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NON-STOCK CORPORATIONS

DEFINITION

One where no part of its income is distributable as dividends to its members, trustees or officers,
subject to the provisions of the Code on dissolution. The profits in a non-stock corporation which it
obtains as an incident to its operations shall, be used in furtherance of the purpose or purposes for
which the corporation was organized. (Sec. 87, Corporation Code)sample

A non-stock corporation thus, cannot engage in business activity for profit as it would run counter to
its very nature as a non-profit entity, unless it is necessary to carry out the purpose or purposes to
which it is organized. However, it is not prohibited to make income or profits as an incident to its
operations. It is in this sense that a non-stock corporation is considered a non-profit corporation.
(De Leon, H. (2013) The Corporation Code of the Philippines)

PURPOSES OF A NON-STOCK CORPORATION: (Eleemosynary Purposes)

Non-stock corporations may be formed or organized for:

1. Charitable;
2. Religious;
3. Educational;
4. Professional;
5. Cultural;
6. Fraternal;
7. Literary;
8. Scientific;
9. Social;
10. Civic service; or
11. Similar purposes like trade, industry, agricultural and like chambers; or
12. Any combination thereof.

What is determinative of whether a corporation is engaged in business is its object or purpose as stated in
its Articles of Incorporation or By-laws.

- The actual purpose of a corporation is not controlled by the corporate form or the commercial aspect
of the business prosecuted but may be shown by extrinsic evidence.

DISTRIBUTION OF INCOME

No part of its income is distributable as dividends to its members, meaning, no pecuniary

benefits shall inure in favor of the members, although they may avail of, or deprive other
forms of, assistance from the corporation. (De Leon, H. (2013). Corporation Code of the Philippines)

Thus, a board cannot legally pass a resolution giving some benefits to the active members of the
corporation, among others, in the form of grocery items and the like. (SEC Opinion, Dec. 17, 1987)

CONVERSION

A non-stock corporation cannot be converted into a stock corporation by mere amendment of the
AOI. It must be dissolved first under the methods specified in Title XIV, and thereafter, the members
may organize as a stock corporation. (SEC Opinion, Feb. 24,1989)

The conversion by mere amendment of the Articles of Incorporation would be tantamount to

distribution of the corporate assets or income of the corporation to its members inasmuch as
thereafter they automatically become stockholders thereof. This scheme might defraud the public
REPORT ON NON-STOCK CORPORATIONS
Members: Quincy Interino, Arif Kadatuan, Jamaica Manaligod, Chareloa Marcial, Roger Montero, Gianna Pealosa, Fawn Reynon, Joseph Rivera
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who might have contributed donations or grants to the non-stock, non-profit corporation since after
its conversion the donated corporate assets would be in effect be treated as paid-in capital or
subscription payments of the stockholders. (SEC Opinion, March 20, 1995)

RULES EXCLUSIVE TO A NON-STOCK CORPORATION

Prohibition against distribution of dividends

Non-profit character It cannot engage in business with the object of making profits. Section 68 of the
Corporation Code provides for the allowable purposes for which such corporation may be organized.

Right to vote This right may be limited, broadened, or even denied in the Articles of Incorporation or
the By-laws. (Sec. 89, Corporation Code) Unless otherwise provided by the Articles of Incorporation or
the By-Laws, a member may vote by proxy in accordance with the provisions of the Corporation Code.

Governing boards Non-stock corporations may, through their Articles of Incorporation or their by-laws,
designate their governing boards by any name other than as board of trustees.

Meetings Meetings of the Board of Trustees may be held anywhere in or outside the Philippines, unless
the By-laws provide otherwise. (Sec. 53, Corporation Code)

Dissolution its assets shall be applied and distributed in accordance with certain specific rules laid
down by law or as may be specified in a plan of distribution adopted by the corporation, provided it is not
inconsistent with such rules.

