Corp Notes (RCC) v.6 (2020) (Cruz)

San Beda University: College of Law
Notes on Private
Corporation Law
Cruz, J. | 2020
I. Basic Principles 1
II. Nature & Attributes of Private Corporations. 2
III. Nationality of Private Corporations 4
IV. Doctrine of Separate Juridical Personality 6
V. Doctrine of Piercing the Veil of Corporate Fiction 6
VI. Articles of Incorporation 9
VII. Corporate By-Laws 11
VIII. Corporate Contract Law 12
IX. Shares & Capital Stock 14
X. The Board & Corporate Officers 19
XI. Stockholders & Members 24
XII. Corporate Powers & Capacity 33
XIII. Acquisitions & Transfers 37
XIV. Mergers & Consolidations 38
XV. Corporate Dissolution & Liquidation 39
XVI. Foreign Corporations 40
XVII. Non-stock Corporations 42
XVIII. Close Corporations 43
XIX. One Person Corporations 44
XX. Special Corporations 46
XXI. Powers of the SEC, Offenses, & Penalties 48
XXII. Miscellaneous Provisions 49
This endeavor is based on the following references:
1. Revised Corporation Code and other related laws;

2. Pertinent SEC Opinions, Memorandums, and Circulars;
3. Related and relevant jurisprudence;
4. Corporation Law Books of Aquino, De Leon, Ricalde, Soriano, Sundiang, and Villanueva;
5. Ateneo de Manila University: CLV Outline 2020;
6. San Beda University: 2019 Memory Aid on Corporation Law; and
7. The writer‖s personal notes on Corporation Law.
While I did my best to guarantee the accuracy of those stated here, I apologize should there be any error
included herein.
This material is not intended to be used to replace the reading of the sources aforementioned.
Notes on Private Corporation Law
Cruz, J. | 2020
HISTORICAL BACKGROUND
1. Sociedades Anónimas under the Spanish Code of Commerce: Sociedades anónimas were
introduced in our jurisdiction in December 1888 with the extension to Philippine territorial
application of Articles 151 to 159 of the Spanish Code of Commerce, which constituted the juridical
entities with features of limited liability and centralized management; but they were more similar
to the English joint stock companies than the modern corporations.1
A sociedad anónima was considered a commercial partnership “where upon the execution
of the public instrument in which its articles of agreement appear, and the contribution of
funds and personal property, becomes a juridical person—an artificial being, invisible,
intangible, and existing only in contemplation of law—with power to hold, buy, and sell
property, and to sue and be sued—a corporation—not a general partnership nor a limited
partnership … The inscribing of its articles of agreement in the commercial register was not
necessary to make it a juridical person; such inscription only operated to show that it
partook of the form of a commercial corporation.” 2
2. Philippine Corporate Law – Sort of Codification of American Corporate Law: When attention was
drawn to the fact that there was no entity in Spanish law corresponding to the notion of the
American “corporation”, the Philippine Commission enacted the Corporation Law (Act No. 1459), to
introduce the American corporation as the standard commercial entity in the Philippines and to
hasten the day when the Spanish sociedad anónima would become obsolete. The statute is a sort-
of- codification of American Corporate Law.3
The Corporation Law recognized the difference between sociedades anónimas and
corporations and the Court refused to apply legal provisions pertaining to the latter to the
former.4
The Corporation Law as the first corporate statute became effective on 01 April 1906. It had
piece-meal amendments during its 74-year history, but became antiquated and un-adapted
to the changing times.
3. The Corporation Code of the Philippines (Batas Pambansa Bilang 68): The Corporation Code, which
took effect on 01 May 1980, adopted various corporate doctrines enunciated by the Supreme Court
under the old Corporation Law; clarified the obligations of corporate directors and officers;
expressed in statutory language established principles and doctrines; and provided for a chapter
on close corporations
4. The Revised Corporation Code of the Philippines: The present governing law in the Philippines is
the Republic Act 11232,5 otherwise known as the Revised Corporation Code of the Philippines.
CONCEPTS
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 incidental to its existence (Sec. 2, RCC).
Based on Sec. 2, a corporation has the following attributes: (J-LAC)

1. Separate Juridical Personality:
2. Creature of Limited Powers;
3. Artificial Being; and
4. Creature of law.
It can also be said that “a corporation has no powers except for those which are expressly conferred
on it by the [Revised] Corporation Code, and those found in its charter, and are implied by or are
incidental to its existence. It exercises its powers through its Board of Directors and/or its duly
authorized officers and agents.”6
Partnership Corporation
As to Creation
Created by mere agreement of the parties. Created by law or by operation of law.
As to Number of Organizers
May be organized by at least 2 persons. Requires at least 2 incorporators (except a one
person corporation).
As to Commencement of Judicial Personality
Acquires juridical personality from the moment of Acquires juridical personality from the date of
execution of the contract of partnership. issuance of the certificate of incorporation by the
Securities and Exchange Commission (SEC).
1
Benguet Consolidated Mining Co. v. Pineda, 1956.
2
Mead v. McCullough, 1911.
1
3
Harden v. Benguet Consolidated Mining, 1933.
Page
4
Phil. Product Co. v. Primateria Societe Anonyme,1965.
5
The RCC took effect on 23 February 2019.
6
Pascual and Santos, Inc. v. Members of the Tramo Wakas Neighborhood Association Inc., 2004.
Cruz, J. | 2020
Partnership Corporation
As to Powers
Partnership may exercise any power authorized by Corporation can exercise only the powers
the partners (provided it is not contrary to law, expressly granted by law or implied from those
morals, good customs, public order, public policy). granted or incident to its existence.
As to Management
Unless agreed upon, every partner is an agent of The power to do business and manage its affairs is
the partnership. vested in the board of directors or trustees.
As to Effect of Mismanagement
A partner as such can sue a co-partner who The suit against a member of the board of
mismanages. directors or trustees who mismanages must be in
the name of the corporation.
As to Right of Succession
Partnership has no right of succession. Corporation has right of succession.
As to Extent of Liability To Third Persons
Partners are liable personally and subsidiarily Stockholders are liable only to the extent of the
(sometimes solidarily) for partnership debts to third shares subscribed by them (Doctrine of Limited
persons. Liability).
As to Transfer of Interest
Partner cannot transfer his interest in the Stockholder has generally the right to transfer his
partnership so as to make the transferee a partner shares without prior consent of the other
without the unanimous consent of all the existing stockholders because corporation is not based on
partners because the partnership is based on the this principle.
principle of delectus personarum.
As to Term of Existence
Partnership may be established for any period of Corporation exists in perpetuity unless its AOI
time stipulated by the partners. provides for a shorter period.
As to Firm Name
Limited partnership is required by law to add the Corporation may adopt any name provided it is
word “Ltd.” to its name. distinguishable from any other corporate name.
As to Dissolution
May be dissolved at any time by any or all of the Can only be dissolved with the consent of the
partners. State.
As to Governing Law
Governed by the NCC. Governed by the RCC.
Franchises of Corporation:
a. Primary or corporate franchise/ general franchise – The right or privilege granted by the State to
individuals to exist and act as a corporation after its incorporation.
b. Secondary or special franchise – The special right or privilege conferred upon an existing
corporation to the business for which it was created (e.g. use of the streets of a municipality to lay
pipes or tracks, or operation of a public utility or a messenger and express delivery service)
Primary Secondary
As to Nature
Refers to the franchise of being or existing as a Refers to the exercise of right or privilege (e.g. public
corporation. utility or telecommunication franchise).
As to Whom Vested
Vested in the individuals who compose the Vested in the corporation after its incorporation and
corporation. not upon the individuals who compose the
corporation.
As to Alienability
Cannot be sold or transferred, in the absence of May be sold or transferred under a general power
legislative authority to do so. This is because it is granted to a corporation to dispose of its properties;
inseparable from the corporation itself. may also be subject to sale on execution or levy.
The power to create a corporation is legislative in character. 7 Congress cannot enact a law creating a
private corporation with a special charter (except if it were a GOCC), then it follows that Congress can create
corporations with special charters only if such are GOCCs.8
Entitled to protection under the Due Process and Equal Protection clauses of the Constitution: The due
process clause has universal application and covers private corporations insofar as their properties are
concerned.9
Entitled to protection against unreasonable searches and seizures: A corporation is protected by the
constitutional guarantee against unreasonable searches and seizures, but its officers have no cause of action
2
Page
7
Sec. 16, Art. XII, 1987 Constitution
8
Veterans Federation of the Philippines v. Reyes, 2006.
9
Philippine Coconut Federation, Inc. (COCOFED) v. Republic, 2016.
Cruz, J. | 2020
to assail the legality of the seizures, regardless of the amount of shares of stock of each in said corporation
because the corporation has a personality distinct and separate from those of said officers.10
Not entitled to privilege against self-incrimination. It is elementary that the right against self-
incrimination has no application to juridical persons. 11
Generally, not entitled to moral damages: Being an artificial person, a corporation cannot experience
physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social
humiliation which are the bases for moral damages under Art. 2217 of the Civil Code. However, a corporation
may have a good reputation which, if besmirched, may be a ground for the award of moral damages.12
Generally, not entitled to practice a profession: Corporations cannot engage in the practice of a profession
since they lack the moral and technical competence required by the PRC.13 However, Sec. 37 of the
Architecture Act of 2004 (R.A. No. 9266) allows the registration of “Architectural Professional Corporations”
to the SEC.
May be held liable for torts: A corporation is civilly liable for torts in the same manner as natural persons,
because the rules governing the liability of a principal for a tort committed by an agent are the same
whether the principal be a natural person or a corporation, and whether the agent be a natural or artificial
person.14
Generally, no corporate criminal liability under Secs. 102 & 103 of the RPC. Corporations cannot be held
criminally liable within Philippine jurisdiction since there is no law relating to the practice and procedure in
criminal actions whereby a corporation may be brought to court to be proceeded against criminally. 15 A
corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by
imprisonment. However, a corporation may be charged and prosecuted for a crime if the imposable penalty
is fine. Even if the statute prescribes both fine and imprisonment as penalty, a corporation may be
prosecuted and, if found guilty, may be fined.16
It is the acting officers who shall be held criminally liable for the criminal corporate act. If the crime
is committed by a corporation, the directors, officers, employees or other officers thereof
responsible for the offense shall be charged and penalized for the crime, precisely because of the
nature of the crime and the penalty therefor.17
Directors/Trustees Per se cannot be held liable for Corporate Criminal Act. The members of the
Board generally do not concern themselves with the day-to-day affairs of the corporation, except
those corporate officers who are charged with the running of the business of the corporation and
are concomitantly members of the Board, like the President.18 Therefore, to be held criminally liable
for the acts of a corporation, there must be a showing that its officers, directors, and shareholders
actively participated in or had the power to prevent the wrongful act.19
Stockholders Per Se Cannot Be Held Liable for a Corporate Criminal Act. Stockholders, being
“owners” of the corporation or being basically investors in the corporation, and with the
management of its business generally vested in the Board of Directors, cannot be held liable for the
criminal offense committed on behalf of the corporation, unless they personally took part in the
same.20
Rules on liability of Corporate Employees: The employee of a corporation engaged in unlawful

business naturally aids and abets in the carrying on of such business and will be prosecuted as
principal if, with knowledge of the business, its purpose and effect, he consciously contributes his
efforts to its conduct and promotion, however slight his contribution may be. Where it is shown that
the employee was merely acting under the direction of his superiors and was unaware that his acts
constituted a crime, he may not be held criminally liable for an act done for and in behalf of his
employer.21
“Corporate Criminal” under Secs. 165-167, RCC:

a. Corporation conducts its business through fraud;
b. Corporation used for committing or concealing fraudulent, graft, and corrupt practices; and
c. Corporation appoints and intermediary who engages in graft and corrupt practices.
10
Stonehill v. Diokno, 1967.
11
Bataan Shipyard & Engineering v. PCGG,1987.
12
San Fernando Regala Trading v. Cargill Philippines, 2013.
13
ULEP v. The Legal Clinic, 1993.
14
PNB v. Court of Appeals, 1978.
15
West Coast Life Ins. Co. v. Hurd, 1914.
16
Ching v. Secretary of Justice, 2006.
17
Ching v. Secretary of Justice, 2006.
3
18
Federated Dealers Assn. v. Del Rosario, 2016.
Page
19
SEC v. Price Richardson Corp., 2017.
20
Espiritu v. Petron Corp., 2009.
21
People v. Chowdury, 2000.
Cruz, J. | 2020
There are 2 tests primarily used in determining the nationality of a private corporation in the Philippines, to
wit:
1. Primary Place of Incorporation Test: The corporation is a national of the country under whose laws
it is organized or incorporated (Sec. 140, RCC); and
2. Ancillary Control Test: In cases involving properties, business or industries reserved for Filipinos, in
addition to the place of incorporation test , the nationality of a corporation is determined by the
nationality of the “controlling stockholders”.22
CONTROL TEST
The control test is applied to determine the controlling stockholders in times of War,23 and of corporations
engaged in the exploitation of Natural resources,24 Public utilities,25 Advertising business,26 and Mass media27
(WN-PAM).
Under Sec. 176 of the RCC, the National Economic Development Authority (NEDA) may set
limitations to stock ownership in Corporations vested with Public Interest. The latter corporations
are enumerated in Sec. 22, RCC, to wit:
1. Those whose securities are registered with the SEC, listed with a Stock Exchange or with
assets of at least P50 million and having 200 or more holders of shares with at least 100
shares of a class of its equity shares;
2. Banks and quasi-banks, NSSLAS, pawnshops, corporations engaged in money service
business, pre-need, trust and insurance companies, and other financial intermediaries; and
3. Analogous corporations as determined by the SEC.
The control test has the following sub-sets:

1. Original DOJ-SEC Grandfather Rule: For purposes of investment holdings, shares belonging to
corporations at least 60% of the capital of which is owned by Filipino citizens shall be considered
as of Philippine nationality; but if the percentage of Filipino ownership is less than 60%, only the
number of shares corresponding to such percentage shall be counted as of Philippine nationality.28
Although the control test is the prevailing mode of determining whether a corporation is a Filipino
corporation entitled under Sec. 2, Art. II of 1987 Constitution, when there is doubt in the minds of
the courts, based on the attendant facts and circumstances of the case, in the 60%-40% Filipino-
foreign equity of the corporation, they may apply the grandfather rule.29
The following are the indicators of doubt (FTM):

1. The foreign investors provide practically all the Funds for the joint investment undertaken
by these Filipino businessmen and their foreign partner;
2. The foreign investors undertake to provide practically all the Technological support for the
joint venture; and
3. The foreign investors, while being minority stockholders, Manage the company and prepare
all economic viability studies.30
Hence, we do not apply the Grandfather rule when there is no doubt.
2. Foreign Investment Act31 (FIA) Test of “Philippine National:” Section 3 of R.A. 7042 considers for
purpose of investment a “Philippine National ” as a corporation organized under the laws of the
Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned
and held by Filipino citizens, or a trustee of funds for pension or other employee
retirement/separation benefits, where the trustee is a Philippine National and at least 60% of the
fund will accrue to the benefit of Philippine nationals.32
3. New SEC Test: The Constitution “provides for the Filipinization of public utilities by requiring that
any form of authorization for the operation of public utilities should be granted only to ―citizens of
the Philippines or to corporation or associations organized under the laws of the Philippines at
least 60% of whose capital is owned by such citizens.‖ The provision is [an express] recognition of
the sensitive and vital position of public utilities both in the national economy and for national
security.” The evident purpose of the citizenship requirement is to prevent aliens from assuming
control of public utilities, which may be inimical to the national interest. The term “capital” in Sec.
11, Art. XII of the Constitution should be subject to (a) the control test that covers only shares of
22
SEC-OGC Opinion 16-15, June 1, 2016.
23
Haw Pia v. China Banking Corp., 1948
24
Sec. 2, Article XII, 1987 Constitution
25
Sec. 11, Article XII, 1987 Constitution
26
Sec. 11(2), Article XII, 1987 Constitution
27
Sec. 11 (1), Article XII, 1987 Constitution
28
XXIV SEC QUARTERLY BULLETIN (No. 2 – June 1990).
4
29
Narra Nickel Mining Corp. v. Redmont Consolidated Mines, 2014.
Page
30
Narra Nickel Mining Corp. v. Redmont Consolidated Mines, 2015.
31
Republic Act No. 7042 was approved on 13 June 1991.
32
Unchuan v. Lozada, 2009.
Cruz, J. | 2020
stock entitled to vote in the election of directors, and (b) the beneficial interest test that shall apply
to each and every class of shares, voting and non-voting.33
As a result of the Gamboa rulings, SEC Memorandum Circular No. 8, s. 2013, was issued and
provides that: All covered corporations shall, at all times, observe the constitutional or
statutory ownership requirement in that “the required percentage of Filipino ownership
shall be applied to both (a) the total number of outstanding shares of stock entitled to vote
in the election of directors; and (b) the total number of outstanding shares of stock, whether
or not entitled to vote in the election of directors.”34
If the Filipino has the voting power of the “specific stock” (he can vote the stock or direct
another to vote for him), or the Filipino has the investment power over the “specific stock”
(he can dispose of that “specific stock” or direct another to vote or dispose it for him) , then
such Filipino is the “beneficial owner” of that “specific stock.” Being considered Filipino, that
“specific stock” is then to be counted as part of the 60% Filipino ownership requirement
under the Constitution. The right to the dividends, jus fruendi — a right emanating from
ownership of that “specific stock” necessary accrues to its Filipino “beneficial owner.”35
No Foreign Equity (100% Filipino-owned) (CROP2-FUM-SMB)

a. Cooperatives;36
b. Retail trade enterprises with paid-up capital of less than US$2,500,000;37
c. Ownership, operation, and management of cockpits;38
d. Practice of all professions;39
e. Private security agencies;40
f. Manufacture of firecrackers and other pyrotechnic devices;41
g. Utilization of Marine Resources in archipelagic waters, territorial sea, and exclusive economic zone
as well as small-scale utilization of natural resources in rivers, lakes, bays, and lagoons;42
h. Manufacture, repair, stockpiling and/or distribution of nuclear weapons ;43
i. Small-scale Mining;44
j. Mass Media except recording;45 and
k. Manufacture, repair, stockpiling and/or distribution of Biological, chemical and radiological
weapons and anti-personnel mines.
Up to 20% Foreign Equity

