LAW ON CORPORATIONS

DEFINITION: A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes
and properties expressly authorized by law or incident to its existence.

ATTRIBUTES:
1. CREATED BY OPERATION OF LAW – the formal requirement of the State’s consent through compliance with the requirements
imposed by law is necessary for its creation such that the mere agreement of the persons composing it or intending to organize
it does not warrant the grant of its independent existence as a juridical entity;

2. ARTIFICIAL BEING – it has a juridical personality, separate and distinct from the persons composing it.

3. RIGHT OF SUCCESSION – unlike in a partnership, the death, incapacity or civil interdiction of one or more of its stockholder
does not result in its dissolution;

4. POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTDHORIZED BY LAW – it can exercise only such powers and
can hold only such properties as are granted to it by the enabling statutes unlike natural persons who can do anything as they
please.

Powers of a corporation:
a. Express Powers – those expressly authorized by the Corporation Code and other laws, and its Articles of Incorporation.
b. Implied Powers – Those that can be inferred from or necessary for the exercise of EXPRESS powers;
c. Incidental Powers – those that are incidental to the existence of the corporation.

under the Corporation Code, a Corporation has power and capacity:

(1) To sue and be sued in its corporate name;
(2) Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of
incorporation;
(3) To adopt and use a corporate seal;
(4) To amend its articles of incorporation in accordance with the provisions of this Code;
(5) To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this
Code;
(6) In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury
stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock
corporation;
(7) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and
personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the
corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution;
(8) To enter into merger or consolidation with other corporations as provided in this Code;
(9) To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic,
or similar purposes: Provided, that no corporation, domestic or foreign, shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;
(10) To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and
(11) Implied Powers: 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.

ULTRA VIRES ACTS are those which cannot be executed or performed by a corporation because they are not within its express,
inherent, or implied powers as defined by its charter or AOI. Accordingly, it may be subject to a collateral attack questioning the
authority of the corporation to engage in such particular endeavor.

Consequences:
1. On the Corporation itself: The proper forum may suspend or revoke, after proper notice and hearing, the franchise or
certificate of registration of the corporation for serious misrepresentation as to what the corporation can do or is doing to
the great damage or prejudice of the general public.
2. On the rights of the Stockholders: A stockholder may bring either an individual or derivative suit to enjoin a threatened
ultra-vires act or contract. If already performed, a derivative suit against the directors may be filed, but their liability will
depend on whether they acted in good faith and with reasonable diligence in entering into the contract.
3. On the immediate parties:
a. If the contract is fully executed in both sides, the contract is effective and the courts will not interfere to deprive either
party of what has been acquired under it;
b. If the contract is executory on both sides, as a rule, neither party can maintain an action for its non-performance; and
c. Where the contract is executory on one side only, and has been fully performed on the other, the courts differ as to
whether an action will lie on the contract against the party who has received benefits of performance under it. Majority
of the courts, however, hold that the party who has received benefits from the performance is “estopped” to set up
that the contract is ultra vires to defeat an action on the contract.

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 are stock corporations.
NON-STOCK CORPORATIONS Corporations which are not authorized to distribute surplus profits.
DOMESTIC CORPORATION are those organized or created under or by virtue of the Philippine laws, either by legislative act
or under the provisions of the General Corporation Law.
FOREIGN CORPORATION are those formed, organized or existing under any laws other than those of the Philippines
CLOSE CORPORATIONS are those whose shares of stock are held by a limited number of persons like the family or other
closely-knit group. There are no public investors and the shareholders are active in the conduct
of the corporate affairs.
OPEN CORPORATIONS are those formed to openly accept outsiders as stockholders or investors. They are authorized
and empowered to list in the stock exchange and to offer their shares to the public such that
stock ownership can widely be dispersed. In which case, they are called PUBLICLY-LISTED
CORPORATIONS.
CORPORATION BY ESTOPPEL A group of persons which holds itself out as a corporation and enters into a contract with third
persons on the strength of such appearance cannot be permitted to deny its existence in an
action under the said contract.
DE JURE CORPORATION A corporation organized in accordance with the requirements of law
DE FACTO CORPORATION A corporation where there exists a flaw in its incorporation. The requisites:
a. There exists a valid law under which it may be incorporated;
b. An attempt in good faith to incorporate;
c. Use of corporate powers.
PRIVATE CORPORATIONS those formed for some private purpose, benefit, aim or end. They are created for the immediate
benefit and advantage of the individuals or members composing it and their franchise may be
considered as privileges conferred by the State to be exercised and enjoyed by them in the form
of the corporation.
PUBLIC CORPORATIONS those formed or organized for the government of a portion of the State or any of its political
subdivisions and which have for their purpose the general good and welfare.
ECCLESIASTICAL are composed exclusively of ecclesiastics organized for spiritual purposes or for administering
CORPORATIONS properties held for religious ones. They are organized to secure public worship or perpetuating
the right of a particular religion.
LAY CORPORATIONS are those organized for purposes other than religion. They may further be classified as:
a. ELEEMOSYNARY: created for charitable and benevolent purposes such as those organized
for the purpose of maintaining hospitals and houses for the sick, aged or poor.
b. CIVIL: organized not for the purpose of public charity but for the benefit, pecuniary or
otherwise, of its members.
AGGREGATE CORPORATIONS are those composed of a number of individuals vested with corporate powers.
CORPORATION SOLE those consist of one person or individual only and who are made as bodies corporate and politic
in order to give them some legal capacity and advantage which, as natural persons, they cannot
have. Under the Code, a corporation sole may be formed by the chief archbishop, bishop, priest,
minister, rabbi, or other presiding elder or religious denominations, sects or churches.

ORGANIZATION AND INCORPORATION

1. PROMOTIONAL STAGE: undertaken by the organizers or promoters who bring together persons interested in the business
venture. They enter into contract either in their own names or in the name of the proposed corporation.

A promoter, although he may assume to act for and on behalf of a projected corporation and not for himself, will be held
personally liable on contracts made by him for the benefit of a corporation he intends to organize. The personal liability continues
even after the formation of the corporation unless there is novation or other agreement to release him from liability.

2. PROCESS OF INCORPORATION: includes the drafting of the Articles of Incorporation, preparation and submission of
additional and supporting documents, filing with the SEC, and the subsequent issuance of the Certificate of Incorporation.

Contents of the Articles of Incorporation:

a. The name of the corporation;

The name of the corporation is essential to its existence since it is through it that it can act and perform all legal acts. Each
corporation should therefore, have a name by which it is to sue and be sued and do all legal acts.

A corporation, once formed, cannot use any other name, unless its Articles of Incorporation has been amended in
accordance with law as this would result in confusion and may open the door to fraud and evasion as well as difficulties of
administration and supervision.
 Thus, the organizers must make sure that the name they intend to use as a corporate name is not similar or confusingly
similar to any other name already registered and protected by law since the SEC would refuse registration if such be the
case.

b. 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;

The statement of the objects or purpose or powers in the charter results practically in defining the scope of authority of the
corporate enterprise or undertaking. This statement both congers and also limits the actual authority of the corporate
representatives.

The reasons for requiring a statement of the purposes or objects:

1. In order that the stockholder who contemplates on an investment in a business enterprise shall know within what lines
of business his money is to be put at risks;
2. So that the board of directors and management may know within what lines of business they are authorized to act;
and
3. So that anyone who deals with the company may ascertain whether a contract or transaction into which he
contemplates entering is one within the general authority of the management.

SECONDARY PURPOSE: Although the Corporation Code does not restrict nor limit the number of purpose or purposes
which a corporation may have, Sec. 14 thereof, requires that if it has more than one purpose, the primary purpose as well
as the secondary ones must be indicated therein.

PROHIBITION: The following are prohibited by special laws for having any other purpose not peculiar to them:
1. Educational, religious, and other non-stock corporations cannot include any other purpose which would change or
contradict its nature or to engage in any enterprise to make profits for is members;
2. Insurance companies cannot engage in commercial banking at the same time, and vice-versa; and
3. Stock brokers can have no other line of business not peculiar to them.

RESTRICTIONS AND/OR ADDITIONAL REQUIREMENTS:

1. As a general rule, the purpose or purposes must be lawful. Hence, the SEC is duty bound to determine the legality of the
corporate purpose/s before it issues the certificate of registration;
2. A corporation may not be formed for the purpose of practicing a profession like law, medicine or accountancy, either
directly or indirectly. These are reserved exclusively for professional partnerships;
3. The retail trade, where the corporate capital is less than $2.5M, or its peso equivalent are reserved exclusively for
Filipinos, or for corporations or partnerships wholly owned by such citizen.
4. As a general rule, corporations with foreign equity are not allowed to engage in restaurant business but corporations
with such foreign equity can purse such undertaking if it is incidental or in connection with hotel or inn-keeping business.
5. Management consultants, advisers and/or specialists, must submit the personal information sheet of the incorporators
and directors in order that the SEC may be able to find out or determine whether or not the applicant corporation is qualified
to act as such.
6. As a matter of policy, financing companies are required by the SEC to submit certain additional documents together with
their applications for registration to verify compliance with RA 8556.
7. For bonded warehousing companies, an undertaking to comply with the General Bonded Warehousing Act must be
submitted along with the AOI.
8. In case the applicant proposes to engage in the business of hospital and/or clinic, the purpose clause must contain the
following proviso: “Provided that purely medical or surgical services in connection therewith shall be performed by duly
qualified physician and surgeon who may or may not be freely and individually contracted by the parties.”
9. In the case of Customs Brokerage business, the applicant must submit the license of at least two customs brokers
connected with the applicant corporation;
10. Transfer Agents, Broker and Clearing Houses must submit the certificate of admission to the profession of the CPA of
any officer of the corporation;
11. Carriage of mails cannot be a purpose of a corporation unless a special franchise has been granted to it.
12. If the corporate purpose or objective includes any purpose under the supervision of another government agency, prior
clearance and/or approval of the concerned government agencies or instrumentalities will be required pursuant to the last
paragraph of Sec. 17 of the Code.