Conversion into stock corporation- A Non-Stock Corporation must be dissolved first under the methods
specified by law, and thereafter, the members may organize a Stock Corporation. (SEC Opinion, Feb. 24,
1989.)

ARTICLES OF INCORPORATION

The Articles of Incorporation (AOI) of a non-stock corporation does not differ from that of a
stock corporations Articles of Incorporation.

Section 14 of the Corporation Code (Code) states all corporations organized under it shall file
with the Securities and Exchange Commission (SEC) articles of incorporation in any of the official
languages duly signed and acknowledged by all of the incorporator, containing the following
matters, except as otherwise provided by this Code or by special law:

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;
REPORT ON NON-STOCK CORPORATIONS
Members: Quincy Interino, Arif Kadatuan, Jamaica Manaligod, Chareloa Marcial, Roger Montero, Gianna Pealosa, Fawn Reynon, Joseph Rivera
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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.

The Securities and Exchange Commission shall not accept the articles of incorporation of any stock
corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers
showing that 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 of 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. (Emphasis supplied)

A perusal of the provision would show that both classes of corporations must state in the
Articles of Incorporation the above contents. However, there are some statements that will only
specifically apply or limit the contents of a non-stock corporations AOI.

Section 88 of the Code limits the Purpose Clause of a non-stock corporations AOI. The same
provides that a non-stock corporation can be organized only for the following purposes:

1. Charitable;
2. Religious;
3. Educational;
4. Professional;
5. Cultural;
6. Fraternal;
7. Literary;
8. Scientific;
9. Social;
10. Civic service; or
11. Similar purposes like trade, industry, agricultural and like chambers; or
12. Any combination thereof.

This means that non-stock corporations cannot engage in business activities that generate profit as
a general rule. Venturing into profitable business activities will negate violate the limitation set forth
in Section 88.1

However, by way of exception, the corporation may, as incident to its purpose(s), engage in
business activities which are reasonably necessary to carry out the purpose(s) for which the
corporation was organized.2 Any such power which is reasonably necessary to enable a corporation
to carry out express powers granted and the purposes of its creation is deemed implied or
incidental purpose by virtue of Section 363.

Accordingly, the determination of whether a non-stock corporation can engage in business

activities for profit would depend on the purpose clause provision in the AOI. If the business activity

1 SEC Opinion dated March 9, 2011

2 Ibid.
3 Section 36. Corporate powers and capacity. Every corporation under this Code has the power and capacity:
xxx

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.

REPORT ON NON-STOCK CORPORATIONS

Members: Quincy Interino, Arif Kadatuan, Jamaica Manaligod, Chareloa Marcial, Roger Montero, Gianna Pealosa, Fawn Reynon, Joseph Rivera
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is not incidental, necessary or essential to carry out the express objectives of the corporation as
appearing in its AOI, the same cannot be undertaken by a non-stock corporation. 4

Finally, a non-stock corporations Articles of Incorporation must substantially comply with the form
set forth in Section 15 of the Code. What would be different in the AOI of a non-stock corporation is
the Seventh Article that should be in this format:

SEVENTH: That the total contribution of the corporations is

________________________________________________________________________
_____________________.5

The same AOI may also contain this provision:

NINTH: That no part of its income is distributable as dividends to its

members, trustees or officers subject to the provisions of the
Corporation Code of the Philippines on dissolution. Provided, That any
profit obtained by the association as an incident to its operation shall,
whenever necessary or proper shall be used for the furtherance of the
purposes enumerated in Article II, subject to the provision of Title XI of
the Corporation Code of the Philippines.6

CAPITAL

The amount of the non-stock corporations capital must be stated in the Articles of
Incorporation. The names, nationalities and residences of the contributors as well the respective
amounts contributed by each must be included in compliance with the requirement under Section
14(9) of the Code.

The capital involved is to be used for the operation of the corporation and may be increased
if there will be additional contributions.