Private radio communications network.46

a. Private recruitment, whether for local or overseas employment ;47
b. Contracts for the construction and repair of locally-funded public works48 except:
i. Infrastructure/development projects;49
ii. Projects which are foreign funded or assisted and required to undergo international
competitive bidding;50 and
iii. Contracts for the construction of defense-related structures.51

Advertising.52
Up to 40% Foreign Equity (C2AP-MO5DE)

a. Culture, production, milling, processing, trading excepting retailing, of rice and corn and acquiring,
by barter, purchase or otherwise, rice and corn and the by-products thereof;53
b. Contracts for the supply of materials, goods and commodities to government-owned or controlled
corporation, company, agency or municipal corporation;54
c. Adjustment companies;55
33
Gamboa v. Teves, 2011 & 2012.
34
Roy III v. Herbosa, 2016.
35
Roy III v. Herbosa, 2017.
36
Sec. 26, R.A. No. 6938.
37
R.A. No. 8762.
38
P.D. No. 449.
39
Sec. 14, Art. XII, 1987 Constitution.
40
R.A. No. 5487.
41
R.A. No. 7183.
42
43
Sec. 8, Art. II, 1987 Constitution.
44
R.A. No. 7076.
45
Sec. 16, Art. XI, 1987 Constitution.
46
R.A. No. 3846.
47
Art. 27., P.D. No. 442.
48
Sec. 1, C.A. 541
49
R.A. No. 7718.
50
Sec. 2a, R.A. No. 7718.
5
51
Sec. 1, C.A. 541.
Page
52
Sec. 11, Art. XI, 1987 Constitution.
53
P.D. No. 194, Sec. 5; R.A. No. 8762, Sec. 15.
54
R.A. No. 5183, Sec. 1.
Cruz, J. | 2020
d. Project Proponent and Facility Operator of a BOT project requiring a public utilities franchise;56
e. Manufacture, repair, storage and/or distribution of products/ingredients requiring PNP
clearance;57
f. Ownership of private lands;58
g. Operation and management of public utilities ;59
h. Ownership/establishment and administration of educational institutions;60
i. Operation of deep sea commercial fishing vessels;61
j. Ownership of condominium units where the common areas in the condominium project are co-
owned by the owners of the separate units or owned by a corporation;62
k. Manufacture, repair, storage and/or distribution of products/ingredients requiring DND
clearance;63 and
l. Exploration, development and utilization of natural resources .64

a. Financing companies regulated by the SEC;65 and
b. Investment houses regulated by the SEC.66
A corporation has a personality separate and distinct from its directors or trustees, officers, stockholders, or
members;67 hence:
1. Assets of the stockholders may not be considered as assets of the corporation, and vice-versa.68
2. It may not be made to answer for personal acts and liabilities of its stockholders or those of legal
entities to which it may be connected, and vice versa.69
3. Stockholders or Members cannot be held liable for the Liabilities of the Corporation, except as to
the extent of their investments or promised Investments (Doctrine of Limited Liability).70
4. Directors or Trustees, Officers and other Corporate Agents do not become personally liable for
Corporate Contracts that they enter into on behalf of the Corporation (Law on Agency).71
a. Knowledge of the agent is knowledge of the principal but the knowledge of the principal is
not the knowledge of the agent (Doctrine of Imputed Knowledge).
A consequence of a corporation‖s separate personality is that its consent made through its representatives is
not consent of the representative, personally. Its obligations, incurred through official acts of its
representatives, are its own. A director or officer does not become a party to a contract just because a
corporation executed a contract through such individual. Hence, a corporation‖s representatives are
generally not personally bound by the terms of the contract executed in behalf of the corporation.72
If the agent contracts in the name of the principal, exceeding the scope of his authority, and the
principal does not ratify the contract, it shall be void if the party with whom the agent contracted
is aware of the limits of the powers granted by the principal. In this case, however, the agent is
liable if he undertook to secure the principal‖s ratification (Art. 1898, NCC).
Though the corporation has separate and distinct personality from its stockholders, such personality may be
disregarded, or veil of corporate fiction may be pierced, attaching personal liability to the responsible
person, if the personality is an alter-ego of a person, or used to defeat public convenience, justify wrong,
protect fraud or defend crime, or used to defeat the labor laws.73
Authorities agreed on at least 3 basic areas where piercing the veil is allowed, to wit:
1. Defeat of public convenience (Equity Piercing) – when the corporation is used to evade existing
obligations;
2. Fraud cases – when the corporation is used to justify wrong, protect fraud, or defend a crime; or
55
P.D. No. 612 as amended by P.D. No. 1814, Sec. 323.
56
Sec. 11, Art. XII, 1987 Constitution; R.A. No. 7718, Sec. 2(a).
57
R.A. No. 7042 as amended by R.A. 8179.
58
Sec. 7, Art. XII,1987 Constitution; C.A. 141, Sec. 22; R.A. No. 9182, Sec. 4.
59
Sec. 11, Art. XII, 1987 Constitution; C.A. 146, Sec. 16.
60
Sec. 4, Art. XIV, 1987 Constitution.
61
R.A. No. 8550, Sec. 27; R.A. 8550.
62
R.A. No. 4726, Sec. 5.
63
R.A. No. 7042 as amended by R.A. No. 8179.
64
65
R.A. No. 5980 as amended by R.A. No. 8556, Sec. 6.
66
P.D. No. 129 as amended by R.A. No. 8366, Sec. 5.
67
Sec. 2, RCC; and Art. 44, NCC
68
Situs Dev. Corp. v. Asiatrust Bank, 2012.
69
6
General Credit Corp. v. Alsons Dev. and Investment Corp., 2007.

70
Traders Royal Bank v. Court of Appeals, 1989.
Page
71
Crisologo v. People, 2012.
72
Land Bank of the Philippines v. Belle Corp., 2015.
73
Dutch Movers, Inc. v. Edilberto Lequin, 2017.
Cruz, J. | 2020
3. Alter ego cases – where the corporation is merely a farce since it is a mere alter ego or a business
conduit of a person.74
The rationale for piercing in a given case is to remove the barrier between the corporation and the persons
comprising it to thwart the fraudulent schemes of those who use the corporate personality as a shield for
undertaking proscribed activities.75
Piercing of the corporate veil is premised on the fact that the corporation concerned must have been
properly served with summons or properly subjected to the jurisdiction of the court a quo. Corollary thereto,
it cannot be subjected to a writ of execution meant for another in violation of its right to due process. There
exists, however, an exception to this rule: if it is shown "by clear and convincing proof that the separate and
distinct personality of the corporation was purposefully employed to evade a legitimate and binding
commitment and perpetuate a fraud or like wrongdoings.”76
No res judicata in piercing cases. Application of the doctrine to a particular case does not deny the
corporation of legal personality for any and all purposes, but only for the particular transaction or instance,
or the particular obligation for which the doctrine was applied.77
Piercing doctrine is an equitable remedy. Piercing the corporate veil is an equitable doctrine developed to
address situations where the separate corporate personality of a corporation is abused or used for wrongful
purposes.78
It is a Remedy of Last Resort. Piercing the corporate veil is remedy of last resort and is not available when
other remedies are still available.79
Piercing must be based on Clear Evidence: To disregard the separate juridical personality, it is elementary
that the wrongdoing cannot be presumed and must be clearly and convincingly established. Application of
the doctrine of piercing should be done with caution. Otherwise, an injustice that was never intended may
result from an erroneous application.80
Outsider reverse piercing occurs when a party with a claim against an individual or corporation attempts to
be repaid with assets of a corporation owned or substantially controlled by the defendant. In contrast, in
insider reverse piercing, the controlling members will attempt to ignore the corporate fiction in order to take
advantage of a benefit available to the corporation, such as an interest in a lawsuit or protection of personal
assets.81
TYPES OF PIERCING CASES

Fraud-piercing cases have the following elements:
1. There must have been fraud or an evil motive in the affected transaction, and the mere proof of
control of the corporation by itself would not authorize piercing;
2. Corporate fiction is used as a means to commit the fraud or avoid the consequences thereof; and
3. The main action should seek for the enforcement of pecuniary claims pertaining to the corporation
against corporate officers or stockholders.82
The corporate fiction must be the very means by which to commit fraud or avoid the
consequences of one‖s unlawful or wrongful acts. The absence of these elements prevents
piercing the corporate veil.83
Corporations used to commit fraud: Fraud and bad faith on the part of certain corporate officers or
stockholders may warrant the piercing of the veil of corporate fiction so that the said individual
may not seek refuge therein, but may be held individually and personally liable for his actions,84
however, mere allegation of fraud or bad faith, without evidence supporting such claims cannot
warrant the piercing of the corporate veil.85
The court must be certain that the corporate fiction was misused to such an extent that injustice,
fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be
clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never
unintended may result from an erroneous application.86
Shell or Fictitious Companies: “Fictitious companies are by definition fraudulent and may also
serve as fronts for government officials. The typical scheme involves corrupt government officials
74
General Credit Corp. v. Alsons Dev. and Investment Corp, 2007.
75
Francisco Motors Corp. v CA, 1999.
76
International Academy of Management and Economics (I/AME) v. Litton and Company, Inc., 2017.
77
Francisco v. Mejia, 2001.
78
Commissioner of Customs v. Oilink International Corp., 2014.
79
Umali v. CA, 1990.
80
PNB v. Andrada Electric & Engineering Co., 2002.
81
International Academy of Management and Economics (I/AME) v. Litton and Company, Inc., 2017.
82
Concept Builders, Inc. v. NLRC, 1996.
7
83
Lim v. Court of Appeals,2000.
Page
84
Lafarge Cement Phils., Inc. v. Continental Cement Corp.,2004.
85
DBP v. Court of Appeals, 2001.
86
Pacific Rehouse Corp. v. Court of Appeals, 2014.
Cruz, J. | 2020
creating a fictitious company that will serve as a ―vehicle‖ to secure contract awards. Often, the
fictitious—or ghost—company will subcontract work to lower cost and sometimes unqualified
firms. The fictitious company may also utilize designated losers as subcontractors to deliver the
work, thus indicating collusion.” They have no significant assets, staff or operational capacity. They
pose a serious red flag as a bidder on public contracts, because they often hide the interests of
project or government officials, concealing a conflict of interest and opportunities for money
laundering.87
Alter-ego Piercing Cases: Mere ownership by a single stockholder or by another corporation of all or nearly
all of the capital stocks is not, by itself, a sufficient ground for disregarding the separate corporate
personality. Other circumstances showing that the corporation is being used to commit fraud or proof of
existence of absolute control over the corporation have to be proven. In short, before the corporate fiction
can be disregarded, alter-ego elements must first be sufficiently established.88
While confirming that there exists no definite test of general application in determining when a
subsidiary may be treated as a mere instrumentality of the parent corporation, there are identified
factors that will justify the application of the treatment of the doctrine of the piercing of the
corporate veil:
1. The parent corporation owns all or most of the capital stock of the subsidiary;
2. The parent and subsidiary corporations have common directors or officers;
3. The parent corporation finances the subsidiary;
4. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise
causes its incorporation;
5. The subsidiary has grossly inadequate capital;
6. The parent corporation pays the salaries and other expenses or losses of the subsidiary;
7. The subsidiary has substantially no business except with the parent corporation or no assets
except those conveyed to or by the parent corporation;
8. In the papers of the parent corporation or in the statements of its officers, the subsidiary is
described as a department or division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporation's own;
9. The parent corporation uses the property of the subsidiary as its own;
10. The directors or executives of the subsidiary do not act independently in the interest of the
subsidiary but take their orders from the parent corporation; and
11. The formal legal requirements of the subsidiary are not observed.89
Probative Factors in Piercing the Corporate Veil: (MIMS)

1. Methods of conducting the business;
2. Identity of directors and officers;
3. Manner of keeping corporate books and records; and
4. Stock ownership by one or common ownership of both corporations.90
Case law lays down the three-pronged test to determine the application of the alter ego theory or
the instrumentality theory, to wit:
1. Control or instrumentality test – control, not mere majority or complete stock control but
complete domination, not only of the finances but of policy and business practice with
respect to the transaction assailed so that the corporate entity as to this transaction had at
that time no separate mind, will, or existence of its own;
2. Fraud test – such control must have been used 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. Harm test – the control and breach of duty must be the proximate cause of the injury or
unjust loss complained of.91
Unlike in fraud piercing, alter ego piercing does not require that evidence of fraud or wrongdoing
be established, but only that the corporate personality has been used as an instrumentality for the
personal agenda of its controlling stockholder.92
Examples of Equity Piercing: Juridical personality cannot be employed to:

1. Confuse legitimate issues;93
2. Raise legal technicalities;94
3. Avoidance or minimization of taxes;95 and
4. Defeat social justice.96
87
Republic v. Mega Pacific eSolutions, Inc., 2016.
88
Pacific Rehouse Corp. v. Court of Appeals, 2014.
89
Philippine National Bank v. Ritratto Group International, Inc., 2001.
90
Concept Builders, Inc. v. NLRC, 1996.
91
Virata v. Ng Wee, 2017.
92
8
Lipat v. Pacific Banking Corp, 2003.

93
Telephone Engineering and Service Co. v. WCC, 1981.
Page
94
Emilio Cano Enterprises v. CIR, 1965.
95
Yutivo Sons Hardware v. CTA, 1961.
96
Lee v. Samahang Manggagawa ng Super Lamination, 2016.
Cruz, J. | 2020
The AOI is in the nature of a contract between the corporation and the State 97 and defines the charter of the
corporation and the contractual relationships between the State and the corporation, the stockholders and
the State, and between the corporation and its stockholders.98
Corporate Existence starts from the moment the SEC issues the certificate of incorporation under
its seal provided that the submitted documents and information are fully compliant with the
requirements of the RCC and other laws (Sec. 18, RCC).
No AOI of banks and quasi-banks, NSSLAS, pawnshops, corporations engaged in money service
business, pre-need, trust and insurance companies, and other financial intermediaries shall be
approved unless accompanied by favourable recommendation from the appropriate government
agency.99
Incorporators are stockholders or members mentioned in the AOI as originally forming or composing the
corporation, and are signatories thereof.100 For the purpose of forming a new domestic corporation under the
RCC, 2 or more persons, but not more than 15, may organize themselves and form a corporation. Only a One
Person Corporation (OPC) may have a single stockholder/director.101
Each incorporator of a stock corporation must own, or be a subscriber to, at least 1 share of the
capital stock. For a non-stock corporation, the incorporator must be a member. The incorporators
may be composed of any combination of natural persons, SEC-registered partnerships, SEC-
registered domestic corporations or associations, as well as foreign corporations.102
Natural persons must be of legal age to be an incorporator.103 Partnerships with dissolved or

expired status104 as well as domestic corporations with delinquent, suspended, revoked, or expired
status with the SEC are not allowed to be incorporators. The investment of the domestic
corporation/incorporator to the new corporation must be approved by 2/3 vote of its
shareholders.105
Incorporators Corporators
As to Nature of Membership
Signatory to the AOI and a stockholder or a Stockholder (stock corporation) or member (non-
member. stock corporation); may or may not be a signatory to
the AOI.
As to Contractual capacity
Must have contractual capacity. May be such through a guardian.
As to Permanence
Fait accompli; accomplished fact (the AOI cannot They may cease to be such if they subsequently lose
be amended to replace them). their shareholdings.
As to Number
Number is limited to 2-15. No restriction as to number, except in close
corporations (not more than 20).
Corporate name under Sec. 13(a), RCC.106 No corporate name shall be allowed if it is not distinguishable from
that already reserved or registered for the use of another corporation, or if such name is already protected
by law, or when its use is contrary to existing law, rules, and regulations. If such were found and proven, the
SEC may summarily order the corporation to cease and desist from using the name. Upon approval of a new
name, the SEC will issue a new certificate of incorporation with the amended name.
Distinguishability Test: A name is not distinguishable even if it contains the following:

(a) The words “corporation,” “company,” “incorporated,” “limited,” “limited liability,” or an
abbreviation of such words; and
(b) Punctuations, articles, conjunctions, contractions, prepositions, abbreviations, different
tenses, spacing, or number of the same word or phrase (Sec. 17, RCC).
A corporation may change its name by the amendment of its AOI, but the same is not effective
until approved by the SEC.107
97
Government of the Philippine Islands v. Manila Railroad Co., 1929.
98
Lanuza v. Court of Appeals, 2005.
99
Sec. 10, SEC Memorandum 16-2019.
100
Sec. 2, SEC Memorandum 16-2019 published 1 August 2019.
101
102
103
9