GENERAL LIMITATIONS:
1. The purpose or purposes must be lawful;
2. The purpose must be specific or stated concisely although in broad or general terms;
3. If there is more than one purpose, the primary as well as the secondary ones must be specified; and
4. The purposes must be capable of being lawfully combined

c. The place where the principal office of the corporation is to be located, which must be within the Philippines;
 It must be located within the Philippines. The AOI must not only specify the province, but also the City or Municipality
where it is located. In this regard, it is to be observed that the principal office may be in one place, but the business
operations are actually conducted in other areas. The law does not, of course, require a statement of the place of corporate
operations and, therefore, may be dispensed with.

The principal office serves as the residence of the corporation and is thus important in: (1) venue of actions; (2) registration
of chattel mortgage of shares; (3) validity of meetings of stockholders or members in so far as venue thereof is concerned.

d. The term for which the corporation is to exist;

The corporate term is necessary in determining at what point in time the corporation will cease to exist or have lost its
juridical personality. Once it ceases to exist, its legal personality also expires and could not thereafter, act in its own name
for the purpose of prosecuting it business.

EXTENSION: can be made no earlier than 5 years prior to expiry date unless there are justifiable reasons.

e. The names, nationalities and residences of the incorporators;

CORPORATORS apply to all who compose the corporation at any given time and need not be among those who executed
the AOI at the start of its formation or organization.

INCORPORATORS are those mentioned in the AOI as originally forming the corporation and who are signatories in the
AOI.

An incorporator may be considered as a corporator as long as he continues to be a stockholder or a member, but not all
corporators are incorporators.

Number of Incorporators: not less than 5 but not more than 15.

Qualifications:
1. Must be natural persons. It implies that a corporation or a partnership cannot become incorporators. EXCEPTION:
(1) cooperatives; (2) corporations primarily organized to hold equities in rural banks and may rightfully become
incorporators thereof.

It must be noted likewise that the law does not preclude firms and other entities from becoming stockholders or
subscribers to the shares of a stock corporation. Thus, while they cannot qualify as incorporators, they can become
corporators or stockholders.
2. Of Legal Age. Minors cannot be incorporators. They may, however, become stockholders provided they are legally
represented by parents, guardians or administrators.
3. Must own at least 1 share.
4. Majority must be residents of the Philippines.

The law does not provide for citizenship requirements. EXCEPT: in certain areas of activity or industry wherein
ownership of shares of stock are reserved wholly or partially to Filipino citizens. Hence, all incorporators may be
foreigners provided majority of them are residents. Note that the requirement is residence and not citizenship

f. The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15);

DIRECTORS compose the governing board in stock corporations. TRUSTEES pertain to non-stock corporations.

There must be at least 5 but not more than 15 directors in a private corporation. EXCEPTIONS:
1. Educational corporations registered as non-stock corporations whose number of trustees, though not less than 5 and not
more than 15 should be divisible by 5.
2. In close corporations where all stockholders are considered as members of the board of directors (Sec. 97) thereby
effectively allowing 20 members in the board.

g. 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;

h. 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;

The Corporation Code requires the AOI to state the authorized capital stock, the number of shares and/or kind of shares
into which the authorized capital is divided, the par value of each share, if there be any, the names, nationalities and
residences of the original subscribers, and the amount subscribed and paid by each. At least 25% of the authorized capital
 stock must be subscribed and at least 25% of the subscribed capital must be paid and in no case may the paid-up capital
be less than P5,000.

The 25% minimum paid-in capital can be paid by any shareholder, meaning that it is not particularly required that each
subscriber pay 25% of their subscription.

There are instances where the SEC, by virtue of an existing law, rules and regulations or policies, requires the payment of
more than the amount provided in the Code, such as Financing Companies where the required minimum paid-up capital be
P10,000,000 (within Metro Manila), P5,000,000 (other cities), and P2,000,000 (municipalities), HMOs which require P10M
paid-up capital, Insurance Brokers which require P20M.

AUTHORIZED CAPITAL signifies the MAXIMUM amount fixed in the articles to be subscribed and paid-in or secured to
be paid by the subscribers. It may also refer to the maximum number of shares that a corporation can issue.

SUBSCRIBED CAPITAL STOCK is the total number of shares and its total value for which there are contracts for their
acquisition or subscription. It is in effect, the stockholder’s equity account showing that part of the authorized capital stock
which has been paid or promised to be paid, or that portion of the authorized capital stock which has been subscribed by
the subscribers or stockholders.

PAID UP CAPITAL STOCK or paid-in capital is the actual amount or value which has been actually contributed or paid to
the corporation in consideration of the subscriptions made thereon.

Considerations for stocks:

1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and
lawful purposes at a fair valuation equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.

Note:
• Stocks cannot be issued for a consideration less than the par or issue price thereof.
• Promissory notes or future service cannot be considered valid consideration for stocks.

OUTSTANDING CAPITAL STOCK: total number of shares issued, including those which are subscribed and not yet fully
paid, but excluding treasury shares.

i. 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

j. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and
convenient.

RESTRICTIONS AND PREFERENCES:

If the corporation desires to grant such options, restrictions and/or preferences, the same must be indicated in the AOI
AND in all of the stock certificates. Failure to provide the same in the AOI would not bind the purchasers in good faith
despite the fact that the said restriction and/or preference is indicated in the by-laws of the corporation.

In a close corporation, however, such restrictions and preferences must not only appear in the articles of incorporation and
in the stock certificates BUT ALSO be embodied in the by-laws of that close corporation otherwise it may not bind
purchasers in good faith.

OTHER MATTERS TO BE INDICATED IN THE ARTICLES OF INCORPORATION:

1. The name of the Treasurer duly elected by the subscribers
2. No Transfer Clause: in case a corporation is required to maintain a required minimum Filipino ownership, committing
that no transfer shall be made which shall reduce the ownership of Filipino citizens to less than the required percentage.
3. The Execution Clause: which will contain the names and signatures of the incorporators
4. Treasurer’s Affidavit which contains the certification of the Treasurer, under oath, that the required 25% of the
authorized capital stock has been subscribed, 25% of the subscription has been paid, in an amount not less than
P5,000.
5. Notarial Acknowledgment

GROUNDS FOR DISAPPORVAL BY THE SEC:

a. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed
herein;
 b. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government
rules and regulations;
c. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid if false;
d. That the 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.
e. That the required favorable recommendation from the appropriate government agency, for corporations governed by special
laws, was not obtained, e.g., Banks – BSP, Insurance Companies – Insurance Commission.

AMENDMENT OF THE ARTICLES OF INCORORPATION, IN GENERAL WOULD REQUIRE:

a. Majority approval of the members of the Board;
b. Written assent of stockholders representing 2/3 of the outstanding stocks
c. Approval of the SEC. If the SEC did not act on the application within 6 months from the date of filing, the amended is
deemed approved.

3. COMMENCEMENT OF CORPORATE EXISTENCE: is at the time of the issuance of the Certificate of Incorporation or
Registration. It is only from this time that it acquires juridical personality and legal existence, EXCEPT:
a. Corporations by Estoppel;
b. Those created by special laws;
c. Those organized as Cooperatives covered by Bureau of Cooperatives;
d. Home Owners’ Associations covered by Home Insurance Guaranty Corporation;
e. Corporation Sole – which is reckoned from the filing of verified articles.

COMMENCEMENT OF BUSINESS: Once the certificate of incorporation has been issued, the corporation MUST formally
organize and commence its business.

Non-Use of Corporation Charter: the failure of the corporation to organize within 2 years would result in it automatic
dissolution, unless, of course, its failure to do so is due to causes beyond its control.

Formal Organization: refers to the process of structuring the corporation to enable it to effectively pursue the purpose for which
it was organized. It includes:
a. Organizational meeting of the stockholders to elect the BOD;
b. Adoption of by-laws, if not simultaneously filed with the AOI, and its subsequent filing with the SEC which must be within
1 month from the issuance of the certificate of incorporation;
c. Organizational meeting of the BOD to elect the corporate officers, adoption of corporate seal, accepting pre-incorporation
subscriptions, establishing the principal office and such other steps necessary to transact the legitimate business for which
the corporation was formed.

Strict compliance is not required. Substantial compliance therewith is sufficient. Thus, it has been held in the case of Perez
vs. Balmacaan that a corporation is deemed to have formally organized if it had a governing board which direct its affairs,
as well as a treasurer and a clerk, and that through these instrumentalities, it actually functioned and engaged in the
business for which it was organized. It cannot be held to have forfeited its charter simply because it has not been shown
that is also had a president and a secretary.

Commencement of Business Operations: when the corporation has actually functioned and engaged in business for which
it was organized which must be done within two years from the issuance of the certificate of incorporation lest
it is deemed dissolved. This may take the form of entering into contracts which tend to pursue its business undertaking
or other acts related thereto.

If a corporation has commenced its business but subsequently becomes inoperative continuously for a period of at
least 5 years, the same shall be merely a ground for suspension or revocation of its corporate franchise or
certificate of registration.

CORPORATE ENTITY THEORY

As a legal entity, the corporation is possessed with a juridical personality separate and distinct from the individual stockholders or
members and is not affected by the personal rights, obligations or transactions of the latter. The properties it possesses belongs to it
exclusively as a separate juridical entity such that the personal creditors of its stockholders or members cannot attach corporate
properties to satisfy their claims.

On the other hand, the corporation is not likewise liable for the debts, obligations or liabilities of its stockholders. Neither may it
properties be made answerable to satisfy the claim of creditors against its stockholders or member even if the stockholder concerned
is its president.

PIERCING THE VEIL OF CORPORATE ENTITY: The applicability of the corporate entity theory is confined to legitimate
transactions and is subject to equitable limitations to prevent its being used as a cloak or cover for fraud or illegality, or to work
injustice.
When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, defend crime, the law will regard
the corporation as a mere association of persons, or in the case of two corporations, merge them into one, the one being merely
regarded as part or instrumentality of the other. The same is true where a corporation is a mere dummy and serves no business
purpose and is intended only as a blind, or an alter-ego or business conduit for the sole benefit of the stockholders.

In cases where the doctrine of piercing the veil of corporate fiction, liability will attach directly to the officers and stockholders, at
least, in so far as that particular act is concerned.

