income tax.
But, time will come that the BIR will be able to discover
this scheme. So they will stop travelling and just keep the
profits in the treasury of the corp. how can the BIR tax
them?
E
The law prohibits retaining of profits in excess of
100% of their paid in capital. So, in this case, the
corp is obliged to distribute.
E
Under NIRC, this surplus is called improperly

accumulated surplus.
The BIR can compel you to distribute dividends and can

collect tax. However, if you are quick enough, what will
you advice to your client?
Corporation!Law!
&
I.
II.
They can declare stock dividends (generally not

subject to taxation).
They can also invoke the exceptions for
retention:
1. Justified by corporate expansion
2. Prohibition under loan agreement with any
financial institution
3. Necessary under special circumstances for
special reserve or probable contingencies
Exceptions for the retention of the surplus profits:

1. you could tell BIR, Sorry BIR we have A LOT OF
EXPANSION PROGRAMS next year. We will be
buying more units; we will be acquiring more lands,
so we need this cash and cannot distribute.
2.
Show to the BIR that you have a PROHIBITION IN

THE TERM LOAN AGREEMENT with the bank and
cannot declare dividends until fully paid.
3.
Contingencies. PAGASA has declared that there

will be a lot of typhoons next year, hence, we cannot
distribute dividends for we might need it for
contingencies.
4.
Issuance of Stock dividends

They would declare stock dividends instead of
cash. Once stock dividends are declared, they
are not taxable. It is not an income. It is a mere
capitalization of the retained earnings of the
corporation. It will become income only when
they become sold. As long as they are shares,
they are not income.
How to declare stock dividend?

For example not all shares are subscribed; the
corporation will give the unsubscribed shares to
the stockholders instead of cash dividends. In
this way, the corporation and the stockholders
are not taxed.
What happens to the profit that was not distributed?
It remains with the corporation. The profits will
be converted to the value of the shares/stocks
that has been distributed. They are just
transferring it in the books. Before, the profits are
in the profit side, now they are part of the capital.
XPN: Unless there is an improperly retained surplus

(dividends amount to more than 100% of the paid up capital)
then the stockholders may demand for distribution.
SITUATION
A corporation had P100M profit. And part of this
P100M was 90% cash and 10% appreciation of
land.
Q: If the corporation decides to declare
dividends, can the corporation use the entire
P100M?
A: No, only up to 90% cash. The 10% appreciation of
land is not yet realized profit per se.
Q: When the corporation declares a dividend, a board
resolution must be made declaring (1) a certain sum of
profit as dividend and (2) which stockholders are entitled
as of a certain period.
If a stockholder of record is entitled for dividend but he
only paid 50% of the entire subscription of P10M, will the
stockholder be entitled to claim his dividend?
A: We must distinguish.
(1) Cash dividends - No, there will be an offsetting. The
dividends will first be applied to unpaid subscription.
(2) Stock dividends No, these will be withheld until the
stockholder pays the unpaid subscription.
Q: Here are unpaid subscriptions and stockholder asks if
he could subscribe to more shares and hell pay those
shares with his future dividends, can he do it?
A: No, because were not certain yet if dividends will be
distributed or declared. Profits are uncertain because in
business there is no guarantee to success there is always a
risk, although risk against business is much better than risk on
gambling. Point is you cannot guarantee payment and assure
the lender to collect from your future earnings which are not
certain yet.
Q: If all of the authorized capital stock has been fully
subscribed, may the corporation still issue stock
dividends?
Distribution of Dividends, covered under the

Business Judgment Rule.
A: Not anymore because all authorized capital stock has been

fully subscribed and therefore why would you issue stock
dividends when there is no more stock to be issued.
Can stockholder demand for distribution of dividends?
Q: But is there a way?
GR: No, for only the Board decide when to distribute.
A: Yes. This is by increasing authorized capital stock (ACS) by

amending the Articles of Incorporation.
37"
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Corporation!Law!
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Q: When you increase, how much should be subscribed
and how much should be paid up?
A: At least 25% of ACS should be subscribed and at least
25% of SCS should be paid of the increase.
Q: The existing stockholders might not have any cash to
pay for subscription, can they subscribe?
A: Yes, by using the unrestricted retained earnings by
transferring profits as capital. Use this to pay additional
subscription for increase. In this case, there is no cash
involved. The intended cash dividends or profit which can be
declared as dividends may be used in paying the paid up
portion of the additional subscriptions of the increase in the
ACS.
Q: If treasury shares are distributed as dividends, do we
have stock dividends or cash dividends?
A: They are property dividends because no cash is involved.
Stock Split simply put is the splitting of stocks; stock split is

when there is an increase in number of shares but there is no
increase in the capital value.
EXAMPLE:
When a stockholder holds a share with Php100 par
value, the corporation can initiate a stock split by
decreasing the par value to Php50.00. so what
happens is, the stockholder owning one share with
previously Php100 par value now becomes a holder
of two shares each with Php50 par value, still
totalling to Php100 for that stockholder.
The purpose could be that the corporation wants to decrease
the value of its stocks for it to be more attractive to investors.
Reverse stock split a reverse stock split is the actual reverse
of a stock split. It is when the corporation decides to decrease
the number of shares and still retain the same capital value.
Example:
when a stockholder holds two shares with Php50 par
value and the corporation decides to declare a
reverse stock split that 2 shares will be made one,
then the latter stockholder will now be a holder of one
share with a par value of Php100.
Some corporations may do this to increase or reduce the
number of shares.
"
Management Contract is an agreement under which a

corporation delegates the management of its affairs to another
corporation for a certain period.
Requirements:
1. Approved by the BOD
2. Approved by stockholders owning at least a majority
of the OCS/ members
I thought that we earlier agreed that management is
vested in the board of directors, but here is an instance
now where the corporation decides to give the
management to another corporation. Is this not a
violation?
No, it is not a violation because what is being delegated is not
the absolute power or control of the corporation. The
management contracts are those instances where it requires
technical skills where the corporation might have not have.
Limitations on Management Contracts
Stock Splits
38"
Management Contracts
1. The management contract should not exceed 5 years, and