104
Page
105
106
See SEC Memorandum 13-2019 published 21 June 2019 for more details.
107
Phil. First Insurance Co. v. Hartigan, 1970.
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A change in the corporate name does not make a new corporation, and has no effect on the
identity of the corporation, or on its property, rights, or liabilities.108
In accordance with SEC Memo Circular No. 6, s. 2015, a dissolved corporation‖s name shall not be
allowed to be used within 3-years after approval of dissolution by the SEC, unless allowed by the
last stockholders representing at least majority of the outstanding capital stock.109
Purpose clause (Sec. 13(b), RCC). The best proof of the purpose of a corporation is its AOI and bylaws. The
AOI must state the primary and secondary purposes of the corporation, while the bylaws outline the
administrative organization of the corporation, which, in turn, is supposed to insure or facilitate the
accomplishment of said purpose.110
Principal place of business (Sec. 13(c), RCC) must be within the Philippines. If there is a change in the
principal place of business within the same city, the same must be manifested in the General Information
Sheet of the Corporation. If there is a change to another city, the AOI must be amended.111
Although the Rules of Court do not provide expressly, jurisprudence has settled that the place
where the principal office of a corporation is located, as stated in the articles, indeed establishes
its residence. This ruling is important in determining the venue of an action by or against a
corporation.112
Existing corporations and partnerships whose Articles indicate only a general address as their
principal office address such as “Metro Manila” are directed to file an amended AOI in order to
specify their complete address such that, if feasible, it has a street number, street name, barangay,
city or municipality and if applicable, the name of the building, the number of the building and
name or number of the room or unit.113
Corporate term: A corporation should have perpetual existence unless provided otherwise by its AOI. A
corporate term for a specific period may be extended or shortened by amending the AOI: Provided, That no
extension may be made earlier than 3 years prior to the original or subsequent expiry date unless there are
justifiable reasons for an earlier extension as may be determined by the SEC: Provided, further, That such
extension of the corporate term shall take effect only on the day following the original or subsequent expiry
date (Sec. 11, RCC).
The following may file a Petition for Revival of Corporate Existence (NERS):
1. Generally, a corporation whose term has Expired;
2. An expired corporation whose Certificate of Registration was Revoked for non-filing of
reports; provided, it files a Petition to Lift its Revoked Status, which may be incorporated in
its Petition to Revive, and must settle the corresponding penalties thereof;
3. An expired corporation whose Certificate of Registration has been Suspended; provided, it
files a Petition to Lift its Suspended Status, which may be incorporated in its Petition to
Revive, and must settle the corresponding penalties thereof; or
4. An expired corporation whose corporate name has already been re-used, and is currently
being used, by another existing corporation duly registered with the SEC; provided, that the
former shall change its corporate name within 30 days from the issuance of the Certificate
of Revival.114
The petition for revival should be approved by a majority vote of both the Board and of the
outstanding capital stock115 and filed with the SEC‖s Company Registration and Monitoring
Department, any SEC Satellite Office, or any SEC Extension Office.116 The revival of corporate
existence is without prejudice to the appraisal right of dissenting stockholders.117
The following may not file a Petition for Revival of Corporate Existence:
1. Expired corporation which has completed liquidation of its assets;
2. Corporation whose Certification of Registration was revoked for reasons other than non-
filing of reports;
3. Corporation dissolved by virtue of Secs. 6(c) and 6(d) of PD No. 902-A, as amended by PD
No. 1799;
4. Expired corporation which has already availed of re-registration under SEC Memorandum
13-2019 or any other circulars issued by the SEC on re-registration, except:
a. The re-registered corporation has given its consent to the Petitioner to use its
corporate name, or has undertaken to undergo voluntary dissolution immediately
after the issuance of Petitioner‖s Certificate of Revival; or
108
Republic Planters Bank v. Court of Appeals, 1992.
109
Indian Chamber of Commerce Phils. Inc. v. Filipino Indian Chamber of Commerce in the Phils., 2016.
110
Gala v. Ellice Agro-Industrial Corp., 2003.
111
SEC Memorandum Circular 6-2016.
112
10
Hyatt Elevators and Escalators Corp. v. Goldstar Elevators, Phils., Inc., 2005.
113
SEC Memorandum Circular No. 6, February 20, 2014.
114
Sec. 1, SEC Memorandum 23-2019 published 6 December 2019.
Page
115
116
117
Cruz, J. | 2020
b. The re-registered corporation has given its consent to the Petitioner to use its
corporate name, and has undertaken to change its corporate name immediately after
the issuance of Petitioner‖s Certificate of Revival.118
No minimum capitalization requirement. Stock corporations shall not be required to have a minimum capital
stock, except as otherwise provided by special law (Sec. 12, RCC). However, Sec. 37 of the RCC requires a 25%
Subscription- 25% Paid up Capital for increasing the authorized capital stock.
The grounds for disapproval of the AOI are the following:

1. AOI or any amendment is not compliant with the form prescribed by the RCC;
2. Purpose of the corporation is patently unconstitutional, illegal, immoral, or contrary to government
rules and regulations;
3. The certification concerning the amount of capital stock subscribed and/or paid is false; and
4. The required percentage of Filipino ownership is not met (Sec. 16, RCC).
The SEC shall give the corporators reasonable time to modify the objectionable portions of their AOI.
Amendment of the AOI should have the vote of at least majority of the Board and at least 2/3 of the
shareholders. The proposed amendments shall take effect upon their approval or from the date of filing if
not acted upon by the SEC within 6 months for a cause not attributable to the corporation (Sec. 15, RCC).
Stock corporation may be converted to non-stock corporation by amendment of the AOI.

Conversion may be made by mere amendment of the purpose clause in the AOI, among others. In
effect, the shares subscriptions constitute as the capital contributions of the shareholders, and
they are converted into members who divest themselves of any right to receive dividends of any
profits of the corporation.119 A non-stock corporation cannot be converted into a stock corporation
by a mere amendment of the AOI. It is fundamental that the non-stock corporation be dissolved
first under any of the methods specified in the Corporation Code.120
Non-use of Corporate Charter: If a corporation does not formally organize and commence its
business within 5 years from the date of its incorporation, its certificate of incorporation shall be
deemed revoked as of the day following the end of the 5-year period. However, if a corporation
has commenced its business but subsequently becomes inoperative for a period of at least 5
consecutive years, the SEC may, after due notice and hearing, place the corporation under
delinquent status.
A delinquent corporation shall have a period of 2 years to resume operations and comply with all
requirements that the SEC shall prescribe. Upon compliance by the corporation, the SEC shall issue
an order lifting the delinquent status. Failure to comply with the requirements and resume
operations within the period given by the SEC shall cause the revocation of the corporation‖s
certificate of incorporation (Sec. 21, RCC).
Bylaws are the self -imposed rules resulting from the agreement between the [corporation] and its members
to conduct the corporate business in a particular way. In that sense, the bylaws are the private “statutes” by
which the [corporation] is regulated, and will function. Bylaws constitute a binding contract as between the
[corporation] and its members, and as among the members themselves. They are self-imposed private laws
binding on all members, directors, and officers of the [corporation]. The prevailing rule is that the provisions
of the AOI and the bylaws must be strictly complied with and applied to the letter.121
The power to adopt bylaws is an inherent power on the part of those forming a corporation or any
other form of association.122
Section 45 of the RCC removed the One-Month-from-Incorporation Period to Adopt Bylaws.

However, failure to Adopt and Maintain the Bylaws now specifically criminally punishable and
subject to SEC‖s Contempt Power (Sec. 161, RCC).
Contents of Bylaws: A private corporation may provide the following in its bylaws:
(a) The time, place and manner of calling and conducting regular or special meetings of the
directors or trustees;
(b) The time and manner of calling and conducting regular or special meetings and mode of
notifying the stockholders or members thereof;
(c) The required quorum in meetings of stockholders or members and the manner of voting
therein;
(d) The modes by which a stockholder, member, director, or trustee may attend meetings and
cast their votes;
(e) The form for proxies of stockholders and members and the manner of voting them;
11
118
119
SEC Opinion, July 19, 1999.
Page
120
SEC Opinion, February 24, 2003.
121
Ching v. Quezon City Sports Club, Inc., 2016.
122
Gokongwei, Jr. v. SEC, 1979.
Cruz, J. | 2020
(f) The directors‖ or trustees‖ qualifications, duties and responsibilities, the guidelines for
setting the compensation of directors or trustees and officers, and the maximum number of
other board representations that an independent director or trustee may have which shall,
in no case, be more than the number prescribed by the SEC;
(g) The time for holding the annual election of directors of trustees and the mode or manner of
giving notice thereof;
(h) The manner of election or appointment and the term of office of all officers other than
directors or trustees;
(i) The penalties for violation of the bylaws;
(j) In the case of stock corporations, the manner of issuing stock certificates; and
(k) Such other matters as may be necessary for the proper or convenient transaction of its
corporate affairs for the promotion of good governance and anti-graft and corruption
measures.
An arbitration agreement may be provided in the bylaws (Sec. 46, RCC).
Adoption of Corporate Bylaws, required votes:

1. If it is adopted prior to incorporation – The by-laws must be signed and approved by all the
incorporators and filed with the SEC together with the AOI.
2. If it is adopted and filed after incorporation – The affirmative vote of the stockholders representing
at least a majority of the outstanding capital stock, or of at least a majority of the members shall be
necessary. The by-laws shall be signed by the stockholders or members voting for them (Sec. 45,
RCC).
Amendment of Corporate By-laws requires the majority vote of the board of directors/trustees and majority
vote of the outstanding capital stock or membership (Sec. 47, RCC).
The power to adopt, amend, or repeal the bylaws may be delegated to the Board by 2/3 vote of
the shareholders. The same power may be revoked by a majority vote of the shareholders (Sec. 47,
RCC).
Promoter is a person who, acting alone or with others, takes initiative in founding and organizing the
business or enterprise of the issuer and receives consideration therefor.123
A corporation, until organized, has no being, franchises or faculties, nor do those engaged in
bringing it into being have any power to bind it by contract—it is, as it were, a child in ventre sa
mere. The acts of promoters of a corporation may be ratified by the corporation if and when
subsequently organized.124
Pre-incorporation subscription: A subscription of shares in a corporation still to be formed shall be

irrevocable for a period of at least 6 months from the date of subscription, unless all of the other subscribers
consent to the revocation, or the corporation fails to incorporate within the same period or within a longer
period stipulated in the contract of subscription. No pre-incorporation subscription may be revoked after the
AOI is submitted to the SEC (Sec. 60, RCC).
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 within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a purchase or some other contract (Sec. 59, RCC).
The subscription contract is a consensual contract that is perfected upon the meeting of the minds
of the parties. The name of the subscriber is recorded in the stock and transfer book, and from that
time, such subscriber becomes a stockholder of record entitled to all the rights of a stockholder.
Until the stocks are fully paid, it continues to be a subsisting liability that is legally enforceable.
Even if subscribers have legal standing to sue for rescission of subscription contract based on
breach of contract, such action cannot prosper since rescission will violate the Trust Fund Doctrine
and the procedures for the valid distribution of assets and property under the [RCC].125
A subscription contract may cover 1 or more shares. But even if it covers 2 or more shares, the
contract is an indivisible contract.126
Prohibited Consideration: Shares of stock shall not be issued in exchange for promissory notes or
future services (Sec. 61, RCC). However, there is no prohibition on the use of checks, bills or notes
in payment of the “cash” consideration.127
12
123
Sec. 3.10, Securities Regulation Code (R.A. 8799).
124
Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko, 1937.
Page
125
Ong Yong v. Tiu, 2003.
126
AQUINO, Corporate Law, p. 472.
127
SEC Opinion, Dec. 1, 1988.
Cruz, J. | 2020
A corporation cannot issue its stock as a gratuity but it is lawful for a corporation to issue watered
stock as a bonus to officers or employees as incentives or for services actually rendered to the
corporation for in such case, the stock cannot be considered gratuitous.128
Amount of Consideration: Shares of stock shall not be issued for a consideration less than the par
or issued price thereof (Sec. 64, RCC) except treasury shares so long as the price is reasonable (Sec.
9, RCC).
It is implied from Sec. 61 that a corporation may issue shares of stock at a price above the
par or issued value. Such value does not necessarily reflect the true or actual value of stock
since book or market value normally fluctuates.
Deposit on Stock Subscription: It is an amount of money received by the corporation as a deposit

with the possibility of applying the same as payment for future issuance of capital stock.129
The person making a deposit on stock subscription does not have the standing of a
stockholder and he is not entitled to dividends, voting rights or other prerogatives and
attributes of a stockholder.130
An entity shall classify a contract to deliver its own equity instruments under equity as a
separate account (e.g., Deposit for Stock Subscription) from “Outstanding Capital Stock” if
and only if, all of the following elements are present as of end of the reporting period:
1. The unissued authorized capital stock of the entity is insufficient to cover the amount
of shares indicated in the contract;
2. There is Board of Directors‖ approval on the proposed increase in authorized capital
stock (for which a deposit was received by the corporation);
3. There is stockholders‖ approval of said proposed increase; and
4. The application for the approval of the proposed increase has been filed with the
SEC.
It is understood from the foregoing that there is a subscription agreement which, among
other things, states that the corporation is not contractually obliged to return the
consideration received and that the corporation is obliged to deliver a fixed number of its
own shares of stock for a fixed amount of cash or property paid or to be paid by the
contracting party.131
DE-FACTO CORPORATION
A de-facto corporation is a company which has colourable compliance in good faith to the legal
requirements set by the RCC and the SEC.
The following are the requisites of a de facto corporation:

1. A valid law under which the corporation is organized;
2. A bona fide attempt in good faith to incorporate; and
3. An assumption of corporate powers.132
The filing of AOI and the issuance of the certificate of incorporation are essential for the existence
of a de facto corporation. In fine, it is the act of registration with SEC through the issuance of the
Certificate of Incorporation that marks the beginning of an entity‖s corporate existence. Thus, a
donation made in favor of the corporation after the filing of its incorporation papers with the SEC,
but before the issuance of the SEC Certificate of Incorporation requires the application, not of the
de facto corporation doctrine, but rather of the corporation by estoppel doctrine under [Sec. 20].133
Instances when there is a de facto corporation:

1. Failure to give the notice required by the statute for the meeting for its organization;
2. Failure to fix and limit the amount of capital stock of the company at the first meeting;
3. Failure to issue stocks;
4. Informalities in the proceedings of corporate meetings;
5. Lack of certificate of organization filed or executed;
6. Lack of elected Board of Directors;
7. Irregularities with respect to the number, term, place of residence, and of meeting of the
Board of Directors;
8. Some of the persons elected as directors are disqualified; and
9. In general, when there is a defect in the organization of the corporation and not on its
creation.134
128
Sabalvaro v. Erlanger & Galinger, Inc., 1937.
129
CIR v. First Express Pawnshop Company, 2009.
13
130
CIR v. First Express Pawnshop Company, 2009.
131
SEC Financial Reporting Bulletin 006 dated January 24, 2013.
Page
132
Hall v. Piccio, 1950.
133
Missionary Sisters of Our Lady of Fatima v. Alzona, 2018.
134
Chung Ka Bio v. IAC, 1988.
Cruz, J. | 2020
Instances when there is no de facto corporation due to invalid law:

1. A corporation under an unconstitutional statute;
2. When its purpose is prohibited by law or contrary to public policy; and
3. When its purpose is to practice a learned profession in the absence of a law expressly
permitting the organization of such corporations.135
CORPORATION BY ESTOPPEL
Founded on principles of equity and designed to prevent injustice and unfairness, the doctrine applies when
persons assume to form a corporation and exercise corporate functions and enter into business relations
with third persons. Where no third person is involved in the conflict, there is no corporation by estoppel. A
failed consolidation therefore cannot result in a consolidated corporation by estoppel.136
When an ostensible corporation or corporation by estoppel is sued on any transaction entered by it

as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense
its lack of corporate personality (Sec. 20, RCC). One who assumes an obligation to an ostensible
corporation cannot resist performance thereof on the ground that there was in fact no
corporation.137
Under the law on estoppel including that under [Sec. 20], those acting on behalf of an ostensible
corporation and those benefited by it, knowing it to be without valid existence , are held liable as
general partners.138
De facto By Estoppel
As to who can question its corporate existence
The State only in a direct proceeding. State or any third person who relied in good faith on
its representation (directly or collaterally).
As to creation
Has not complied with all requirements but there Absence of conditions precedent needed for a de
has been a colorable compliance facto corporation.
As to liabilities of officers and directors
Liable only to the extent of their subscription All who have knowledge of its lack of authority to act
unless acted in bad faith. as such are liable as general partners.
As to capacity to sue or be sued
Can sue and be sued. Cannot sue or be sued except by a third party who
relied on its representations in good faith.
DEFINITION OF TERMS
[Section 173 of RCC] defines “Paid-up Capital” as that portion of the “Authorized Capital Stock” which has
been both subscribed and paid. Not all funds or assets received by the corporation can be considered paid-
up capital; such must form part of the Authorized Capital Stock that has been subscribed and then actually
paid up. Advances by stockholders as payment of future subscriptions do not constituted part of the
Outstanding Capital Stock of the company.139
Under [Section 173 of RCC] the term “Capital Stock” excludes treasury shares. Thus, quorum is based on the
totality of the shares that have been subscribed and issued, whether it be founders‖ shares or common
shares.140
The “Subscribed Capital” is the total amount of the capital that persons (subscribers or shareholders) have
agreed to take and pay for, which need not necessarily be, and can be more than, the par value of the shares.
In fine, it is the amount that the corporation receives, inclusive of the premium if any, in consideration of the
original issuance of the shares.141
Trust Fund Doctrine: The subscriptions to the capital stock of a corporation constitute a fund to which the
creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain
an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. 142
The trust fund doctrine is not limited to reaching the stockholders unpaid subscriptions. The scope
of the doctrine when the corporation is insolvent encompasses not only the capital stock, but also
other property and assets generally regarded in equity as a trust fund for the payment of corporate
debt. All assets and property belonging to the corporation held in trust for the benefit of creditors
135
DE LEON, Corporation Code, pp. 190-191.
136
Lozano v. De Los Santos, 1997.
137
Paz v. New International Environmental Universality, Inc., 2015.
14
138
Lim Tong Lim v. Phils. Fishing Gear Industries, Inc., 1999.
139
MSCI-NACUSIP v. NWPC, 1997.
Page
140
Lanuza v. Court of Appeals, 2005.
141
NTC v. Court of Appeals, 1999.
142
Phil. Trust Co. v. Rivera, 1923.
Cruz, J. | 2020
that were distributed or in the possession of the stockholders, regardless of full payment of their
subscriptions, may be reached by the creditor in satisfaction of its claim.143
It is established doctrine that subscriptions to the capital of a corporation constitute a fund to

which creditors have a right to look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for
the payment of its debts144
Application of the Trust Fund Doctrine:

1. Where the corporation has distributed its capital among the stockholders without providing
for the payment of creditors;
2. When there is payment of dividends without unrestricted retained earnings;
3. Where it had released the subscribers to the capital stock from their subscriptions;
4. Where it has transferred the corporate property in fraud of its creditors;
5. Where the corporation is insolvent;
6. Prohibition against the issuance of watered stocks;
7. Purchase of a corporation of its own shares; and
Decrease of authorized capital stock to the prejudice of the corporation‖s creditors.145
The “trust fund” of pre-need companies is not subject to the Trust Fund Doctrine. In pre-need
companies, the so-called “Trust Fund” is not part of the paid-up capital which could be used to
satisfy the claims of the corporation‖s creditors. The trust fund is separate and distinct from the
capital stock of the company, and is established under a trust agreement approved by the
Securities and Exchange Commission to pay the benefits as provided in the pre-need plans. The
trust fund therefore is not subject to the “Trust Fund Doctrine” which pertains to the capital stock
of the corporation.146
Doctrine of Equality of Shares: Each share shall be equal in all respects to every other share, except as
otherwise provided in the AOI and in the certificate of stock. However, no share may be deprived of voting
rights except those classified and issued as “preferred” or “redeemable” shares, unless otherwise provided in
the RCC; Provided that there shall always be a class or series of shares with complete voting rights (Sec. 6,
RCC).
CLASSES OF SHARES
Common Shares represent the residual ownership interest in the corporation. It is a basic class of stock
ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro
rata division of profits.147
Conversion of common shares into preferred shares through amendment of AOI, is a legitimate
exercise of corporate powers. Conversion does not amount to [the corporation] using its funds to
effect conversion, but would amount merely to a reconfiguration of said (common) shares into
preferred shares.148
Preferred Shares are those which entitle the shareholder to some priority on dividends and asset
distribution.149 In the absence of provisions in the AOI denying voting rights to preferred shares, preferred
shares have the same voting rights as common shares.
However, preferred shareholders are often excluded from any control, that is, deprived of the right
to vote in the election of directors and on other matters, on the theory that the preferred
shareholders are merely investors in the corporation for income in the same manner as
bondholders. Under the Corporation Code only preferred or redeemable shares can be deprived of
voting rights. Common shares cannot be deprived of the right to vote, and any provision in the AOI
restricting the right of common shareholders to vote is invalid.150
Kinds of Preferred Shares:

1. Cumulative – one which entitles the owner thereof to payment not only of current dividends
but also back dividends not previously paid whether or not the past years‖ dividends were
declared or paid;
2. Non-cumulative – one which grants 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;
3. Participating – one which entitles the shareholder to participate with the common shares in
excess distribution at some predetermined or at a fixed ratio as may be determined; and
4. Non-participating – one which entitles the shareholder thereof to receive the stipulated
preferred dividends and no more.151
143
Halley v. Printwell, Inc., 2011.
144
Philippine Trust Company v. Marciano Rivera, 1923.
145
SUNDIANG & AQUINO, p. 230.
146
Securities and Exchange Commission v. College Assurance Plan Philippines, Inc., 2018.
15
147
CIR v. CA, 1999.
148
COCOFED v. Republic, 2009.
Page
149
Commissioner of Internal Revenue v. Court of Appeals, 1999.
150
Gamboa v. Teves, 2011.
151
AQUINO, Corporate Law, pp. 124-125.
Cruz, J. | 2020
In the absence of any characteristic as to the shares, the shares are non-cumulative and non-
participating.152
Redeemable Shares are shares which may be purchased by the corporation from the holders of such shares
upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the
books of the corporation, and upon such other terms and conditions stated in the AOI and the certificate of
stock representing the shares, subject to rules and regulations issued by the SEC (Sec. 8, RCC).
The corporation may reacquire redeemable shares even if it has no unrestricted retained earnings
except when such reacquisition will lead to bankruptcy.
Founders’ Shares may be given certain rights and privileges not enjoyed by the owners of other stocks.
Where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a
limited period not to exceed 5 years from the date of incorporation: Provided, That such exclusive right shall
not be allowed if its exercise will violate Commonwealth Act No. 108, otherwise known as the “Anti-Dummy
Law”; Republic Act No. 7042, otherwise known as the “Foreign Investments Act of 1991”; and other pertinent
laws (Sec. 7, RCC).
Delinquent Shares: Payment of unpaid subscription or any percentage thereof, together with any interest
accrued shall be made on the date specified in the subscription contract or on the date stated in the call
made by the board. Failure to pay on such date shall render the entire balance due and payable and shall
make the stockholder liable for interest at the legal rate on such balance, unless a different interest rate is
provided in the subscription contract. The interest shall be computed from the date specified, until full
payment of the subscription. If no payment is made within 30 days from the said date, all stocks covered by
the subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided,
unless the board of directors orders otherwise (Sec. 66, RCC).
Effects of Delinquency: No delinquent stock shall be voted for, be entitled to vote, or be

represented at any stockholder‖s meeting, nor shall the holder thereof be entitled to any of the
rights of a stockholder except the right to dividends in accordance with the provisions of the RCC,
until and unless payment is made by the holder such delinquent stock for the amount due on the
subscription with accrued interest, and the costs and expenses of advertisement, if any (Sec. 70,
RCC).
Any cash dividends due on delinquent stock shall first be applied to the unpaid balance on
the subscription plus costs and expenses, while stock dividends shall be withheld from the
delinquent stockholders until their unpaid subscription is fully paid (Sec. 42, RCC). No
delinquent stock shall vote and be voted (Sec. 23, RCC).
Procedure for Delinquency Sale under Sec. 67, RCC: (ReNo-PuSa-TC)

1. Resolution. The board shall issue resolution ordering the sale of delinquent stock.
It must contain:
a. Amount due on each subscription;
b. All accrued interest; and
c. Date, time and place of the sale.
The resolution under Sec. 68 is different from the call under Sec. 67. The former orders the
sale of delinquent stock while the latter makes an unpaid price due and demandable.
2. Notice. Notice of said sale, with a copy of the resolution, shall be sent to every delinquent
stockholder either personally or by registered mail;
3. Publication. The notice shall furthermore be published once a week for 2 weeks in a
newspaper of general circulation in the province or city where the principal office of the
corporation is located;
4. Sale. The delinquent stock shall be sold at the public auction to be held not less than 30
days nor more than 60 days from the date the stocks become delinquent;
It may be cancelled by:
a. Payment on or before date of the sale
b. Order of the board to that effect
5. Transfer. The stock so purchased shall be transferred to such purchaser in the books of the
corporation and a certificate for such stock shall be issued in his favor; and
6. Credit Remainder. The remaining shares, if any, shall be credited in favor of the delinquent
stockholder who shall likewise be entitled to the issuance of a certificate of stock covering
the same.153
Winning Bidder in a Delinquency Sale

1. The person participating in the delinquency sale who offers to pay the full amount of the
balance of the subscription together with the accrued interest, costs of advertisement and
16
expenses of sale, for the smallest number of shares.

Page
152
DE LEON, Corporation Code, p. 99.
153
AQUINO, Corporate Law, pp. 511-512.
Cruz, J. | 2020
2. If there is no bidder as mentioned above, the corporation may bid for the same, and the
total amount due shall be credited as paid in full in the books of the corporation. Such
shares shall be considered as treasury shares (Sec. 67, RCC).
The board is not bound to accept the highest bid unless the contrary appears or there are
board resolutions.154
Treasury Shares: 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 (Sec. 9,
RCC).
Treasury shares may be treated as part of the issued shares as long as they are not cancelled or
retired. They do not revert to the unissued shares of the corporation but are regarded as property
acquired by the corporation which may be reissued or resold at a price to be fixed by the Board of
Directors. They do not lose their status as “issued shares.”155
Treasury shares need not be sold at par or issued value but may be sold at the best price
obtainable, provided it is reasonable. When treasury shares are sold below its par or issued value,
there can be no watering of stock because such watering contemplates an original issuance of
shares (Sec. 9, RCC).
Treasury shares, not having been retired by the corporation reacquiring it, are subject to the
following rules:
1. They may be re-issued or sold again as long as they are held by the corporation as treasury
shares;
2. As long as they are held by the corporation, they cannot participate in dividends because
dividends cannot be declared by the corporation to itself who owns as property the said
shares;
3. They cannot be represented during stockholders‖ meeting for otherwise equal distribution
of voting powers will be lost; and
4. The amount of unrestricted retained earnings equivalent to the cost of treasure shares
being held shall be restricted from being declared and issued as dividends. The restriction
shall be lifted only after reissuance.
5. Treasury shares may be declared as property dividend to be issued out of the retained
earnings previously used to support their acquisition provided that the amount of the
retained earnings has not been subsequently impaired by losses.156
Watered Stocks are stocks issued for a consideration less than its par or issued value (Sec. 64, RCC).
Kinds of Watered Stocks:

1. Stocks issued without consideration (bonus share);
2. Stocks issued as fully paid when the corporation has received a lesser sum of money than its
par or issued value (discount share);
3. Stocks issued for a consideration other than actual cash such as property or services, the fair
valuation of which is less than its par or issued value; and
4. Stocks issued as stock dividend when there are no sufficient retained earnings to justify it.157
The prohibition to issue “watered stock” refers only to original issue of stocks but not to a
subsequent transfer of such stocks by the corporation, for then it would no longer be an “issue” but
a sale thereof.158
Liability for Watered Stock

1. Consenting director or officer – solidary with the participating stockholder for the difference
between the fair value received at the time of the issuance of the stock and the par or the
issued value of the same (Sec. 64, RCC).
2. Subscriber – liable (1) to be called upon to contribute, if necessary for the benefit of
creditors to the extent of the difference between the amount paid and the par or issued
value of the shares; (2) for the purpose of adjusting the rights of the stockholders inter se
(Sec. 64, RCC).
Holder of watered stock cannot escape liability by transferring the same to an

irresponsible person or to a bona fide purchaser.
3. Subsequent transferee – occupies the same position as his transferor with respect to the
right to complain if his transferor was estopped. This is true notwithstanding the fact that
he purchased the stock in good faith and in ignorance of the fraudulent or unlawful issue
(Sec. 64, RCC).
17
154
155
SEC-OGC Opinion No. 16-16, June 27, 2016.
Page
156
SEC-OGC Opinion No. 16-16, June 27, 2016.
157
158
Cruz, J. | 2020
4. Transferor or party to the fraud - It can be made liable for damages
Basis of Liability: Where the corporation issues watered stocks and thereby assumed
an ostensible capitalization in excess of its real assets, the transaction necessarily
involves the misleading of subsequent creditors and whether done with that purpose
actually in mind or not, is at least a constructive fraud upon creditor.
STOCK CERTIFICATE
Certificate of Stock is a written instrument signed by the proper officer of a corporation stating or
acknowledging that the person named in the document is the owner of a designated number of shares of its
stock. It is prima facie evidence that the holder is a shareholder of a corporation.159 A certificate, however, is
merely a tangible evidence of ownership of shares of stock.160 It is not a stock in the corporation and merely
expresses the contract between the corporation and the stockholder. 161The shares of stock evidenced by
said certificates, meanwhile, are regarded as property and the owner of such shares may, as a general rule,
dispose of them as he sees fit, unless the corporation has been dissolved, or unless the right to do so is
properly restricted, or the owner's privilege of disposing of his shares has been hampered by his own action.
162
When a stock certificate is endorsed in blank by the owner thereof, it constitutes what is termed as
street certificate, so that upon its face, the holder is entitled to demand transfer into his name
from the issuing corporation. Such certificate is deemed quasi-negotiable and as such, the
transferee thereof is justified in believing that it belongs to the holder and transferor. 163
While [Section 72] appears to be mandatory, the same admits exceptions, such that a corporation
may voluntarily issue a new certificate in lieu of the original certificate of stock which has been lost
without complying with the requirements under said section. It would be an internal matter for the
corporation to find measures in ascertaining who the real owners of stock for purposes of
liquidation are. It is well-settled that unless proven otherwise, the “stock and transfer book” is the
best evidence to establish stock ownership.164
Doctrine of Free Transferability of Shares: Shares are not owned or are the assets of the corporation—they
are owned by the stockholders of record. The corporation whose shares of stock are the subject of transfer
transaction need not be a part to the transaction to be valid; however, to bind the corporation as well as
third parties, it is necessary that the transfer is recorded in the books of the corporation.165
[Section 62 of RCC] contemplates no restriction as to whom the stocks may be transferred. It does
not suggest that any discrimination may be created by the corporation in favor of, or against a
certain purchaser. The owner of shares, as owner of personal property, is at liberty, under said
section to dispose them in favor of whomever he pleases, without limitation in this respect, than
the general provisions of law.166
HOWEVER, a contractual undertaking on restriction of transfer of shares that has a

reasonable business purpose and limited in coverage is valid and binding.167
Registration of a transfer of shares of stock is a ministerial duty on the part of the

corporation. Aggrieved parties may then resort to the remedy of mandamus to compel
corporations that wrongfully or unjustifiably refuse to record the transfer or to issue new
certificates of stock. This remedy is available even upon the instance of a bona fide
transferee who is able to establish a clear legal right to the registration of the transfer.168
REGISTRATION OF TRANSFERS OF STOCK TO CORPORATE RECORDS