The test in determining the applicability of piercing the veil of corporate fictions is as follows:
1. Control, not mere majority or complete stock control, but complete domination, not only in finances but of policy and business
practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or
other positive legal duty or dishonest and unjust act in contravention of plaintiff’s legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

BOARD OF DIRECTORS

The Board of Directors (or trustees or other designation allowed under Sec. 138) is the supreme authority in matter of management
of the regular and ordinary business affairs of the corporation.

However, this authority does not extend to the fundamental changes in the corporate charter such as amendments or substantial
changes thereof, which belong to the stockholders as a whole.

Classification of powers of the board members/corporate officers: The general rule is that a corporation is bound by
the acts of its corporate officers who act within the scope of the 5 classifications of powers of corporate agents, which
are:
1. Those expressly conferred or those granted by the articles of incorporation, corporate by-laws or by the official act of the
board of directors;
2. Those that are incidental or those acts as are naturally and ordinarily done which are reasonable and necessary to carry out
the corporate purpose or purposes;
3. Those that are inherent or acts that go with the office;
4. Those that are apparent or those acts which although not actually granted, the principal knowingly allows or permits it to be
done; and
5. Powers arising out of customs, usage or emergency

QUALIFICATIONS AND DISQUALIFICATIONS: The by-laws of a corporation may provide for additional qualifications and
disqualifications of its members of the board of directors or trustees. However, it may not do away with the minimum qualifications
and disqualifications.

Qualifications of a Director/Trustee:
1. Must own at least 1 share in their own names or a member (in the case of trustees);
2. Majority must be resident of the Philippines. Even aliens may be elected as directors, provided that the majority of such
directors are residents of the Philippines. EXCEPT: in activities exclusively reserved to Filipino citizens like the management of
educational institutions and those governed by the Retail Trade Law

Disqualifications of a Director/Trustee:
1. Imprisonment for a period exceeding 6 years;
2. Violation of the Corporation Code within 5 years prior to the date of election or appointment;
3. Such other disqualifications that may be provided in the by-laws.

ELECTION OF MEMBERS OF THE BOARD/TRUSTEES

1. Majority of the outstanding capital stock, whether in person or by written proxy must be present at the election of the directors;
or majority of members entitled to vote, in the case of a non-stock corporation. If the required quorum is not obtaining, the
meeting may be adjourned;
2. On the request of any voting stockholder or member, the election may be held by ballot otherwise viva-voce would suffice.
3. The candidates receiving the highest number of votes shall be elected

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:
a. Cumulative voting gives the stockholder entitled to vote the right to give a candidate as many votes as the number of directors
to be elected multiplied by the number of his shares shall equal (Cumulative Voting for one candidate) or he may distribute
them among the candidates as he may see fit (Cumulative voting by distribution)
b. This is granted by law to each stockholder with voting rights. However, in non-stock corporations, cumulative voting is
generally not allowed, UNLESS allowed by the AOI or by-laws.
c. Under this method, if there are 10 directors to be elected, a holder of 1,000 shares will have 10,000 votes which he may cast
 in favor of one candidate or may apportion to any number of candidate he may wish
d. PURPOSE: to allow the minority to have a rightful representation in the board of directors.
e. Cumulative voting is not available in non-stock corporations.

REMOVAL AND FILLING-UP OF VACANCIES

1. By-laws may provide for causes or grounds for removal of a director;
2. A director representing the minority may not be removed except for those causes;
3. A director NOT representing the minority may be removed even without a cause.

Requirements for a valid removal:

1. The removal should take place at a general or special meeting duly call for that purpose;
2. The removal must be by the vote of the stockholders holding or representing 2/3 of the outstanding capital stock or the members
entitled to vote in cases of non-stock corporations; and
3. There must be a previous notice to the stockholders or members of the intention to propose such removal at the meeting either
by publication or on written notice to the stockholders or members.

Vacancy:

CAUSE OF VACANCY WHO WILL FILL THE VACANCY

Removal Stockholders by the election of a replacement in the same
meeting as that of the removal
Expiration of the term Stockholders
Other causes (death, resignation, abandonment) Board of Directors – if they still constitute a quorum;
Stockholders – if the Directors no longer constitute a quorum

Replacement of Hold-Over Directors: in the event that a director, after the expiration of his term is not replace since there was
no election held, such director can continue to function in a holdover capacity. However, if he resigns, the stockholders will be the
one to replace him even if the remaining directors continue to constitute a quorum. Note that the power of the Board to fill up the
vacancy is only if the director resigns before the expiration of his term. In this instance, the term of the director already expired, he
just continued as such only in a hold-over capacity.

Compensation of Directors/Trustees: General Rule: Directors are not entitled to receive any compensation this is because the
office of a director is usually filled up by those chiefly interested in the welfare of the institution by virtue of their interest in stock or
other advantages and such interests are presumed to be the motive for executing duties of the office without compensation. Except:
1. Reasonable per diems;
2. As provided in the by-laws or upon a majority vote of the stockholders; and
3. If they are performing functions other than that of a director.

CORPORATE OPPORTUNITY DOCTRINE: it places a director of a corporation in the position of a fiduciary and prohibits him from
seizing a business opportunity and/or developing it at the expense and with the facilities of the corporation. He cannot appropriate to
himself opportunity which in fairness should belong to the corporation.

Ratification:
1. The second paragraph of Sec. 31 which makes a director liable to account for profits if he attempts to acquire or acquires any
interest adverse to the corporation in respect to any matter reposed in him in confidence as to which equity imposes a disability
upon him to deal in his own behalf is not subject to ratification.
2. Whereas, in Sec. 34, if a director acquires a business opportunity which should belong to the corporation, he is bound to account
for such profits unless his act is ratified by the stockholders owing or representing at least 2/3 of the outstanding capital stock.

Example: A, B, C, D and E are directors of REALTY CORP., Z wanted to sell his property with a fair market value of P100M for P90M.
a. If it was offered first to A, and A made a profit of P90M, this would fall under Sec. 34 and may be subject to ratification; A merely
acquired a business opportunity owing to the corporation.
b. If it was offered to REALTY CORP., and A, later on offered to buy it for P95 and sold it making a profit of P5M, it would fall under
Sec. 31 and not subject to ratification, A should return the profits to REALTY CORP. It was a matter reposed in him in confidence.

SELF-DEALING DIRECTORS: is one who deals or transacts business with his own corporation.

Generally, A contract entered into by a director with his own corporation is voidable at the latter’s option, except
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.

On the other hand, where any of the first two conditions is absent, the contract becomes voidable subject to the ratification of the
stockholders representing 2/3 of the outstanding capital stock – the requirements of which are: (1) there must be a meeting called
for that purpose; (2) full disclosure of the adverse interest of the director; and (3) the contract is fair and reasonable under the
circumstances.

If the self-dealing director owns all or substantially all of the shares of stock, thereby making ratification easily possible, the
reasonableness of the transaction shall be determined - to which there is no yardstick and remains to be a question of fact depending
on the circumstances.

INTERLOCKING DIRECTOR: is a director in one corporation who deals or transacts with another corporation of which he is also a
director. In such case, there may effectively be a dual agency, a divided allegiance where allegiance in one corporation may
subordinated to the other.

1. The contract between corporations with interlocking director is valid absent fraud and provided it is reasonable under the
circumstances;
2. If the interest of the interlocking director in one corporation exceeds 20% and in the other merely nominal, the contract
becomes voidable at the latter corporation’s option. In effect, the director would be treated as a self-dealing director discussed
above.
3. If the interest in both companies is either both substantial or both nominal, no. 1 would apply.

REMEDIES AGAINST ERRING OFFICERS/DIRECTORS: In case of a wrongful or fraudulent act of a director, officer or agent,
stockholders have the following options:
1. Individual or Personal Action – for direct injury to his rights, such as denial of his right to inspect corporate books and records
or pre-emptive rights;
2. Representative or Class Suit – in which one or more members of a class sue for themselves as a class or for all to whom the
right was denied, either as an individual action or a derivative suit; and a
3. Derivative Suit – an action based on injury to the corporation – to enforce a corporate right – wherein the corporation itself is
joined as a necessary party, and recovery is in favor of and for the corporation. It is a suit granted to any stockholder to institute
a case to remedy a wrong done directly to the corporation and indirectly to stockholders.

The requisites for a derivative suit are as follows:

a. the party bringing suit should be a shareholder as of the time of the act or transaction complained of, the number of
his shares not being material;
b. he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the
appropriate relief but the latter has failed or refused to heed his plea; and
c. the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to
the corporation and not to the particular stockholder bringing the suit.

CORPORATE OFFICERS

ELECTION OF CORPORATE OFFICERS: Except in a close corporation where the corporate officers may be elected directly by the
stockholders, the Code requires the BOD to elect the said officers;

The officers that may be elected are the:

1. President – who must be a director;
2. Treasurer – who may or may not be a director;
3. Secretary – who should be a resident and citizen of the Philippines;
4. 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:
1. The president and the secretary;
2. The president and the treasurer.

Quorum: requirement for a valid board meeting is the majority of the number of the board fixed in the AOI, and a decision of at least
a majority of the directors/trustees present in a meeting at which there is a quorum shall be a valid corporate act, except:
1. Election of officers, which shall require the majority of all the members of the board; and
2. Unless the AOI or the by-laws provide for a greater quorum/voting requirement.

Every action of the board without a meeting and without the required voting and quorum requirement will not bind the corporation
unless subsequently ratified, expressly or impliedly.

Individual directors, however, can rightfully be considered as agents of the corporation. And although they cannot bind the corporation
by their individual acts, this is subject to certain EXCEPTIONS: (1) by delegation of authority; (2) when expressly conferred; or (3)
where the officer or agent is clothed with actual or apparent authority.