2. There shouldnt be a total abdication of the power of the
corporation.
Additional requirements in case of interlocking

shareholders or BOD.
1. Where a stockholder or stockholders representing the same
interest of both the managing and the managed corporations
own or control more than one-third(1/3) of the total
outstanding capital stock entitled to vote of the managing
corporation;
2. Where a majority of the members of the board of directors
of the managing corporation also constitute a majority of the
members of the board of directors of the managed
corporation.
What the law intends to avoid here is a corporation
completely controlling and completely managing another
corporation so that the managed corporation appears to
be totally helpless. So, the law requires that if the
managing corporation owns at least 1/3 of the managed
corporation or if the board of directors of the managed
and the managing group then, aside from the approval of
the majority of the board, the management contract must
be
approved
by
the
stockholders
of
the
managed corporation owning at least two-thirds(2/3) of
the total outstanding capital stock entitled to vote/
members. So that it will not only be a transaction between
the board and the corporation but also of the ratification
of the 2/3 of the stockholders representing the
outstanding capital stock/members.
Corporation!Law!
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In addition, one may also look at who the Officers
and Directors of the corporation are and know
the people he will be dealing with.
Ultra Vires Acts

Ultra vires acts are acts not within the express, implied,
incidental powers of the corporation conferred by the
Corporation Code or articles of incorporation.
How do we classify the Powers of the Corpo? Distinguish one
from the other
1. Express expressly provided in the AIC or the Law
2. Implied intended to effectuate the express powers
3. Incidental necessary.
4. Inherent power vested for being a corporation
Q: If you are a president of a corporation, what inherent
power do you have?
- Inherent power to preside. It goes with the office. Nobody
else can preside unless in instances of absent. In the meeting
there is no need to ask who will preside.
Q: What example of implied power can you think of?
-Corporation engaged in Construction of Subdivision. Implied
power is to acquire trucks to transport materials
Can a Corporation, engaged in the business
comstruction, still exist even without owning trucks?
=> Yes. They can lease.
of
Ultra Vires acts = acts of a corporation which are beyond or in

excess of its express, implied, incidental and/or inherent
powers.
Do you have to present to every client or potential client
of yours the Articles of Incorporation (AoI) in order to
show them that you are authorized to engage in the
construction business?
=> No. It is not usual in business transactions. People dealing
with a corporation don't normally ask for the AoI and inspect it.
Unless if you are dealing with multi-million projects, in which
case, examining the AoI becomes a standard requirement in
order to ascertain that the person they are dealing with is
acting with authority and within the scope of the corporation's
powers.
Discussion: Aside from inspecting the AoI to
know if one is acting within the express powers
of the corporation, potential clients may also take
a look at your capitalization or financial capacity.
Now I am offering a 100M project, why should I
deal with a corporation whose Authorized capital
stock is 5,000? What could happen to this project
if these people will run away from me after
receiving the mobilization fee of 20% of the
project? I will have to deal with them.
39"
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In big transactions, inspecting the AoI is a

standard requirement.
However, the same cannot be said in small
transactions like selling hopia and siopao as it is
impractical to do so.
Sometimes, examining the AoI becomes impractical and
unrealistic because we presume that the person we are
dealing with is a legitimae businessman. Otherwise, what
do you think will happen if we will always require the
presentation and inspection of the AoI in every
transaction?
=> It will disturb the ordinary economic activity. It is time
consuming and a waste of resources. Just imagine always
carrying with you copies of the AoI to present in every
transaction. It is just impractical to do so.
We are discussing these because, on the principle of
Ultra Vires acts, what did you notice?
=> Ultra vires acts are merely voidable.
Q: Ultra vires act is merely voidable. It is valid until
annulled by whoever will question the act. As a matter of
fact, would the courts look favorably on this principle,
ultra vires acts?
A: No, courts do not look favorably on this principle. Because
if we were to be strict about it, then we will have to carry AOI
all the time just to prove that it is a legit corporation and is
authorized to do such acts. It does not result to a sound
business practice when people constantly questions each and
every act of the corporation as this would discourage investors
and those people who want to contract with a corporation.
Q: Although courts do no favorably adopt the principle of
ultra vires acts, yet there are some rare occasions where
this principle could be very helpful, in what way?
A: There could be ratification so that even if an act is ultra
vires, it may be ratified even if it is outside its authority, if
highly beneficial to the corporation.
Discussion: In other words, there are occasions
as well that this principle is abused so much so
that even if a corporation clearly has violated that
principle, there are occasions when the courts
will have to impose strict reliance on this
principle of ultra vires acts because sometimes
its not always easy to determine an ultra vires
act from a legitimate act. There is a thin line in
the definitions of inherent, incidental and implied
Corporation!Law!
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powers of a corporation so much so that they
could mean the same thing. Thats why the
courts are very cautious in imposing strictly this
principle.
To all intents and purposes, generally, the courts will
allow the performance of these acts unless there are now
clear indications of fraud or abuse on the part of the
corporation so much so that a corporation may be
questioned in the performance of its acts.
Q: So that if a corporation, for example, is engaged in
subdivision development, can it buy a vessel?
A: No, its quite far, thats an abuse.
Q: But let us assume that it did buy a vessel. It has paid
the seller of that vessel and vessel has been delivered to
corporation engaged in subdivision development. Can
anyone question?
A: No. The ultra vires contract was consummated and since
this is so, neither party can set aside the contract. Only the
state can question the ultra vires act.
It may be ultra vires but the court says leave them alone. If the
buyer was happy in paying the vessel and the seller was also
happy in accepting the payment, leave them alone.
Q: But heres the creditor of that subdivision developer,
he was not paid for the loan that he extended to that
subdivision developer. The loan was intended for
expanding the subdivision development but instead, it
was used to acquire the vessel. Can the creditor question
the acquisition of the vessel?
A: Yes, coz theres fraud on the part of the subdivision
developer. (Wa maklaro pagkaexplain ni sir but mao ni iya
sulti: The money must be returned to the creditor. But its a
long process so the courts would say that collection of the
money must be done in some other ways by not questioning
the transaction.)
Observation: in the present case, the contract was
only partially executed by one of the parties. In such
a case, the aggrieved party is allowed to recover the
object of the sale.
Ultra Vires acts vs Illegal Acts