The stock and transfer book records the names and addresses of all stockholders arranged alphabetically,
the installments paid and unpaid on all stock for which subscription has been made, and the date of
payment thereof, a statement of every alienation, sale or transfer of stock made the date thereof and by and
to whom made, and such other entries as may be prescribed by law. A stock and transfer book, like other
corporate books and records, is not in any sense a public record, and thus is not exclusive evidence of the
matters and things which ordinarily are or should be written therein.169
As between the General Information Sheet and the corporate books, it is the latter that is
controlling as to the number of shares held by shareholders.170
159
Lao v. Lao, 2008.
160
Republic v. Estate of Hans Menzi, 2005.
161
Makati Sports Club v. Cheng, 2010.
162
Teng v. SEC, 2016.
163
Guy v. Guy, 2012
164
SEC Opinion 28 January 1999, addressed to Ms. Ma. Cecilia Salazar-Santos
165
Forest Hills Golf & Country Club v. Vertex Sales and Trading, Inc., 2013.
18
166
Fleishcher v. Botica Nolasco, 1925.
167
Lambert v. Fox, 1914.
Page
168
Andaya v. Rural Bank of Cabadbaran, 2016.
169
Lanuza v. CA, 2005.
170
Lao v. Lao, 2008.
Cruz, J. | 2020
Until challenged in a proper proceeding, a stockholder of record has a right to participate in any
meeting; his vote can be properly counted to determine whether a stockholders‖ resolution was
approved, despite the claim of the alleged transferee. On the other hand, a person who has
purchased stock, and who desires to be recognized as a stockholder for the purpose of voting,
must secure such a standing by having the transfer recorded on the corporate books. Until the
transfer is registered, the transferee is not a stockholder but an outsider.171
Shares for which no certificate of stock has been issued may validly be mortgaged in whole and
the corporation receiving notice thereof is bound to respect the security arrangement. The “unpaid
claims” under [Sec. 62 of RCC] refers to any unpaid subscription, and not to any indebtedness
which a stockholder may owe the corporation arising from any other transactions, like unpaid
monthly dues.172 Hence, in order for the chattel mortgage on shares of stock be valid and binding
on third parties, registration thereof in the stock and transfer book is not required and not legally
effective. What is necessary is that the chattel mortgage over the shares be registered in the
Registry of Deeds of the principal place of business of the corporation, as well as in the Registry of
Deeds of the stockholders‖ domicile.173
Attachments of shares of stock are not included in the term “ transfer” as provided in [Section 62 of
RCC]. Both the Revised Rules of Court and [RCC] do not require annotation in the corporation‖s
STB for the attachment of shares to be valid and binding on the corporation and third parties.174
Situs of shares of stock is the domicile of the corporation to which they pertain to.175
Doctrine of Centralized Management (Sec. 22, RCC): The raison d‖etre behind conferment of corporate
powers on the Board is not lost on the Court – indeed, the concentration in the Board of the powers of
control of corporate business and appointment of corporate officers and managers is necessary for
efficiency in any large organization. Stockholders are too numerous, scattered and unfamiliar with the
corporate business to conduct its affairs directly—so the plan of corporate organization is for the
stockholders to choose the directors who shall control and supervise the conduct of corporate business.176
Whatever may be the term used in the company charter, the “Board of Directors” is the body which
(1) exercises all powers provided for under the [RCC]; (2) conducts all business of the corporation;
and (3) controls and holds all properties of the corporation. Its members have been characterized
as clothed with a fiduciary character. Hence, the corporation‖s general counsel cannot represent
the members of the Board who have been sued by the stockholders in a derivative suit, for clearly
the Board is separate and distinct from the corporate entity itself.177 Non-stock and other special
corporations may, through their AOI or their bylaws, designate their Governing Board by any name
other than as “Board of Trustees” (Sec. 174, RCC). A director holds office for a year while a trustee
holds office for a term not exceeding 3 years or until the replacement director/trustee is elected
(Sec. 22, RCC).
Qualifications for a seat in the Board: The governance and management of corporate affairs in a corporation
lies with its Board of Directors/Trustees. As the Board exercises all corporate powers and authority expressly
vested upon it by law and by the corporations‖ bylaws, there are minimum requirements set in order to be a
director or trustee, one of which is ownership of a share in one‖s name or membership in a non-stock
corporation. Thus, while a corporate stockholder or member may rightfully designate proxies or
representatives, the latter, however, cannot be elected as directors or trustees of the corporation. First, the
[RCC] clearly provides that a director or trustee must be a member of record of the corporation. Further, the
power of the proxy is merely to vote. If said proxy is not a member in his own right, he cannot be elected as
a director or proxy.178
Disqualifications of Directors, Trustees, and Officers: A person shall be disqualified from being a director,
trustee, or officer of any corporation if, within 5 years prior to the election or appointment as such, the
person was:
a. Convicted by final judgment:
i. Of an offense punishable by imprisonment for more than 6 years;
ii. For violating the RCC; and
iii. For violating the SRC.
b. Found to be administratively liable or any offense involving fraud acts; and
c. By a foreign court or equivalent foreign authority for acts, violations, misconducts similar to (a) and
(b) (Sec. 26, RCC).
171
Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 2001.
172
Fua Cun v. Summers, 1923.
173
Chua Guan v. Samahang Magsasaka, Inc., 1935.
19
174
Chemphil Export & Import Corp. v. CA, 1995.
175
Wells Fargo Bank and Union v. Collector, 1940.
Page
176
Filipinas Port Services v. Go, 2007.
177
Hornilla v. Salunat, 2003.
178
Lim v. Moldex Land, Inc., 2017.
Cruz, J. | 2020
The enumeration of grounds for disqualification is not exclusive. The by-laws may validly provide
that a stockholder is ineligible to be director if he is also a director in a corporation whose business
is in competition with that of the other corporation.179
An 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. Independent directors are required to constitute at least 20% of the Board‖s
membership in corporations vested with public interest (Sec. 22, RCC).
Compensation of Directors or Trustees: In the absence of any provision in the by-laws fixing their
compensation, the directors or trustees shall not receive any compensation in their capacity as such, except
for reasonable per diems: Provided however, That the stockholders representing at least a 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.
In no case shall the total yearly compensation of directors exceed 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 own per diems or
compensation (Sec. 29, RCC).
Election of Directors/Trustees: The underlying policy of the Corporation Code is that the business and affairs
of a corporation must be governed by a Board of Directors whose members have stood for election, and
who have actually been elected by the stockholders, on an annual basis. Only in that way can the directors‖
continued accountability to the shareholders, and the legitimacy of their decisions that bind the
corporation‖s stockholders, be assured. The shareholder vote is critical to the theory that legitimizes the
exercise of power by the directors or officers over properties that they do not own.180
Cumulative voting in stock corporations, a stockholder is entitled to vote as many as the number
of his shares and apportion them in any way he likes. Straight voting in non-stock corporations, a
member is generally entitled to 1 vote; unless, the AOI or the bylaws allow that a member is
entitled to vote as many as the number of seats in the Board of Trustees to be filled provided that
no candidate shall be voted more than once by a member (Sec. 23, RCC).
Formula in computing the vote requirement for a guaranteed seat in the Board:
[ ]
All election contests over directors and trustees fall within the original and exclusive jurisdiction of
the RTC Special Commercial Courts and no longer with the SEC.181 Under Secs. 1 -3 of Rule 6 of the
Interim Rules of Procedure for Intra-Corporate Controversies, an election contest should be
dismissed when filed beyond the 15-day prescriptive period allowed for an election protest.182
Vacancies in the Board: If the reason for the vacancy is Removal, Expiration of term, or Increase in the
number of seats (REI), the stockholders will fill the vacancy. For all other reasons, the Board will fill the
vacancy provided that it still has quorum. If the Board does not have a quorum, the stockholders will fill the
vacancy.
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 (Sec. 28, RCC).
Emergency Board: When the vacancy prevents the remaining directors from constituting a quorum and
emergency action is required to prevent grave, substantial, and irreparable loss or damage to the
corporation, the vacancy may be temporarily filled from among the officers of the corporation by unanimous
vote of the remaining directors or trustees. The action by the designated director or trustee shall be limited
to the emergency action necessary, and the term shall cease within a reasonable time from the termination
of the emergency or upon election of the replacement director or trustee, whichever comes earlier. The
corporation must notify the SEC within 3 days from the creation of the emergency board, stating therein the
reason for its creation (Sec. 22, RCC).
Special Facts or Special Circumstances Doctrine: While a director does not stand in fiduciary relation to the
stockholder, he is under legal obligation to make fair and full disclosure of pertinent official information
where special circumstances exist giving rise to the obligation to disclose.183
The power to purchase real property is vested in the Board of Directors or Trustees. While a
corporation may appoint agents to negotiate for the purchase of real property needed by the
corporation, the final say will have to be with the Board, whose approval will finalize the
20
179
180
Valle Verde Country Club, Inc. v. Africa, 2009.
Page
181
GSIS v. CA, 2009.
182
Ricafort v. Dicdican, 2016.
183
Strong v. Repide, 1909.
Cruz, J. | 2020
transaction. A corporation can only exercise its powers and transact its business through its Board
of Directors and through its officers and agents when authorized by a board resolution or by its by-
laws.184
Business Judgment Rule: When resolutions are passed in good faith by the Board of Directors, it is valid and
binding, and whether or not it will cause losses or decrease the corporation‖s profits, the courts have no
authority to review them. Questions of policy or management are left solely to the honest decision of
officers and directors of a corporation, and the court is without authority to substitute its judgment [for that]
of the Board. The Board is the corporation‖s business manager, and so long as it acts in good faith its orders
are not reviewable by the courts.185
Directors and officers who purport to act for the corporation, keep within the lawful scope of their
authority and act in good faith, do not become liable, whether civilly or otherwise, for the
consequences of their acts, which are properly attributed to the corporation alone.186
It is elementary in Corporation Law that the business judgment rule, which prohibits the courts
from interfering in the judgment made by the Board and its officers, admits of exceptions: bad
faith being one of them, gross negligence, another.187
However, doctrine of estoppel or ratification applies (Art. 1910, NCC). Ratification means that the
principal voluntarily adopts, confirms and gives sanction to some unauthorized act of its agent on
its behalf. The substance of the doctrine is confirmation after conduct, amounting to a substitute
for a prior authority. Ratification can be made either expressly or impliedly. Implied ratification
may take various forms—like silence or acquiescence, acts showing approval or adoption of the act,
or acceptance and retention of benefits flowing therefrom.188
Doctrine of Laches or Stale Demands: The failure or neglect, for an unreasonable and unexplained
length of time, to do that which by exercising due diligence could or should have been done
earlier, or the negligence or omission to assert a right within a reasonable time, warrants a
presumption that the party entitled to assert it either has abandoned it or declined to assert it.189
MEETINGS OF THE BOARD

Quorum in Directors’/Trustees’ Meeting: Unless the AOI or the by-laws provides for a greater majority, a
majority of the directors or trustees as stated in the AOI shall constitute a quorum to transact corporate
business, and every decision reached by at least a majority of the directors or trustees constituting a
quorum, except for the election of officers which shall require the vote of a majority of all the members of
the board, shall be valid as a corporate act (Sec. 52, RCC).
Abstention in a Board meeting is presumed to be counted as an affirmative vote insofar as it may

be construed as an acquiescence in the action of those who voted affirmatively; but such
presumption, being merely prima facie would not hold in the face of clear evidence to the
contrary.190
Place and time of meetings: Regular meetings of the board of directors or trustees of every
corporation shall be held monthly, unless the bylaws provide otherwise. Special meetings of the
board of directors or trustees may be held at any time upon the call of the president or as provided
in the bylaws. Meetings of directors or trustees of corporations may be held anywhere in or
outside of the Philippines, unless the bylaws provide otherwise. Notice of regular or special
meetings stating the date, time and place of the meeting must be sent to every director or trustee
at least two (2) days prior to the scheduled meeting, unless a longer time is provided in the bylaws.
A director or trustee may waive this requirement, either expressly or impliedly.
Teleconferencing in board meetings is now allowed under Sec. 52 of the RCC subject to the
guidelines laid down by the SEC in SEC Memorandum 15-2001.
Board may delegate some of its authority. Just as natural person may authorize another to do certain acts
for and on his behalf, the Board, as the repository of corporate powers, may validly delegate some of its
functions and powers to officers, committees, or agents. The authority of such individuals to bind the
corporation is generally derived from law, bylaws or authorization from the Board, either expressly or
impliedly by habit, custom or acquiescence in the general course of business.191
If the bylaws so provide, the board may create an executive committee composed of at least 3
directors. 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 bylaws or by majority vote of
the board, except with respect to the: (a) approval of any action for which shareholders‖ approval is
also required; (b) filling of vacancies in the board; (c) amendment or repeal of bylaws or the
184
Sps. Firme v. Ukal Enterprises and Development Corporation, 2003.
185
Montelibano v. Bacolod-Murcia Miling Co., 1962.
186
Benguet Electric Cooperative, Inc. v. NLRC, 1992.
21
187
188
Lopez Realty v. Spouses Tanjangco, 2014.
Page
189
Rovels Enterprises, Inc. v. Ocampo, 2002.
190
Lopez v. Ericta, 1972.
191
Colegio Medico-Farmaceutico de Filipinas, Inc. v. Lim, 2018.
Cruz, J. | 2020
adoption of new bylaws; (d) amendment or repeal of any resolution of the board which by its
express terms is not amendable or repealable; and (e) distribution of cash dividends to the
shareholders (Sec. 34, RCC).
CORPORATE OFFICERS
The following are the Statutory Corporate Officers under Sec. 24 of the RCC:
1. President – must be a director;
2. Treasurer – must be a resident of the Philippines;
3. Secretary – Filipino citizen and resident of the Philippines; and
4. If a corporation vested with public interest, a compliance officer.
The same person may hold 2 or more positions concurrently, except that no one shall act as president and
secretary or as president and treasurer at the same time.
The corporate officers are elected by a majority vote of all members of the Board of Directors (Sec. 52, RCC).
Corporate Officers in the By-Laws: A position must be expressly mentioned in the By-Laws in order to be
considered as a corporate office. Thus, the creation of an office pursuant to or under a By-Law enabling
provision is not enough to make a position a corporate office.192
In the absence of a charter or bylaw provision to the contrary, the President is presumed to have
the authority to act within the domain of the general objectives of the corporation‖s business and
within the scope of his usual duties. Hence, it has been ruled in other jurisdiction that the president
of the corporation possesses the power to enter into a contract for the corporation, when the
“conduct on the part of both the president and the corporation [shows] that he had been in the
habit of acting in similar matters on behalf of the company and that the company had authorized
him so to act and had recognized, approved and ratified his former and similar actions.” 193
A corporate officer’s dismissal is always a corporate act, or an intra-corporate controversy which arises
between a stockholder and a corporation. The question of remuneration involving a stockholder and officer,
not a mere employee, is not a simple labor problem but a matter that comes within the area of corporate
affairs and management and is a corporate controversy in contemplation of the [RCC].194
Doctrine of Apparent Authority: If a private corporation intentionally or negligently clothes its officers with
apparent power to perform acts for it, the corporation will be estopped to deny that such apparent authority
is real, as to innocent third persons dealing in good faith with such officers or agents. 195
Director or Trustee Corporate Officer

As to Basis
The RCC mandates the election of directors or The RCC mandates the election of a president,
trustees. secretary, treasurer, and compliance officer. Other
position or office is provided for in the by-laws
As to Election
Elected by the stockholders or members. Generally, elected by the majority of all the members
of the board of directors or trustees. Except in non-
stock or close corporations where the AOI provide
that they shall be elected by the stockholders or
members.
As to Power to Act Individually
Directors or Trustees are not the agents of the Has the authority to act individually to bind the
corporation per se and they have no power acting corporation
individually to bind the corporation.
As to firms engaged in wholly or partially nationalized activities
Aliens may be elected as directors or trustees in Aliens are banned from being appointed to
proportion to their allowable participation or management positions, such as president, vice-
share in the capital of such activities. president, treasurer, auditor etc.
As to ownership of stocks
Directors are required to be stockholders. Officers need not be a stockholder or member
Trustees should be a member of the non-stock except for the president.
corporation.
As to Compensation
In the absence of any provision in the by-laws, the It is within the powers of the board to fix the salaries
directors shall not receive any compensation, of corporate officers.
except for reasonable per diems.
As to Term
Shall hold office for 1 year until their successors The term cannot extend beyond that of the
are elected and qualified. directors. However, the RCC permits a corporation to
provide in its by-laws a term longer than 1 year for its
corporate officers, other than directors or trustees.
22
192
Matling Industrial and Commercial Corporation v. Coros, 2010.
Page
193
Advance Paper Corp. v. Arma Traders Corp., 2013.
194
Okol v. Slimmers World International, 2009
195
Calubad v. Ricarcen Development Corp., 2017.
Cruz, J. | 2020
As to Removal
Any director or trustee may be removed from Where the term of an officer is not fixed by contract
office by a vote of at least 2/3 of the outstanding or in the by-laws, he may be removed at any time
capital stock or members entitled to vote. with or without cause by the board.
Removal may be with or without cause; Provided, If fixed in the by-laws, he has to be re-elected by the
it may not be used to deprive minority board until the expiration of the term; otherwise, the
stockholders of the right of representation. corporation may be held liable for damages.
FIDUCIARY DUTIES OF DIRECTORS/TRUSTEES, AND OFFICERS

Directors, trustees, and officers have the fiduciary duty to (MOLD): Duty to Maintain records (Sec. 161, RCC),
Obedience to the formalities prescribed by corporate bylaws and AOI (Sec. 24, RCC), Loyalty to the
corporation (Secs. 30, 31, & 33), and to observe Diligence for the betterment of the corporation (Sec. 30,
RCC).
Under the duty to maintain records are (Sec. 161, RCC):

1. To adopt, maintain, and allow inspection of Bylaws (Sec. 45, RCC);
2. To keep, maintain, and allow inspection of AOI and other corporate books and records (Sec.
73, RCC);196
3. To keep and update the list of Members and Proxies for Non-stock Corporations (Sec. 92,
RCC);
4. To keep, maintain, and update the Minutes book for One Person Corporation (Sec. 128, RCC);
5. To annually submit the General Information Sheet and Audited Financial Statements to the
SEC (Sec. 177, RCC); and
6. For corporations vested with public interest: submit a Director Compensation Report and
Director Appraisal and Performance Report (Sec. 177, RCC).
This Court takes judicial notice of the fact that audited financial statements submitted by
corporations, as required by [Section 177 of RCC], are made available to the public by the
SEC.197
Duty of Diligence: Under [Sec. 30] personal liability will only attaches to a director or officer if they are guilty
of any of the following: (1) wilfully or knowingly vote or assent to patently unlawful acts of the corporation;
(2) gross negligence; or (3) bad faith. It is only in these exceptional cases when officers are solidarily liable.198
Requisites to Hold Directors/Trustees or Officers Personally Liable: The general rule is that a
corporation is invested by law with a personality separate and distinct from that of the persons
composing it, or from any other legal entity that it may be related to. Therefore, to hold a director
officers personally liable for corporate obligations, the following requisites must concur: (1)
complainant must allege in the complaint that the director or officer assented to a patently
unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and
(2) complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith. 199
Bad faith does not arise just because a corporation fails to pay its obligation, because the
inability to pay one‖s obligation is not synonymous with fraudulent intent not to honor the
obligations. In order to piece the veil of corporate fiction, for reasons of negligence by the
director, trustee or officer in the conduct of the transactions of the corporation, such
negligence must be “gross”.200
Formal recognition of the duty of Directors/Trustees to Good Corporate Governance are found in
various provisions of the RCC:
1. Directors/Trustees elected shall perform their duties as prescribed by law, rules of good
corporate governance, and bylaws of the corporation (Sec. 23, RCC);
2. Qualifications and disqualifications rules imposed by SEC to promote good corporate
governance (Sec. 26);
3. Contents of the Bylaws for the promotion of good corporate governance (Sec. 46[k], RCC);
and
4. Duty to present to stockholders/members at annual meetings reports, records and such
other items that the SEC may require in the interest of good corporate governance and the
protection of minority stockholders (Sec. 49[6], RCC).
Under the duty of loyalty, the doctrine of corporate opportunity was enunciated, stating: Corporate officers
are not permitted to use their position of trust and confidence to further their private interest. Fiduciary
standard cannot be upheld where the fiduciary was acting for 2 entities with competing interests.201 It
applies to confidential employees of the corporation.202
Applicability of the Doctrine of Corporate Opportunity: Unless his act is ratified, a director shall
refund to the corporation all the profits he realizes on a business opportunity which: (FLI)
196
See SEC Memorandum 15-2019 dated 26 July 2019.
23
197
Ready Form, Inc. v. Castillon, Jr., 2018.
198
Kho, Sr. v. Manganua, 2019.
199
Mactan Rock Industries v. Germo, 2018.
Page
200
Magaling v. Ong, 2008.
201
Gokongwei v. SEC, 1979.
202
Sing Juco v. Llorente, 1922.
Cruz, J. | 2020
1. The corporation is Financially able to undertake;