AUTHORITY OF CORPORATE OFFICERS TO ACT IN BEHALF OF THE CORPORATION: a corporate officer or agent may
represent and bind the corporation in transactions with third person to the extent that authority has been conferred upon him, and
this includes powers which have been:
1. intentionally conferred, and
2. also, such powers as, in the usual course of business, are incidental thereto, or may be implied therefrom,
3. powers added by custom and usage, as usually pertaining to the particular officer or agent, and
4. such apparent powers as the corporation has caused persons dealing with the officer or agent to believe that it has conferred

LIABILITY OF CORPORATE OFFICERS: The general rule is that unless the law specifically provides a corporate officer or agent is
not civilly or criminally liable for acts done by him as such officer or agent, or when absent bad faith or malice. Personal liability of
a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only
when:
5. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or (c) gross negligence in directing its affairs,
or (d) conflict of interest, resulting in damages to the corporation, its stockholders or other persons;
6. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto;
7. He agrees to hold himself personally and solidarily liable with the corporation;
8. He is made, by a specific provision of law, to personally answer for his corporate action.

CLASSES OF STOCKS

Shares of Stock designate the units into which the proprietary interest in a corporation is divided. They represent the proportionate
integers or units, the sum of which constitutes the capital stock of the corporation. It is likewise the interest or right which the owner,
called the stockholders or shareholder, has in the management of the corporation, and in the surplus profits and in case of distribution,
in all of its assets remaining after the payment of its debts.

Certificate of Stock is a document or instrument evidencing the interest of a stockholder in the corporation.

COMMON STOCKS are the most commonly issued shares of stock of a corporation. Although no clear-cut definition can be found,
it has been described as one which entitles it owner to an equal or pro-rata division of profits, if there are any, but without any
preference or advantage in that respect over any other stockholder or class of stockholders.

A common share usually carries with it the right to vote, and frequently, the exclusively right to do so. However, where the AOI is
silent, all issued and outstanding shares shall be considered to have the right to vote and be voted for.

PREFERRED STOCKS is a stock that gives the holder preference over the holder of common stocks with respect to the payment of
dividends and/or with respect to distribution of capital upon liquidation.

LIMITATIONS imposed by the Code in the issuance of preferred stocks:

1. They can be issued only with a stated par value; and
2. The preference must be stated in the AOI and in the certificate of stock otherwise each share shall be, in all respect, equal to
every other share.

Preference as to Dividends
They have the privilege of being paid dividends first before any other stockholders are paid theirs. The guaranty is not absolute so as
to create a relation of debtor and creditor between the corporation and the holders of such stock. The amount of preference is stated
in the contract of subscription and is usually a fixed percentage or by specified amount indicated therein.

Participating and Non-Participating Preferred Shares

If the preferred share is participating, they are entitled to participate in dividends with the common shareholders beyond their stated
preference. Non-participating preferred shares on the other hand are entitled to its fixed priority or preference only.

Cumulative and Non-cumulative Preference Shares

Cumulative preferred shares are those that entitle the owner thereof to payment not only of current dividends but also back dividends
not previously paid whether or not, during the past years, dividends were declared or paid. In light of the provision of the Code stating
that all shares are equal in all respects unless otherwise stated in the AOI, a preferred share to be considered cumulative, the same
must be provided for and specified in the certificate.

Non-cumulative preferred shares are those which grant the holders of such shares only to the payment of current dividends but not
back dividends, when and if dividends are paid, to the extent agreed upon before any other stockholders are paid the same.

Voting Rights of Preferred Shares: same with redeemable shares, preferred shares are usually denied voting rights – but this
right must be clearly withheld. However, even if the right to vote is withheld, they shall have the right to vote on the following:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.
Preference upon liquidation: this preference must be stated in the contract to accordingly grant such preference in the distribution
of the assets ahead of the common stockholders, including dividends in arrears in case the preferred shares are cumulative.

PAR AND NO-PAR VALUE SHARES

Par Value Shares are those whose values are fixed in the Articles and shown on the certificate. The par value is the minimum
subscription or original issue price of the shares. If the shares are issued at less than its par value, the shares sold is considered as
watered stocks, and the stockholders will remain liable for the difference of the par value and the amount paid therefor.

No Par Value Shares are those whose issued price are not stated in the certificate of stock but may be fixed in the AOI, or by the BOD
when so authorized the articles or the by-laws, or in the absence thereof, the stockholders themselves. They do not purport to
represent any stated proportionate interest in the capital measured by value, but only an aliquot part of the whole number of shares
of the corporation issuing it.

The Code allows the issuance of no par value shares, subject to the following limitations provided in Sec. 6:
1. Such shares once issued, are deemed fully paid and thus, non-assessable;
2. The consideration for its issuance should not be less than P5;
3. The entire consideration constitutes capital, hence, not available for dividend declaration;
4. They cannot be issued as preferred stock; and
5. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loans associations.

Advantages of no-par value shares:

1. Flexibility in price – no par shares may be issued from time to time at different prices with the exception only that it shall not be
issued at less than P5;
2. The issuance thereof practically results to the evasion of the danger of liability upon watered stock in case of overvaluation of the
consideration paid for it;
3. There is a disappearance of personal liability on the part of the holder for unpaid subscription since they are already deemed fully
paid and non-assessable.

ILLUSTRATION: X Co. has P10M Authorized Capital Stock divided into: (1) 5M shares at P1.00 par value; and (2) 1M no par
value shares with issued value at P5.00. A acquired 1M of the par value shares for P.80 and 100,000 no par value shares at P4.00:
1. WATERED STOCK: There is stock watering for both shares. Sec. 65 speaks of issuance of shares at “less than its par or issued
value”;
2. LIABILITY FOR PAR VALUE SHARES: The directors who consented to the issuance or were passive about it, without written
dissent, are solidarily liable with A for the difference of P.20;
3. LIABILITY FOR NO PAR VALUE SHARES: A cannot be held liable because the no par value shares are “deemed fully paid and
non-assessable” (Sec. 6). Accordingly, only the directors or officers consenting to the issuance are liable.

FOUNDER’S SHARES: are shares issued to the founders of the corporation which are granted certain right and privileges such as
the exclusive right to vote and be voted for in the election of directors, for a period not to exceed 5 years, subject to the approval of
the SEC.

The period of 5 years is non-extendable because it may result in the almost perpetual disqualification of other stockholders to elect
or be elected as members of the BOD resulting to the lack of proper representation thereat.

REDEEMABLE SHARES: are those subject to redemption, as indicated in the contract, usually attached to preferred shares and
other debt securities like bonds. This type of shares grants the corporation the right to repurchase the shares at its option or at the
option of the holder based on the face or issued value plus a specified premium. The redemption may be optional or mandatory at a
fixed future date.

The repurchase is not subject to the availability of unrestricted retained earnings.

TREASURY SHARES: are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing
corporation by purchase, redemption, donation or through some other lawful means. Subsequently, the corporation can re-issue the
shares of stock or sell them or declare them as property dividends.

Such shares, though paid for already, do not form part of outstanding shares and accordingly, do not have the right to vote and
receive dividends.

SUBSCRIPTION CONTRACT: Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to
be formed shall be deemed a subscription, notwithstanding the fact that the parties refer to it as a purchase or some other contract.

Subscriptions may be made upon a condition precedent or upon special terms (condition subsequent). A conditional subscription,
or one made upon a condition precedent, does not make the subscriber a stockholder, or render him to pay the amount of his
subscription, until performance of the condition. A subscription upon special terms, on the other hand, is an absolute subscription,
making the subscriber a stockholder, and rendering him liable as such, as soon as the subscription is accepted, the special term being
an independent stipulation.

In case of doubt in the intention of the parties, a subscription should be considered as an absolute subscription upon special terms,
rather than conditional. The policy of giving protection to creditors and other subscribers has led to the adoption of this rule of
construction favoring the immediate liability of the subscriber.

Conditional Subscriptions are valid provided: (1) there is nothing in the charter or enabling act prohibiting the same; and (2) providing
the conditions are not such as to render their performance beyond the powers of the corporation or in violation of law or contrary to
public policy.

Pre-incorporation subscriptions: refer to subscriptions for shares of stock of a corporation still to be formed while post-
incorporation subscriptions are those made or executed after the formation or organization of the corporation, and are deemed
irrevocable:
1. For a period of at least 6 months from the date of subscription unless (a) all the subscribers consent to the revocation; or (b)
the incorporation fails to materialize within said period or within a longer period as may stipulated in the contract of subscription;
and
2. After submission of the AOI to the SEC

Issuance of certificates of stock; requisites:

1. It must be signed by the president or vice-president and countersigned by the secretary or assistant secretary;
2. It must be sealed with the corporate seal, and
3. The entire value thereof (together with the interest or expenses, if any) should have been paid.

Indivisibility: As the law stands now, subscription to shares of stock are deemed indivisible and no certificate of stock can be issued
unless and until the full amount of his subscription including interest and expenses, if any is paid.

Rights of a SUBSCRIBER: a subscriber, even if not yet fully paid, is entitled to exercise all the rights of a stockholder and the
corresponding liability that attach thereunder, except:
1. For the issuance of a certificate of stock;
2. If his shares are declared delinquent; or
3. When he exercises appraisal right.

Enforcement of payment of subscriptions: Unpaid subscription or any percentage thereof, together with interest if required by
the by-laws or the contract of subscription, shall be paid either:
1. On the date or dates fixed in the contract or subscription;
2. On the date or dates that may be specified by the BOD pursuant to a “call” declaring any or all unpaid portion thereof to be so
payable

To enforce payment, the following remedies are available:

1. By board action; and
2. By a collection case in court.

Failure or refusal of the BOD to enforce or collect payment of unpaid subscription will not prevent the creditors or the receiver of the
corporation to institute a court action to collect the unpaid portion thereof.

Delinquent Shares of Stock: become delinquent when no payment is made on the balance of all or any portion of the subscription
on the date or dates fixed in the contract of subscription without need of call, or on the date specified by the BOD pursuant to a call.

Effect of Delinquency: The stockholder thereof immediately loses the right to vote and be voted upon or represented in any
stockholders meeting as well as all the rights pertaining to a stockholder except the right to receive dividends in accordance with the
Code. Any cash dividend due on delinquent stockholders shall first be applied to the unpaid balance on his subscription plus cost and
expenses, while stock dividends shall be withheld until his unpaid subscription is paid in full.

