Notes in Corporation Law

(Revised Corporation Code of the Philippines)

1. Can a corporation be held criminally liable?

No. A corporation cannot be held criminally liable. Philippine law generally does not impose corporate
liability for the commission of crimes. Rather, it is the responsible officers – directors, officers or employees of the
corporation who are held responsible for crimes and therefore also charged and penalized for the same.

However, if the penal law creates an offense for which a corporation may be punished and then prescribes a
fine, or both fine and imprisonment as penalty, a corporation may be prosecuted and, if found guilty, may be fined.

On the other hand, if the statute defines a crime that may be committed by a corporation but prescribes that
the penalty imposed on the officers, directors or employees of such corporation or other persons responsible for the
offense, only such individuals will suffer such penalty.

Examples of Corporate Criminal Liability: Anti-Graft and Corrupt Practices Act – Acting as
Intermediaries for graft and corrupt practices (Sec. 166), Engaging Intermediaries for Graft and Corrupt Practices
(Sec. 167), Tolerating Graft and Corrupt Practices (Sec. 168); AMLA – the penalty shall be imposed upon
responsible officers;

2. a. Subscription Contract – Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed.

b. Pre-incorporation Subscription – It is a preparatory contract among incorporators and

initial subscribers.

c. Doctrine of Indivisibility of Subscription – The law requires “full payment of

subscription. A subscription covers all stipulated shares. The corporation accepted partial payment
on the premise that the non-payment of the balance renders all subscribed shares delinquent.

A subscription of shares in a corporation still to be formed shall be irrevocable for a period of at least six
(6) from the date of subscription, unless all other subscribers consent to the revocation or the corporation fails to
incorporate within the said period or within longer period stipulated in the contact of subscription.

2. Stock Subscription - It is a contract, oral or written, between the corporation and the subscriber.

3. Consideration for Stocks – Stocks shall not be issued for a consideration less than the par issued
price thereof.

Consideration for issuance of stock may be:

a. Actual cash paid to the corporation;

b. Property, tangible or intangible, actually received by the corporation;
c. Labor actually performed for or services actually rendered to the corporation;
d. Previously incurred indebtedness of the corporation;
e. Amounts transferred from an unrestricted retained earnings to stated capital;
f. Outstanding shares exchanged for stocks in the event of reclassification or conversion;
g. Shares of Stock in another corporation; and/or
h. Other generally accepted form of consideration.

Consideration other than actual cash, or consists of intangible property, such as patents or
copyrights, the valuation thereof shall initially be determined by the stockholders or the board of directors,
subject to the approval of SEC.

Shares of stock shall not be issued on exchange of promissory notes or future service.

The issue price of no-par value shares may be fixed in the articles of incorporation or by the board
of directors pursuant to the authority conferred by the articles of incorporation or by the by-laws, or if not
so fixed, by the stockholders representing the majority of the outstanding capital stock at a meeting called
for the purpose.

The capital represents the value of assets that form as corporate trust fund, for operation and to
answer liabilities to creditors of the corporation.

4. Watered Stocks; a. shares for a consideration less than their par value or issue
price; b. shares for a non-cash consideration issued in excess of its fair value.

5. Number and Qualifications of Incorporators –

a. Any person, partnership, association, or corporation, singly or jointly with

others, but not more than 15;
 b. Incorporators who are natural persons must be of legal age and have legal
capacity to enter into a contract;

c. A single person may form a corporation sole or one-person corporation (OPC);

d. Each incorporator of a stock corporation must own or be subscriber to at least

one (1) share of the capital stock.

e. Natural persons, partnerships or associations may only form a corporation for

the purpose of exercise of a profession if so authorized by law.

6. Components of Corporation –

a. The components of the corporation include:

i. Shareholders or members;
ii. Directors or trustees
iii. Officers

b. Incorporators are those who form the corporation; the ones who compose and
fund the corporation are called corporators; those who manage the corporation are directors or
trustees; corporators of stock corporation are called stockholders or shareholders; corporators of
non-stock corporation are called members; officers are those who are specified and designated as
such or given that character by law, Articles of Incorporation or By-laws of the corporation; the
officers perform the duties enjoined on them by law or the by-laws of the corporation.

7. Formation of Corporation involves several processes:

a. Submission and reservation of corporate name;

b. Initial submission of the Articles of Incorporation and By-laws for review by
SEC’s processors;
c. Submission of signed and notarized Articles of Incorporation and By-laws; and
d. Upon approval and payment of registration fees, issuance of Certificate of
Incorporation with attached Articles of Incorporation and By-laws;

The corporate existence and juridical personality of a corporation commences from the
date the Securities and Exchange Commission issues the Certificate of Incorporation under its
official seal.