"
Ultra Vires those that are beyond the express, implied, and
incidental powers of the corporation which are voidable and
subject to ratification
40"
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Illegal Acts those that are contrary to law, morals, customs,

public order and public policy. They are void and not subject to
ratification.
Ultra Vires Act v. Unauthorized Acts

Q: Here is Ms. Abellanosa, authorized by the board, in her
capacity as president of the corporation, to acquire a
parcel of land, with the description and the amount.
Instead of acquiring one, she acquired two. The
acquisition of one was covered, but what about the
acquisition of the other? Was it an ultra vires act?
A: No since the acquisition was still within the power of the
corporation. It is merely an unauthorized act. When we talk of
ultra vires acts, these are acts of the corporation , not acts of
its officers. In other words, if they are acts of the officers which
are beyond the authority given to them, then they are not ultra
vires acts, rather, unauthorized acts.
Business Judgment Rule

- The Courts cannot question nor change the decision of the
board. The Courts believe that management is vested in the
board and it has the discretion of deciding what is best for the
corporation.
The courts believe that management is vested in the board
and the board has complete discretion to determine what is
best for the corporation and because of that principle, the SHs
cannot even complain UNLESS of course they are one of
those mentioned in the code which requires ratification or
conformity by the SHs but GENERALLY the board decides
and no one, not the SH, not can anyone go to court and
secure an order from the court to compel the board to change
its decision, perhaps if there was fraud madenot because
the judgment made was wrong but because the board was
guilty of fraud, if that is the groundbut never ever a mistake
in its decision making, the judgment of the board is a decision
that no one can change or interfere.
Q: And so here, we said that the business judgment rule
of the BOD cannot be questioned. If the decision of the
BOD constitutes an ultra vires act, do you think it can
now be questioned? What could happen?
A: That act is voidable unless ratified by the SHs. So ultra
vires acts can be ratified, here is a defect that can be cured by
the SHs themselves and ratification may be done in order to
cure a defect.
Ratification of an ultra-vires act:

"
Corporation!Law!
1.
&
Ratification cannot be made on the part of the corporation
by the same persons who wrongfully assume to make the
contract. Ratification must be made by the officer or
governing body having authority to make the contract;
2.
If the contract is executory on both sides, it cannot be

enforced by either party;
3.
If it has been fully performed on both sides, neither party

can maintain action to set aside the transaction or to
recover what has been parted with;
4.
If it has been performed on one side and the other party

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 sanction
retention of benefits coupled with refusal to perform. (De
Leon)
If you have started, and you have consummated

it, stay where you are, you are good where you are.
But if you have not started it yet, do not start it at all.
However, if only one party has performed his
obligation and the other party has benefited from
such performance and the other have not yet
performed his obligation yet, the party who
performed such obligation can ask for the return of
what he delivered or ask for the performance of the
contract.
Q: Let us go back to our example of the movie house. The

buyer refused to pay the balance because it only paid the
partial. Now, here comes the owner of the movie house
demanding the balance of the price and so the
subdivision owner said sorry, we will not pay the
balance because this is an ultra vires act, the transaction
is not binding to the corporation. What do you think?
**based on 2014-2015 transcript**

So once ratified, the ultra-vires act is cured, that act will
become binding. However, we said that ratification can be
done only insofar as ultra-vires acts are concerned.
Illegal Act cannot be ratified as they are void

"
If the ACT IS ILLEGAL, such that it is contrary to law, morals,
public policy and etc., the act cannot be ratified and is void
from the very beginning.
SITUATION:
Q: If the corporation, engaged in real estate
business but decided to acquire a movie house, it
is clearly an ultra-vires act, so that if acquisition
has been consummated and as a matter of fact
the family of the officers of the corporation has
been watching the movie and the movie owner
has accepted the payment, do you thing the SHs
could still question that?
A: No. Ratification can be done only IF no rights of
3rd parties are affected. Because once rights of
3rd parties will be affected and the transaction is
consummated, the court says that neither party can
maintain action to set aside the transaction or to
recover what has been parted with. However, if not
yet consummated, the parties affected by the ultravires act cannot compel to enforce the contract,
IOWs if they have not started it yet DO NOT start it at
all.
41"
"
A: The real estate company can still be compelled to pay the

remaining balance and he is now estopped in assailing the
defense that it is an ultra-vires act. IOWs, he cannot be
allowed to take advantage, you know, it was he who
performed an act, and now he is taking an advantage of that
illegal act or unlawful act or unauthorized act just because he
does not want to pay the balance. So he has to pay, it has
become binding on the corporation.
By-laws.
Rules of action adopted by a corporation for its internal
government and for the government of its stockholders or
members and those having the direction, management and
control of its affairs in their relation to the corporation and as
among themselves.
What are the difference between By-Laws and

Articles of incorporation (AOI)
By-laws
Merely
rules
and
regulations adopted by
the corporation
Executed usually after
incorporation
by
the
stockholders or members
Filing
is
condition
subsequent
Amendment of by-laws
may be delegated to the
BOD
AOI
Constitutes the charter or
fundamental law of the
corporation
Executed before the
incorporation
by
the
incorporators
Filing is a condition
precedent to corporate
existence
Amendment
of
AOI
cannot be delegated by
the stockholders to the
Corporation!Law!
&
BOD
What do you mean by condition subsequent and

condition precedent?
Condition subsequent (By Laws) it means that

by laws are created or adopted after the issuance of
the certificate of incorporation by the SEC and By
Laws should be adopted within 1 month after receipt
of official notice of the issuance of its certificate of
incorporation by the SEC.
Condition precedent ( AOI) means that articles of
incorporation is adopted prior to the creation and
existence of a corporation.
Cannot these two filed together?

