CORPORATION LAW

BP Blg. 68 – the present CORPORATION CODE of the Philippines.

Section 2. 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.
- Refers only to corporations organized under the Corporation Code or to private corporations.
- Artificial being
- Artificial intellectual being
- A collection of many individuals
- A legal institution

Attributes of a Corporation
1. It is an artificial being
- Not a natural person;
- Judicial person with a separated personality from its stockholders/members.
- General rule is that obligations incurred by a corporation, acting through its authorized agents, are its
sole liabilities.
- The separate personality of a corporation is a shield against personal liability of its officers.
- A corporation cannot be held liable for the personal indebtedness of a stockholder even if he should be
its president.
- Corporate officers cannot be held personally liable for the consequences of their acts, for as long as
they are for and on behalf of the corporation, within the scope of their authority and in good faith.
- The property of the corporation is not the property of the stockholders or members and may not be
sold by the stockholders or members without express authorization of its board of directors or trustees.
- Personal liability may attach when the director/trustee or officer acted maliciously or in bad faith, or
with gross negligence, or agreed to hold himself personally and solidarily liable with the corporation, or
made, by specific provision of law, personally liable for corporate action or it is proven that the officer
used the fiction of separate corporate personality to defraud a third party or for wrongful ends.
- A corporation may incur obligations and bring civil and criminal actions in its own name in the same
manner as a natural person.
- A corporation may have a good reputation which, if debased or besmirched resulting in social
humiliation, may be a ground for recovery of moral damages and attorney’s fees.
- The place of business of the suing corporation is considered its residence.
- It may acquire and possess property of all kinds.
- While a share of stock represents a proportionate interest in the property of the corporation, it does
not vest the owner thereof with any legal right or title to any of the properties of the corporation.
- The interest of shareholders in corporate property is purely inchoate and therefore, does not entitle
them to intervene in a litigation involving corporate property.
2. Created by operation of law
- Consent is granted by the State, expressed in terms of special/general incorporation law.
- No corporation can exist without the consent or grant of the sovereign, and that the power to create
corporations is one of the attributes of sovereignty.
- Special incorporation law or charter: directly creates the corporation; authorizes creation of only one
corporation (government owned/controlled corporations)
- General corporation law: under which individuals desiring to be and act as a corporation may
incorporate; authorizes creation of corporations in general; no limit; BP 68/Act 1459.
3. It has the right of succession
- A corporation has a capacity of continuous existence irrespective of the death, withdrawal, insolvency,
or incapacity of the individual stockholders or members and regardless of the transfer of their interest
or shares of stock.
- See Section 11 for Corporate Term
4. It has only the powers, attributes, and properties expressly authorized by law or incident to its
existence.
- May exercise only such powers as are granted by the law of its creation.
- All powers which may be implied from those expressly provided by law and those which are incidental
or essential to the corporation’s existence may also be exercised.

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Doctrine of Corporate Entity
- A corporation is a legal or judicial person with a personality separate and apart from its individual
stockholders or members and from any other legal entity to which it may be connected or related.
- The law treats it as though it were a person by process of fiction.
Doctrine of Piercing the Veil of Corporate Entity
- Where the fiction of corporate entity is being used as a cloak or cover for fraud or illegality, or to defeat
public convenience, justify wrong, protect fraud, or defend crime, or for ends of subversive of the policy
and purpose behind its creation, this fiction will be disregarded and the individuals composing it or two
corporations will be considered identical.
- Disregarding the fiction of corporate entity or doctrine of corporate alter ego.
- Removes the barrier between the corporation from the persons comprising it to thwart the fraudulent
and illegal schemes of those who use the corporate personality as a shield for undertaking proscribed
activities.
- Liability will attach personally or directly to the officers and stockholders.
- Application of doctrine in three areas:
1. Defeat of public convenience
2. Fraud cases
3. Alter ego cases
- The absence of any of the three elements below prevents piercing of the corporate veil:
1. Instrumentality or control test – complete dominion
2. Fraud test – control must have been used by the defendant at the time the acts complained of took
place, to commit fraud or wrong.
3. Harm/causal connection test – control and breach of duty must proximately cause the injury or just loss
complained of.
- The court must acquire jurisdiction first over the corporation or corporations involved before it can
apply the doctrine.
- The doctrine must be raised during a full-blown trial over a cause of action duly commenced involving
parties duly brought under the authority of the court.

DISTINCTIONS BETWEEN PARTNERSHIP & CORPORATION

Partnership Corporation
Manner of Mere agreement
Created by law or operation of law
Creation of the parties
Number of
Only two persons At least 5 incorporators
Incorporators
From the moment
Commencement
of execution of the From the date of issuance of the certificate of incorporation by the
of Juridical
contract of SEC
Personality
partnership
Any power
authorized by the
partners, as long
as it is not
Only those expressly granted by law or implied from those granted or
Powers contrary to law,
incident to its existence.
morals, good
customs, public
order or public
policy.
When not agreed
upon, every
Management Vested in the board of trustees or directors.
partner is an agent
of the partnership.
A partner as such
Effect of The suit against a member of the board who mismanages should be in
can sue a co-
Mismanagement the name of the corporation.
partner for

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 mismanagement.
Right of No right of
A corporation has such right.
Succession succession.
Partners may be
personally and
Extent of Liability subsidiarily Stockholders are liable only to the extent of their investment as
to Third Persons (sometimes represented by the shares subscribed by them.
solidarily) liable for
partnership debts.
Transferability of Delectus A stockholder has the right to transfer his shares without prior
Interest personarum consent of the others.
May be
Term of Existence established for any 50 years, extendible for another 50 years.
period of time.
Limited
May adopt any name provided it is not identical or deceptively similar
Firm Name partnership bears
to any registered firm name or contrary to law.
“Ltd.”
Dissolution At any time Can only be dissolved with the consent of the State.
Laws which
Civil Code Corporation Code
Govern

Similarities between Partnership and Corporation:

1. Separate juridical personality
2. Can act only through agents
3. Composed of an aggregate of individuals
4. Distributes its profits to those who contribute to the capital of the business
5. Organized only when there is a law authorizing its organization
6. Taxable

Corporation as a Partner
General Rule: Corporations cannot ordinarily enter into partnership with other corporations or individuals.
- Because the identity of the corporation is lost or merged.
- Limitation is based on public policy.
- It would permit the corporate assets to be subjected to risks and liabilities not contemplated by the
stockholders at the time of making their investment.
Exceptions:
1. Joint venture where the nature of that venture is in line with the business authorized by their
charters.
2. Where the partnership agreement provides that the two partners will manage the partnership so that
the management of the corporate interest is not surrendered.
3. With a foreign corporation licensed to do business in the Philippines and a domestic corporation for
the purpose of undertaking certain phases of the construction of an economic development project
registered as a pioneer enterprise with the Board of Investments, provided that both parties shall be
jointly & severally liable for all the obligations of the partners in the Philippines.