MEMBERSHIP

Members are those corporators who compose a non-stock corporation. If such member is
mentioned in the AOI as one who is originally forming and composing such non-stock corporation
and who is a signatory thereof, such member is referred to as an incorporator. (Section 5,
Corporation code)

NATURE OF MEMBERSHIP RIGHTS

Membership and all rights arising therefrom, personal and non-transferable, unless
otherwise provided in the AOI or the by-laws. (sec.90)

4 SEC Opinion dated September 19, 1995; SEC Opinion dated December 27, 1993; SEC Opinion dated July 29, 1993; SEC
Opinion dated February 18, 1993; and SEC Opinion dated September 18, 1990.
5 Sample Articles of Incorporation and By-Laws of a Non Stock Corporation, retrieved at http://www.sec.gov.ph, last accessed
April 20, 2017.
6 Ibid.
REPORT ON NON-STOCK CORPORATIONS
Members: Quincy Interino, Arif Kadatuan, Jamaica Manaligod, Chareloa Marcial, Roger Montero, Gianna Pealosa, Fawn Reynon, Joseph Rivera
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MANNER OR MODE OF ACQUISITION

Acquired in the particular manner or mode of acquiring the same, as provided for in
the by-laws of such non-stock corporation.

APPROVAL OF ADMISSION OF NEW MEMBERS

One of the corporate powers expressly granted under Section 36(6) of the Code.

General Rule: Such approval is lodged with the Board of Trustees as it is the Board
which exercises the corporate powers of all corporations under the Corporation Code and the
approval of the members of the corporation shall not be necessary. (sec. 23).

Exception: Unless there is an express provision in the by-laws as to what body the
admission of corporate members is lodged (e.g. Committee on Membership). Once adopted,
such mode of admitting new members must be observed until a new procedure is adopted
by the corporation through an amendment of the by-laws. (SEC opinion, Sept. 26, 1969)

QUALIFICATIONS FOR MEMBERSHIP

Corporations may validly prescribe certain qualifications necessary for membership

and the mode. The equal protection guarantee under the Constitution will not be violated as
long as there reasonable grounds for so doing and it is not arbitrary or capricious, as said
guarantee does not require that persons different in fact be treated in law as they are the
same. (SEC opinion, Oct. 4, 1993)

o Cebu Country Club, Inc. v. Elizagaque (542 SCRA 65, 2008) the exercise by the
Board of Directors of a non-profit and non-stock membership club, in a despotic and
arbitrary manner of their power to disapprove the application for proprietary
membership may make them personally liable for damages under the concept of
abuse of right.

o Calatagan Golf Club, Inc. v. Clemente Jr. (585 SCRA 300, 2009) every
corporation has an obligation to treat every person honestly and in good faith and
such duty extends to its members, and the utter bad faith of its Board of Directors
brings into operation articles 19, 20 and 21 under the chapter on Human Relations
and makes the corporation liable for moral damages under article 2217 of the Civil
Code.

TERMINATION OF MEMBERSHIP

Membership shall be terminated in the manner and for the causes provided in the
articles of incorporation or the by-laws. Termination of membership shall have the effect
of extinguishing all rights of a member in the corporation or in its property unless
otherwise provided in the articles of incorporation or the by-law. (sec.91)

NOTE: In cases where termination of membership in a non-stock corporation also entails loss of
property rights, the manner of termination must be in accordance with substantial justice.

o Valley Golf & Country Club, Inc. v. Vda. De Caram (585 SCRA 218, 2009)
membership in Valley Golf require the purchase of ownership share as a condition
sine qua non. Thus such membership entails the acquisition of property rights. In
such case, the manner of deprivation if such property rights should also be in
REPORT ON NON-STOCK CORPORATIONS
Members: Quincy Interino, Arif Kadatuan, Jamaica Manaligod, Chareloa Marcial, Roger Montero, Gianna Pealosa, Fawn Reynon, Joseph Rivera
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accordance with the provisions of the Civil Code including Articles 19, 20 and 21
under the Chapter on Human Relations

QUORUM

The principle under stock corporation in terms of quorum are applied by analogy, thus only those who are
actual members with voting rights shall be counted. In Tan vs. Sycip, the Supreme Court has held that the
basis of quorum are those actual living members and not the number appearing in the articles of
incorporation. If the legislature's intent was to base the quorum on this number, then they would have
expressly done so, otherwise then the basis is the number of actual living memebers.