Yes, By Laws it can filed together with the AOI however, it
shall be effective only upon the issuance by the SEC of a
certification that the by-laws are not inconsistent with the
provisions of the code.
Binding effect of by-laws

As to third persons
Generally, the by-laws do not bind third persons

since they operate merely as internal rules among
stockholders.
Exception: when the third person has knowledge

either actually or constructively at the time the
transaction in question was entered into.
Effects of Failure to file By Laws within 1

month.
1.
2.
3.
SEC may render the Corporation liable to the

revocation of its registration.
After hearing for the reason of their failure, SEC may
impose suspension
impose an administrative fine.
SITUATION
So here is a corporation who did not file their By
Laws for 2 years after the issuance of the certificate
of incorporation, what will happen?
There will be a hearing conducted in order for the
corporation to be heard whether it has a reasonable
ground for their failure to file a By Law.
So that after year 1 the corporation entered into a
contract, so that the corporation is now insisting that
42"
"
the other party should perform their obligation, but

the other party said you do not have any personality
to sue me because you were dissolve when you fail to
file your By Laws within 1 month. You do not have a
juridical personality, because the law requires you to
file your By Laws within 30 days after you receive the
certificate of incorporation. And its now 2 years, so
you do not have any legal standing to sue me. So
what do you think?
The other party cannot set as a defense that the other
party has no legal personality to sue because of their
failure to file their By Laws within 1 month. There is no
automatic dissolution of the corporation by reason of
failure to file a By Laws. There is still a hearing that will be
conducted in order to determine whether it has a
reasonable explanations or ground for their failure to file.
So a hearing will still be conducted because if they have a
reasonable ground for their failure then its okay.
However?
However, if it would be proven that their ground is not
reasonable then a penalty will be meted out against the
corporation. These penalties could either:
a. Fine;
b. Suspension
c. Eventual revocation of their certificate of
registration.
So it doesnt mean automatic dissolution.
So what is the difference?
In dissolution the registration is now revoked or cancelled
and there will be distribution of assets, while;
In suspension or revocation only the operation of the
corporation is affected and they can still file their registration
or comply with the requirements.
Once the certificate is revoked, what will happen?
Its juridical personality will now cease to exist, and it will no
longer have any legal standing to sue including those rights
given to them under the law by reason of its creation.
So we said a corporation has a tripartite relationship,
what are these?
It means 3 party and these are:
1. corporation;
2. stockholders;
3. Third party which is the public
Also we said, it is a tri contract relationship. What are
these?
These are:
1. Relationship between the Corporation and the
stockholders;
2. Relationship between the Corporation and the public;
3. Relationship between the stockholders in relation
with the other stockholders
Corporation!Law!
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So that here, we also said that a corporation is a creation
of the state, what are the powers of the corporation
again?
Since it is a creation of the state, its powers are limited; the
law determines the power it can exercise
So it is limited by?
The constitution and statutes
These are the secondary contracts as distinguished form

primary contracts of loan, because the existence of these
contracts depends upon the existence of the principal
contract
(then sir talks about gold diggers in the cemeteries- her
mother's carcass already at her side, gi hilabtan in search of
jewels/valuables)
So, he can foreclose and he can dispose it.
This refers to the express powers, what are the other

powers?
SITUATION
The power to adopt by laws is it express or implied?

Express,
it
is
provided
by
corporation
code
This time he wanted to assume ownership,

because they were shares of stock, they wrote
the secretary to effect the transfer of ownership
to his name. The secretary wrote back: were
sorry but we cannot transfer the ownership in
your name because no shares can be transferred
without first offering it to the corporation. That
was contained in the by laws but not in the
articles, not even in the certificate of shares of
stock. And so she contended that she never
knew about it. What do you think?
If you want changes in the bylaws, there shall be a vote

by 2/3 of stock holders, in order to amend the by-laws, the
power to amend is it express or implied powers?
Still an express power provided in the code
A: It can be transferred to her name because as a

rule the by laws are not binding with respect to third
parties except when they have knowledge. Since,
she does not have any knowledge, it will not bind her.
Implied powers- to execute the express powers of the

corporation
Incidental
Inherent powers
Shares of Stock as Objects of Pledge or

Mortgage.
because of that relationship, the stock holder own a share
of stock, and being the owner he own a stock certificate,
now, because it is a property, can it mortgage and offer
this security as collateral?
Yes
As a matter of fact, it can also be offered as pledge, and it
was pledge to someone else, so that when the loan was
not paid, what would happen to the pledged shares?
When the loan is not paid, the collateral will be auctioned, the
creditor now becomes the owner
Very similar to RD pawnshop you pledge, so when you
pledge?
You transfer possession to the pledgee
As distinguished form a mortgage?
There is no transfer of possession, there is only an
encumbrance, and the debtor maintains possession
What are the 2 kinds of mortgages?
Real estate
Chattel mortgage
43"
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XPN: However, if it were indicated in the AOI as well

as in the certificate itself, it will now bind third person
because there is already knowledge.
Once the by laws are approved then the corporation can
already start its operation and the stock holders will now be
bound by it.
Contents of the By-Laws.

"
Sec. 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;
Corporation!Law!
&
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.
6.
Here is the by-laws of the corporation and they wanted to

amend it. The amendment was that no stocks could be
sold to anyone without securing the consent of the
corporation. Since this is an amendment, what is
required?
2 modes:
1. Majority vote of BOD or trustees AND vote of owners
of majority of OCS or members
2. OR it can be delegated to the BOD by 2/3 of OCS or
members, provided that the delegation is authorized.
However, the delegated authority may be revoked.
nd
And so the amendment was done via the 2 mode. And

the amendment refers to the qualifications of the
members of the Board. So that the amendment now
states: no person who is also a director of another
corporation can be qualified to be a director of this
corporation if the business of the other corporation is
competitive or antagonistic to the business of our
corporation.
Is this amendment valid?
E
44"
"
YES. It is a valid amendment in the by-laws. It will

endanger the existence of the corporation if the
amendment will not be allowed because of the
antagonism that could be created or the competition
that could arise
(Case
of Robina farms
and
San
Miguel
Corp.) Gokongwei, Rubina farms
owner,
was
acquiring shares of stocks in San Miguel Corp. that is
enough to put him in the board. Both corporations
are into almost the same businesses. (Poultry, ice
cream, coffee, textiles). San Miguel amended their
bylaws to prohibit the director of other corp. from
other corp. Gokongwei countered that it is only
intended for him even if he is not named. SC ruled
that it is valid for it will endanger the existence of
the corp. and the antagonism could be created or the
competition that will arise.
This time the amendment is now requiring all

stockholders to secure the consent or conformity of the
corporation before they could assign, transfer, or sell
their shares of stocks. Justified by the corp. that they
want know the potential buyers to protect the integrity
and existence of the corp. Is this valid?
E
No.
It is a NOT a valid amendment. This will
encroach on the right of the stockholder as an owner
to dispose, use, and abuse their property. If ever that
the corporation will not give their consent, then it will
tantamount to a prohibition of disposing their stocks.
In contracts we learn, the principle on liberality of
contracts, isnt not?
Such principle must be not being contrary to law, morals,
public policy.
And how can this be contrary to law?
It will now prohibit the owner from selling the property, or in
other words it will violate the right to ownership. Because in
ownership, the person has the right to dispose his property.
Quorum provided for under By-Laws.