RIGHTS OF A STOCKHOLDER:
1. Participation in the management of the corporate affairs by exercising their right to vote and be voted upon either
personally or by proxy as provided for under Sec. 50 and 58 of the Code;

Instances where the concurrence of the stockholders are necessary for the exercise of the powers of the
corporations
a. Requiring majority vote of the BOD and concurrence of the stockholders representing 2/3 of the outstanding capital
stock:
(1) Extend or shorten the corporate term;
(2) Increase/decrease corporate stock
(3) Incur or create bonded indebtedness;
(4) Deny pre-emptive right
(5) Sell, dispose, lease, encumber all or substantially all of corporate assets;
(6) Invest in another corporation other than the primary purpose;
 (7) Declare stock dividends
(8) Enter into a management contract - where the stockholders own 1/3 of the capital stock of the managing corporation or
where a majority of the members of the board of the managing corporation also constitute a majority of the board of
the managed corporation;
(9) Amend the articles of incorporation.
b. Requiring majority of the outstanding capital:
(1) Enter into a management contract other than no. (8) above;
(2) adopt, amend or repeal the by-laws

Without board resolution, the stockholders may:

a. Delegate to the board the power to amend the by-laws – 2/3 of the outstanding capital stock
b. Revoke such power – majority of the outstanding capital stock

2. To enter into a voting trust agreement subject to the procedure, requirements and limitations imposed under Sec. 50;
3. To receive DIVIDENDS and to compel their declaration if warranted under Sec. 43;

If the dividends to be declared are stock dividends, it requires not only the majority vote of the BOD but also the approval of
stockholders owning at least 2/3 of the outstanding capital stock.

The BOD can be compelled to declare dividends if the retained earnings are in excess of 100% of the paid-up capital. However,
the BOD can still refuse, if:
a. Justified by a definite corporate expansion/projects/programs approved by the Board;
b. The corporation is prohibited under a loan agreement to declare dividends without the creditor’s consent and such consent
has not yet been secured;
c. It can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation.

If there are no retained earnings, dividends, as a rule, cannot be declared out of capital stock. EXCEPT:
a. Liquidating dividends
b. Investments in wasting assets such as mining, oil, well, etc.

4. To transfer shares of stock subject only to reasonable restrictions such as the options and preferences as may be allowed by
law inclusive of the right of the transferee to compel the registration of the transfer in the books of the corporation as provided
for in Sec. 63;
5. To be issued a certificate of stock for fully paid-up shares in accordance with Sec. 64;
6. To exercise pre-emptive rights as provided for in Sec. 39;

A pre-emptive right is the shareholder’s right to subscribe to all issues or disposition of shares of any class in proportion to his
present holdings, the purpose being to enable the shareholder to retain his proportionate control in the corporation and to retain
his equity in the surplus. Except in the following cases:
a. Shares to be issued to comply with the laws requiring stock offering or minimum stock ownership by the public;
b. Shares issued in good faith in exchange for property needed for corporate purposes;
c. Shares issued in payment for previously contracted debt;
d. In case the right is denied in the Articles of Incorporation;
e. If one shareholder does not want to exercise his pre-emptive right, the other shareholders are not entitled to purchase the
corresponding shares of the shareholder who declined. But if nobody purchased the same and later on the board re-issued
the shares, the pre-emptive right applies.

7. To exercise their appraisal right in accordance with the provision of Sec. 81 and in those instances allowed by law such as
Sec. 42 and 105;

APPRAISAL RIGHT: Right is the method of paying a shareholder for the taking of his property. It is a statutory means whereby
a stockholder can avoid the conversion of this property into another property not of his own choosing.

When may it be exercised:

1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder
or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of
extending or shortening the term of corporate existence;

Not all amendments: the right may only be exercised in cases of amendment which “has the effect of changing or restricting
the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding
shares of any class, or of extending or shortening the term of corporate existence”.

Accordingly, if the amendment is to increase or decrease the number of directors, or change the corporate name, or change
of principal office, the appraisal right is not available.

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate
property and assets as provided in the Code;
 3. In case of merger or consolidation;
4. Investment of funds in another corporation or business or for any other purpose other than its primary purpose;
5. In a close corporation, a stockholder has the unbridled right to compel the corporation “for any reason” to purchase his
shares at their fair value which shall not be less than the par or issued value, when the corporation has sufficient assets to
cover its debts and liabilities, exclusive of capital stock.

Suspension of rights: the stockholder concerned is regarded as having made an election to withdraw from the corporate enterprise
and take the value of his stock. Such a procedure suspends (for a maximum period of 30 days) certain ownership rights associated
with stockholder status, such as the right to receive dividends or distribution and the right to vote which cannot be restored
without compliance with the governing statutory conditions.

8. To institute and file a derivative suit;

9. To recover shares of stock unlawfully sold for delinquency as may be allowed under Sec. 69;
10.To inspect the books of the corporation subject only to the limitations imposed by Sec. 75;
11.To be furnished by the most recent financial statement of the corporation as by Sec. 75;
12.To be issued a new stock certificate in lieu of the lost or destroyed one subject to the procedure laid down in Sec. 73;
13.To have the corporation dissolved under Sec. 118 to 121, and Sec. 105 in a close corporation;
14. To participate in the distribution of assets of the corporation upon dissolution under Sec. 122;
15. In the case of a close corporation, to petition the SEC to arbitrate in the event of a deadlock as allowed under Sec. 104;
and
16. Also, in the case of a close corporation, to withdraw therefrom, for any reason, and compel the corporation to purchase
his shares as provided for in Sec. 105.

OBLIGATIONS AND LIABILITIES:

1. To pay the corporation the balance of his unpaid subscriptions subject to the provision of Sec. 67-70;
2. To pay interest on his unpaid subscription, if required by the by-laws or by the contract of subscription in accordance with
Sec. 66;
3. To answer to the creditor for the unpaid portion of his subscription under the Trust Fund Doctrine;
4. To answer the “water” in his stocks as provided for in Sec. 65;
5. To be liable, as general partners, for all debts, liabilities and damages of determinable corporation as envisioned under Sec.
21 (corporation by estoppel); and
6. To be personally liable for torts, in the event that a stockholder in a close corporation actively participates in the management
of corporate affairs.

BY-LAWS

BY-LAWS are rules made by a corporation for its own government; to regulate the conduct and define the duties of the stockholders
or members towards the corporation and among themselves. They are the rules and regulations or private laws enacted by the
corporation to regulate, govern and control its own actions, affairs and concerns and its stockholder or members and directors and
officers with relation thereto and among themselves in their relation to it.

Effectivity: After approval by the SEC.

Adoption of by-laws: may be made:

1. Prior to incorporation – it must be signed by all the incorporators without need of the majority vote of outstanding stocks or
members as long as it is submitted together with the AOI;
2. After incorporation – must be submitted within 1 month after receipt of the notice of issuance of certificate of registration or
incorporation and must be approved by majority of the outstanding capital stock or members. Failure to file within the 1 month
period may be a ground for suspension or revocation of the corporate franchise.

Amendment of by-laws; two modes:

1. By a majority vote of the directors or trustees and the majority vote of the outstanding capital stock or members, at a regular
or special meeting called for that purpose; or
2. By the board of directors alone when delegated by stockholders owning 2/3 of the outstanding capital stock or 2/3 of the
members. This power, however, is considered revoked, when so voted by a majority of the outstanding capital stock or members
in a regular or special meeting.

MEETINGS

STOCKHOLDERS’ MEETING

Date of Regular Meeting: The date so fixed in the by-laws, if not fixed, on any date of April of very year as the BOD/T may determine.
April, because this is the time the Audited Financial Statements are already available.

Date of Special Meeting: At any time deemed necessary or as provided for in the by-laws.

Requirements of a Valid Stockholders’ Meeting:

1. It must be held on the date fixed in the by-laws or in accordance with law: the date required, as previously discussed,
admits of an exception, as when the annual meeting cannot be held on the appointed time for some valid and meritorious reasons.

2. Prior notice must be given: Written notice of regular meeting shall be sent at least 2 weeks prior to the meeting, whereas, 1
week prior notice is required for special meetings.

Exceptions: (a) If the by-laws provide for a different period for sending out notice for regular or special meetings (failure to
comply would render the resolutions adopted at the option of the stockholder who was not notified); (b) Waiver, either express
or implied.

The Notice must contain the agenda or business matter/s that may be taken up before the meeting otherwise it may become
voidable at the instance of any objecting stockholder or member.

3. It must be held at the proper place: Meeting must, at all times, be held in the city or municipality where the principal office
is located, or if practicable at the principal office of the corporation. For this purpose, Metro Manila is considered as one city or
municipality.

While there is no law allowing a STOCK corporation to hold a meeting outside the city or municipality where the principal office
is located, NON-STOCK corporations are allowed to provide a provision in its by-laws any place of members’ meeting provided
there is proper notice.

4. It must be called by the proper party: the following are authorized to call a meeting:
a. The person or persons authorized under the by-laws;
b. Absent any provision in the by-laws, it may be called by the President;
c. By the secretary on order of the president or on written demand of the stockholders representing at least a majority of the
outstanding capital stock or majority of the members entitled to vote, or the stockholder or member making the demand if
there is no secretary or he refuses to do so; and
d. A stockholder as empowered by the SEC when there is no person authorized to call a meeting, after a petition for such
purpose is filed by the stockholder.

5. Quorum and Voting Requirements must be met

General Rule: a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of
the members in case of non-stock corporations. Exception: A by-law provision may provide for a higher quorum requirement than
that prescribed in the Code, but not less.

Otherwise, the by-law provision providing for a lesser quorum requirement have no force and effect since a by-law provision is
subordinate to the statute and could not defeat the requirements of the law. The same goes for a by-law provision providing for
a voting requirement less than that provided in the Code.

If the voting requirement is met, any resolution passed in the meeting, even if improperly held or called will be valid if ALL the
stockholders or members are present or duly represented thereat, as provided under the last paragraph of Sec. 51: “All proceedings
had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation,
shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present
or duly represented at the meeting.”