VOTING RIGHTS

Under the Corporation Code, the voting rights of memebers are personal, such that members vote as
persons and not as number of stocks as in stock corporations. However, this right may be limited,
broadened or denied in the articles of incorporation or by-laws, thus the law gives the corporation the
freedom to determine who may vote and who may not vote, even how to vote as the general rule in
electing trustees that each member may only give one vote for each candidate is subject to contrary
stipulations in the by-laws or articles of incorporation.

RIGHTS OF MEMBERS SIMILAR TO STOCKHOLDER AND HOW THER ARE EXERCISED

The right to vote for trustees and other corporate acts expressly authorized by the Corporation Code. The
members, as a general rule, will only have 1 vote each regardless of class and when it comes to voting
for trustees, they may only cast 1 vote per candidate. However, this may be limited, broadened or denied
in the articles of incorporation or the by-laws.

The right to receive corporate peoperties upon liquidation of the non-stock corporation. Sec 94 (4) of the
Corporation Code says that the assets of the corporation may be distributed to the members and in such
proportions as stated by the articles of incorporation.

The right to be elected as a member of the board of trustees as provided by sec. 92 of the Corporation
Code which states the no person shall be lected as a trustee unless he is a member of the corporation.

The right to vote by proxies as stated in sec. 89 of the Corporation Code which states that members may
vote by proxies in accordance with the provisions of the code. Thus, the rules for voting by peoxies of
stockholders shall apply to members voting by proxies.

RIGHTS OF MEMBERS NOT APPLICABLE TO STOCKHOLDERS

The right to vote by mail as provided under sec. 89 of the Corporation Code which says that memer may
vote by mail or other simmilar means if it is authorized by the by-laws and under the conditions set by the
SEC. This right is not available to stockholders as it is not expressly provided by law. Also, this right may
only be exercised if the SEC has approved the by-law provision authorizing the same.

TRUSTEES AND OFFICERS

NUMBER OF TRUSTEES

A non-stock corporation may have more than 15 trustees as provided under section 92. It should be
noted that the number of incorporating trustees shall not be more than 15 following section 14.

o Rationale

REPORT ON NON-STOCK CORPORATIONS

Members: Quincy Interino, Arif Kadatuan, Jamaica Manaligod, Chareloa Marcial, Roger Montero, Gianna Pealosa, Fawn Reynon, Joseph Rivera
 Page 7 of 10
The reason for allowing non-stock corporations to have more than 15 trustees is to give more
representation to the Board of Trustees of nationwide membership associations.

o Principle of delegation of corporate management

The board is supposed to be small in number so that it may easily muster a quorum to act on
urgent matters.

There is no maximum limit under the code but according to an SEC Opinion (21 August 1997), the
number of trustees should not exceed the number of members of the non-stock corporation.

The same Opinion ruled that the SEC may question the propriety of a large number if it feels that the
number is unreasonable under the surrounding circumstances.

The SEC has adopted a policy of requiring registrant corporations to submit an explanation/justification if
its AOI provide for more than 15 trustees.

QUALIFICATIONS

Section 92 provides for only one qualification of a trustee which is membership in the corporation.

o Membership is a continuing qualification.

o Hence, if a trustee ceases to be a member of the corporation, he can no longer act as a trustee.

The Code and SEC also prescribe the following qualifications for trustees:

o He must be of legal age (SEC Opinion, 2 February 1981);

o He must not be convicted by final judgment of an offense punishable by more than 6 years of imprisonment, or a
violation of the corporation code committed within 5 years prior to the date of his election (sec. 27);

o A majority of the trustees must be residents of the Philippines. (sec. 23)

Other qualifications may be prescribed by the corporations by-laws.