8. Articles of Incorporation as Charter and Contract –

a. The Articles of Incorporation has been described as a document that defines the
charter of the corporation.

b. The Articles of Incorporation defines the contractual relationships between the

State and the corporation, the stockholders and the State, and between the
corporation and its stockholders. (Lanuza, et al. vs. Court of Appeals, et al., G.R.
No. 131394, March 28, 2005)

c. The Articles of Incorporation are not only binding on the corporation, but also
on its stockholders. It also binds the Sate.

d. The Articles of Incorporation constitutes the constitution of the corporation.

9. Why is a corporate name important?

A corporate name is peculiarly important as necessary to the existence of a corporation. Its name
is one of its attributes, an element of its existence, and essential to its identity. It could sue and be sued in
its name and do all legal acts.

A corporate name or trade name is a property right, a right in rem.

In SEC Memorandum Circular No. 12-2008, the Commission requires that “a business or trade
name which is different from the corporate x x x name shall be indicated in the articles of incorporation x x
x. A company may have more than one business or trade name.

10. Why is place of principal office important?

The place of business of a corporation shall determine the venue of court cases involving
corporations; it may also determine if service of summons and notices was properly served. (Sy vs. Tyson
Enterprises, Inc., 119 SCRA 367 (1987).

The place of principal office is where the corporation is required to maintain its basic corporate
records;

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 It is also the place where the corporation must hold its shareholders’ or members’ meetings;

For local tax purposes, the place of principal office determines the LGU where it should register
and principally pay its tax;

A specific address is now required. (SEC Circular No. 3, Series of 2006)

11. Purpose or purposes (Purpose Clause) –

A corporation may have a primary purpose or secondary purpose/s.

Why is purpose important?

a. The directors and officers will know within what scope of business they are authorized to
act.

b. Third person who has dealings with the corporation may know by perusal of the articles
whether the transaction or dealing he has with the corporation is within the authority of the corporation.

12. Board of Directors or Trustees –

a. Repository of Corporate Powers (Corporate Management)

The board of directors or trustees shall exercise corporate powers, conduct all business
and control all properties of the corporation.

b. Tenure

Directors shall be elected for a term of one (1) year from among the holders of stocks
registered in the corporation’s books, while trustees shall be elected for a term of not exceeding
three (3 ) years from among the members of the corporation.

A director who ceases to own at least one (1) share of stock or a trustee who ceases to be
a member of the corporation shall cease to be such.

A director or trustee shall hold office until the successor is elected and qualified.

c. Qualifications and Disqualifications

As a rule, a director or trustee must have all the qualifications and none of the
disqualifications under the Corporation Code.

A director must have at least one (1) share registered under his name in the corporation’s
books.

Unlike in the Corporation Code of the Philippines, majority of directors or trustees need
not be residents of the Philippines.

Requirement of Independent Director - Corporations vested with public interest shall

have independent directors constituting at least twenty (20%) percent of such board.

Independent director is a person who, apart from shareholdings and fees received from
the corporation, is independent of management and free from any business or other relationship
which could, or could reasonably be perceived to materially interfere with the exercise of
independent judgment in carrying out the responsibilities as a director.

Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise known as
“The Securities Regulation Code”, namely those whose securities are registered with the
Commission, corporations listed with an exchange or assets of at least Fifty million pesos
(P50,000,000.00) and having two hundred (200) or more holders of shares, each holding at least
one hundred (100) shares of a class of its equity shares; and corporations mentioned in Paragraphs
(b) and (c) of Section 22, Revised Corporation Code.

A person shall be disqualified from being a director or trustee of any corporation if within
five (5) years prior to the election or appointment as such, the person was:

(a) Convicted by final judgment:

(1) Of an offense punishable by imprisonment for a period exceeding six

(6) years;

(2) For violating this Code; and

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 (3) For violating Republic Act No 8799, otherwise known as “The
Securities Regulation Code”;

(b) Found administratively liable for any offense involving fraudulent acts; and

(c) By a foreign court or equivalent foreign regulatory authority for acts, violations
or misconduct similar to those enumerated in paragraph s (a) and (b) above.

The foregoing is without prejudice to qualifications or other disqualifications, which the

Commission, the primary regulatory agency, or the Philippine competition Commission may
impose in its promotion of good corporate governance or as a sanction in its administrative
proceedings.

d. Who shall exercise corporate powers?

The Board of directors or trustees shall exercise corporate powers as provided by Section
22 of the Revised Corporation Code.

e. Reason for the Concentration of Power

The concentration of powers in the board is necessary for efficiency in any large
organization. Stockholders or members are too numerous, scattered and unfamiliar with the
business of a corporation to conduct its business directly. And so, the plan to choose directors or
members who shall manage and supervise the conduct of corporate business.