"
It is the required number of person in order to conduct a valid
meeting, otherwise without a quorum there can no valid
meeting, and any resolution passed without a a quorum will
not be binding to the corp.
SITUATION
So that in 10 directors, how many or what would
be the quorum?
In the absence of the stipulation of the by-laws, then
the simple majority or 50% plus 1, such that the
quorum of 10 is 6.
Can the by-laws provide that 4 is quorum? That
the by-laws provide that there are 10 directors
and that the by-laws provide that 4 will constitute
a quorum.
Yes, if it does not provide what the quorum is, then
the majority, if it provides for the quorum then it will
depend on the by-laws and not necessarily the
majority because quorum provides the required
number of participants to conduct a meeting. IOW in
the absence of the stipulation the majority should be
the quorum.
However, what do we mean by majority?
Thats 50% plus 1, simple majority, as distinguished to
qualified majority which refers, any number greater than
simple majority. And plurality means it constitute the highest
Corporation!Law!
&
number obtain in any given situation, it could less than the
majority not necessarily majority, in a group of 100 votes, 1
could win with 30 votes if that is the number votes acquired,
as earlier said only Estrada got the majority votes
in an election and only to be ousted.
Meetings.
"
And may that annual meeting be postponed?

GR: NO because it could be abused, by the board, and
designed to perpetuate their term
XPN: for valid reasons such as:
1. Erroneous date for holding the meeting stated in the
notice sent out to members;
2. Natural calamity; and
3. Lack of the required quorum
As early as February there was a notice from PAGASA
that there will be a typhoon on April 15 so the meeting
was postponed to June, valid?
A typhoon is a good reason to postpone
We have regular and special meetings.

A.
Meetings of stockholders or members:
1.
Regular those held annually on a date fixed in the

by-laws, or if not so fixed, on any date in April of
every year as determined by the BOD. It is held
principally for the purpose of electing another set of
directors or trustees. Provided, that written notice
of Regular meetings shall be sent to all stockholders
or members of record at least two(2) weeks prior to
the meeting,
Special those held at anytime deemed necessary
or as provided in the by-laws (e.g. amendment of the
AOI or by-laws) provided, however, that at least one
(1) week written notice shall be sent to all
stockholders or members, unless otherwise provided
in the by-laws
2.
B.
Meetings of directors or trustees
1.
Regular those held by the board monthly, unless

the by-laws provide otherwise
Special those held by the board at any time upon
the call of the president or as provided in the by-laws
2.
Why is it held in the month of April?

Its the time of the passing of the ITR of the corporation by this
time the corporation the financial statement of the company,
reports for purposes of submitting to the BIR for the corporate
income tax.
Why should the stockholders meeting, in the absence of
a provision in the by-laws for the date of the meeting, be
held in April of every year?
Because it is normally the filing of the ITR. This is more
appropriate in April because the financial statements have
been prepared in connection with the filing of the ITR. And so
by this time, the financial statements are available for
distribution to stockholders. There, it could be discovered
whether or not the corporation has profits or losses. If they
suffer losses then it has to be reported to the stockholders
.
45"
"
Presider of the Meeting.

Generally, the president
Deadline for notices supposed to be sent.

For Stockholders Meetings:
If regular then 2 weeks prior to the meeting
If special then 1 week prior to the meeting
Who can vote during meetings when shares of

stock are pledged or mortgaged or when the
stockholder is dead.
"
We earlier said that these certificates of stock can be
pledge and in pledging what do we do?
We surrender the possession to the pledgee
In pledge, who could vote during election?
It is the pledger because the pledgor still retains the legal
ownership of the stocks although the possession of the stock
certificate is already with the pledgee unless stated or
expressly agreed that the pledgee is the one who will vote
If the stockholder is dead, who will vote?
It is the legal representative. It could either be:
Executor appointed by the testator in the will or
Administrator - appointed by the court in the absence

of a will
Voting in Joint Owners of Stock

Sir: 2 or more owners of a stock, who can vote?
The consent of everyone must be secured unless 1 is
authorized to be proxy by the others.
Treasury shares have no voting rights.

No voting rights. Otherwise the directors will abuse this and
use this in voting for themselves to perpetuate their position.
Corporation!Law!
&
is!a!proxy.!Enclosed!likewise!is!a!proxy!for!you!to!be!
signed.! And! in! the! proxy,! you! are! authorizing! the!
president!or!whoever!is!the!officer!named!there!to!
cast! any! vote! in! your! behalf! or! in! behalf! of! the!
shares! mentioned! there.! So! theres! a! proxy! form,!
and! the! purpose! is! if! we! want! to! elect! somebody!
else,!the!proxy!form!will!be!used!in!the!electing!the!
nominees! or! if! there! are! issues! or! concerns! that!
management!wants!to!be!approved,!then!that!proxy!
could!help!because!that!proxy!represents!votes!and!
therefore! the! votes! may! be! cast! by! the! officers! or!
the! proxy! or! authorized! person! himself,! to! cast!
your!vote!in!your!behalf!to!approve!or!disapprove!a!
certain! management! issue.! So! thats! a! purpose! of!
the! proxy.! Its! more! for! management! control.! Of!
course,!another!possible!objective!is!to!control!the!
size.! You! know! if! there! are! 5k! stockholders,! PLDT!
could!have!much!more,!5k!subscribers,!imagine!all!
of!you!in!the!meeting!and!served!lunch.!That!could!
be! another! reason,! to! overcome! or! address! the!
uncontrollable!size!that!may!be.!On!the!other!hand!
we!have!other.&
Proxy, defined.
In legal sense it refers to the paper/instrument.
Requirements for a Valid Proxy.