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ADVANTAGES of a BUSINESS DISADVANTAGES of a BUSINESS CORPORATION
CORPORATION
1. Legal capacity to act 1. Relatively complicated formation and management;
and contract as a
distinct unit;
2. Continuity of 2. High cost of formation and operations;
existence;
3. Credit is strengthened; 3. Credit is weakened by the limited liability of stockholders;
4. Centralized 4. Lack of personal element;
management;
5. Standardized creation, 5. Greater degree of governmental control and supervision;
organization,
management and
dissolution;
6. Makes feasible 6. Management and control are separated from ownership in large
gigantic financial corporations.
undertakings;
7. Shareholders have 7. Stockholders’ voting rights have become theoretical;
limited liability
8. They are not general 8. Stockholders have little voice in the conduct of the business.
agents of the business;
9. Shares of stocks can
be transferred without
the consent of the
other stockholders.

Section 3. Classes of Corporations

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.
Non-Stock Corporations – one where no part of its income is distributable as dividends to its members,
trustees, or officers. Section 87

Other classifications:
1. As to number of persons who compose them:
a. Corporation aggregate
b. Corporation sole
2. As to whether they are for religious purposes or not:
a. Ecclesiastical Corporation
b. Lay Corporation
3. As to whether they are for charitable purposes or not:
a. Eleemosynary corporation
b. Civil corporation
4. As to State under or by whose laws they have been created:
a. Domestic
b. Foreign
5. As to their legal right to corporate existence:
a. De jure
b. De Facto
6. As to whether they are open to the public or not:

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 a. Close
b. Open
7. As to their relation to another corporation:
a. Parent or Holding
b. Subsidiary
c. Affiliated
8. As to whether they are for public or private purpose:
a. Public – provinces, cities, municipalities, barangays
b. Private – includes GOCCs, quasi-public corporations
9. As to whether they are corporations in a true sense or in a limited sense:
a. True corporation
b. Quasi-corporation – “Defective corporations” such as corporation by prescription and by
estoppel

Important distinctions between public and private corporations:

1. Governmental control
 Public – subject to governmental visitation and control
 Private – not subject to visitation, control or change by the State except in the exercise of police power.
2. Public corporation may be created without consent of the locality to be affected, which consent of the
incorporators is necessary to the creation of a private corporation.
3. Taxation, liability for torts or negligence of officers and agents and to various other questions.

Section 4. Corporations created by special laws or charters:

- Governed primarily by the provisions of the special law or charter creating them or applicable to them,
supplemented by this Code, insofar as they are applicable.
- This section authorizes the creation of private corporations by special laws or charters.

Section 5. Corporators and incorporators, stockholders and members.

Corporators – those who compose a corporation, whether as stockholders or as members.
Incorporators – stockholders or members mentioned in the articles of incorporation as originally forming and
composing the corporation and who are signatories thereof.
Stockholders or shareholders– Corporators in a stock corporation.
Members – Corporators in a non-stock corporation.

Three other classes:

1. Promoters – persons who bring about or cause to bring about the formation and organization of a
corporation by bringing together the incorporators or persons interested in the enterprise, procuring
subscriptions or capital, and setting in motion the machinery which leads to the incorporation of the
corporation itself.
2. Subscribers – persons who agreed to take and pay for original, unissued shares of a corporation
formed or to be formed.
3. Underwriter – a person, usually an investment banker, who has agreed to buy at stated terms an
entire issue of securities or a substantial part thereof/ guaranteed the sale of an issue/ has agreed to
use his best efforts to market all or part of an issue/ has offered for sale stock he purchased from a
controlling stockholder.

Agreement or contract with a corporation:

- There shall be an agreement between the corporators and the corporation creating a contractual
relation between them.

Section 6. Classification of Shares

Xxx
No share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable”
shares, unless otherwise provided in this Code.
There shall always be a class or series of shares which have complete voting rights.
Xxx

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Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder
of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided, that shares
without par value may not be issued for a consideration less than the value of five pesos per share..
Xxx

When Classification of Shares may be made:

- First determined by the incorporators as stated in the articles of incorporation filed with the SEC.
- After the corporation comes into existence, they may be altered by the board of directors and
stockholders by amending the articles of incorporation.
Doctrine of Equality of Shares
- Except as otherwise provided by the articles and stated in the certificate of stock, each share shall be
in all respects equal to every other share.

Capital Stock and Capital Explained

Capital Stock – the amount fixed in the articles of incorporation, to be subscribed and pain in or agreed to be
pain in by the stockholders of a corporation, in money, property, services, or other means at the organization
of the corporation or afterwards and upon which it is to conduct its business, such contribution being made
either directly through stock subscription or indirectly through the declaration of dividends.
a. Authorized Capital Stock – amount of capital stock as specified in the articles of incorporation.
b. Subscribed Capital Stock – amount of the capital stock subscribed, whether fully paid or not.
a) Subscription contract – any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed.
c. Outstanding Capital Stock – portion of the capital stock which is issued and held by persons other
than the corporation itself; the total shares of stock issued to subscribers or stockholder whether or
not fully or partially paid, except treasury shares.
d. Paid-up Capital Stock – portion of the subscribed or outstanding capital stock that is actually paid.
e. Unissued Capital Stock – portion of the capital stock that is not issued or subscribed.
f. Legal Capital – amount equal to the aggregate par value and/or issued value of the outstanding
capital stock.
Capital – used broadly to indicate the entire property or assets of the corporation. It includes the amount
invested by the stockholders plus the undistributed earnings less losses and expenses.
Stock Dividends – amount that the corporation transfers from its surplus profit account to the capital account.