Speed and cost, motivation and expertise are also issues for consideration.

f. Business Judgment Rule

Under this rule, the will of the majority of the board members controls in corporate
affairs, and contracts intra vires entered into by the board of directors are binding on the
corporation and courts will not interfere unless such contracts are unconscionable and oppressive
as to amount to a wanton destruction of rights of the minority. Courts cannot undertake to control
the discretion of the board of directors about administrative matters as to which they have
legitimate powers of action. Judges are not experts; they cannot replace their judgments for the
judgment of the directors on business matters.

The board is the business manager of the corporation and so long as it acts in good faith
its orders are not reviewable by the courts or the Securities and Exchange Commission.

The directors are not liable to the stockholders in making decisions using their business
judgment.

Business Judgment Rule as a Defense –

Business judgment rule is a defense when: (a) the act is intra vires, or is within the
powers of the corporation; (b) the members of the board observed due care; and (c) the action has
rational business purpose, with no obvious corporate waste.

g. Election of directors or Trustees

(1) The election process starts with nomination, followed by a meeting duly called
for the purpose. The names of the duly elected directors or trustees must be immediately reported
to the Commission.

(2) The nominees shall be presented in a shareholders’ or members’ meeting duly

called for the purpose. In order to have a valid election, “there must be present, either in person or
through a representative authorized to act by written proxy, the owners of the majority of the
outstanding capital stock, or if there be no capital stock, majority of the members entitled to vote.”
In the absence of the prescribed majority, there will be failure of election.

(3) Shareholders or members may vote in person or through a written proxy. There
may be voting through remote communication or in absentia if so permitted in the by-laws, except
in corporations vested with public interest. The election may be by show of hands, or if so
requested by any shareholder or member, by poll or ballot.

(4) The law follows the plurality voting. The nominees who receive the highest
number of votes shall be elected as member of the board. To highlight, one vote cast in favor of a
director or trustee is sufficient if he is the only nominee. There is no need of the support of
‘majority of the outstanding capital stock, of if non-stock, a majority of the members entitled to
vote’.

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 The election is generally done through straight voting. In a stock corporation, cumulative
voting shall always be permitted. Cumulative voting is not generally permitted in a non-stock
corporation.

(5) Cumulative Voting. “In stock corporations, stockholders entitled to vote shall
have the right to vote the number of shares of stock standing in their own names, x x x vote such
number of shares for as many persons as there are directors to be elected, x x x (and) cumulate
said shares and give one (1) candidate as many votes as the number of directors to be elected
multiplied by the number of shares owned.”

As mentioned, the total number of votes cast should not exceed 500 (100 shares x 5 board
seats). The controlling block may cast 400 voters (80 shares x 5 board seats), while the minority
block may cast 100 votes (20 x 5 board seats). Where the minority block opts to cumulate its vote,
it may cast 100 votes for its representative. The said votes are sufficient to elect such
representative to one board seat. The controlling bloc may fill in the remaining board seats. It
should be noted that the minority director only received 100 votes. He does not have the support
of shareholders representing “majority of the outstanding capital stock.”

h. Removal of Directors or Trustees

The law provides shareholders and members the power to replace directors and trustees,
respectively, anytime and generally, for whatever reason. This collective power of the
shareholders or members to dismiss the board (or ‘shotgun’ power) is essential to address the
inefficiency, failure or abuse of the concerned directors or trustees.

Any director or trustee of a corporation may be removed from office by a vote of the
stockholders having or representing at least two-thirds (2/3) of the outstanding capital stock, or in
a non-stock corporation by a vote of two-thirds (2/3) of the members entitled to vote.

Removal shall take place either at a regular or special meeting called for the purpose, in
either case, after previous notice to the stockholders or members of the corporation of the intention
to propose such removal at a meeting.

A special meeting of the stockholders or members for the purpose of removing any
director or trustee must be called by the secretary on order of the president, or upon written
demand of the stockholders representing or holding at least majority of the outstanding capital
stock, or a majority of the members entitled to vote.

If there is no secretary or, if the secretary, refuses despite demand, fails or refuses to call
the special meeting or to give notice thereof, the stockholder or member of the corporation signing
the demand may call for the meeting b directly addressing the stockholders or members. Notice of
the time and place of such meeting, as well as of the intention to propose such removal, must be
given by publication or by written notice prescribed by the Code.

Removal may be with or without cause.

Removal without cause may not be used to deprive minority stockholders or members of
the right of representation to which they may be entitled under Section 23 and 25 of this Code.

The Commission shall, motu propio, or upon verified complaint, and after due notice and
hearing, order the removal of the director or trustee elected despite disqualification, or whose
disqualification arose or is discovered subsequent to an election.

The Commission may impose other sanctions on the directors or trustees who, with
knowledge of the disqualification, failed to remove such directors or trustee.

i. Filling of Vacancies

The law seeks to avoid a vacuum in the board. It may lead to disruption in the operation
of the corporation. Such vacuum may arise from term expiration, removal, increase in number,
death or resignation of directors or trustees.