1.
2.
3.
Proxies must be in writing signed by the stockholder

or member and filed before the scheduled meeting
with the corporate secretary. Oral proxies, therefore,
are not valid.
It is valid only for the meeting for which it is intended,
unless otherwise provided in the proxy.
A continuing proxy must be for a period not
exceeding 5 years at any one time.
Purpose of Proxies.
1.
2.
3.
To acquire a quorum in meetings

Exercise of right to vote even though the SH is
absent
Management control
SIR: More importantly, it is used as a
management control devise. It is intended to ensure
or guarantee that a possible issue could be
positively achieved/approved.
Atty: Management control. Not just for a quorum,
because quorum is just the number. But you
know if proxy is not just for the purpose of
having a quorum, being present there. More
importantly, you said, as a management control
device. Which means?
S: Which means that the corporation will use proxy
by obtaining a vote from the stockholders and so it
could be used favorably
Atty: More importantly, it is intended to
ensure or guarantee that a possible issue could
be positively achieved or approved. Thats why in
big corporations for example, in a widely held
corporation, proxies are necessary.
So!that!here!if!you!were!a!I!dont!know!if!
you! still! retain! your! PLDT! subscriptions,! because!
each!PLDT!holder!is!a!subscriber;!thats!why!youre!
called! a! subscriber! because! you! subscribe! certain!
shares! of! the! PLDT.! You! are! an! owner! of! that!
company.! You! are! a! subscriber.!From! time! to! time,!
youre! supposed! to! receive! a! presidents! report!
from!the!PLDT.!And!if!there!are!dividends!issued!or!
declared,! from! time! to! time! you! will! receive! a!
check.! Congratulations;! attached! is! a! check! of! one!
centavo.! But! you! are! a! subscriber.! But! more!
importantly,!if!you!try!to!examine!that!notice,!there!
46"
"
If there are two or more proxies existing.

A proxy being an authorization issued by one, generally
can a stockholder change his mind? Yes. Thats
revocable any time. As a matter of fact, revocation may be
implied. How?
By the mere presence of the stockholder himself.
However we will have a problem here. If two or more
proxies are issued. If two or more proxies are issued,
which proxy will the corporation honor?
The proxy which bears a later date. Because the presumption
is, if you issued a second proxy, then the intention must be to
revoke the first.
However, the problem is if they bear the same date?
S: I think the proxy who presents first. Depends first if the time
varies, the later proxy will be honored.
Atty: The proxy which bears a later time. Problem here is,
if the time cast on the proxies are identical.
There is a committee who decides.
Management Control Devices.

E
A tool or device used by management to regulate or

control the decisions of the stockholders so that this
decisions will conform to the preferences of
management
Examples:
1. Proxies
2. Voting Trust Agreements (VTAs)
Corporation!Law!
3.
4.
E
&
Voting Trusts
Management Contracts.
Q: In a voting trust, the trustee becomes the stockholder.

What happens to the certificate of stock earlier issued?
1. Proxy
E
If management wants something to be achieved,

votes will be cast in favor of such by getting the
proxies of each stockholder (such as president)
Owner of the proxy can easily anticipate the outcome
of the vote
2. Voting trust agreements (VTAs)

E
E
E
agreement between a shareholder and a third person

wherein the legal title of the share is transferred to
the third person, including the right to vote, the right
to be voted upon, the right to participate in the
meeting, right to inspect corporate books; third
person becomes the legal owner
Agreement must be in writing and notarized and filed
by Corporation to SEC
Trustee has a voting trust certificate as proof of
transfer of legal title; in the eyes of the Corporation,
he is now the stockholder; hence, for meetings,
notice will be sent to the trustee
However any beneficial ownership will still redound to
the original owner (trustor)
Proxy vs voting trust:
E
E
E
Proxy is limited to a particular meeting but voting

trust covers other purposes
Proxy is short term but voting trust is long term
Proxy cannot be elected as director (unless proxy is
already a stockholder of such) but voting trust allows
trustee to be voted upon (transfer of legal title)
Proxy has no legal title but voting trust acquires legal
title
E
Differences between Proxy and Voting Trust Agreement
(De Leon p510)
Proxy
Trust
no legal title to the shares of
the SH
revocable at anytime unless
coupled with interest
acquires legal title to the

shares of the SH
irrevocable for a definite and
limited period of time
can only act at the specified

SHs meeting
votes only in the absence of
the owner of stock
not limited to any particular

meeting
can vote and exercise all the
rights of the transferring SH
even when the SH is present
shorter duration
need not be notarized nor a
copy filed with SEC
no right of inspection of
corporate books
longer duration
notarized and a certified copy
with SEC
has such right
47"
"
A: The certificate of stock covered by the voting trust will be

cancelled and a new certificate of stock in the name of the
trustee shall be issued which shall be recorded in the
corporate books, with a note that the certificate of stock is
issued to the trustee is pursuant a voting trust. The trustee will
then execute and deliver the voting trust certificate to the
trustor.
Once the trust expires, the certificate of stock in the name of
the trustee shall be cancelled and a new certificate of stock in
the name of the trustor shall be issued.
3. Voting Agreements.
E
The stockholders agree among themselves to vote

as one so they will have a unified vote as to how to
decide on certain issues.
Note: Voting agreement is binding among them. If one does

not comply, it depends on the agreement but it should be
honored by the corporation itself.
4. Management contracts
Because the BOD can enter into management contract with
another corporation, they can assign the technical aspects of
the management.
Q: Going back to voting, we discussed that a certificate of
stock may be transferred, for example, as security. In the case
of pledge, who will be entitled to vote?
A: It is the pledgor because he is still the owner of the stock. It
is only the possession of the certificate that is transferred.
In case of mortgage, it is still the mortgagor who is entitled to
vote because he is the owner.
Q: If stockholder is dead, who is entitled to vote?
A: The legal
administrator.
representative,
either
the
executor
or
Executor is person appointed in the will