CAPITAL CAPITAL STOCK

Actual corporate property; An amount; abstract.
concrete thing.
Fluctuates or varies from day Amount fixed in the articles of corporation, unaffected by profits and losses.
to day according as there are
profits or losses or
appreciation or depreciation
of assets.
Belongs to the corporation. When issued, belongs to the stockholders.
May either be real or Always personal.
personal property.

Stock or Share of stock – one of the units into which the capital stock is divided. It represents the interest or
right which the owner has:
1. To participate in the management of the corporation Sec 23;
2. Share in the surplus earnings/assets/profits or unrestricted earnings Sec 43;
3. Share in the remaining properties after dissolution, if any Sec 122.
Certificate of Stock – written acknowledgment by the corporation of the interest, right and participation of a
person in the management, profits and assets of a corporation.
- Formal written evidence of the holder’s ownership of one or more shares and is a convenient
instrument for the transfer of title.

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 -
SHARE OF STOCK CERTIFICATE OF STOCK
Incorporeal or intangible Tangible property;
property;
Represents the right/interest Written evidence of that right/interest;
of a person in a corporation;
May be issued even if May not be issued unless the subscription is fully paid;
subscription is not fully paid,
except in no par shares;
Situs is deemed to be the May have a situs at the place where it is located or at the domicile of the
State where the corporation owner, even though the corporation is domiciled elsewhere.
has its domicile.

Classes of Shares in General:

1. Par Value/ No Par Value
a. Par Value – one with specific money value fixed in the articles of incorporation and appearing in the
certificate of stock.
- May be issued without payment, as long as there is a valid subscription and date of payment is indicated
at the subscription.
- “Face Value”
- Assessable
- Represents the amount of money or property contributed by the shareholder to the capital stock of the
corporation.
b. No Par Value – one without any stated value appearing on the face of the certificate of stock. It is a
stock which does not state how much money it represents.
- No “face value”
- Deemed fully paid
- Non-assessable
- It always has an issued value – the consideration fixed by the corporation for its issuance.
- Issued value may be fixed by the articles of incorporation or by the board of directors or by stockholders
representing majority of OCS and shall not be less than P5/share.
- Conversion of the no par value to par value is allowed by SEC provided there would be no change in the
stockholders’ percentage interest in the total assets of the corporation.
2. Voting or Non-Voting
a. Voting Share – share with right to vote.
- Each common share shall be equal in all respects to every other common share.
- Only shares classified and issued as preferred or redeemable may be deprived of voting rights.
- “One share, one vote” because representation in a corporation is commensurate to extent of
ownership.
b. Non-Voting Share – share without right to vote.
- Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the
holders of such shares shall nevertheless be entitled to vote on the following matters:
a) Amendment of the articles of inc.;
b) Adoption and amendment of by-laws;
c) Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate
property;
d) Incurring, creating or increasing bonded indebtedness;
e) Increase or decrease of capital stock;
f) Merger or consolidation of the corporation with another corporation/s;
g) Investment of corporate funds in another corporation or business in accordance with this Code; and
h) Dissolution of the corporation.
3. Common or Preferred:
a. Common Share – one which entitles the holder thereof to a pro rata division of the profits, if there are
any, and in its assets upon dissolution, without any preference or advantage in that respect over other

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 stockholders or class of stockholders but equally with all other stockholders except preferred
stockholders.
- It is the basic class of stock which private corporations generally issue or because its holders stand upon
an equal footing, without extraordinary rights or privileges.
- Have complete voting rights.
- Residual owners of the corporation.
- Has preference in the matter of management.
b. Preferred Share – one with a stated par value which entitles the holder thereof to certain preferences
over the holders of common stock.
- Designed to induce persons to subscribe for shares of a corporation.
- Unless otherwise provided, preferred stocks are presumed to be voting although they are rarely given
voting privileges.
- Cannot be converted into common and cannot be changed without the consent of the stockholders.
- Kinds of Preferred Shares:
a) Preferred share as to assets – gives the holder thereof preference in the distribution of the assets of the
corporation in case of liquidation;
b) Preferred share as to dividends – share the holder of which is entitled to receive dividends o said share
to the extent agreed upon before any dividends at all are paid to the holders of common stock.
b) Limitations regarding issuance of preferred shares:
a) Preferred shares deprived of voting rights in the articles of inc., shall be entitled to vote on matters
enumerated in Section 6, although they shall not be entitled to vote on other matters;
b) Must not be violative of the provisions of the Code;
c) May be issued only with a stated par value;
d) Board of directors may fix the terms and conditions of preferred shares or any series thereof only when
so authorized by the articles and shall be effective upon filing of a certificate with the SEC.
c) Kinds of Preferred Shares as to Dividends:
1) Cumulative preferred share – entitles the holder not only to the payment of current dividends but also
to dividends in arrears.
2) Non-cumulative preferred share – entitles the holder to the payment of current dividends only in
preference to common stockholders.
3) Participating preferred share – gives the holder not only the right to receive the stipulated dividends at
the preferred rate but also to participate with the holders of common shares in the remaining profits
pro rata after the common shares have been paid.
4) Non-participating preferred share – entitles the holder thereof to receive the stipulated preferred
dividends and no more.
5) Cumulative participating preferred share – combination of the cumulative share and the participating
share.
4. Promotion Share – issued to promoters, or those in some way interested in the company, for
incorporating the company, or for services rendered in launching or promoting the welfare of the
company.
5. Share in Escrow – subject to an agreement by virtue of which the share is deposited by the grantor or
his agent with a third person to be kept by the depository until the performance of a certain condition
or the happening of a certain event contained in the agreement.
6. Convertible Share – convertible or changeable by the stockholder from one class to another class at a
certain price and within a certain period.
7. Founder’s share
8. Redeemable share
9. Treasury share

Limitations or Restrictions imposed by law regarding the issuance of No Par Value shares:
1. Banks, trust companies, insurance companies, and building and loan associations shall not be
permitted to issue no par value shares of stock;
2. Preferred shares of stock of any corporation may be issued only with a stated par value;
3. Shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto. Holder shall not be liable beyond the issued price,
notwithstanding a change in their value;

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 4. May not be issued for a consideration less than 5 pesos per share;
5. Shall be treated as capital, and therefore, shall not be available for distribution as dividends.