2. From its nature, is in Line with corporations business and is of practical advantage to it; and
3. The corporation has an Interest or a reasonable expectancy (Sec. 33, RCC).
The rule shall be applied notwithstanding the fact that the director risked his own funds in
the venture.
When Corporate Opportunity Ceases: A business opportunity ceases to be corporate opportunity

and transforms to personal opportunity where the corporation refuses or is definitely no longer
able to avail itself of the opportunity .203
The Board of Directors is expected to be more than a mere rubber stamp of the corporation and its
subordinate departments. It wields all corporate powers bestowed by the Corporation Code,
including the control over its properties and the conduct of its business. Being stewards of the
company, the Board is primarily charged with protecting the assets of the corporation in behalf of
its stakeholders.204 Although it cannot be shown that the directors approving the credit line where
unaware of the fraudulent intent for such transactions, nevertheless, they were still liable for the
defrauded investors for gross negligence in managing the affairs of the company in not exercising
more circumspection based on the facts already known to them that resulted to the prejudice of
its clients and stakeholders. Neither can the business judgment rule apply herein for it is
elementary in Corporation Law that the doctrine admits of exception: bad faith being one of them,
gross negligence, another.205
Using Inside Information: When a director and majority stockholder, who is the administrator of
corporate affairs directly negotiating the sale of corporate landholdings to the Government at
great prices, purchases the stocks of a shareholder without informing the latter of the on-going
negotiations, such director is deemed to have fraudulently acquired the shareholdings by way of
deceit practiced by means of concealing his knowledge of important corporate affairs.206
Self-Dealings of Directors and Officers (Sec. 31, RCC):207 [Section 31 of RCC] on self-dealings by
directors and officers merely incorporate well-established principles in Corporate Law. A director
who enters into a distributorship agreement with the corporation would make the contract
voidable at the option of the corporation especially when the terms are disadvantageous to the
corporation, unless:208
1. The presence of such director or trustee in the board meeting in which the contract was
approved was not necessary to constitute a quorum;
2. The vote of such director or trustee was not necessary for the approval of the contract;
3. The contract is fair and reasonable;
4. In case of a corporate officer, the contract has been previously authorized by the board; and
5. For corporations vested with public interest, material contracts are approved by at least 2/3
of the entire membership of the board, with at least majority of the independent directors
voting to approve it (Sec. 31, RCC).
The contracts may be ratified by a 2/3 vote of the outstanding capital stock or members;
provided, first three conditions are present (Sec. 31, RCC).
Contracts between Corporations with Interlocking Directors (Sec. 32, RCC): The rule under [Sec. 32
of RCC] allowing annulment of contracts between corporations with interlocking directors
resulting in the prejudice to one of the corporation, has no application to cases where fraud is
alleged to have been committed to third parties.209
Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances,
a contract between 2 or more corporations with interlocking directors should not be invalidated on
that ground alone.
If the interest of the interlocking director in one corporation is substantial (more than 20%
of the outstanding capital stock) and the interest in the other is nominal, the contract shall
be subject to Sec. 31 of the RCC (Sec. 32, RCC).
While shares constitute personal property, they are not the property of the corporation. They are property of
the stockholders to whom issued, and they represent an aliquot part to share in its proceeds of the
liquidation of the corporation properties when distributed according to law and equity. The stockholder is
not a co-owner of corporate property, nor is he entitled to any definite portion of its assets.210
203
SEC Opinion, March 4, 1982.
204
See SEC Memorandum 19-2016 (Code of Corporate Governance for Publicly-Listed Corporations.)
24
205
206
Strong v. Repide, 1909.
207
See SEC Memo Circular No. 10-2019 published 27 April 2019
Page
208
Prime White Cement Corp. v. IAC, 1993.
209
DBP v. Court of Appeals, 2001.
210
Stockholders of F. Guanson and Sons, Inc. v. Register of Deeds of Manila, 1962.
Cruz, J. | 2020
RIGHTS OF SHAREHOLDERS
Pre-emptive Right (Sec. 38, RCC): Pre-emptive right under [Section 38] refers to the right of a stockholder of
a stock corporation to subscribe to all issues or disposition of shares of any class, in proportion to their
respective shareholdings. Although it can validly be withdrawn, it cannot be done in breach of fiduciary
duties such as to perpetuate control over the corporation.211
Pre-emptive Right Right of First Refusal

Common law right. Arises by virtue of:
1. Contractual stipulations; or
2. Specified statutory provisions.
May be exercised by stockholders even when no May only be exercised if provided for by law or by
provision is granted by law. the AOI. It is a creature of Contract Law.
Pertains to that portion of the authorized capital Pertains to shares already issued.
stock that has not been subscribed i.e. unissued
shares that are offered for subscription.
A right claimed against the corporation on A right exercisable against another stockholder of
unissued shares of its capital stock the corporation on his shares of stock.
Right to Dividends: The term “dividend” in its technical sense and ordinary acceptation is that part of portion
of the profits of the enterprise which the corporation, by its governing agents, sets apart for ratable division
among the holders of its capital stock—it is a payment, and the right thereto is an incident of ownership of
stock.212
HOWEVER, stockholders cannot compel the Board to issue dividends. The power to declare
dividends under [Section 42 of RCC] is with the Board of Directors, and can be declared only out of
its unrestricted retained earnings. Assuming arguendo that Socorro as corporate director was
authorized by the Board to fix the monthly dividends of Sugiyama, it appears that she committed
an ultra vires act because dividends can be declared only out of unrestricted retained earnings of a
corporation, which earnings cannot obviously be fixed and pre-determined 5 years in advance.”213
Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in
capital stock.
Exceptions: (SLEx)
1. When it can be clearly shown that such retention is necessary under Special circumstances
obtaining in the corporation, such as when there is a need for special reserve for probable
contingencies;
2. When the corporation is prohibited under any Loan agreement with any financial institution
or creditor, whether local or foreign, from declaring dividends without its/his consent and
such consent has not yet been secured; and
3. When justified by definite corporate Expansion projects or program approved by the board
of directors (Sec. 42, RCC).
Stock dividend is the amount that the corporation transfers from its surplus profit account to its capital
account. It is the same amount that can loosely be termed as the “trust fund” of the corporation.214
[Section 42 of RCC] prohibits the issuance of any stock dividend without the approval of
stockholders, representing not less than 2/3 of the outstanding capital stock, which underscores
the fact that payment of dividends to a stockholder is not a matter of right but a matter of
consensus. Furthermore, “interest bearing stocks”, on which the corporation agrees absolutely to
pay interest before dividends are paid to the common stockholders, is legal only when construed
as requiring payment of interest as dividends from net earnings or surplus only.215
Delinquent shareholders have the right to dividends; provided that “any cash dividends due on
delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and
expenses, while stock dividends shall be withheld from the delinquent stockholders until their
unpaid subscription is fully paid (Sec. 42, RCC). No delinquent stock shall vote and be voted” (Sec.
23, RCC).
Cash Dividends Stock Dividends

As to Authority to Declare
Declared only by the board of directors at its Declared by the board with the concurrence of the
discretion. stockholders representing at least 2/3 of the
outstanding capital stock at a regular/special
meeting.
25
211
Majority Stockholders of Ruby Industrial Corp. v. Lim, 2011.
212
Cojuangco v. Sandiganbayan, 2009.
Page
213
Ongkingco v. Sugiyama, 2019.
214
NTC v. Court of Appeals, 1999.
215
Republic Planters Bank v. Agana, 1997.
Cruz, J. | 2020
Cash Dividends Stock Dividends

As to Disbursements of Funds
Involves a disbursement to the stockholders of Does not involve any disbursement of funds.
accumulated earnings.
As to Corporate Capital
Does not increase the corporate capital. Corporate capital is increased.
As to Creation of Debts
Its declaration creates a debt from the corporation No debt is created by its declaration.
to each of its stockholders.
As to Liability to Corporate Creditors
When declared and paid becomes the absolute Since it is still part of corporate property, may be
property of the stockholder and cannot be reached reached by corporate creditors.
by creditors of the corporation in the absence of
fraud.
As to Applicability to Unpaid Subscription
May be applied to unpaid subscription May not be applied
As to Liability on Income Tax
Taxable as income to stockholder Generally not subject to income tax
MEETINGS OF STOCKHOLDERS/MEMBERS
Right to Attend Stockholders’/Members’ Meetings (Secs. 48-51, RCC): Until challenged successfully in
proper proceedings, a registered stockholder has a right to participate in any meeting, and in the absence of
fraud the action of the stockholders‖ meeting cannot be collaterally attacked on account of such
participation, even if it be shown later on that the shares had been previously sold (but not recorded).216
Place of Stockholders’/Members’ Meeting: Stockholders‖ or members‖ meetings, whether regular

or special, shall be held in the principal office of the corporation as set forth in the AOI, or, if not
practicable, in the city or municipality where the principal office of the corporation is located:
Provided, That any city or municipality in Metro Manila, Metro Cebu, Metro Davao, and other
Metropolitan areas shall, for purposes of this section, be considered a city or municipality (Sec. 50,
RCC).
When the AOI or bylaws are silent, the quorum in the shareholders‖ meeting is the
attendance of stockholders representing the majority of the outstanding capital stock or a
majority of the members for non-stock corporations (Sec. 51, RCC). For stock corporations,
the “quorum” referred to in Sec. [51] is based on the number of outstanding voting stocks;
however, 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.217
Specific Rules on the Waiver of Improper Notice under Sec. 49, RCC: [Section 49 of RCC] expressly
allows a shorter period of notice of stockholders‖ meetings that those provided under its default
[21 days] period, provided the same is provided for in the Bylaws;218 such period set in the Bylaws is
valid even when the period is reckoned from the mailing of the notice rather than when it is
actually received by the stockholder of record.219
Regular meetings of stockholders or members shall be held annually on a date fixed in the by-
laws, or if not so fixed, on any date after April 15 of every year as determined by the Board (Sec. 49,
RCC).
Quorum: It is that number of members of a body which, when legally assembled in their proper
places, will enable the body to transact its proper business or that number which makes a lawful
body and gives it power to pass upon a law or ordinance or do any valid act .220
General Rule: A quorum shall consist of the stockholders representing a majority of the
outstanding capital stock or a majority of the members in the case of non-stock
corporations (Sec. 51, RCC).
Exception: Unless otherwise provided for in the Code or in the by-laws (Sec. 51, RCC).
A corporation is authorized to provide in its by-laws a quorum less than majority. However,
the provision in the by-laws relative to quorum will not hold true in those instances where
the [RCC] or applicable special law explicitly prescribes the proportion of stockholders or
members necessary to resolve or carry out a particular corporate proposal.221
26
216
Price and Sulu Dev. Co. v. Martin, 1933.
217
Tan v. Sycip, 2006.
218
Ricafort v. Dicdican, 2016.
Page
219
Guy v. Guy, 2016.
220
La Carlota City v. Rojo, 2012.
221
SEC Opinion No. 11-23 dated April 13, 2011.
Cruz, J. | 2020
To determine what constitutes quorum for purposes of election of directors or trustees

under Sec. 24, the phrase “entitled to vote” should be applied to both the “majority of
outstanding capital stock” in stock corporations and “majority of the members” of non-stock
corporations.222
Stockholders/Members Board of Directors/Trustees

Regular Meetings
Annually on the date fixed in the Bylaws; or, if there On the date fixed by the Bylaws; or, if there is no
is no date fixed, any date after April 15 as provision, monthly.
determined by the Board.
Notice for Regular Meetings
Within the period in the Bylaws; or, in the absence Within a period (at least 2 days) provided in the
of provision, at least 21 days prior to the meeting. Bylaws; or, in the absence of provision, at least 2
days prior to the scheduled meeting.
Special Meetings
Any time deemed necessary; or, as provided in the At any time upon the call of the President; or, as
Bylaws. provided in the Bylaws.
Notice for Special Meetings

Within the period in the Bylaws; or, in the absence Within a period (at least 2 days) provided in the
of provision, at least 1 week prior to the meeting. Bylaws; or, in the absence of provision, at least 2
days prior to the scheduled meeting.
As to Venue
Must be held in the city or municipality where the May be held in or out of the Philippines.
principal office is located, if practicable in the
principal office.
As to Who may Preside

Petitioner, person chosen by majority stockholders President presides the meetings.
or President may preside at meetings.
As to Allowance of Proxy
Proxy is allowed. Proxy is not allowed.
SHAREHOLDERS’ RIGHT TO VOTE

Instances when Stockholders with voting shares are entitled to vote:
1. Option to Maintain Fixed Term (Sec. 11, RCC);
2. Extension or shortening of fixed term (Secs. 11 & 36, RCC);
3. Amendment of AOI (Sec. 15, RCC);
4. Election of directors or trustees (Sec. 23, RCC);
5. Removal of directors or trustees and filling-up the vacancy (Sec. 27, RCC);
6. Granting compensation to directors or trustees (Sec. 29, RCC);
7. Approval of material contracts with directors/trustees (Sec. 31, RCC);
8. Ratifying contracts between corporations with interlocking directors (Sec. 32, RCC);
9. Investment in another business or corporation (Secs. 35 & 41, RCC);
10. Increase or decrease of capital stock (Sec. 37, RCC);
11. Incurring, or increasing bonded indebtedness (Sec. 37, RCC);
12. Sale, disposition or encumbrance of all or substantially all of the corporate assets (Sec. 39, RCC);
13. Declaration of stock dividends (Sec. 42, RCC);
14. Entering into management contracts (Sec. 43, RCC);
15. Adoption, amendment and repeal of bylaws (Secs. 45 & 47, RCC);
16. Fixing of consideration of no par value shares (Sec. 61, RCC); and
17. Merger and consolidation (Sec. 76, RCC).
Instances when even Stockholders with non-voting shares are entitled to vote (AA-SII-MID):
1. Amendment of the AOI;
2. Adoption and amendment of bylaws;
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 authorized 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; and
8. Dissolution of the corporation (Sec. 6, RCC).
Voting in case of joint ownership of share: The consent of all the co-owners shall be necessary in voting
shares of stock owned jointly by 2 or more persons, unless there is a written proxy, signed by all the co-
27
owners, authorizing 1 or some of them or any other person to vote such share or shares: Provided, That when
the shares are owned in an “and/or” capacity by the holders thereof, anyone of the joint owners can vote
said shares or appoint a proxy therefor (Sec. 55, RCC).
Page
222
SEC Opinion No. 11-23 dated November 23, 2013.
Cruz, J. | 2020
Treasury Shares have no voting rights. Treasury shares shall have no voting right as long as such shares
remain in the Treasury (Sec. 56, RCC).
Fractional shares have no voting rights.
Delinquent Stocks have no voting rights. No delinquent stock shall be voted for, be entitled to vote, or be
represented at any stockholder‖s meeting, nor shall the holder thereof be entitled to any of the rights of a
stockholder except the right to dividends in accordance with the provisions of this Code, until and unless
payment is made by the holder such delinquent stock for the amount due on the subscription with accrued
interest, and the costs and expenses of advertisement, if any (Sec. 70, RCC).
Voting through Remote Communications: In addition to voting by proxy, Sec. 57 of the RCC allows voting
through remote communications, to wit:
1. When authorized in the Bylaws or by a majority of the Board;
2. Votes through remote communication or in absentia must be received before the corporation
finishes the tally of votes;
3. A stockholder or member who participates through remote communication or in absentia shall be
deemed present for purposes of quorum; and
4. The corporation shall establish the appropriate requirements and procedures for voting through
remote communication and in absentia taking into account the company‖s scale, number of
shareholders or members, structure and other factors consistent with the basic right of suffrage.
APPRAISAL RIGHT
A stockholder who dissents from certain corporate actions has the right to demand payment of the fair value
of his shares, which right of appraisal is expressly recognized in Section 81. Clearly, the right of appraisal may
be exercised when there is a fundamental change in the charter or AOI substantially prejudicing the rights of
the stockholders. It does not vest unless objectionable corporate action is taken. It serves the purpose of
enabling the dissenting stockholder to have his interest purchased and to retire from the corporation.223
Instances when Appraisal Right is available:

(a) In case an amendment to the AOI 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;
(b) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets;
(c) In case of merger or consolidation; and
(d) In case of investment of corporate funds for any purpose other than the primary purpose of
the corporation (Sec. 80, RCC).
Exercise of Appraisal Right:

1. The dissenting stockholder should make a written demand for the payment of the fair value
of the shares within 30 days from the date on which the vote was taken;
a. Fair value is the amount of the share, excluding depreciation and appreciation, had
on the day immediately preceding the date when the voting where he dissented
happened.
2. If within 60 days, the corporation and the dissenting stockholder cannot agree on the fair
value, it shall be determined by 3 disinterested persons (1 chosen by the corporation,
another by the stockholder, and the third chosen by both.);
a. The finding of the majority of the 3 disinterested persons is final.
b. The costs and expenses of appraisal shall be borne by the corporation, unless the fair
value ascertained by the appraisers is approximately the same as the price which the
corporation may have offered to pay the stockholder, in which case they shall be
borne by the latter (Sec. 84, RCC).
3. The corporation should pay the dissenting stockholder within 30 days after the award is
made.
a. The corporation should have unrestricted retained earnings.
4. Upon payment, the dissenting stockholder shall transfer his shares to the corporation (Sec.
81, RCC).
a. Right to payment ceases when the demand is withdrawn or when the dissented
corporate act is withdrawn (Sec. 83, RCC).
Effect of Demand of Appraisal Right: From the time of demand for payment of the fair value of a
stockholder‖s shares until either the abandonment of the corporate action involved or the
purchase of the said shares by the corporation, all rights accruing to such shares, including voting
and dividend rights, shall be suspended, except the right of such stockholder to receive payment
of the fair value thereof: Provided, That if the dissenting stockholder is not paid the value of the
said shares within 30 days after the award, the voting and dividend rights shall immediately be
restored (Sec. 82, RCC).
28
Page
223
Turner v. Lorenzo Shipping Corp., 2010.
Cruz, J. | 2020
APPOINTMENT OF PROXIES
Proxy under Sec. 57, RCC: It is a written authorization given by one person to another so that the second
person can act for the first.
It also refers to the instrument which evidences the authority of the agent. It may be used to apply
to the holder of the authority or person authorized by an absent stockholder or member to vote
for him at a stockholder‖s or members‖ meetings.224
Sec. 57 imposes no limitation as to who may be a proxy. A stockholder/member may appoint any
person he sees fit to represent him, and by-laws restricting his right in this respect are likewise
void.
In non-stock corporations, the right to vote by proxy, or even the right to vote itself may be denied
to members in the AOI or the by-laws as long as the denial is not discriminatory (Sec. 88, RCC).
Requirements for Validity: (F5-SWV)

1. It shall be Filed before the scheduled meeting with the corporate secretary;
2. No proxy shall be valid and effective for a period longer than 5 years at any one time;
3. It shall be Signed by the stockholder or member concerned;
4. Proxies shall be in Writing; and
5. Unless otherwise provided in the proxy, it shall be Valid only for the meeting which it was
intended (Sec. 57, RCC).
Kinds of Proxy:
1. General Proxy – confers a general discretionary power to attend and vote at annual meeting
as well as exercise all powers the stockholder/member could do if personally present.
2. Limited Proxy – restricts the authority to vote to specified matters only and may direct the
manner in which the vote shall be cast.
3. Specific Proxy – the authority granted is merely for a particular meeting on a specific date.
4. Continuing Proxy – the authority given is to represent the stockholders at any and all regular
or special stockholder‖s meetings unless the stockholder revokes the same.225
Purposes and Use of Proxies

1. For convenience or favor to the distant and indifferent stockholders;
2. Assures the presence of a quorum;
3. Enables those who do not wish to attend a stockholder or member‖s meeting to protect
their interest by exercising their right to vote through representative; and
4. Secure voting control or management control in corporation.226
The right to vote by proxy may be exercised in any of the following instances:
1. Election of the board of directors or trustees;
2. Voting in case of joint ownership of stock;
3. Voting by trustee under voting trust agreement;
4. Voting by members in a non-stock corporation;
5. Pledge or mortgage of shares; and
6. As provided for in its by-laws.227
Revocation of Proxies: Proxies, even those with irrevocable terms, have always been considered as
revocable, unless coupled with an interest.228
Revocation may be made through:

1. Formal notice;
2. Verbal communication; or
3. Conduct (i.e. when the stockholder votes or attends the meeting personally
notwithstanding his appointment of a proxy. In such case, the proxy is deemed
revoked).229
Rules on Revocation:
1. Last Proxy given revokes all previous proxies; and
2. Where proxies are undated, the postmark dates become important.230
Proxy solicitation involves the securing and submission of proxies, while proxy validation concerns the
validation of such secured and submitted proxies. It is possible that an intra-corporate controversy may
animate a disgruntled shareholder to complain to the SEC, corporation‖s violations of SEC rules and
regulations, but that motive alone should not be sufficient to deprive the SEC of its investigatory and
regulatory powers, especially when such powers are exercisable on a motu proprio basis.231
224
225
DE LEON, Corporation Code, pp. 496-501
29
226
227
DE LEON, Corporation Code, pp. 493.
228
SEC Memorandum No. 4, Series of 2004.
Page
229
SEC Opinion, October 28, 1991.
230
DE LEON, Corporation Code, p. 499
231
GSIS v. Court of Appeals, 2009.
Cruz, J. | 2020
Proxy Solicitation v. Proxy Validation: Proxy solicitation involves the securing and submission of
proxies by the corporation, while proxy validation concerns the validation of such secured and
submitted proxies. Proxy solicitation is a procedure that antecedes proxy validation.232
Rules on Proxy Solicitation: Proxy must be issued and proxy solicitation must be made in
accordance with rules and regulations to be issued by the SEC:
1. Proxies must be in writing, signed by the stockholder or his representative, and filed before
the scheduled meeting with the corporate secretary;
2. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is
intended. No proxy shall be valid and effective for a period longer than 5 years at one time;
3. No broker or dealer shall give any proxy, consent or authorization, in respect of any security
carried for the account of a customer, to a person other than the customer, without the
express written authorization of such customer;
4. A broker or dealer who holds or acquires the proxy for at least 10% or such percentage as
the SEC may prescribe of the outstanding share of the issuer shall submit a report
identifying the beneficial owner within 10 days after such acquisition, for its own account or
customer, to the issuer of the security, to the Exchange where the security is traded, and to
the SEC (Sec. 20, SRC); and
5. For proxy or consent solicitation, the SEC may require that the person making such filing
pay a fee of not more than 1/10 of 1% of the proposed payment in cash, and the value of any
securities or property to be transferred in the acquisition, merger or consolidation, or the
cash and value of any securities proposed to be received upon sale or disposition of such
assets in the case of a solicitation (Sec. 21, SRC).
VOTING TRUST AGREEMENTS

Voting Trust Agreements under Sec. 58, RCC: A VTA separates the voting rights and other rights covered of
the stock from other attributes of ownership, intended to be irrevocable for a definite period of time and the
purpose of which is to give to the trustee to acquire voting control of the corporation.233 The trustor has a
right to terminate the voting trust agreement for breach thereof.234
Limitations to VTA:
1. The agreement cannot be entered into for a period exceeding 5 years at any one time
except when it is a condition in a loan agreement, in which case, said contract shall
automatically expire upon full payment of the loan;
2. The agreement must not be used for purposes of fraud;
3. It must be in writing and notarized and specify the terms and conditions thereof;
4. A certified copy of the agreement must be filed with the corporation and with the SEC;
5. The agreement shall be subject to examination by any stockholder of the corporation; and
6. Unless expressly renewed, all rights granted in the agreement shall automatically expire at
the end of the agreed period (Sec. 58, RCC).
A voting trust agreement not filed with the corporation and SEC is ineffective and unenforceable
(Sec. 58, RCC).
Status of the Voting Trustee: Title to shares conveyed is transferred to the trustee on the books of
the corporation.235
Status of the Transferring Stockholder: The transferring stockholder parts with the voting power
but only retains the equitable or beneficial ownership of the stock.236
Voting Trust Agreement Proxy

As to Nature
The trustee votes as owner. The proxy holder votes as agent.
As to Notarization
The agreement must be notarized. Proxy need not be notarized.
As to Legal Title
Trustee acquires legal title to the shares of the Proxy has no legal title to the shares of the
transferring stockholder; only beneficial title remains principal.
with the stockholder.
As to Manner of Voting
The trustee may vote in person or by proxy unless the The proxy must vote in person.
agreement provides otherwise.
As to Actions Allowed
Trustee is not limited to act at any particular meeting. Proxy can only act at a specified stockholder‖s
meeting (if not continuing).
30
232
GSIS v. SEC, 2009.
233
Lee v. Court of Appeals, 1992.
Page
234
Everett v. Asia Banking Corporation, 1926.
235
236
DE LEON, Corporation Code, p.505.
Cruz, J. | 2020
Voting Trust Agreement Proxy

As to Restrictions on Voting
A trustee can vote and exercise all the rights of the A proxy can only vote in the absence of the
stockholder even when the latter is present. owners of the stock.
As to Period
An agreement must not 5 years at any one time except A proxy is usually of shorter duration although
when the same is made a condition of a loan. under Sec. 57 it cannot exceed 5 years at any
one time.
As to Separability of Ownership and Voting Right
The voting right is divorced from the ownership of The right to vote is inherent in or inseparable
stocks. from the right to ownership of stock.
As to Revocability
The agreement is irrevocable. Revocable anytime except if coupled with
interest
RIGHT TO INSPECT CORPORATE BOOKS AND RECORDS

The stockholder‖s right of inspection of corporate books and records arises as an incident of ownership of
the assets and property of the corporation. It is therefore an incident of ownership of the corporate property,
whether such interest be termed as equitable ownership, a beneficial ownership or a quasi-ownership. The
right of inspection is predicated upon the necessity of self-protection on the part of the stockholder.237
The right to inspect remains valid and enforceable during the 3-year liquidation period provided
under [Secs. 139 and 184 of RCC].238
Records covered by the Right to Inspect: Every corporation shall keep and carefully preserve at its
principal office all information relating to the corporation including, but not limited to:
(a) The AOI and by-laws of the corporation and all their amendments;
(b) The current ownership structure and voting rights of the corporation;
(c) The 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 SEC;
(g) The minutes of all meetings of stockholders or members, or of the board of directors or
trustees; and
(h) Stock corporations must also keep a stock and transfer book.
i. Record of all stocks in the names of the stockholders alphabetically arranged;
ii. Installments paid and unpaid on all stocks for which subscription has been made, and
the date of payment of any installment;
iii. Statement of every alienation, sale or transfer of stock made, the date thereof, by and
to whom made; and
iv. Such other entries as the by-laws may prescribe (Sec. 73, RCC).
Corporate records, regardless of the form in which they are stored, shall be open to inspection by
any director, trustee, stockholder or member of the corporation in person or by a representative at
reasonable hours on business days, and a demand in writing may be made by such director,
trustee or stockholder at their expense, for copies of such records or excerpts from said records
(Sec. 73, RCC).
The only express limitations on the right of inspection under [Section 73 of RCC] are: (a) it should
be exercised at reasonable hours on business days; (b) the person demanding the right to examine
and copy excerpts from the corporate records and minutes has not improperly used any
information secured through any previous examination of records; and (c) the demand is made in
good faith or for a legitimate purpose.239
Remedies of the Stockholder when right is refused: Refusal to allow stockholders or members to
examine company books is not a ground for appointing a receiver (or creating a management
committee) since there are other adequate remedies, such as a writ of mandamus.240
The clear provision in [Section 73 of RCC] is sufficient authority to conclude that an action
for injunction and, consequently, a writ of preliminary injunction filed by a corporation is
generally unavailable to prevent stockholders from exercising their right to inspection.241
Officer‖s refusal to allow a stockholder to review any corporate record, including the stock
and transfer book, provided for in [Section 73 of RCC] would constitute a criminal offense
31
237
238
Chua v. People, 2016.
Page
239
Africa v. PCGG, 1992.
240
Sps. Hiteroza v. Cruzada, 2016
241
PASAR Corp. v. Lim, 2016.
Cruz, J. | 2020
under [Section 161 thereof] which punishes all violations of the [RCC.]242 It is jurisprudentially
settled that proof of malice or deliberate intent (men rea) is not essential in offenses
punishable by special laws, which are mala prohibita. [Section 73, in relation to Sec. 161, of
the RCC], a special law, provides for penalties relative to the SEC of offenses, which cannot
be trivialized, lest the public purpose for which they are crafter be defeated and put to
naught.243
Sanctions for violation of Right to Inspect: fine ranging from P10, 000.00 to P200, 000.00, at the
discretion of the Court, taking into consideration the seriousness of the violation and its
implications.
When the violation of this provision is injurious or detrimental to the public, the penalty is a
fine ranging from P20,000 to P400,000 (Sec. 161, RCC).
RIGHT TO FILE DERIVATIVE SUITS

Derivative Suit is an action brought by minority shareholders in the name of the corporation to redress
wrongs committed against the corporation, for which the directors refuse to sue. It is a remedy designed by
equity and has been the principal defense of the minority shareholders against abuses by the majority. 244
They are governed by the Interim Rules of Procedure Governing Intra-Corporate Controversies.245
A Stockholder's right to institute a derivative suit is not based on any express provision of the
Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the
said laws make corporate directors or officers liable for damages suffered by the corporation and
its stockholders for violation of their fiduciary duties .246
Under [Section 35, in relation to Section 22 of RCC], a corporation‖s power to sue is lodged with its
Board. An individual stockholder is permitted to institute a derivative suit on behalf of the
corporation in order to protect or vindicate corporate rights, whenever the officials of the
corporation refuse to sue, or are the ones to be sued, or hold the control of the corporation. In
such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real
party in interest.247
Requisites of a Derivative Suit: Section 1, Rule 8 of the Interim Rules lays down the requirements
for the proper filing a derivative suit:
(1) Relator was a stockholder/member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint,
to exhaust all remedies available under the AOI, bylaws, laws or rules governing the
corporation or partnership to obtain the relief he desires (Doctrine of Exhaustion of Intra-
Corporate Remedies);
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.248
Nuisance and harassment suits are prohibited, and in determining whether a suit is a nuisance or
harassment suit, the court shall consider, among others, the following:
(a) The extent of the shareholding or interest of the initiating stockholder or member;
(b) subject matter of the suit;
(c) legal and factual basis of the complaint;
(d) availability of appraisal rights for the act or acts complained of; and
(e) prejudice or damage to the corporation.
In case of nuisance or harassments suits, the court may, motu proprio or upon motion, dismiss the
case.249
Venue for Derivative Suit: Under Section 5, Rule 1 of the Interim Rules, the proper venue for
derivative suit would be in the RTC which has jurisdiction over the principal office of the
corporation.250
For purposes of venue in intra-corporate suits, when the AOI indicates that the principal
place of business is “Metro Manila”, then the action must be filed in the city or municipality
where the head office is actually located.251
Individual v. Representative v. Derivative Suits: Individual Suit is an action brought by a stockholder against
the corporation for direct violation of his contractual rights. Representative Suit is one brought by a person
242
Yujuico v. Quimbao, 2014.
243
Chua v. People, 2016.
244
Ang v. Ang, 2013.
245
See A.M. No. 01-2-04-SC dated 01 April 2001
32
246
Ching v. Subic Bay Golf and Country Club, Inc., 2014.
247
Chua v. Court of Appeals, 2004.
248
Yu v. Yukayguan, 2009.
Page
249
BSP v. Campa, Jr., 2016.
250
Hi-Yield Realty, Inc. v. Court of Appeals, 2009.
251
Interim Rules of Procedure for Intra-Corporate Controversies, Rule 1, Sec. 5.
Cruz, J. | 2020
in his own behalf and on behalf of all similarly situated. Derivative Suit is one brought by one or more
stockholders or members in the name and on behalf of the corporation to redress wrongs committed
against it or to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue
or are the ones to be sued or hold control of the corporation.252
Right to Proportionate Share of Remaining Assets upon Dissolution (Sec. 139, RCC): In the liquidation of a
corporation, after the payment of all corporate liabilities, the remaining assets, if any, must be distributed to
the stockholders in proportion to their interests in the corporation, which is referred to as liquidating
dividend.253
In summary, the proprietary rights of a shareholder are:

1. To pre-emption upon issuance of shares;
2. To transfer of stocks in the corporate book;
3. To receive dividends when declared;
4. To the issuance of certificate of stock/other evidence of stock ownership; and
5. To participate in distribution of corporate asssets upon dissolution.
A corporation has no power except those expressly conferred by the Corporation Code and those that are
implied or incidental to its existence. In turn, a corporation exercises said powers through its Board of
Directors and/or its duly authorized officers. In turn, physical acts of the corporation, like the signing of
documents, can be performed only by natural persons duly authorized for the purpose by corporate bylaws
or by a specific act of the Board.254
EXPRESS POWERS OF THE CORPORATION

Every corporation incorporated under this Code has the power and capacity:
(a) To sue and be sued in its corporate name;
(b) To have perpetual existence unless the certificate of incorporation provides otherwise;
(c) To adopt and use a corporate seal;
(d) To amend its AOI in accordance with the provisions of this Code;
(e) To adopt bylaws, not contrary to law, morals or public policy, and to amend or repeal the same in
accordance with this Code;
(f) In case of stock corporations, to issue or 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;
(g) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and otherwise deal
with such real and personal property, subject to the limitations prescribed by law and the
Constitution;
(h) To enter into a partnership, joint venture, merger, consolidation, or any other commercial
agreement with natural and juridical persons;
(i) To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, That no foreign corporation shall give
donations in aid of any political party or candidate or for purposes of partisan political activity;
(j) To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers,
and employees; and
(k) To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in the AOI (Sec. 35, RCC).
Doctrine of Necessary Implication: Reference must be made to a corporation‖s AOI and unless the power to
carry a particular business is either expressly or impliedly conferred thereby, it does not exist. 255
POWER TO EXTEND OR SHORTEN CORPORATE TERM

Corporate term may be extended or shortened upon compliance with the following (NARS):
1. Written Notice of the proposed action and the time and place of meeting served to each
stockholder or member either by mail or personal service;
2. Approval by a majority vote of the board of directors/trustees;
3. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of
the members in case of non-stock corporations; and
4. A copy of the amended AOI Submitted to the SEC for approval (Sec. 36, RCC).
Despite the Board resolution approving the increase in capital stock and the receipt of payment on the
future issues of the shares from the increased capital stock, such funds do not constitute part of the capital
stock of the corporation until approval of the increase by SEC.256
33
252
Ching v. Subic Bay Golf & Country Club, Inc., 2014.
253
President of PDIC v. Reyes, 2005.
Page
254
Shipside Inc. v. CA, 2001.
255
SEC Opinion No. 05-18, December 5, 2005.
256
Central Textile Mills v. NWPC, 1996.
Cruz, J. | 2020
POWER TO INCREASE OR DECREASE CAPITAL STOCK, OR INCUR, CREATE, OR INCREASE BONDED