Administrator one appointed by the court
STOCKS AND STOCKHOLDERS
Stock Subscriptions
It is a contract entered into by a person with a corporation still
to be incorporated or an already existing corporation that the
former will purchase unissued shares of the stocks from the
Corporation!Law!
&
latter. It could be an existing corporation or one still to be
formed.
Consideration in Cash.
1.
Pre-incorporation subscription
E
one entered into before incorporation. It constitutes a

binding contract among the subscribers.
Sir: It is a commitment so that before
actually registering as a corporation of filing the
papers in the SEC, you might want to have a survey
as to how many are interested and how much money
will be gathered if you proceed.
Conditions: sec. 61
E
irrevocable for a period of at least 6 months from the
date of subscription, unless all of the other
subscribers consent to the revocation, or unless the
incorporation of said corporation fails to materialize
within said period or within a longer period as may be
stipulated in the contract of subscription
E
no pre-incorporation subscription may be revoked
after the submission of the AOI to the SEC; thus
permanently irrevocable even if the 6-month period
has not expired so long as the AOI has been
submitted to the SEC
Object of Stock Subscription Contracts.

If a person enters into an agreement with another
stockholder to purchase the latters shares of stock in a
particular corporation. Is this a subscription?
No. it is not a subscription because subscription has for its
object unissued (virgin) shares of a corporation.
The earlier transaction is simply classified as a sale of the
stocks by the stockholder and not a subscription contract.
Consideration of Stock Subscription Contracts.

What is the consideration for the unissued stocks?
Considerations for Subscription: sec. 62
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by
the corporation and necessary or convenient for its
use and lawful purposed at a fair valuation equal to
the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to
the corporation;
4. Previously incurred indebtedness by the corporation;
5. Amounts transferred from unrestricted retained
earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the
event of reclassification or conversion
48"
"
2.
Par value shares - then it should be not less than the

par value,
Non-par Value shares - the price should not be less
than 5 pesos per share.
In fact, out of the subscription of the subscriber only
25% is required to be paid by the subscriber upon
subscription. The balance shall be paid on the date
stipulated in the subscription contract, or if not
stipulated, upon call by the BOD.
Transcribers+Observations:+
(Ako lang ni note sa immediately preceding paragraph for
me there is really a possibility that a subscriber be not asked
to pay anything upon the execution of the subscription
contract, since the law provides as a minimum paid up capital
to be 25% of the total subscription. So upon incorporation
pwde ani ang mu happen.
Name
Subscribed shares Paid up in PHP
in PHP
Mr. X
Php 20,000.00
Php 20,000.00
Mr. Y
Php 20,000.00
Php 5,000.00
Mr. Z
Php 20,000.00
Php 0
Mr. A
Php 20,000.00
Php 0
Mr. B
Php 20,000.00
Php 0
Total
Php 100,000.00
Php 25,000.00
In this case, naaubanmga subscribers walagi.bayad but as
you can see the provision of the law that the 25% of the total
subscription be paid up is still complied.
The remaining balance or the unpaid subscription shall be
paid.
1. As indicated in the subscription agreement.
2. On call by the board at any reasonable time, the
Board of directors may call for the payment of the
unpaid subscription. Otherwise, they will be called
delinquent shares.
When you say on call, it is the time when the board
demands the payment of any unpaid subscription.
Pre-emptive Right v. Stock Option.

Pre-emptive right refers to the first/new issuance of shares of
stock. The corporation here is increasing its capital stock and
has the obligation to first offer it to the existing SHs.
Purpose: This is to maintain percentage of ownership
in the corporation and their voting rights to be
Corporation!Law!
&
maintained.
In other words: to maintain their
proportionate interest in the control of the
corporation.
incorporation&and&in&the&by3laws&as&well&as&in&the&
certificate&of&stock;&otherwise,&the&same&shall&not&
be&binding&on&any&purchaser&thereof&in&good&faith.&
Said! restrictions! shall! not! be! more! onerous!
than!granting!the!existing!stockholders!or!the!
corporation!the!option!to!purchase!the!shares!
of! the! transferring! stockholder! with! such!
reasonable!terms,!conditions!or!period!stated!
therein.&If&upon&the&expiration&of&said&period,&the&
existing& stockholders& or& the& corporation& fails& to&
exercise& the& option& to& purchase,& the& transferring&
stockholder& may& sell& his& shares& to& any& third&
person.&(emphasis&supplied)&
If they originally own 25% and new shares are

offered, they can acquire shares in proportion to their
existing ownership percentage.
Stock Option is an opportunity given by corporation to
someone else to allow him within a certain time within which to
decide whether or not to proceed with his intended
subscription.
If you are an existing stockholder, you are entitled to preemptive right; you dont need to pay for the stock option,
automatically, you are entitled to exercise that right.
While if you are a non-stock holder in a stock option, there is a
consideration; although the corporation is free to waive for that
consideration for exercising that option, but the corporation
cannot waive the consideration for the stock itself. So the
option may require putting up a consideration for that option.
Stock option is deemed to be worth it because it is a privilege.
You are given an option to something that you should take
advantage because this is money, you are holding money.
With a mine of an astute businessman, what can you do
with that option?
I can make money out of that option by selling because this
option is one with value.
Discussion: If you are given an option to buy shares of stocks
at P10 each and you were allotted 1M shares. You are given 3
months to decide WON to buy. If you can sell it to someone at
P12 pesos, you will have P2 pesos per share. Thats
P2,000,000. So when given an option like that, take it and
look for buyers who will be willing to buy it at higher price.
Pre-emptive Right in Close Corporations.