ADVANTAGES OF PAR VALUE

DISADVANTAGES OF PAR VALUE SHARES
SHARES
Easily sold as the public is
more attracted to buy this Subscribers are liable to corporate creditors for their unpaid subscription;
kind of shares;
Greater protection to
Stated face value of the share is not an accurate criterion of its true value.
creditors;
Unlikelihood of sale of
subsequently issued shares at
a lower price;
Unlikelihood of distribution of
dividends that are only
ostensible profits.

ADVANTAGES OF NO PAR
DISADVANTAGES OF NO PAR VALUE SHARES
VALUE SHARES
Issued as fully paid and non-
Legalize large issues of stock property;
assessable;
Flexible price; Conceal the money or property represented by the shares;
Low-priced stocks enjoy
Promote issuance of watered stock;
wider distribution;
They tell no untruth
concerning the value of the Lesser protection to creditors.
stockholder’s contributions;
Stock dividends are more
easily issued.

Section 7. Founders’ shares – classified as such in the articles, may be given certain rights and privileges not
enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the
election of directors is granted, it must be for a limited period not to exceed 5 years subject to the approval of
the SEC. 5-year period commences upon such approval by the SEC.
- Shares issued to the organizers and promoters of a corporation in consideration of some supposed right or
property.
Section 8. Redeemable shares – may be issued by the corporation when expressly so provided in the articles.
They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the
existence of unrestricted retained earnings in the books of the corporation, and upon such terms and
conditions stated in the articles of incorporation, which terms and conditions must also be stated in the
certificate of stock representing said shares.
Section 9. Treasury shares – shares of stock issued and fully paid for but subsequently reacquired by the
issuing corporation, by purchase, redemption, donation, or through some other lawful means. Such shares
may again be disposed of for a reasonable price fixed by the board of directors.

Section 10. Number and Qualifications of Incorporators

- Any number of natural persons not less than five but not more than fifteen, all of legal age and a majority
of whom are residents of the Philippines, may form a private corporation for any lawful purpose or
purposes. Each of the incorporators of a stock corporation must own or be a subscriber to at least one
share of the capital stock of the corporation.

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PRIMARY (CORPORATE) SECONDARY (SPECIAL) FRANCHISE
FRANCHISE
Right or privilege granted to Franchise to exercise powers and privileges granted to such corporation
individuals by the State to be to the business for which it was created, including those conferred for
and act as a corporation after purposes of public benefit such as the power of eminent domain and
its incorporation. other powers and privileges enjoyed by public utilities.
Granted to the incorporators; Conferred upon the corporation after its incorporation and not upon the
enables them to act for individuals who compose the corporation.
certain designated purposes
as a single individual and
exempts them, unless
otherwise provided, from
individual liability for
corporate debts.
Inalienable; it is part of the May ordinarily be conveyed or mortgaged under a general power
corporation and cannot be granted to a corporation to dispose of its property, except such
sold or assigned. It may be franchises as are charged with a public use.
conveyed provided there is
express legislative authority
to do so.

Steps in the Creation of a Corporation:

1) Promotion
- A number of business operations peculiar to the commercial world by which a company is generally
brought to existence.
- Make known to the general public that they are forming a corporation; invite prospective incorporators.
- Stages in Corporate Promotion
a) Discovery – represent a new product or service, or the promoter may simply organize another company
in an existing line of business;
b) Investigation – analysis of needs
c) Assembly – bringing together the property, money and personnel into an organization.
2) Incorporation
- Steps in Incorporation:
a) Drafting and execution of the articles of incorporation;
b) Filing with the SEC of the articles of incorporation;
c) Payment of the filing and publication fees;
d) Issuance by the SEC of the certificate of incorporation.
3) Formal organization and commencement of business operations

Section 11. Corporate Term – A corporation shall exist for a period not exceeding fifty years from the date of
incorporation unless sooner dissolved or unless said period is extended. That corporate term as originally
stated in the articles of incorporation may be extended for periods not exceeding fifty years in any single
instance by an amendment of the articles of incorporation, in accordance with this Code: Provided, that no
extension can be made earlier than five years prior to the original or subsequent expiry date(s) unless there
are justifiable reasons for an earlier extension as may be determined by the SEC.

Section 12. Minimum capital stock required of stock corporations – stock corporations incorporated under this
Code shall not be required to have any minimum authorized capital stock except as otherwise provided for by
special law, and subject to the provisions of the following section.

Section 13. Amount of capital stock to be subscribed and paid for purposes of incorporation – At least 25% of
the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of
incorporation, and at least 25% of the total subscription must be paid upon subscription, the balance to be
payable on the date/s fixed in the contract of subscription, without any need of call, or in the absence of fixed

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date/s, upon call for payment by the board of directors: Provided, however, that in no case shall the paid-up
capital be less than 5,000 pesos.

Corporation with ACS of only 5,000 may be organized: it has to be fully subscribed then
fully/entirely paid up.