DIRECTORS’/TRUSTORS’ MEETING

Regular Meetings: those held monthly or as the by-laws may provide;

Special Meetings: those that are held at any time upon call of the President or the person authorized to do so as may be provided in
the by-laws.

Place: Unlike the meeting of stockholders, the meetings of directors/trustees may be held anywhere, within or even outside the
Philippines, except when the by-laws provide otherwise.

Notice Requirement: is necessary for the purpose of determining the legality of and binding effect of the resolution/s passed, EXCEPT:
1. When subsequently ratified;
2. In close corporations where a director may bid the corporation even without a meeting;
3. When the right to a notice is waived.

The SEC has ruled that a special meeting conducted in the absence of some of the directors and without any notice to them is illegal
and the action at such meeting although by a majority of the directors is invalid, unless ratified.

However, if all the directors are present, their presence at the meeting waives the want of notice.

Presiding officer: Unless the by-laws otherwise provide, the president.

Quorum: Unless the AOI or by-laws provide for a greater majority, a majority of the members of the BOD/T as fixed in the AOI will
constitute a quorum for the transaction of corporate business and the decision of the majority of those present shall be valid as a
corporate act. EXCEPT: election of corporate officers as provided under Sec. 25 which requires the vote of a majority of all the
members of the board.

Proxy Voting: is not allowed for a director or trustee, since he was supposedly elected because of his expertise in management or his
business acumen such that he is expected to personally attend and vote on matters brought before the meeting.

REORGANIZATION; MERGER AND CONSOLIDATION

REORGANIZATION: is generally entered into to put the company upon a sound financial basis and to enable it to take care of its
obligations thereby avoiding liquidation or bankruptcy. But in some cases, a reorganization is effected notwithstanding the fact that
the corporation is solvent.

MERGER: is a union effected by absorbing one or more existing corporations by another which survives and continues the combined
business. It is the uniting of two or more corporations by the transfer of property to one of them which continue in existence, the
other or the others being dissolved and merged therein.

Example: It was agreed that B Company will take over and acquire all the business, assets, properties, rights and liabilities of C
Corporation and by virtue of which B will absorb C which is to be dissolved.

CONSOLIDATION: is the uniting or amalgamation of two or more existing corporations to form a new corporation. It signifies a
union as necessarily results in the creation of a new corporation and the termination of existence of old ones. The united concern
resulting from such union is called consolidated corporation.

Thus, in the example given, if B and C agreed to form a new corporation, A Company, which will absorb both business, and all of
B’s and C’s assets, properties, rights and liabilities are transferred to A which will continue their combined business while B and C
will be dissolved, a consolidation takes place.

In effect, in a consolidation, the constituent corporations are all dissolved, while in a merger, the absorbing or surviving corporation
is not, only the absorbed.

REQUIREMENTS AND PROCEDURE TO ACCOMPLISH MERGER OR CONSOLIDATION:

1. The BOD/T of each constituent corporations shall approve a plan or merger or consolidation setting for the matters required in
Sec. 76;
2. Approval of the plan by the stockholders representing 2/3 outstanding capital stock or 2/3 of the member in non-stock
corporations of each of such corporations at separate corporate meetings called for the purpose;
3. Prior notice of such meeting, with a copy or summary of the plan of merger or consolidation shall be given to all stockholders or
members at least 2 weeks prior to the scheduled meeting, either personally or by registered mail stating the purpose thereof;
4. Execution of the articles of merger or consolidation by each constituent corporations to be signed by the president or vice-
president and certified by the corporate secretary or assistant secretary setting forth the matters required in Sec. 78;
5. Submission of the articles of merger or consolidation in quadruplicate to the SEC subject to the requirement of Sec. 79 that if it
involve corporations under direct supervision of any other government agency or governed by special laws the favorable
recommendation of the government agency concerned shall first be secured; and
6. Issuance of the certificate of merger or consolidation by the SEC at which time the merger or consolidation shall be effective. If
the plan, however, is believed to be contrary to law, the SEC shall set a hearing to give the corporations concerned an opportunity
to be heard upon notice and thereafter, the Commission shall proceed as provided in the Code.

EFFECTS OF MERGER OR CONSOLIDATION:

1. There will only be a single corporation. In case of merger, the surviving corporation or the consolidate corporation in case of
consolidation;
2. The termination of corporate existence of the constituent corporations, except that of the surviving corporation or the
consolidated corporation;
3. The surviving corporation or the consolidated corporation will possess all the rights, privileges, immunities and powers and shall
be subject to all the duties and liabilities of a corporation organized under the Code;
4. The surviving or consolidated corporation shall possess all the rights, privileges, immunities and franchises of the constituent
corporations, and all property and all receivables due, including subscriptions to shares and other choses in action, and every
other interest of, or belonging to or due to the constituent corporations shall be deemed transferred to and vested in such
surviving or consolidated corporation without further act or deed; and
5. The rights of creditors or any lien on the property of the constituent corporations shall not be impaired by the merger or
consolidation.

LIQUIDATION: There would be no need to liquidate or wind-up the affairs of the corporation because (1) there are no assets to
distribute; (2) no debts and liabilities to pay – since all these are transferred to the surviving or consolidated corporation.
NON-STOCK CORPORATIONS

A non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, except
upon dissolution. Any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or
proper, be used for the furtherance of the purpose or purposes for which the corporation was organized.

The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may be covered
by specific provisions pertaining to non-stock corporations.

Non-stock corporations may be organized or formed for any purpose or purposes allowed or indicated in the above provision. The
enumeration, however, is not exclusive as the law itself recognizes similar or allied purpose or purposes for which non-stock
corporations may be organized. Recreational, sports club, athletic or allied activities of similar import, for instance, may likewise be
lawful purpose of a non-stock corporation.

Voting rights: Cumulative voting is generally not allowed, accordingly, even if the members may cast as many votes are there are
trustees to be elected, he may not cast more than one vote for one candidate, UNLESS: allowed in the AOI or the by-laws.

Classification of membership: the by-laws or the AOI may provide for classification as to members with voting or non-voting rights,
since it is provided that “the right of the members of any class or classes to vote may be limited, broadened or denied”.

Proxy voting: Generally, allowed unless disallowed by the AOI or the by-laws.

Voting other than in person: may also be allowed by the AOI or by-laws. Contrary to a stock corporation, a stockholder has to vote
in the meeting called for the purpose except in case of a general amendment where “written assent” is allowed.

Membership: non-stock corporations have the right to adopt rules prescribing the mode and manner in which membership thereat
can be obtained or maintained. This includes the right to limit membership. In other words, membership in non-stock corporations
may be acquired by complying with the provisions of its rules prescribed in the by-laws. This is in consonance with the express power
granted by law authorizing them to admit members thereof and that authority carries with it the power to prescribe rules on
membership.

It has thus been stated that in the absence of charter or statutory restrictions, non-stock corporations may determine who shall be
admitted to membership and how they shall be admitted. It may exclude any person whom it deems unfit for membership. Indeed,
in the absence of restrictions, it may act arbitrarily and exclude any persons it may see fit, and the courts have no power to interfere.
In other words, it is free to fix qualifications for membership and to provide for termination of membership.

Termination of membership: membership may be terminated in the manner and for causes provided in the AOI or by-laws and when
a member is so terminated it shall extinguish all his rights in the corporation or in its property unless otherwise provided in the said
articles or by-laws.

The power or authority to terminate members in non-stock corporations is said to be inherent but strict compliance with the manner
and procedure laid down in the by-laws must be observed, otherwise it may render the expulsion ineffective and invalid.

In the absence of any provision in the AOI or by-laws relative to the manner and causes of termination or expulsion of member, the
decided weight of authority is to the effect that the power is inherent and may be exercised in certain situations, namely:
1. When an offense is committed which, although it has no immediate relation to a member’s duty as such, it is so infamous as to
render him unfit for society of honest men, and which is indictable at common law;
2. When the offense is a violation of his duty as member of the corporation; and
3. When the offense is of a mixed nature, being both against his duty as a member of the corporation, and also indictable at
common law.

As to whether or not a member should be expelled or maintained is the established right of the corporation to determine and the
courts are without authority to strip a member of his membership without cause.

Trustees: constitute the governing board or body of a non-stock corporation.

Qualifications:
1. He is a member of the association;
2. Majority thereof must be residents of the Philippines; and
3. Other qualifications as may be provided for in the by-laws.

Disqualifications and Removal: of members of the board of directors of a stock corporation also applies to trustees.

Number of trustees: may exceed 15 as may be fixed in the AOI or by-laws, contrary to a stock corporation whose BOD must not
exceed 15 members.
Term: Sec. 92 allows the AOI or by-laws to provide a desired term of office and may vary depending on the needs of a specific
corporation. However, a term in excess of 5 years is not allowed as it would unduly deprive other members to take active part in
corporate management.

Staggered term: The term of office may also be staggered unless the AOI or by-laws otherwise provide. If such be the case, the
board shall classify themselves in order that 1/3 of their number shall expire every year and subsequent elections of trustees
comprising 1/3 shall be held annually. The trustees so elected to fill up any vacancy occurring before the expiration of a particular
term shall hold office only for the unexpired portion of his predecessor.

Election of Officers: one of the significant features of a non-stock corporation is that it allows the AOI or by-laws to provide that the
officers thereof shall be directly elected by the members. Unlike in a stock corporation where corporate officers are elected by the
BOD.

Place of Meeting: another distinctive feature of a non-stock corporation is that membership meeting may be held anywhere in the
Philippines whereas in a stock corporation, the stockholders’ meeting is mandated to be held or conducted within the city or
municipality where the principal office is located, and as far as practicable, within the principal office of the corporation.

CLOSE CORPORATIONS

DEFINITION: A close corporation is one whose articles of incorporation provide that:

1. All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified
number of persons, not exceeding twenty (20);
2. All the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and
3. The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class.

Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting
stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code.