Here, the shares are limited to certain persons and not open
to the public.
In that close corporation, there is a provision in the AOI, By
laws and the Stock certificate that such shares cannot be sold
to anyone else except present members of the corp. Thats
they only way to remain close. Because when he leaves the
corp, he cant just offer it to someone else before offering it first
to current stockholders.
NOTE: restrictions on transfer of shares is governed by Sec.
98, to wit:
Section! 98.& Validity) of) restrictions) on) transfer) of)

shares.& & Restrictions& on& the& right& to& transfer&
shares& must& appear& in& the& articles& of&
49"
"
&
&
As a General Rule, Pre-emptive Right does not

extend to Treasury Shares.
The purpose of pre-emptive right is to protect the
shareholding of the stockholder in a corporation.
With this as the objective pre-emptive right, even if
existing stockholders got the opportunity to buy treasury
shares, is that objective achieved? Yes. There could be some
authors who say that existing stockholders will be allowed to
exercise their pre-emptive right of treasury shares.
We say that it is not because if we go by objective,
that objective is not violated or is still achieved even if the
stockholder is not given the opportunity or the option to buy
treasury shares.
As an exception, Pre-emptive Right extends to

Treasury Shares in Close Corporations by
express provision of law.
"
However, if this was a close corporation and we got
the treasury shares, can the existing stockholders insist that
they should be given the opportunity to buy that share from
the other stockholder? Yes, to be able to maintain the stocks
within the close corporation. Otherwise, the objective is
violated.
The rule therefore, if we go by objective so far as
treasury shares are concerned:
The existing stockholder in a close corporation may
insist on exercising his pre-emptive right as to the treasury
shares of a corporation while in an open/widely-held
corporation, the existing stockholder cannot exercise their preemptive right as to the treasury shares.
Corporation!Law!
&
Sec.!102.&Pre6emptive)right)in)close)corporations&&
The& pre3emptive& right& of& stockholders& in& close&
corporations&shall&extend&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&provide&otherwise.&
To summarize:
1) GR: there is no pre-emptive right as to the
reissued treasury shares, unless
otherwise
provided in the AOI
2) XPN: Close corporation there is pre-emptive
right as to the reissued treasury shares, unless
the AOI provides otherwise
Reclassification of shares.
A corporation may reclassify its shares by amending its
articles of incorporation and exchange outstanding shares of
stockholders for stocks reclassified or converted from one
class to another, such as from preferred share to common
share. The value of one share may be used as a consideration
in acquiring a new share.
EXAMPLE
If you are a holder of class A share, which is 50
pesos per share, and intend to acquire class B
shares which is only 25 pesos per share, you could
use the 50 pesos per share in paying your class B
shares.
SITUATION
A certificate of stock is not a negotiable instrument because it

failed to comply the requisites (e.g. unconditional promise to
pay a sum certain in money). There is no sum certain in
money but shares of stock.
Certificate of stock is transferrable. The law allows transfer of
shares by indorsement with delivery of the certificate of stock.
A certificate of stock is like a diploma (front: nice piece of
paper, name of the corporation, authorized capital stock and
number shares belonging to the holder; back: indorsement
portion).
SCENARIO
You did not pay the entire subscription. The
balance becomes due. Despite the call, you did
not pay the balance.
The shares become delinquent shares. In
delinquent shares, the stockholder is deprived of
certain rights (e.g. right to vote and be voted
upon), what remains to the stockholder is the
right to the dividends.
Q. We have authorized capital stock, subscribed
capital stock? How much do you pay?
A: You only pay 25% of the subscribed capital stock.
Once you paid 25% of the 100 shares you
subscribed at P1000 per share, you pay P25,000.
Q. If dividends are declared last December, would
you be entitled to 25% of the shares or for the 100
shares?
The stockholder is entitled to the dividends of the 100
shares (whole). Despite not fully paid, the
stockholder owned the shares.
Can you subscribe for shares in a corporation by

rendering service as an accountant for one year?
No. For labor as payment for subscription,

the labor must be a past service and not future
service because a future service is uncertain, there is
no guarantee that he can or will serve as an
accountant and it cannot be ascertained the amount
of service to render. (Some parts inaudible)
The law allows only past services because they are
already certain and can be estimated, while future
services are uncertain and unconditional. (Transcript
2014-2015)
Certificate of Stock.
"
The best proof of being a stockholder is the certificate of
stock.
50"
"
-END-

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By: Batch Batang Sip-onon

Differences between Corporation and Partnership.

Any powers authorized by the partners

None; dissolution if a partner dies

Liability to 3rd persons

Liable personally and subsidiary

Requires consent of all the partners

In a limited partnership, there must be

Advantages and Disadvantages.

More personal relations among the people, based

Not based on such principle and may admit any

Liable up to the separate properties

Shareholders liable only up to the extent of their

Less people to deal with

Limited capitalization because of the principle of

Acquire more investments by mere subscription of

Advantages of a Business Corporation.

(4) Corporation has a legal capacity to act and

(5) Its creation, organization, management, and

(3) The shareholders have limited liability

Having decided the corporation route, do you think you can be

Q: I thought the Constitution does not allow the

See De Leon, p. 54 (2013 ed.)

SECTION 2. All lands of the public domain,

A: Yes. The number of the incorporators should not

different language such as Arabic, because no one

Can partnership be an incorporator?

XPN: Citizenship is material in NATIONALIZED

These are corporations reserved for Filipinos. Here,

A corporation can only act thru its duly authorized

Can a partnership be a stockholder?

Who compose the corporation?

Incorporators - these are the persons that appear

How about the underwriters?

This is just one kind of underwriting agreement, called a Firm

Natural: All enumerated in the bill of rights

A Corporation, as a General Rule, cannot

The crime is a mala prohibita (special laws)

Here, criminal intent is immaterial.

Q: If you penalize a corporations officers for crimes the

created by operation of law,

having the right of succession

and the powers, attributes and properties

Q: Alright, artificial being as distinguished from a natural

Q: So if it enjoys certain rights and privileges, on the

An artificial being is a person created under the fiction of the

Q: So that if there were 5 incorporators and the

6 sir --- namely: the 5 incorporators and the corporation

So who decides what rights to give to a natural person?

Doctrine of Piercing the Veil of Corporate

Doctrine of Corporate Entity (Fiction).3

p. 15 onwards, De Leon (2013 ed.)

1.When it is used to defeat public convenience, as when the

Examples where the corporate veil was pierced:

3.) Alter ego cases, as when the corporation is a mere farce

Three-Pronged Test in Corporate Alter

In alter ego cases, the Supreme Court applied the

Instrumentality or control Test COMPLETE

Fraud Test such control was used by the

Causal Connection Test - the control must be

An example would be a situation where there are two