Section 14. Contents of Articles of Incorporation

1) Name of the corporation (Section 18)
- Should not be identical or deceptively or confusingly similar to that of any existing corporation or to any
other name already protected by law or is patently deceptive, confusing, or contrary to existing laws.
2) Specific purpose/s for which the corporation is being incorporated
- Must be lawful
- Must be stated with sufficient clarity
- Primary purpose must be stated
- Purposes must be capable of being lawfully combined
3) Place where the principal office of the corporation is to be located, which must be within the
Philippines
- “Place of the principal office” – place where its books and records are ordinarily kept and its officers
usually meet for the purpose of managing the affairs and transacting the business of the corporation.
4) Term for which the corporation is to exist
5) Names, nationalities and residences of the incorporators
6) Number of directors/trustees, which shall not be less than 5 nor more than 15
7) Names, nationalities and residences of the persons who shall act as directors/trustees until the first
regular directors/trustees are duly elected and qualified (Incorporating Directors)
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 shares 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, names, nationalities and residences of the
contributors and the amount contributed by each
10) Such other matters as are not inconsistent with law and which the incorporators may deem necessary
and convenient.
- Sworn statement of the Treasurer elected by the subscribers showing at least 25% of the ACS has been
subscribed, and at least 25% of the total subscription has been fully paid, such paid up capital being not
less than 5,000.

Section 15. Forms of Articles of Incorporation

Articles of Incorporation – document prepared by the persons establishing a corporation and filed with the
SEC containing the matters required by the Code.
- Defines the charter of the corporation and the contractual relationships between the State and the
corporation, the stockholders and the State, and between the corporation and stockholders.

Section 16. Amendment of Articles of Incorporation

- Any provision or matter stated in the articles of incorporation may be amended by a majority vote of the
board of directors/trustees and the vote or written assent of the stockholders representing at least 2/3 of
the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code, or the vote or written assent of 2/3 of the members if it be a
non-stock corporation.
- The original and amended articles together shall contain all provisions required by law to be set out in the
articles of incorporation. Such articles, as amended, shall be indicated by underscoring the change/s
made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the
directors or trustees stating the fact that said amendment/s have been duly approved by the required
vote of the stockholders or members, shall be submitted to the SEC.

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 - Amendments shall take effect upon approval by the SEC or from the date of filing with the said
commission if not acted upon within 6 months from the date of filing for a cause not attributable to the
corporation.

Section 17. Grounds when articles of incorporation or amendment may be rejected or disapproved.
1) Articles of incorporation or any amendment thereto is not substantially in accordance with the form
prescribed therein;
2) Purpose/s of the corporation are patently unconstitutional, illegal, immoral, or contrary to
government rules and regulations;
3) Treasurer’s affidavit concerning the amount of capital stock subscribed and/or paid is false;
4) Percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been
complied with as required by existing laws or the Constitution.
Grounds for suspension or revocation of certificate of registration of corporations:
1) Fraud in procuring its certificate of incorporation;
2) Serious misinterpretation as to what the corporation can do or is doing to the great prejudice of, or
damage to, the general public;
3) Refusal to comply with or defiance of a lawful order of the commission restraining the commission of
acts which would amount to a grave violation of its franchise;
4) Continuous inoperation for a period of at least five years;
5) Failure to file by-laws within the required period;
6) Failure to file required reports in appropriate forms as determined by the commission within the
prescribed period.

Section 19. Commencement of corporate existence – a private corporation formed or organized under this
Code commences to have corporate existence and juridical personality and is deemed incorporated from the
date the SEC issues a certificate of incorporation xxx

Section 20. De Facto Corporations – the due incorporation of any corporation claiming in good faith to be a
corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally
in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor
General in a quo warranto proceeding.

De Jure Corporation – one created in strict or substantial conformity with the mandatory statutory
requirements for incorporation and the right 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 Corporation – exists for all practical purposes as a corporation but which has no legal right to
corporate existence as against the State; did not substantially comply with requirements of law (colourable
compliance).

Requisites of a de facto corporation:

1) Valid law under which a corporation with powers assumed might be incorporated;
2) Bona fide attempt to organize a corporation under such law;
3) Actual user or exercise in good faith of corporate powers conferred upon it by law.
Defects precluding creation of corporation:
1) Absence of articles of incorporation
2) Failure to file articles of incorporation with the SEC
3) Lack of certificate of incorporation from the SEC
Defects resulting in creation of de facto corporation:
1) Articles of incorporation fails to state all the matters required by the Code, or state some of them
incorrectly;
2) Name of the corporation closely resembles that of a pre-existing corporation
3) Incorporators or a certain number of them are not residents of the Philippines
4) Acknowledgment of the articles of incorporation or certificate of incorporation is insufficient or
defective in form, or it was acknowledged before the wrong officer;
5) Percentage of Filipino ownership of the capital stock is less than that prescribed by law;
6) Minimum paid-up capital stock has not been paid to and received by the corporate treasurer contrary
to his affidavit

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 7) Failure to submit its by-laws on time

Questioning validity of corporate existence

- De facto corporation cannot be collaterally attacked either by the State or by private individuals.
- The State must bring a direct proceeding (quo warranto) against the corporation to oust it from the
exercise of corporate powers usurped by it and to have it dissolved.
Direct attack – the State, in a proceeding for that purpose, attacks the existence of an association claiming to
be a corporation.
Collateral attack – one whereby corporate existence is questioned in some incidental proceedings not
provided by law for the express purpose of attacking the corporate existence.
Rationale: public policy

 It is the regular courts, not the SEC, that have jurisdiction over disputes or controversies among them.
Proof of Corporate Existence:
1) De Jure existence – valid law creating or authorizing such a corporation; valid organization under it;
and substantial compliance with all conditions precedent.
2) De Facto existence – law under which the alleged corporation might have been formed; a colourable
bona fide compliance with that law; assumption or user of corporate powers.

Section 21. Corporation by estoppel – all persons who assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as
a result thereof: Provided, however, that when any such ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a
defense its lack of corporate personality.
One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on
the ground that there was in fact no corporation.

Two aspects of a corporation by estoppel:

1) Stockholders/members of a pretended or ostensible corporation who participated in holding out as a
corporation are generally estopped to deny its existence against creditors for the purpose of escaping
liability for corporate debts or for unpaid part of a subscription to stock.
2) Third persons who deal with such a corporation recognizing it as such and the pretended corporation
itself, estopped from denying its existence and raising the defense of its lack of corporate personality for
the purpose of defeating a liability growing out of the contractual relation between them and such
entity, or later taking advantage of their non-compliance with the law, chiefly in cases where such
persons have received the benefits of the contract.