A juridical person (i.e. corporation) is not qualified to be a trustee. (sec. 25)

o The SEC ruled in an Opinion (2 Sept 1991) that if the by-laws of the corporation expressly provides
that authorized representatives of juridical persons are to be considered as members for the
purpose of qualifications, then they may be elected as trustees.

TERM

Section 23 provides that trustees shall hold office for 1 year until their successors are elected and
qualified.

Trustees first elected

o Section 92 states that unless otherwise provided in the AOI or the by-laws, the terms of office of the
trustees first elected are staggered with a 1-year interval.

o Thus, the term of office may vary as the AOI or by-laws may provide. It may be staggered or fixed.

o Lifetime or unlimited term of the trustees is not allowed as it will deprive other members of the
opportunity to participate in the management of the corporation.

o If there is no such provision, the trustees shall classify themselves that the term of office of
1/3 of their number shall expire every year. (sec. 92)
REPORT ON NON-STOCK CORPORATIONS
Members: Quincy Interino, Arif Kadatuan, Jamaica Manaligod, Chareloa Marcial, Roger Montero, Gianna Pealosa, Fawn Reynon, Joseph Rivera
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Trustees subsequently elected

o Trustees subsequently elected comprising 1/3 of the trustees shall have a term of 3 consecutive
years. (sec. 92)

o But their terms of office also vary under the AOI or by-laws.

MODE OF ELECTION

The right to vote may be limited, broadened, or denied by the AOI or by-laws. (See section 89 voting
rights)

The by-laws may provide for the election.

Election by district

o A form of limitation on the voting rights of the members of a non-stock corporation as recognized
under section 89.

Election by proxy

o Generally allowed, unless denied by the AOI or by-laws.

Election by mail

o This may be authorized by the by-laws, especially where a non-stock corporation has numerous
members who are located in various parts of the country.

Election of officers

o Under section 92, the AOI or by-laws may provide for election of officers of a non-stock corporation.
Thus, it may authorize the board to elect the officers.

o If there is no provision, officers shall be directly elected by the members.

VACANCY

Under section 29, trustees may fill vacancies in the board, provided that those remaining still constitute a
quorum.
o This is merely permissive and not mandatory.
o But if there is no quorum, the vacancies must be filled by the members in a regular or special meeting
called for the purpose.
The by-laws may prescribe the specific mode of filling up vacancies in the board, either:
By the remaining trustees constituting quorum or,
By the members in a meeting called for the purpose.
o This specific mode provided in the by-laws should be followed.

MEETINGS

Meetings of the board of trustees of a stock corporation may be held anywhere in or outside the
Philippines, unless as the by-laws provide otherwise.

REPORT ON NON-STOCK CORPORATIONS

Members: Quincy Interino, Arif Kadatuan, Jamaica Manaligod, Chareloa Marcial, Roger Montero, Gianna Pealosa, Fawn Reynon, Joseph Rivera
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a. The by-laws may provide that the members may hold their meetings at any place even outside
the place outside the place where the principal office of the corporation is located, provided that
such place is within the Philippines. Thus meetings may coincide with coventions of the non-
stock corporation in any place of the country.

b. Where the by-laws expressly provide for the holding of members meeting at the principal office
of a non-stock corporation conformably with the general rule in sec. 51 meetings may not take
place anywhere else without first amending said by-laws.

c. In case the by-laws do not indicate the place of meeting, the members cannot hold their
meetings outside the place where the principal office of the corporation is located. The authority
to transfer the place of members meetings outside the place where the principal office of the
corporation is located must be expressly granted by the by-laws.

DISTRIBUTION OF ASSETS IN NON-STOCK CORPORATION

DISSOLUTION
It is the extinguishment of the franchise of a corporation and the termination of its corporate
existence.