The law requires their immediate replacement, following the procedure for their election,
subject to notice to the Commission prescribed in Sections 23 and 25 of by the shareholders or
members.

When the vacancy is due to term expiration, the election shall be held not later than the
day of such expiration at a meeting called for that purpose.

When the vacancy arises as a result of removal by the stockholders or members, the
election may be held on the same day of the meeting authorizing the removal and this fact must be
stated in the agenda and notice of the said meeting.

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 When the vacancy arises as a result of other cases, the election must be held no later than
forty-five (45) days from the time the vacancy arose. A director or trustee elected to fill a vacancy
shall be referred to as “replacement director or trustee” and shall serve only for the unexpired term
of the predecessor in office.

However, when the vacancy prevents the remaining directors or trustees from
constituting a quorum and emergency action is required to prevent grave, substantial and
irreparable damage to the corporation, the Code has permitted the creation of the “Emergency
Board”.

The law authorizes the remaining members of the board, by unanimous vote, to designate
a “Replacement Director or Trustee” for the sole purpose of addressing the emergency. The
designee shall be chosen from among the corporate officers. The corporation must notify the
Commission within three (3) days from creation of the emergency board.

The tenure of the designee shall end within a reasonable time from the termination of the
emergency, or upon the election of the replacement director or trustee (through shareholders or
members action, whichever is earlier.

j. Compensation of Directors or Trustees

The law does not generally authorize the payment of compensation to a shareholder or
member as director or trustee, because the election or appointment to the board is a consequence
of ownership. An owner or member is ordinarily expected to assume the post of director or trustee
and manage the corporation for his ultimate benefit, except: (a) for reasonable per diem; (b) when
there is any provision in the by-laws fixing the the compensation of directors or trustees; and (c)
when the stockholders representing at least majority of the outstanding capital stock or majority of
the members may grant directors or trustees with compensation and approve the amount thereof at
a regular or special meeting.

The total yearly compensation of directors or trustees must not exceed ten percent (10%)
of the net income before income tax of the corporation during the preceding year.

Directors or trustees shall not participate in the determination of their per diem or
compensation.

Corporations vested with public interest shall submit to their shareholders or members
and the Commission, an annual report of the total compensation of their directors or trustees.

k. Compensation of Executive Directors or Trustees

A director or trustee may be appointed as corporate officer, like President. His

compensation is not subject of limitation as provided by Section 29. It is a product of negotiation
between a corporation and the corporate officer, for his services and not for his appointment as a
member of the board.

l. Three-fold Duties of Directors or Trustees (Section 30)

The three-fold duties of directors or trustees, i.e. duties of obedience, care (diligence, and
loyalty. Corporate officers have similar duties as agents of the corporation. In such a case, the law
on agency primarily determines their civil liability in case of breach of such duties.

The law provides consequences of breach of the concerned directors or trustees, namely:
(a) personal joint and several liability for all resulting damages suffered by the corporation, its
shareholders or members and other concerned stakeholders; (b) fiduciary liability as trustee for
profits that would have accrued to the corporation; and (c) administrative and criminal liability.

(1) Duty and Obedience

Directors and trustees must “perform their duties as prescribed by law,

ruled of good corporate governance and by-laws of the corporation. They can
perform and exercise the powers conferred on the corporation by the
Corporation Code” and “by its articles of incorporation and except as necessary
or incidental to the exercise of the powers conferred.” Thus, a breach of duty of
obedience may arise from ultra vires acts or unlawful acts.

(2) Duty of Care

Members of the board must exercise great care in directing the affairs
of the corporation. However, to make them personally liable, there must be
“gross negligence of bad faith.” Simple negligence does not give rise to such
liability.

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 Members of the board must: (a) take steps to sufficiently inform
themselves of relevant information before making a decision, and (b) act in good
faith and in the honest belief that their action is in the best interest of the
corporation. The first standard (process due care) is objective and the second
(substantive due care) is subjective.

(3) Duty of Loyalty

In general, directors or trustees, and agents have the duty to promote

the interest of their respective beneficiaries. It is the basic fiduciary duty. The
members of the board as special fiduciaries have the duty to promote the success
of the corporation. They must not “acquire any personal al pecuniary interest in
conflict with their duty as directors or trustees.” Further, they must not “attempt
to acquire, or acquire any interest adverse to the corporation in respect of any
matter which has been reposed in them in confidence, and upon which, equity
imposes a disability upon themselves to deal in their behalf. ” Thus, they must
not accept bribes or commissions from third parties.

Observance of duty of loyalty is relevant when directors or trustees

enter into a contract with the corporation (“self-dealing contract”), negotiate on
their compensation, and personally acquire a corporate opportunity.

m. Disloyalty

There is disloyalty when a director or trustee takes away for himself a business
opportunity that property belongs to the corporation, thereby obtaining profits to the
prejudice of such corporation.