Section 22. Effects of non-use of corporate charter and continuous inoperation of a corporation – if a
corporation does not formally organize and commence the transaction of its business or the construction of its
works within 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 5 years, the same shall be a ground for
the suspension or revocation of its corporate franchise or certificate of incorporation.
This provision shall not apply if the failure to organize, commence the transaction of its business or the
construction of its works, or to continuously operate is due to causes beyond the control of the corporation as
may be determined by the SEC.

Section 23. The board of directors or trustees. – the corporate powers of all corporations formed under this
Code shall be exercised, all business conducted and all property of such corporations controlled and held by
the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock,
from among the members of the corporation, who shall hold office for one year until their successors are
elected and qualified.
Every director must own at least one share of the capital stock of the corporation of which he is a director,
which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner
of at least one share of the capital stock of the corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees
of all corporations organized under this Code must be residents of the Philippines.

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Powers of the Board:
1) Exercise all corporate powers (Sections 36-44)
2) Conduct the business of the corporation
3) Hold and control all properties of the corporation

Governing body of the corporation – board of directors or trustees

In the absence of authority or valid delegation from the board of directors or trustees, no person, not even its
officers, can validly bind a corporation.

Limitations on powers of board of directors or trustees:

1) Limitations or restrictions imposed by the Constitution, statutes, articles of incorporation, or by-laws
of the corporation;
2) Cannot perform constituent acts, that is, acts involving fundamental or major changes in the
corporation, which require the approval or ratification of the stockholders or members;
3) Cannot exercise powers not possessed by the corporation.

General rule: directors or trustees must act as a body and personally to bind the corporation.
Exception: Extraordinary situations or conditions to justify the act of stockholders or corporate officers as to
make a board action as nothing more than a mere formality.

Term of office of directors or trustees – one year and until their successors are elected and qualified.

Hold-over – the office has a fixed term which has expired, and the incumbent is holding the succeeding term. A
hold-over board has the power to declare the position of the President vacant and elect another.

Qualifications of directors or trustees:

1) Stock corporations
a. Must own at least one share of the capital stock
b. Share of stock held by the director must be registered in his name on the books of
corporation
c. Must continuously own at least a share of stock during his term; otherwise he shall
automatically cease to be a director
d. Majority of directors must be residents of the Philippines
2) Non-stock corporations
a. Members in good standing thereof
b. Majority must be residents of the Philippines
 Only natural persons can be elected as directors or trustees and they must be elected from among
the stockholders or members.
 No citizenship requirement demanded of the members of the board of directors under this Code.
 Additional qualifications of directors or trustees may be prescribed by the by-laws but their
qualifications may not be modified if such modification would be in conflict with the requirements
prescribed by the corporation law.

Section 24. Election 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.
• By ballot, if requested by any voting stockholder or member.
• 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.
• Voting is on the bases of the number of shares and not on the number of stockholders present in the
stockholders’ meeting.
• Voting by viva voce or roll call is valid except when there is a request that the election be by ballot in
which case such voting is mandatory.

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 • Mere designation by the stockholders or by a corporate officer empowered by the stockholders
without election of directors in the manner provided in the by-laws or the Code will not be sufficient.
• Methods of Voting:
1) Straight Voting – every stockholder may vote such number of shares for as many persons as
there are directors to be elected.
2) Cumulative voting for one candidate – stockholder is allowed to concentrate his votes and
give one candidate as many votes as the number of directors to be elected multiplied by the
number of his shares shall equal.
 For the purpose of giving minority stockholders representation in the board of
directors.
3) Cumulative voting by distribution – stockholder may cumulate his shares by multiplying also
the number of his shares by the number of directors to be elected and distribute the same
among as many candidates as he sees fit.
• Voting in a non-stock corporation – voting members may cast as many votes as there are trustees to
be elected but may not case more than one vote for one candidate.

Section 25. Corporate officers, quorum.

• Immediately after their election, the directors of a corporation must formally organize by the election
of a :
o president, who shall be a director,
o a treasurer who may or may not be a director,
o a secretary who shall be a resident and citizen of the Philippines, and
o Such other officers as may be provided for in the by-laws.
• Any two or more positions may be held concurrently by the same person, except that no one shall act
as president and secretary or as president and treasurer at the same time.
• The directors or trustees and officers to be elected shall perform the duties enjoined on them by law
and the by-laws of the corporation. Unless the articles or by-laws provide for a greater majority, a
majority of the number of directors/trustees as fixed in the articles shall constitute a quorum for the
transaction of corporate business, and every decision of at least a majority of the directors/ trustees
present at a meeting at which there is a quorum shall be valid as a corporate act, except for the
election of officers which shall require the vote of a majority of all the members of the board.
• Directors/trustees cannot attend or vote by proxy at board meetings.
• Quorum – such number of the membership of a collective body as is competent to transact business
or do any other corporate act.

Section 26. Report of election of directors, trustees, and officers.

• Within 30 days after the election, the secretary or any other officer of the corporation, shall submit
to the SEC, the names, nationalities, and residences of the directors, trustees, and officers elected.
• Should a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case
of his death, the secretary, or any other officer of the corporation or the director, trustee, or officer
himself shall immediately report such fact to the SEC.

Section 27. Disqualification of directors, trustees or officers.

• No person convicted by final judgment of an offense punishable by imprisonment for a period
exceeding six years, or a violation of this Code, committed within five years prior to the date of his
election or appointment, shall qualify as a director, trustee or officer of any corporation.

Section 28. Removal of directors or trustees

• Stock corporation - By a vote of the stockholders holding or representing 2/3 of the outstanding
capital stock
• Non-stock Corporation - 2/3 of the members entitled to vote.
• Such removal shall take place either at a regular meeting of the corporation or at a special meeting
called for the purpose, after previous notice to stockholders/members of the intention to propose
such removal at the meeting.

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 • Special meeting 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 on
the written demand of a majority of the members entitled to vote.
• Should the secretary fail or refuse to give 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 signing the
demand.
• 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.