*Remember: A corporation is a legal fiction created by law. If a corporation is likened to a natural

person, dissolution is the equivalent of death of a human being. Dissolution removes the capacity of
the corporation to perform acts which produce legal effect except those need to wind up its affairs.

MODES
1. Voluntary
2. Involuntary
3. Shortening of the term
4. Expiration of the term
5. Revocation of Certificate by Securities Exchange Commission

DISTRIBUTION OF ASSETS
Non-stock corporations do not contemplate distribution of gains, profits or dividends to their
members on invested capital. It is not in the nature of a non-stock corporation. However, the
distribution of assets of a non-stock corporation is not prohibited.

Two Basic Principles

1. Distribution of assets upon dissolution is allowed IF EXPRESSLY PROVIDED for the in the Articles of
Incorporation or By-laws.
a. If the distribution is expressly provided for, then the distribution must be in accordance with the
plan.
2. Not all assets of non-stock corporations are allowed to be distributed.

LIQUIDATION
It is the process by which all the assets of the corporation are converted into liquid assets (cash) in
order to facilitate the payment of obligations to creditors and the remaining balance if any is to be
distributed to the stockholders.

This only applies to Stock corporations.

DISTRIBUTION OF INCOME
Distribution of Income is not the same with distribution of assets contemplated in Section 94 and
95. In section 94-95, the corporation must be in the process of dissolution. Furthermore, distribution
of income is counterintuitive to the nature of a non-stock corporation. Under Section 3, a non-stock
corporation is defined in the negative. A non-stock corporation is a corporation which is not a stock
corporation. A stock corporation is defined therein as a corporation which a) which have capital
stock divided into shares and b) are authorized to distribute to the holders of such shares dividends

REPORT ON NON-STOCK CORPORATIONS

Members: Quincy Interino, Arif Kadatuan, Jamaica Manaligod, Chareloa Marcial, Roger Montero, Gianna Pealosa, Fawn Reynon, Joseph Rivera
 Page 10 of 10
or allotments of surplus profits. Therefore, the distribution of income violates the definition of a non-
stock corporation as defined by the Corporation Code.

It is worth remembering that distribution of income does not necessarily mean giving cash to the
members. Income may come into any form of remuneration or benefit.

RULES OF DISTRIBUTION

The Assets that should be distributed to the members DO NOT INCLUDE the assets that are included or will
answer for the following:

1. All liabilities and obligations of the corporation;

2. Assets held by the corporation upon a condition requiring return, transfer, or conveyance, and the condition
occurs by reason of the dissolution.
3. Assets received and held by the corporation subject to limitation permitting the use only for charitable,
religious, benevolent, educational, or similar purposes, BUT NOT held upon a condition requiring return,
transfer, or conveyance by reason of the dissolution.

Other assets shall be distributed in accordance with the provisions of the articles of incorporation or the by-
laws.
In any other cases, assets may be distributed to such persons, societies, organisations, or corporations,
whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to Chapter
3, Title 11 of the Corporation code.

PLAN OF DISTRIBUTION OF ASSETS

A plan providing for the distribution of assets, not inconsistent with the provisions of this Title, may be adopted by
a non-stock corporation in the process of dissolution in the following manner:

1. The BOD shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the
submission thereof to a vote at a regular or special meeting of members having voting rights
2. Written notice setting forth the proposed plan of distribution or a summary thereof and the date, time and place
of such meeting shall be given to each member entitled to vote, within the time and in the manner provided in
this Code for the giving of notice of meetings to members.
3. The plan of distribution shall be adopted upon approval of at least two-thirds (2/3) of the members having
voting rights present or represented by proxy at such meeting.

REPORT ON NON-STOCK CORPORATIONS

Members: Quincy Interino, Arif Kadatuan, Jamaica Manaligod, Chareloa Marcial, Roger Montero, Gianna Pealosa, Fawn Reynon, Joseph Rivera