The director or trustee must account for and refund to the corporation all such
profits.

n. Dealings of Director, Trustees or Officers with the Corporation

The function of the directors, trustees or officers requires their loyalty to the
corporation. They must avoid conflict of interest. In directing its affairs, they
must not extract profits from the corporation. They must neither sell overvalued
properties to or buy undervalued properties from the corporation. They must
consider its best interest and take actions that will benefit the corporation.

o. Contracts Between Corporation with Interlocking Directors or Trustees

As a rule, a self-dealing contract between corporations with interlocking directors

or trustees is valid.

This includes cases where both interests of the directors and trustees in the
contracting corporation is nominal or substantial. However, there must be no fraud or
misrepresentation, and the contract must be fair and reasonable.

p. Concept of Corporate Opportunity

A corporate business opportunity can be in various forms. It can be an

opportunity developed by a director making use of corporate information or properties.

It can be an opportunity developed by a director who has been tasked by the

board to precisely develop such opportunity.

It can be an opportunity that has come to the director, because of his position in
the corporation, and he would not have it if not for such position in the corporation.
Finally, it is an opportunity within the corporation’s existing or expected line of business.

It can be ratified by a vote of stockholders owning or representing at least 2/3 of

the outstanding capital stock.

q. Executive Committee and other Special Committees

The board may create executive committee or special committees for operational
efficiency. “In view of the multi-faceted and comprehensive duties of the Board
associated with their over-all final responsibility of ‘managing the affairs of the
corporation,’ the Board needs to structure itself and adopt a Board protocol to guide its
own internal processes. It should also consider creating specialized committees to aid it in
the performance of its functions.”

1. Executive Committee

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 The Board may delegate its managerial authority to an executive
committee, but only when authorized in the by-laws. The executive committee
must be comprised of at least three directors or trustees.

The decision of the executive committee is considered a decision of the

board. It is also called a “small Board”.

The said committee may act, by majority vote of all its members, on
such specific matters within the competence of the board, as may be delegated to
it in the by-laws or by majority vote of the board.

However, the law does not permit an executive committee to: (a)
initiate extraordinary actions needing stockholders’ or members’ approval; (b)
fill vacancies in the board, amend or repeal by-laws or any board resolution
which by its express terms is not amendable or repealable; and (c) distribute
cash dividends.

2. Special Committees

The board may create special committees, even if not explicitly

authorized in the by-laws. Such committees need not be comprised of directors
or trustees, and may be temporary or permanent in nature. The Board may
determine the members’ terms, composition, compensation, powers, and
responsibilities.

A special committee may be created for ‘policy formulation.’

The board may assign them to perform tasks for consideration of the
board. Their action does not have the effect of a board decision.

13. Meetings

Corporate meetings may only be undertaken following the collective decision of the
concerned body, in a properly convened meeting. The law provides very limited exceptions. All
members of such body must be given sufficient notice and reasonable opportunity to prepare,
attend, and actively participate in the meeting.

In order to have a valid meeting: (a) it must be held at the stated date (per by-laws) and
appointed time or at a reasonable time thereafter; (b) there must be previous notice; (c) it must be
called by the proper person; (d) it must be held at the proper place; and (c) there must be quorum.
A mere referendum without a meeting is not sufficient. The meeting permits shareholders or
members to participate during the deliberations.

a. For shareholders’ or members’ meetings –

(1) Annual meeting, in the absence of specific provision in the by-

laws, may be set “on any date after April 15 of every year, “ substituting “on any
date in April of every year.”

(2) Notice must be sent at least 21 days (replacing “at least two
weeks”) prior to the meeting. At least 21 days, which is longer than two weeks
by seven days, is the standard corporate governance practice.

(3) The closure of the stock and transfer book at least 20 days for
regular meetings, and seven days for special meetings, before the scheduled date
of the meeting. The by-laws may provide for a longer period.

(4) Meetings may be held in the principal office of the corporation

as stated in the articles, or if not practicable, in the city or municipality where
such office is located. Any city or municipality in Metro Manila, Metro Cebu or
Metro Davao, and other metropolitan area shall be considered a city or
municipality. This replaces the order in the old Code mandating the meeting
should be held in the city or municipality where the principal office is located,
and if not practicable in the principal office of the corporation. This changes the
concept that of Metro Manila being considered as a big city or municipality. The
change thus limits place of meetings to the principal office and the city or
municipality where the principal office is located, disregarding other cities of
municipalities even though parts of the same metropolitan area.

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 (5) The Chairman (replacing the president) presides meetings of
the board, shareholders or members. However, in the absence of the Chairman,
the president presides the meetings.

(6) The board must endeavor to present the prescribed

information to the shareholders or members.