Business with public interest: may not be formed as close corporation. Sec. 140 of the Code lays down a similar policy authorizing
NEDA to recommend to the legislature the setting of maximum limits to family or group ownership of stock in corporations vested
with public interest, and the determination of whether or not it should be vested with public interest within its domain. The following
cannot be a close corporation:
1. Mining companies;
2. Oil companies;
3. Stock exchanges;
4. Banks;
5. Insurance companies;
6. Public utility;
7. Educational institutions

CLASSIFICATION OF SHARES: the close corporation may classify its shares into different classes to be held of record only by
specified persons. Example: Classes A, B and C. Class A is to be held only by the incorporators; Class B by their relatives within the
third civil degree of consanguinity or affinity; Class C by their close business associates.

CLASSIFICATION OF DIRECTORS: a close corporation may provide for a classification of directors into one or more class, each
of whom may be voted for and elected solely by a particular class of stock.

Example: 1,000 Class A shares; 500 Class B shares; and 200 Class C shares. The AOI may provide that each class shall have a
representation in the BOD regardless of the number of shares within each class. So, if the close corporation has 5 directors, then the
AOI may allocate 3 directors for Class A shares, 1 for B and 1 for C. Within each class, cumulative voting may also be exercised by
the stockholders of such class to elect their representative in the board.

But to the extent that each class can elect its own directors regardless of the number of shares in such class, cumulative voting may,
in effect be restricted. This is so because if there is no provision for a classification of directors, then Class A stockholders, by
cumulating their votes (5x1000) will have 5,000 votes and can elect 3 directors with 1,666 votes each. Class B shares, having 2,500
votes can vote 2 members and Class C shares having only 1,000 votes cannot be guaranteed to any seat in the board.

QUORUM AND VOTING REQUIREMENT: a close corporation may provide for a greater quorum or voting requirement. Although
the AOI or by-laws of other stock corporations may provide for greater quorum and voting requirements in directors’ meeting as
provided in Sec. 25 of the Code, those for stockholder’ meeting, unlike in a close corporation, may not be altered or increased. This
provisions in effect, increases the veto power of the minority stockholders.

DIRECT MANAGEMENT BY STOCKHOLDERS: the AOI of the close corporation may provide that the corporation shall be managed
by the stockholders rather than by the BOD. If such be the case, the stockholders are deemed directors and are subject to all the
rights and liabilities of a director. However, their liability would be more extensive in that they are personally liable for torts unless,
again, the corporation has obtained reasonably adequate liability insurance. As distinguished from the ordinary stock corporation,
directors hereof are liable for corporate torts only if they have been negligent or acted fraudulently in the performance of their
functions. As to what is “reasonably adequate liability insurance” would vary depending on the facts and circumstances of the case.

In order that the provision allowing a close corporation to do away with a BOD may be effective, the same must contain the continuing
provisions:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose
of applying the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of directors.

ELECTION OF OFFICERS: the law allows the AOI of a close corporation to provide that all officers or employees shall be elected or
appointed by the stockholders instead of the BOD.

RESTRICTIONS ON TRANSFER OF SHARES: must appear in the articles of incorporation and in the by-laws as well as in the
certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith.

ACTIONS OF BOARD OF DIRECTORS WHEN MEETING IS NOT NECESSARY:

1. Before or after such action is taken, written consent thereto is signed by all the directors; or
2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto
in writing.

CLOSE CORPORATION ORDINARY STOCK CORPORATION

The number of stockholders cannot exceed 20
To the extent that all stockholders can be deemed directors, the
number of directors can effectively be more than 15
Shares of stock are subject to specified restrictions
Shares of stock are prohibited from being listed in the stock
exchange or offered for sale to the public
Stockholders may take an active part in corporate management
by vesting management to them rather than a Board of Director
Those active in management are personally liable for corporate
torts unless the corporation has obtained an adequate liability
insurance
Directors can validly act even without a meeting
Agreements between stockholders regarding the operations of
the business can validly be made
To the extent that directors may be classified into one or more
classes and to be voted solely by a particular class of stock,
cumulative voting may, in effect, be restricted
The articles of incorporation may provide that all officers shall
be elected or appointed by the stockholders
It may provide for greater quorum and voting requirements in
meetings of stockholders and directors
Restriction on transfer of shares should be indicated in the
articles of incorporation, by-laws and stock certificates
Pre-emptive right of stockholders is broader as it includes all
issues without exception
A stockholder may withdraw and compel the corporation to
purchase his shares for any reason with the limitation only that
the corporation has sufficient assets to cover its liabilities
exclusive of capital stock
The proper forum may interfere in the management of a close
corporation in case of deadlocks under Section 104, even of the
directors/stockholders are acting in good faith
Any stockholder may petition the SEC for corporate dissolution
on grounds among others, provides for in section 105.
No limitation as to number of shareholder
Maximum number of directors is 15
Generally no restriction on transfer of shares
No prohibition
Management is lodged in the Board of Directors
Directors are liable for torts only if they have acted negligently
or fraudulently
Directors must, as a rule, act as a body at a duly constituted
meeting
Not valid and binding since stockholders’ agreement cannot limit
the discretion of the Board to manage corporate affairs
Ordinarily, no such classification and no restrictions on
cumulative voting
Officers are elected by the Board of Directors
Although the articles of incorporation or by-laws may provide
for greater quorum and voting requirements in directors’
meeting under section 25, those for stockholders’ meeting
cannot generally be altered
Valid and binding if indicated in the articles of incorporation and
stock certificates
Pre-emptive rights may be denied as provided for in section 39
Unless he sells his shares, a stockholder cannot get back his
investment nor compel the corporation to buy his shares except
in the exercise of his appraisal right
Courts cannot interfere I the business judgment of the
directors/stockholders “BUSINESS JUDGMENT RULE”
Dissolution may be had only on the grounds provided by the
provisions of the Code on dissolution and P.D. 902-A, as
amended

DISSOLUTION

DISSOLUTION is the extinguishment of the corporate franchise and the termination of corporate existence.
When a corporation is dissolved, it ceases to be a juridical entity and can no longer pursue the business for which it was incorporated.
It will nevertheless continue as a body corporate for another period of three years from the time it is dissolved but only for the purpose
of winding up its affairs and the liquidation of its assets.

THREE WAYS OF DISSOLUTION:

1. Expiration of its corporate term

Extension: should be made before the expiration of the original term, but not earlier than 5 years prior to such expiration,
otherwise the corporation is dissolved, ipso facto.

Dissolution by shortening the term of corporate existence: A corporation may exist for 50 years, but there is no law which
prevents the shareholders thereof to shorten that period and effect a dissolution of the corporation. This, however, requires the
vote of the stockholders to be cast in a meeting therefor, not only “written assent” as for general amendments. Moreover, this
requires the approval of the SEC and its inaction is not deemed an approval therefor.

2. Voluntary surrender of its primary franchise (voluntary dissolution); and

Formal and Procedural Requirements:

a. Majority vote of the board of directors or trustees;
b. Sending of notice of each stockholders or member either by registered mail or personal delivery at least thirty (30) days
prior to the meeting (scheduled by the board for the purpose of submitting the board action to dissolve the corporation for
approval of the stockholder or members.);
c. Publication of the notice of time, place and subject of the meeting for three (3) consecutive weeks in a newspaper published
in the place where the principal office of said corporation is located or in a newspaper of general circulation in the Philippines;
d. Resolution adopted by the affirmative vote of the stockholders owning at least 2/3 of the outstanding capital stock or 2/3
of the members at the meeting duly called for the purpose;
e. A copy of the resolution authorizing the dissolution must be certified by a majority of the board of directors or trustees and
countersigned by the corporate secretary;
f. Issuance of a certificate of dissolution by the SEC.

3. The revocation of its corporate franchise (involuntary dissolution)

Grounds:
a. Fraud in procuring its certificate of registration;
b. Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or damage to the
general public;
c. Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts which would
amount to a grave violation of its franchise;
d. Continuous inoperation for a period of at least five (5) years;
e. Failure to file by-laws within the required period;
f. Failure to file required reports in appropriate forms as determined by the Commission within the prescribed period.

Other grounds provided under the Corporation Code:

a. Violation of any provision of the Code under section 144;
b. In case of deadlock in a close corporation as provided for in section 105;
c. In a close corporation, any acts of directors, officers or those in control of the corporation which is illegal or fraudulent or
dishonest or oppressive or unfairly prejudicial to the corporation or any stockholder or whenever corporate assets are being
misapplied or wasted under section 105.

EFFECTS OF DISSOLUTION: Dissolution terminates its power to enter into contracts or to continue the business as a going concern.

The SC held that a corporation, whose corporate life expired, cannot lawfully pursue the business for which it was organized. It cannot
apply for a new certificate or a secondary franchise for it is incapable of receiving a grant (Buenaflor vs. Camarines Sur Industry
Corp). Neither can it enforce a contract executed prior to its dissolution for the purpose of continuing the business of its organization
(Cebu Ports vs. State Marine).

Debts due to or by a corporation are not extinguished. It has thus been held that the termination of the life of a juridical entity does
not, by itself, imply the diminution or extinction of rights demandable against such juridical entity (Gonzales vs. Sugar Regulatory
Adm.)

Despite its dissolution, a corporation nonetheless, continues to be a body corporate for a period of 3 years for purposes of liquidation
and winding up its affairs (Sec. 122). Upon expiration of the 3-year period to wind up its affairs, the juridical personality of the
corporation ceases for all intent and purposes, and as a general rule, it can no longer sue and be sued.

LIQUIDATION AND WINDING-UP:

1. The assets are collected and sold;
2. The rights and claims of creditors are settled;
3. The remaining assets, if any, are distributed to the stockholders.

Liquidation can be taken up in any of the following manner:

1. By the corporation itself through the BOD
a. This is the usual method or procedure of liquidating a corporation (China Banking Corp vs. Michelin) and although there is no
law authorizing it, neither is there anything that prohibits the BOD from undertaking the same
b. If this method is resorted to, the board will only have a period of 3 years to finish its task of liquidation
c. Claims for or against the corporate entity not filed within the period will become unenforceable as there exist no corporate
entity against which they can be enforced.
d. Actions pending for or against the corporation when the 3-year period expires are abated, since after the period, the
corporation ceases for all intents and purposes and is no longer capable of suing or being sued (National Abaca & Other Fibers
Co. vs. Pore)

2. By a trustee appointed by the corporation

a. The corporation may opt to convey all corporate assets to a trustee who will take charge of liquidation
b. If this method is used, the three-year period limitation imposed by section 122 will not apply provided the designation of the
trustee is made within that period.
c. Thus, during the period of liquidation, but before the completion thereof, a dissolved corporation is still liable for all its debts
and liabilities in an action filed against it through its trustee even if the case is filed beyond the 3-year period of liquidation.