Requisites for removal of directors/trustees:

1. Take place either at a regular/special meeting;
2. Previous notice to stockholders/members of the intention to propose such removal;
3. Vote of the stockholders holding 2/3 of the outstanding capital stock or 2/3 of the members
entitled to vote.
Resignation of directors or trustees
• May resign at any time;
• A corporation continues to exist despite the resignation of the directors/trustees.
• A director cannot resign as part of fraudulent scheme to prejudice the corporation or its stockholders
and make profit to his own advantage or at an unreasonable time if the immediate consequence
would be to leave the interest of the corporation without proper care and protection.
• Resignation need not be in any particular form.
• Resignation has to be reported to the SEC immediately.
• Unless otherwise provided, resignation becomes complete and his office becomes vacant the
moment the resignation is made to the proper office or body.
• It is not necessary that the resignation be accepted or that someone be elected to take his place.
Abandonment of office and failure to attend meetings
• Acceptance of incompatible office
• Absence for an unreasonable length of time
• Mere absence or continued failure to attend meetings where there has been no resignation, does not
have the effect of vacating his seat or terminating his term of office, unless there is some express
provision to such effect.

Section 29. Vacancies in the office of director/trustee.

• Any vacancy occurring in the board other than by removal by the stockholders or members or
expiration of term, may be filled by the vote of at least a majority of the remaining directors/trustees,
if still constituting a quorum.
• Otherwise, said vacancies must be filled by the stockholders in a regular/special meeting for that
purpose.
• A director/trustee so elected to fill a vacancy shall be elected only for the unexpired term of his
predecessor in office.
• Any directorship/trusteeship to be filled by reason of an increase in the number of directors or
trustees shall be filled only by an election at a regular/special meeting called for the purpose, or in the
same meeting authorizing the increase, if so stated in the notice of the meeting.
• Grounds for replacement during term:
o Resignation/removal
o When his position is otherwise lawfully vacated
• Filling of vacancies in any of the following cases:
o By stockholders/members:
 Vacancy results from the removal by the stockholders/members or the expiration of term;
 Vacancy occurs other than by removal or by expiration of term, e.g. death, resignation, abandonment,
disqualification;
 Vacancy may be filled by remaining directors/trustees, but the board refers the matter to the stockholders
or members;
 Vacancy is created by reason of an increase in the number of directors or trustees.

o By members of the board:

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  Allowing the remaining directors/trustees to fill up vacancies avoid the expenses and inconveniences
attending the calling of stockholders’ or members’ meeting;
 The power of the board is not suspended by vacancies in the board unless the number is reduced below
the quorum.
 Board has no power to fill any directorship/trusteeship by reason of an increase in the number of
directors/trustees.

o Where vacancy caused by resignation of a holdover director

 Stockholders, and not the remaining members of the board, have the power to elect a director to fill the
vacancy.
 Holdover period – that time from the lapse of one year after a member’s election to the board and until
his successor’s election and qualification, is not a part of the director’s original term, nor is it a new term.

Section 30. Compensation of directors

• In the absence of any provision in the by-laws fixing their compensation, the directors shall not
receive any compensation, as such directors, except for reasonable per diems.
• Any such compensation other than per diems may be granted to directors by vote of the stockholders
representing at least a majority of the outstanding capital stock at a regular/special stockholders’
meeting.
• In no case shall the total yearly compensation of directors, as such, exceed 10% of the net income
before income tax of the corporation during the preceding year.

Section 31. Liability of directors, trustees, or officers.

Cases when directors/trustees/officers are liable for damages:
1. Wilfully and knowingly votes or assents to patently unlawful acts of the corporation;
2. Guilty of gross negligence or bad faith in directing affairs of the corporation;
3. Acquires any personal or pecuniary interest in conflict with his duty as such director or trustee.
4. Consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file
with the corporate secretary his written objection thereto;
5. When he is made, by a specific provision of law, to personally answer for his corporate action;
6. When he agrees to hold himself personally and solidarily liable with the corporation.

Three-fold duty of directors: OBEDIENCE, LOYALTY, DILIGENCE

Sec. 32. Dealings of directors, trustees or officers with the corporation. - A contract of the corporation with
one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the
following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the contract
was approved was not necessary to constitute a quorum for such meeting; 2. That the vote
of such director or trustee was nor necessary for the approval of the contract; 
3. That the
contract is fair and reasonable under the circumstances; and 
4. That in case of an officer,
the contract has been previously authorized by the board of directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract
with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting
called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees
involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the
circumstances.

Self-dealing directors/trustees or officers.

General Rule: Contract is void— voidable at the option of the corporation a contract of such corporation with
one or more of its directors/trustees or officers

Reason: Being its agents and entrusted with the management of its affairs, the directors/trustees and other
officers of a corporation occupy a fiduciary relation toward it, and cannot be allowed to contract with the

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corporation, directly or indirectly, or to sell or purchase property to or from it, where they act both for the
corporation and for themselves.

But, this does not require that the corporation suffers injury or damage as a result of the contract.

Exceptions— Contract shall be valid and cannot be set aside in any of the ff. instances:
1. all the conditions enumerated in this section are present;
2. not all the conditions set forth are present but the corporation (board) elects not to question the validity of
the contract without prejudice to the liability of the consenting directors or trustees for damages under
sec. 31 — a dissenting stockholder may file a derivative suit in behalf of the corporation (sec. 64); or
3. contract is ratified by the required vote of stockholders or members in a meeting called for the purpose,
provided that full disclosure of the adverse interest of the directors or trustees involved is made at such
meeting

Sec. 33. Contracts between corporations with interlocking directors. - Except in cases of fraud, and provided
the contract is fair and reasonable under the circumstances, a contract between two or more corporations
having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the
interlocking director in one corporation is substantial and his interest in the other corporation or corporations
is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter
corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial
for purposes of interlocking directors.

Contracts between corporation with interlocking directors.

- Contract is valid between two or more corporations which have interlocking directors (sec. 44). However, if
the interest of the interlocking director in one corporation is substantial, the rules of sec. 32 on self-dealing
directors shall apply insofar as the latter corporation is concerned.
- This section pertains to transaction between corporations with interlocking directors resulting in the
prejudice to one of the corporations. This does not apply where the corporation allegedly prejudiced a third
party, not one of the corporations with interlocking directors. (DBP v. CA 2001)

Evils of interlocking directorates.