(7) A director, trustee, stockholder, or member may propose any

other matter for inclusion in the agenda at any regular meeting of stockholders
or members.

(8) A stockholder or member may propose the holding of a

special meeting and items to be included in the agenda.

(9) Should there be postponement of the annual meeting, the

prescribed notice must be sent to all shareholders or members at least two weeks
prior to the next scheduled meeting. The shorter period is justified since there
has been a prior longer notice to the postponed meeting.

(10) Secured creditors and administrators may vote the shares

through proxies.

b. For board meetings

(1) Notice of regular or special meetings of directors or trustees

must be sent to every director or trustee at least two days (replaces “at least one
day”) prior to the scheduled meeting, unless othe4rwise provided by the by-
laws.

(2) The Code mandates that a director or trustee to disclose a

potential interest in, and to recuse from voting on the approval of, the related
party transaction, subject to proper treatment of self-dealing contracts. This
reinforces the requirements that his presence should not be necessary to
constitute a quorum, and his vote for the approval for the contract. Simply put,
the conflicted director or trustee is better off being absent at the meeting. It is his
mere physical presence that could be the source of undue influence, even if such
presence is not necessary for quorum or his vote necessary for approval of the
contract.

(3) Despite the silence of by-laws, directors or trustees who

cannot physically attend or vote in person at board meetings can participate and
vote through remote communication, such as videoconferencing,
teleconferencing, or other alternative modes of communication that allow them
reasonable opportunities to participate.

The Code sets the framework for virtual meetings and electronic means to send
notices.

c. Kinds of meetings –

Meetings of directors, trustees, stockholders, or members may be

regular or special.

(1) Regular and Special Meetings of Stockholders or Members

(i) Regular meetings of stockholders or members shall be held

annually on a date fixed in the by-laws, or if not fixed on any date after April 15 of the of
every year as determined by the board of directors or trustees: Provided, That written
notice of regular meetings shall be sent to stockholders or members of record at least
twenty-one (21) days prior to the meeting, unless a different period is required in the by-
laws, law, or regulation: Provided further, that written notice may be sent to all
stockholders or members of record through electronic mail or such other manner as the
Commission shall allow under the guidelines.

(ii) Special meetings of the stockholders or members shall be held at any

time deemed necessary or as provided in the by-laws: Provided, however, That at least
one (1) week written notice shall be sent to all stockholders or members, unless a
different period is provided in the by-laws, law, or regulation.

(iii) Notice of Meetings - Notice of meetings shall be sent through means of

communication as provided in the by-laws, which notice shall state the time, place and
purpose of the meetings.

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 (iv) Notice of meeting may be waived, expressly or impliedly, by any
stockholder or member. General notice of waivers in the articles of incorporation or by-
laws shall not be allowed. Attendance at a meeting shall constitute a waiver of notice of
such meeting, except when the person attends the meeting for the purpose of objecting to
the transaction of any business, because the meeting is not lawfully called or convened.

(v) Place and time of Meetings of Stockholders or Members - The place

and time of meetings of stockholders, whether regular or special, shall be held in the
principal office of the corporation as set forth in the articles of incorporation, or if not
practicable, in the city or municipality where the principal office of the corporation is
located.

(vi) Quorum in Meetings – Unless provided in the Code or by-laws, 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.

(vii) Quorum in Stock Corporation – Generally, there is quorum when there

is presence in person or proxy of stockholder representing a majority of the outstanding
capital stock.

Shares in the name of the deceased stockholder should be counted. As long as

they have been duly appointed by the court, executors or administrators do not need
proxy in their favor from the heirs.

(viii) Quorum in Non-stock Corporations – For non-stock

corporations, “only those who are actual, living members with voting rights
shall be counted in determining the existence of a quorum during members
meetings. Dead members shall not be counted. X x x (The) majority of the
members representing the actual number of voting rights, not the number or
numerical constant that may originally be specified in the articles of
incorporation, constitutes the quorum.” (Tan et al. v. Sycip and Lim, G.R. No.
153468, dated August 17, 2006. Generally, membership is non-transferable.

(ix) Quorum in Special Cases – In the election of directors or

trustees, the Code requires the presence of “owners of majority of outstanding
capital stock, or there be no capital stock, a majority of the members entitled to
vote. It does not admit a contrary stipulation.

(x) Voting Requirement - As a rule, the vote of “majority of the

quorum” is sufficient to pass a resolution. However, with regard to the election
of director or trustee, he shall be declared elected if he receives the highest
number of votes cast during the meeting.

(2) Regular and Special Meetings of Directors or Trustees

(i) Quorum - the law requires presence of majority of directors or

trustees to have quorum for the meetings. However, the articles or by-laws may
provide for a greater majority.