3. By appointment of a receiver
a. A receiver may be appointed by the proper forum on petition or moto proprio upon the dissolution of the corporation (Sec.
119)
b. The appointment of a receiver is, however, permissive rather than mandatory and the law tends to recognize that in cases of
voluntary dissolution there is no occasion for the appointment of a receiver except under special circumstances and upon
proper showing (China Banking vs. Michelin)
c. If a receiver is appointed, the 3-year period fixed by law within which to complete the task of liquidation will not likewise
apply because the dissolved corporation is substituted by the receiver who may sue or be sued even after that period (Sumera
vs. Valencia).
d. Thus, it has been held that when a corporation is dissolved and the liquidation of assets is placed in the hands of a receiver
or assignee, the 3 year period is not applicable and the assignee may institute all actions leading to the liquidation of the
corporation even after the expiration of 3 years.
e. Note however, that a receiver may be appointed by the court even while the corporation is a going concern and does not
always imply dissolution of a corporation.

FOREIGN CORPORATIONS

A FOREIGN CORPORATION is one formed, organized or existing under any laws other than those of the Philippines.

Incorporation Test: is applied in determining whether a corporation is domestic or foreign. If it is incorporated in another state, it is
a foreign corporation, while if it is registered under Philippine laws, it is deemed a Filipino or domestic corporation irrespective of the
nationality of its stockholders.

Control Test: on the other hand, is used to determine corporate nationality for purposes of applying laws, e.g., prohibition to acquire
lands applicable to corporations more than 40% of which is owned by non-Filipinos.

Grandfather Rule: a method of determining the nationality of a corporation which in turn is owned by another corporation by
breaking down the entity structure of the shareholders of the corporation. The true Filipino ownership is traced all the way to the
individual stockholders of the corporation (A) owning shares in another corporation (B), by multiplying the Filipino ownership of the
first corporation (A) to the corresponding ownership of the other corporation (B).

It applies to nationalized activities or those which require whole or partial Filipino ownership.

Example: 60% of ABC Corporation’s voting stocks are owned by XYZ Corporation and 40% is owned by foreign individuals. XYZ
Corporation’s outstanding stocks, on the other hand, are 70% owned by Filipino individuals while 30% is owned by foreign
nationals. Is ABC Corporation treated as a Philippine national?

Answer: No. Applying the grandfather rule, ABC Corporation would be considered as 42% Filipino-owned only (60% * 70%)

MODES OF ENTRY OF FOREIGN CORPORATIONS:

1. Branch Office – of a foreign corporation is one which carries out the business activities of the foreign corporation itself and
derives income from the Philippines (Sec. 1, C, IRR of RA No. 7042). As such, the juridical entity involved is one and the same;
2. Representative or Liaison Office – one which deals directly with the clients of the parent company but does not derive
income from the host country and is fully subsidized by the head office. It undertakes activities such as but not limited to
information dissemination and promotion of the company’s products;
3. Local Subsidiary – A foreign corporation may form or organize a separate corporation under the Foreign Investment Act (RA
7042) by making at least a majority of the investments therein. The corporation thus formed becomes known as a local subsidiary
of the investing foreign corporation which becomes a legally independent unit governed by the laws of the Philippines. Ballantine
calls it “domestication” in the sense that the foreign corporation is granted the right to obtain a charter or organize itself into a
domestic corporation under the general laws of the other state;
4. Regional or Area Headquarters – is an office whose purpose is to act as an administrative branch of a multinational company
engaged in international trade which principally serves as a supervision, communications and coordinating center for its
subsidiaries, branches or affiliates in the Asia-Pacific Region and other foreign markets and which does not earn or derive income
in the Philippines (Sec. 2(2), RA 8756). It cannot in any manner, participate in the management of any subsidiary or branch
office in the Philippines nor shall it market goods and services in behalf of its mother company, branches or affiliates.
5. Regional Operating Headquarters – is a foreign business entity which is allowed to derive income in the Philippines by
performing qualifying services exclusively to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region
and in other foreign markets (Sec. 2(3), RA 8756).

Qualifying services, under RA 8756, include among others: general administration and planning, business planning and
coordination, sourcing or procurement of raw materials and components, corporate finance advisory services, marketing control
and sales promotion, training and personnel management, logistic service, research and development services and the like.

The Regional or Area Headquarters and Regional Operating Headquarters are granted certain tax incentives such as exemption
from all kinds of local taxes, fees or charges imposed by local government units except real property tax on land improvements;
tax and duty-free importation of training materials and equipment; and importation of motor vehicles.
6. Regional Warehouse – one whose activities are limited to serving as supply depot of Regional or Area Headquarters or
Regional Operating Headquarters in the Philippines, after securing a license therefor from the Philippine Economic Zone Authority
(PEZA) or the concerned ecozone authorities. The regional warehouse shall only be used for the storage, deposit and safekeeping
of its spare parts, components, marking, labelling and cutting or altering to customer’s specifications but shall not directly engage
in trade nor solicit business, promote any sale nor enter into contracts for the sale or disposition of goods in the Philippines,
except those for delivery to an authorized distributor in the country.
7. Joint Venture – is a one-time grouping of two or more persons, natural or juridical, for carrying out a specified undertaking.
Under Sec. 1, L of RA 7042, it is combination of property, money, efforts, skill or knowledge to carry out a single business
enterprise for profit, which is duly registered with the SEC as a corporation or partnership. No license to do business is required
on the part of the foreign corporation entering into such kind of a business venture since mere investment does not constitute
doing business as per the Implementing Rules and Regulations of RA 7042 unless, of course, the foreign corporation actively
participates in the management thereof.

RESIDENT AGENT: As a condition precedent to the grant of license to do or transact business in the Philippines, the foreign
corporation is required to designate its resident agent on whom summons and other legal processes may be served in all actions or
legal proceedings against such corporation.

LICENSE REQUIREMENT AND DOING BUSINESS WITHOUT ONE: A foreign corporation must secure the necessary license
before it can transact or do business in the Philippines.

Without a license: a foreign corporation shall NOT be permitted to maintain or intervene in any action, suit or proceeding in any court
or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under Philippine laws.

CAPACITY TO SUE OR BE SUED:

WHETHER OR NOT IT CAN SUE:

1. A foreign corporation transacting or doing business in the Philippines with a license can sue before Philippine Courts;
2. Subject to certain exceptions, a foreign corporation doing business in the country without a license cannot sue in Philippine
Courts; and
3. If it is not transacting business in the Philippines, even without a license, it can sue before the Philippine Courts.

“It is not the lack of required license but doing business without a license which bars a foreign corporation from
access to our courts” (Universal Shipping vs. IAC)

EXCEPTIONS:
1. Foreign corporations can sue before the Philippine Courts if the act or transaction involved is an “isolated transaction” or the
corporation is not seeking to enforce any legal or contractual rights arising from, or growing out of, any business which it has
transacted in the Philippines (Western Equipment Supply vs. Reyes)
2. Neither is a license required before a foreign corporation may sue before the forum if the purpose of the suit is to protect its
trademark, trade name, corporate name, reputation or goodwill; (Western Equipment Supply vs. Reyes)
3. Or where it is based on a violation of the Revised Penal Code (Le Chemise Lacoste, SA vs. Fernandez);
4. Or merely defending a suit filed against it (Time, Inc. vs. Reyes)
5. Or where a party is estopped to challenge the personality of the corporation by entering into a contract with it (Communications
Materials and Design, Inc. vs. CA and ITEC)
WHETHER OR NOT IT CAN BE SUED:
1. A foreign corporation transacting business in the Philippines with the requisite license can be sued in Philippine Courts;
2. A foreign corporation transacting business in the Philippines without a license can be sued in Philippine Courts;
3. If it is not doing business in the Philippines, it cannot be sued in Philippine Courts for lack of jurisdiction.

“DOING BUSINESS”: As to what constitutes “doing business” or “transacting business” which would bar a foreign corporation from
access to our courts, no general rule or governing principle can be laid down. Indeed, such case must be judged in the light of its
peculiar environmental circumstance. However, the TRUE TEST seems to be whether the foreign corporation is continuing the body
or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over
to another. The term implies a continuity of commercial dealings and arrangements and contemplates, to the extent, the performance
of acts or works or the exercise of some functions normally incident to and in progressive prosecution of, the purpose and objects of
its organization (Metholatum, Inc. vs. Mangaliman)

Doing business in the Philippines may be determined using the following tests:
1. Continuity test – doing business implies a continuity of commercial dealings and arrangements and contemplates to some extent
the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of the
purpose and object of its organization;
2. Substance test – a foreign corporation is doing business in the country if it is continuing the body or substance of the enterprise
of business for which it was organized
3. Contract test – actual performance of specific commercial acts within the territory of the Philippines

“DOING BUSINESS” under the Foreign Investment Act (Sec. 3, d), “doing business” would include:
1. Soliciting orders, service contracts;
2. Opening offices, whether called “liaison offices” or branches;
3. Appointing representatives or distributor domiciled in the Philippines or who in any calendar year stay in the country for a period
or periods totaling 180 days or more;
4. Participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines;
5. Any other act that imply a continuity of commercial dealings or arrangements and contemplate to that extent the performance
of acts or works, or the exercise of functions normally incident to and in progressive prosecution of commercial gain or of the
purpose and object of the business organization.

Provided, however, that the phrase “doing business” shall not be deemed to include:
1. Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or exercise of
rights as such investor, nor
2. Having a nominee director or officer to represent its interest in such corporation; nor
3. Appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own
account.

ISOLATED TRANSACTION: even if it is pursuant of the usual business does not constitute doing business the doing of which would
not bar a foreign corporation from access to Philippine Courts (Facilities Mgt. vs. Dela Osa)