1. Validity of by-laws prohibiting interlocking directorates.

By-laws which prohibit a director of a
corporation form serving at the same time as director of a competing corporation, have been upheld as
valid and reasonable. (Gokongwei v. SEC 1979)
Reason: The interlock permits the coordination of policies
between nominally independent firms to an extent that competition between them may be completely
eliminated. Indeed, if a director, for example, is to be faithful to both corporations, some accommodation
may result.

2. No absolute prohibition of interlocking directorates.

Contracts between corporations having directors in
common are not rendered void or voidable on that ground alone. 

An individual may be a stockholder in
different corporation and it is not unusual to find a director or corporate officer occupying the same
position in another corporation not only because he has investments therein but also because his services
may have been proven to be valuable. However, while such situation is allowable, dealings of interlocking
directors are subject to section 31, 33, and 34.

Sec. 34. Disloyalty of a director. - Where a director, by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such
corporation, he must account to the latter for all such profits by refunding the same, unless his act has been
ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding
capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds
in the venture.

Doctrine of “Corporate Opportunity”

A director who, by virtue of his office, acquires for himself a business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of such corporation, is guilty of disloyalty and should,

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therefore, account to the latter for all such profits by refunding the same, notwithstanding that he risked his
funds in the venture.

Note: This section applies only to directors. If the disloyalty is committed by an officer, he is liable under the
2nd paragraph of sec. 31.

When doctrine not applicable.

1. Enterprise engaged in, distinct from corporation business. — The doctrine does not preclude a director
from engaging in a distinct enterprise of the same general class of business as that which his corporation is
engaged in, so long as he acts in good faith.
2. Opportunity not in conflict with corporation’s business. — The doctrine is not applicable where the director
or officer does not exploit opportunity by employment of company’s resources, or where the director or
officer embracing opportunity personally is not brought into direct competition with the corporation. Note:
The profits must have been obtained by the director to the prejudice of the corporation.
3. Opportunity ceases to be a “corporate opportunity.” — When does corporate opportunity cease to be
such? It is when this corporate opportunity transforms into a personal opportunity where the corporation
is definitely no longer able to avail itself of the opportunity, which may arise from financial insolvency, or
form legal restrictions, or from any other factor which prevents it from acting upon the opportunity for its
own advantage

Ratification by stockholders of disloyal act.

The guilty director will only be exempt from liability to the corporation to account for the profits he realized if
his disloyal act is ratified by the vote of the stockholders owning or representing at least 2/3 of the OCS. (This
does not apply in sec.31)

Sec. 35. Executive committee. - The by-laws of a corporation may create an executive committee, composed
of not less than three members of the board, to be appointed by the board. Said committee may act, by
majority vote of all its members, on such specific matters within the competence of the board, as may be
delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any
action for which shareholders' approval is also required; (2) the filing of vacancies in the board; (3) the
amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any
resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of
cash dividends to the shareholders

Executive committee.
1. Need for an executive committee. — The Board delegates to an executive committee composed of some
members of the board corporate powers to assure prompt and speedy action and solution to important
matters without the need for a board meeting, especially where such meetings cannot readily be held.
ExeCom directly manages the operations of the corporation between meetings of the board, thereby
reducing the workload of the latter.

2. Express provision in the by-law. — ExeCom must be provided for in the by-laws and composed of not less
than three (3) members of the board. The same may be vested by a board resolution. 

The board cannot
create or appoint an ExeCom in the absence of authority in the by-laws. In such case, the principle of de
facto officers may be applied insofar as third persons are concerned. However, insofar as the corporation is
concerned, the unauthorized act of appointment of an exec may be subject to sec. 144, which provides for
penalties in case of any violation of this Code.

3. Committee contemplated. — The ExeCom should be distinguished from any other committees which are
within the competence of the board to create at any time and whose actions require confirmation by the
board itself.

4. Matters excepted from delegation by board. — Matters enumerated with respect to which only the board
duly called and assembled as such can act upon. Thus, the ExeCom can function as the board itself in all
matter delegated to it other than the excepted matters. However, the board cannot validly delegate to the
ExeCom blanket or general authority to act for the board if the delegation constitutes in effect an
abdication of the corporate powers and duties vested in it by law. The board cannot delegate entire
supervision and control of the corporation to an ExeCom for this will be violative of sec. 23.


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5. Enlargement by board of restrictions. — The restrictions on the power of the ExeCom as provided in this
section may be enlarged by the board to cover other matters.

Note: Under no.4 — The ExeCom may
amend or repeal any resolution of the board unless by its express terms it is not so amendable or
repealable.

6. Authority to function as the board itself. — As a matter of business practice, the use of an ExeCom in many
companies may reduce the directors to little more than a supervising and ratifying committee. 

7. Membership. — Non-members of the board may be appointed as members of the ExeCom provided that
there are at least three members of the board who are members of the committee.

An “Executive
Committee” is a “governing body” which functions as the board itself. Thus, membership therein shall be
governed by the same law / rules applicable to the board of directors as provided in Sec. 35.

8. Ultimate control by the board, — Where the committee is made up of, or includes persons who are not
directors, such committee shall be subject to norm restrictions and requirements relating to undue
abdication of authority by the board. Thus, while the ExeCom may manage the day to day operation of the
business of the corporation, the business affairs thereof shall be controlled and all corporate powers shall
be exercised under the ultimate discretion of the board as provided in sec. 23.

9. Quorum and voting. — The general rule for quorum requirements is the same as that for board of
directors. A majority of the committee constitute a quorum. To bind the corporation, it is essential that
the executive committee acts “by a majority vote of all its members.”

10. Membership of a foreigner. — While foreigners are disqualified from being elected/appointed as corporate
officers in wholly or partially nationalized business activities, they are allowed representation in the board
of directors or governing body of said entities in proportion to their shareholdings.

Reason for exception:
The board of directors performs specific duties as a “body.” Unlike corporate officers, each member if the
board of directors/governing body has no individual power of authority to perform management functions.

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