(ii) Voting Requirement – As a rule the vote of “majority of the

quorum” is sufficient to pass a valid resolution. However, the vote of the
“majority of all the members” of the board is necessary to appoint corporate
officers. This means 1/2 plus one of the total number of directors or trustees, as
fixed in the articles of incorporation. The same is true even when there is
vacancy in the board, The majority of the quorum rule does not apply.

(iii) Liability of Directors or Officers of Watered Stocks

A director or officer of a corporation who:

(a) Consents to the issuance of stocks for a consideration less

than its par or issued value;

(b) Consents to the issuance of stocks other than cash,

valued in excess of its fair value; or

(c) Having knowledge of the insufficient consideration,

does not file a written objection with corporate secretary, shall be liable
to the corporation or its creditors, solidarily with the stockholder
concerned for the difference between the value received at the time of
issuance of the stock and the par or issued value of the same.

14. Certificate of Stocks

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a. Subscription Contract

Any contract for the acquisition of unissued stock in an existing corporation or a

corporation still to be formed. It is a contract between a corporation and a subscriber.

A subscription of shares in a corporation still to be formed.

b. Pre-incorporation Subscription

It is a preparatory contract among incorporators and initial subscribers. It is

irrevocable within the stipulated period no earlier than six months from subscription. It
may not be revoked after the articles of incorporation is submitted to the Commission.

c. Shares of Stock are personal properties

They represent political and economic rights over the corporation.

Political rights: (a) attend meetings; (b) elect and be elected as

directors; (c) approve the exercise of special corporate powers; (d) access basic
corporate information and inspect corporate records.

Economic Rights: (a) the right to dividends; (b) the right to transfer shares;
and (c) the right to receive residue assets, following the corporation’s partial or full
liquidation.

d. Certificate of Stocks and Transfer of Shares

The capital stock of a corporations is divided into shares for which certificates
signed by the president or vice president, secretary or assistant secretary, and sealed with
the seal of the corporation, shall be issued in accordance with the by-laws.

Shares of stock so issued are personal property and may be transferred by

delivery of the certificate or certificates indorsed by the owner, his attorney-in-fact, or
any other person legally authorized to make the transfer.

No transfer, however, shall be valid, except as between the parties, until the
transfer is recorded in the books of the corporation showing the names of the parties to
the transaction, the date of transfer, the number of the certificate or certificates, and the
number of shares transferred.

e. Issuance of Stock Certificates

No certificate of stock shall be issued to a subscriber until the full amount of the
subscription together with interest and expenses (in case of delinquent shares), if any is
due, has been paid.

f. Rights of Shareholders or Members

(i) Political and economic rights

(ii) Right to disassociate from the corporation, and
(iii) File court action to protect their rights.

g. Right to Disassociate

The law permits the shareholders to exit the corporation by sale, transfer or
conveyance of their shares; members may resign or terminate their membership
therewith.

h. Right to Institute court Action

Shareholders or members may institute a court action to protect, and seek

redress for violation of their rights, such as: individual suit, class suit, and derivative suit.

(1) Individual suit

An individual suit is filed when the cause of action personally belongs

to the shareholder or member. He must bring the action in his own name, and
pay for the corresponding costs of litigation. Example: Stockholder is denied
the right to receive dividends.

(2) Class Suit

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 A class suit is filed when the cause of action belongs to a group of
shareholders or members. This refers to claims involving oppression of minority
shareholders, shareholders voting rights, and pre-emptive rights; shareholder
may exercise his appraisal right.

(3) Derivative Suit

It is an action initiated by a shareholder or member in the name of and

for the benefit of the corporation against the management of controllers of the
corporation. The cause of action belongs to the corporation. The cause of action
is generally premised on the breach of duty, care and loyalty. The benefits of the
action will accrue to the corporation and not to the shareholders of members
who instituted the action.

In Cua, Jr. vs. Tan, GR No. 181455-56 and 182008, December 4, 2009,
differentiates derivative suit and an individual/class suits:

“Xxx where a stockholder or member is denied of inspection, his suit

would be individual because the wrong is done to him personally and not to
other stockholders or members or the corporation. Where the wrong is done to a
group of stockholders, as where preferred stockholders’ rights are violate, a
class or representative suit will be proper for the protection of all stockholders
who belong to the same group. But where the acts complained of constitute a
wrong to the corporation itself, the cause of action belongs the corporation and
not to the individual stockholders or members. X x x.”

Requirements in filing a derivative suit:

To institute a derivative suit, the petitioner must allege in his complaint

that he is suing for and in behalf of the corporation based in the derivative cause
of action;

He must implead the corporation as an indispensable party, which will

be bound the court’s judgment.

In such actions, the suing stockholder or member is regarded as the

nominal party, with the corporation as the party-in-interest.

In a derivative suit, the petitioning stockholder or member must

specifically allege that:

(a) Violation of directors’ or trustees’ duties to the prejudice of

the corporation;

(b) Prior demand to the board to initiate the required action;

(c) Unjustified refusal of the board to institute such action;

(d) The exercise of appraisal right is not available;

(e) The action is not a nuisance suit;

(f) Further, the action must be filed within the prescribed period.

As a rule, a stockholder or member must make a demand to the board to redress

the wrong. Derivative suit is the final recourse of the stockholder or member, after all
remedies to obtain relief sought had failed.

i. Interest on Unpaid Subscription

Subscribers of stocks shall be liable to the corporation for interest on all unpaid
subscriptions from the date of subscription, if so required, at the rate of interest fixed in
the subscription contract. The prevailing legal rate shall apply.

j. Payment of Balance of Subscription

The unpaid subscription must be paid in accordance with terms of the

subscription contract. In the absence of such terms, the payment must be made upon call
of the board and on the date specified in the call. The corresponding interest, if stipulated,
must be paid together with the unpaid subscription that is due on the stipulated date or
call. If no payment is made within thirty (30) days, from the said date, all stocks covered
by subscription shall therefrom become delinquent and shall be subject to sale.

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 The subscriber is not considered a corporate debtor for the unpaid subscription.
There is no interest on unpaid subscription, unless expressly stipulated in the subscription
contract.

i. Delinquency Sale

The law allows the collection of the entire amount through a public auction. The
winning bidder will pay the entire amount due, for the least number of shares. It covers
the unpaid subscription, accrued interest, if any, costs of advertisement, and expenses of
sale.

In theory, it is the shareholder who sells the delinquent shares. There is agency
by operation of law. The corporation is merely regarded as agent of the delinquent
shareholder, with the authority to use the sale proceeds to pay for the amount due.

Procedure:

The Board declares the delinquency, following the non-payment of subscription

and accrued interest, if any, within the 30-day grace period.

The board shall offer the delinquent shares through a public auction, set on date,
at a time and place, and in a manner that permits many persons to bid. The auction must
not be earlier than 30 days nor more than 60 days from the date of shares become
delinquent, i.e., from the end of the grace period.

The corporation must send notice to the delinquent shareholder and the plan to
sell the delinquent shares through public auction. The notice may be sent by registered
mail, personal service or through other means sanctioned by the by-laws. The delinquent
shareholder shall be given all opportunities to stop public auction, by paying the entire
amount due prior to the sale.

The corporation can: (a) recognize the winning bidder as new owner for the
shares sold, and (b) issue the corresponding stock certificates to the winning bidder, and
to the shareholder for the remaining shares, if any.

Should there a failure of bidding, there will be a second bid. The corporation
may participate in such bid, provided it has sufficient unrestricted retained earnings. If
there is no highest bidder, the corporation may be declared winner and considered owner
of such shares.

Court Action to Recover Unpaid subscription

Public auction sale of delinquent share is a speedy and adequate remedy to

collect the entire amount due. However, there my be a need for a judicial action, when
there is failure of bidding and the corporation cannot acquire the shares in the absence of
unrestricted retained earnings.

Loss or Destroyed Certificates

The certificate of stock is a tangible representation of a person’s rights over the

corporation. There should be no two certificates covering the same underlying shares.

The law provides the following procedure before a corporation issues a new
stock certificate in lieu of a lost, stolen or destroyed certificate:

The registered shareholder must submit to the corporation an affidavit, attesting

to the circumstances of the loss, theft or destruction of the subject certificate.

After verification of the information stated, the corporation must cause the
publication essentially stating the name of corporation, the registered owner, the details
of the subject certificate and the underlying shares, and issuance of replacement
certificate after one year.

A one-year period is given to any interested party to contest the issuance of the
replacement certificate. If there is no contest filed within the one-year period, the
corporation may issue a replacement certificate, and the requesting shareholder must file
a bond or other security for the benefit of any person.

Corporate Books and Records

Every corporation shall keep and carefully preserve at its principal office all
information relating to the corporation, including, but not limited to:

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(a) The articles of incorporation and by-laws of the corporation and all
their amendments;

(b) The current ownership structure and voting rights of the corporation,
including list of stockholders or members, group structures, intra-group
relations, ownership data, and beneficial ownership;

(c) Names and addresses of all the members of the board of directors or
trustees and the executive officers;

(d) A record of all business transactions;

(e) A record of the resolutions of the board of directors or trustees and of

the stockholders or members;

(f) Copies of the latest reportorial requirements submitted to the

Commission; and

(g) The minutes of all meetings of stockholders or members or of the board

of directors or trustees.

The minutes of meetings must contain basic information, such as:

(a) the time and place of meeting and how it was held; (b)
the notice given and the agenda; (c) the purpose of meeting;
and (d) the persons present and absent.

The minutes must also reflect the matters action taken, the
time when any participant entered or left the meeting, the yeas and
nays, and the protest on any action or proposed action.

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