INDEBTEDNESS
The ways to increase or decrease capital stock are:
1. By increasing/decreasing the number of shares and retaining the par value;
2. By increasing/decreasing the par value of existing shares without increasing/ decreasing the
number of shares; or
3. By increasing/decreasing the number of shares and increasing/decreasing the par value.257
The requirements for the increase or decrease of authorized capital stock or incur, create, or increase
bonded indebtedness are as follows: (NARS-CP25)
1. Prior written Notice of the proposed increase or decrease of the capital stock indicating the time
and place of meeting addressed to each stockholder which must be made either by mail or
personal service;
2. Approval by the majority vote of the Board of directors;
3. Ratification by the Stockholders holding or representing at least 2/3 of the outstanding capital
stock at a meeting duly called for that purpose;
4. Submission to the SEC for approval;
5. A Certificate in duplicate signed by a majority of the directors of the corporation, countersigned by
the chairman and the secretary of the stockholders meeting;
6. In case of decrease in capital stock, the same must not Prejudice the right of the creditors;
7. Filing of the certificate with the SEC; and,
8. In case of increase in capital stock, 25% of such increased capital must be subscribed and that at
least 25% of the amount subscribed must be paid either in cash or property (Sec. 37, RCC).
Bonded indebtedness is a secured indebtedness or those secured by real or personal property that is
covered by certificates.258
POWER TO SELL OR DISPOSE OF CORPORATE ASSETS

The requirements are as follows (NARC):
1. Prior written Notice of the proposed action indicating the time and place of meeting addressed to
each stockholder or member which must be made either by mail or personal service;
2. Approval by the majority vote of the board of directors;
3. Ratification by the stockholders holding or representing at least 2/3 of the outstanding capital
stock at a meeting duly called for that purpose; and,
4. The sale of the assets shall not be Contrary to the provisions of existing laws on illegal
combinations and monopolies and Bulk Sales Law (Sec. 39, RCC).
Under Sec. 39 of the RCC, a sale or other disposition shall be deemed to cover substantially all the corporate
property and assets if thereby the corporation would be rendered incapable of continuing the business or
accomplishing the purpose for which it was incorporated.
Instances when ratification of stockholders is not required:

1. If it is necessary in the usual and regular course of business;
2. If the proceeds of the sale or other disposition of such property and assets be appropriated for the
conduct of the remaining business; or
3. If the transaction does not cover all or substantially all of the assets (Sec. 39, RCC).
Under the Nell Doctrine, the transfer poof all the assets of a corporation to another shall not render the latter
liable to the liabilities of the transferor, except:
1. Where the purchaser expressly or impliedly agrees to assume such debts;
2. Where the transaction amounts to a consolidation or merger of corporations;
3. Where the purchasing corporation is merely a continuation of the selling corporation; and
4. Where the transaction is entered into fraudulently in order to escape liability for such debts.259
POWER TO INVEST CORPORATE FUNDS IN ANOTHER CORPORATION OR BUSINESS

The following are the requirements for investment (NAR):
1. Prior written Notice of the proposed investment and the time and place of the meeting shall be
made, addressed to each stockholder or member by mail or by personal service;
2. Approval by the majority of the board of directors or trustees;
3. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of
the members in case of non-stock corporation at a meeting duly called for the purpose (Sec. 39,
RCC).
A corporation is not allowed to engage in a business distinct from those enumerated in the AOI without
amending the purpose clause of said article. However, if the investment by the corporation is reasonably
necessary to accomplish its primary purpose as stated in AOI, there is no need for stockholders‖ approval
(Sec. 39, RCC).
POWER TO ACQUIRE OWN SHARES

The instances when the corporation can acquire its own shares are (EC-PaRD):
34
1. To Eliminate fractional shares out of stock dividends (Sec. 40, RCC);

Page
257
AQUINO, Corporation Law, p. 357.
258
AQUINO, Corporation Law, p. 366
259
Y-I Leisure Phils., Inc. v. Yu, 2015.
Cruz, J. | 2020
2. To Collect or compromise indebtedness to the corporation, arising out of unpaid subscription, in a

delinquency sale and to purchase delinquent shares sold during said sale (Sec. 40, RCC);
3. To Pay dissenting or withdrawing stockholders (Sec. 40, RCC);
4. To acquire Redeemable shares regardless of existence of retained earnings (Sec. 8, RCC);
5. In Close corporations, when there is a Deadlock in the management of the business (Sec. 103,
RCC).
A corporation can acquire its own shares provided that:

1. The capital is not impaired;
2. A legitimate and proper corporate purpose or objective is advanced;
3. The corporate affairs warrant it;
4. The transaction is designed and carried out in good faith;
5. There is intended and there results no undue advantage to a favored stockholder at the expense of
the remainder;
6. The creditors are not prejudiced; and
7. The corporation acts in good faith and without prejudice to the rights of creditors and
stockholders.260
POWER TO DECLARE DIVIDENDS

Dividends are corporate profits allocated, lawfully declared and ordered by the directors to be paid to the
stockholders on demand or at a fixed time.261
The requirements to declare dividends are as follows (URC):

1. Unrestricted retained earnings;
2. Resolution of the board; and
3. If stock dividends are declared, there must be resolution of the board with concurrence of 2/3 of
outstanding Capital (Sec. 42, RCC).
Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital
stock, except:
(a) when justified by definite corporate expansion projects or programs approved by the board of
directors; or
(b) when the corporation is prohibited under any loan agreement with financial institutions or
creditors, whether local or foreign, from declaring dividends without their consent, and such
consent has not yet been secured; or
(c) when it can be clearly shown that such retention is necessary under special circumstances
obtaining in the corporation, such as when there is need for special reserve for probable
contingencies (Sec. 42, RCC).
Unrestricted retained earnings is the amount of accumulated profits and gains realized out of normal
operations which is:
1. Not appropriated by the Board for corporate expansion;
2. Not covered by a restriction under a loan agreement; and
3. Not required to be retained under special circumstances.
The following are the corporate acts which requires the existence of unrestricted retained
earnings: (ADA)
1. Power to Acquire own shares (Sec. 40, RCC);
2. Power to Declare dividends (Sec 42, RCC); and
3. Payment of stocks to dissenting stockholder in exercise of his Appraisal right (Sec. 80, RCC).
POWER TO ENTER INTO MANAGEMENT CONTRACTS

Management contract is a contract whereby a corporation undertakes to manage or operate all or
substantially all of the business of another corporation, whether such contracts are called service contracts,
operating agreements or otherwise (Sec. 43, RCC).
A corporation cannot enter into a management contract with a natural person. Such contract is an
employment contract and not a management contract contemplated under the Corporation
Code.262
A management contract must not be longer than 5 years for any 1 term except those contracts
which relate to the exploration, development, exploitation or utilization of natural resources that
may be entered into for such periods as may be provided by pertinent laws or regulations (Sec. 43,
RCC).
The requirements for a valid management contract are as follows:

1. Approval by a majority of the quorum of the board of directors;
2. Ratification by the majority of the members or owners of the outstanding capital stock
entitled to vote of the managing corporation; and
3. Ratification by—
35
Page
260
SEC Opinion No. 10-24 dated August 12, 2010.
261
SEC Memorandum Circular 11-09, Sec. 2.
262
AQUINO, Corporate Law, p. 412.
Cruz, J. | 2020
a. the majority of the members or owners of the outstanding capital stock entitled to
vote of the managed corporation; or
b. 2/3 of the membership or 2/3 of the owners of the outstanding capital stock entitled
to vote of the managed corporation:
Where a stockholder/s representing the same interest of both the managing
and the managed corporations own or control more than 1/3 of the total
outstanding capital stock entitled to vote of the managing corporation; or
Where a majority of the members of the board of directors of the managing
corporation also constitute a majority of the members of the board of directors
of the managed corporation (Sec. 43, RCC).
ULTRA VIRES DOCTRINE

An ultra vires act is one committed outside the object for which a corporation is created as defined by the
law of its organization and therefore beyond the power conferred upon it by law. The term “ ultra vires“ is
“distinguished from an illegal act for the former is merely voidable which may be enforced by performance,
ratification, or estoppel, while the latter is void and cannot be validated.”263
Corporations are artificial entities granted legal personalities upon their creation by their
incorporators in accordance with law. Third persons dealing with corporations cannot assume that
corporations have powers. It is up to those persons dealing with corporations to determine their
competence as expressly defined by the law and their AOI. Corporate acts that are outside those
express definitions under the law or AOI or those “committed outside the object for which a
corporation is created” are ultra vires. The only exception to this rule is when acts are necessary
and incidental to carry out a corporation's purposes, and to the exercise of powers conferred by
the Corporation Code and under a corporation's AOI. This exception is specifically included in the
general powers of a corporation under [Section 35 of the RCC].264
Types of Ultra Vires Act (BAI)

1. Acts done Beyond the powers of the corporation as provided in the law or its AOI;
2. Acts or contracts entered into in behalf of a corporation by persons who have no corporate
Authority; and
3. Acts or contracts, which are per se Illegal as being contrary to law.265
The effects of an ultra vires act in executed and executory contracts are:
1. Executed contract – courts will not set aside or interfere with such contracts;
2. Executory contracts – no enforcement even at the suit of either party (unenforceable);
3. Partly executed and partly executory – principle prohibiting unjust enrichment at the expense of
another shall apply; and
4. Executory contracts apparently authorized but ultra vires – the principle of estoppel shall apply.266
SUMMARY OF VOTING REQUIREMENTS UNDER THE RCC

BOARD APPROVAL RATIFICATION VOTING
CORPORATE POWER
(Majority) REQUIREMENT
ARTICLES OF INCORPORATION
Amendment of the AOI Yes 2/3 of OCS or Members
Extending, shortening, or revival of the Corporate
Yes 2/3 of OCS or Members
Existence
Increase or decrease Capital Stock Yes 2/3 of OCS
Majority of OCS or
Authorizing the Board to fix the issue price of no- Yes, if authorized by the
Members, if Board is
par value shares AOI
not authorized
2/3 of OCS or Members
Approval or amendment of plan of merger or
Yes of all constituent
consolidation
corporations
Amendment of AOI of a Close Corporation to:
2/3 of OCS or a greater
1. Delete a provision required by Title XII;
requirement provided
2. Reduce quorum requirements; or
in AOI
3. Reduce voting requirements.
Decision of a religious society to incorporate as a
2/3 of Members
religious corporation
BY-LAWS
Majority of OCS or
Adoption of by-laws Yes
Members
Majority of OCS or
Amendment of by-laws Yes
Members
Delegation of authority to adopt, amend, or repeal
by-laws to the Board
Revocation of delegation of authority to adopt, Majority of OCS or
amend, or repeal by-laws to the Board Members
36
263
Atrium Management Corp. v. Court of Appeals, 2001.
Page
264
University of Mindanao v. Bangko Sentral ng Pilipinas, 2016.
265
Woodchild Holdings v. Roxas Electric, 2004.
266
Pirovano v. De la Rama, 1958.
Cruz, J. | 2020
ELECTION, REMOVAL, AND FILLING UP VACANCIES IN THE BOARD

Majority of OCS or
Election of Directors or Trustees
Members
Removal of Directors or Trustees 2/3 of OCS or Members
Filling a vacancy in the Board other than:
If Board has no
1. Removal; Yes, provided there is
quorum, 2/3 of OCS or
2. Expiration of term; or quorum
Members
3. Increase in seats in the Board.
Grant of compensation to Directors or Trustees Majority of OCS or
other than per diem allowance Members
Ratification of an act of disloyalty of a director 2/3 of OCS or Members
CORPORATE OFFICERS
Majority of all members
Election of Corporate Officers
of the Board
Majority of the
Actions of the Executive Committee
Executive Committee
OTHER CORPORATE POWERS
Ratification of a contract with a self-dealing
director or trustee
Create, increase, or incur bonded indebtedness Yes 2/3 of OCS or Members
Deny pre-emptive right 2/3 of OCS
Pledge, lease, exchange, mortgage, or sale of all or
substantially all corporate assets
Power to acquire own shares Yes
Redemption of redeemable shares Yes
Investment of Corporate funds germane to the
Yes
primary or secondary purpose of the corporation
Investment of Corporate funds to other purposes
not germane to the primary or secondary purpose Yes 2/3 of OCS or Members
of the corporation
Issuance of Stock Dividends Yes 2/3 of OCS
Issuance of Cash or Property Dividends Yes
MANAGEMENT CONTRACTS
Majority of OCS or
Management Contracts Yes
Members
Management Contracts with:
1. 1/3 of OCS in managing corporation is
owned by the same interest in both
corporations; Yes 2/3 of OCS or Members
2. Majority of both Boards are interlocking;
and
3. Service contracts.
DISSOLUTION AND WINDING-UP
Adoption of a distribution plan of assets for the 2/3 of Members with
Yes
dissolution of a non-stock corporation voting rights
Voluntary dissolution where no creditors are
affected
Voluntary dissolution where creditors are affected Yes 2/3 of OCS or Members
Dissolution by shortening corporate term Yes 2/3 of OCS or Members
Assets-Only Transfers: A corporation that purchases the assets of another will not be liable for the debts of
the selling corporation, provided the former acted in good faith and paid adequate consideration for such
assets; except: When any of the following circumstances is present: (1) where the purchasers expressly or
impliedly agrees to assume the debts; (2) where the selling corporation fraudulently enters into the
transactions to escape liability for those debts (3) where the purchasing corporation is merely a continuation
of the selling corporation, and (4) where the transaction amounts to a consolidation or merger of the
corporations.267
Business Enterprise Transfers: An evaluation of our contract and corporation laws validates that the Nell
Doctrine is fully supported by Philippine statutes. The general rule expressed by the doctrine reflects the
principle of relativity under Article 1311 to 34 of the Civil Code. Contracts, including the rights and obligations
arising therefrom, are valid and binding only between the contracting parties and their successors-in-
interest. Thus, despite the sale of all corporate assets, the transferee corporation cannot be prejudiced as it
is not in privity with the contracts between the transferor corporation and its creditors. Jurisprudence has
held that in a business-enterprise transfer, the transferee is liable for the debts and liabilities of his transferor
arising from the business enterprise conveyed. Many of the application of the business-enterprise transfer
37
have been related by the Court to the application of the piercing doctrine.268
Page
267
Edward J. Nell Co. v. Pacific, 1965.
268
Y-I Leisure Phils., Inc. v. Yu, 2015.
Cruz, J. | 2020
Equity Transfers: The fact that a stockholder sells his equity in the corporation, during the pendency of a
collection case against the corporation, does not make such stockholder personally liable for the corporate
debt, since disposing stockholder has no personal obligation to the creditor, and it is the inherent right of
stockholder to dispose of his shares anytime he desires.269
Consolidation is the union of 2 or more existing entities to form a new entity called the consolidated
corporation. A merger, on the other hand, is a union whereby one or more existing corporations are
absorbed by another corporation that survives and continues the combined business. Since a merger or
consolidation involves fundamental changes in the corporation, as well as in the rights of stockholders and
creditors, there must be an express provision of law authorizing them.270
Merger is a re-organization of 2 or more corporations that results in their consolidating into a single
corporation, which is one of the constituent corporations, one disappearing or dissolving and the other
surviving. To put it another way, merger is the absorption of one or more corporations by another existing
corporation, which retains its identity and takes over the rights, privileges, franchises, properties, claims,
liabilities and obligations of the absorbed corporation/s. The absorbing corporation continues its existence
while the life or lives of the other corporation/s is or are terminated.271
Merger or acquisition agreements that substantially prevent, restrict, or lessen competition in the
relevant market or in the market for goods or services as may be determined by the SEC shall be
prohibited as anti-competitive (Sec. 20, R.A. No. 10667).272
Merger or acquisition agreement prohibited under Section 20 of the Philippine Competition Act
may, nonetheless, be exempt from prohibition by the SEC when the parties establish either of the
following:
1. The concentration has brought about or is likely to bring about gains in efficiencies that are
greater than the effects of any limitation on competition that result or likely to result from
the merger or acquisition agreement; or
2. A party to the merger or acquisition agreement is faced with actual or imminent financial
failure, and the agreement represents the least anti-competitive arrangement among the
known alternative uses for the failing entity‖s assets.
The acquisition of the stock or other share capital of one or more corporations solely for
investment and not used for voting or exercising control and not to otherwise bring about or
attempt to bring about the prevention, restriction or lessening of competition in the relevant
market shall not be prohibited (Sec. 21, R.A. No. 10667).
Merger Consolidation
A union whereby one or more existing The union of 2 or more existing corporations to form
corporations are absorbed by another corporation a new corporation called the consolidated
which survives and continues the combined corporation
business.
A+B=A A+B=C
De facto merger can be pursued by one corporation acquiring all or substantially all of the
properties of another corporation in exchange of shares of stock of the acquiring corporation. The
acquiring corporation would end up with the business enterprise of the target corporation;
whereas, the target corporation would end up with basically its only remaining assets being the
shares of stock of the acquiring corporation.273
Procedure: The steps necessary to accomplish a merger or consolidation are:

(a) The board of each corporation draws up a plan of merger or consolidation. Such plan must include
any amendment, if necessary, to the AOI of the surviving corporation, or in case of consolidation,
all the statements required in the AOI of a corporation.
(b) Submission of plan to stockholders or members of each corporation for approval. A meeting must
be called and at least 2 weeks‖ notice must be sent to all stockholders or members, personally or
by registered mail. A summary of the plan must be attached to the notice. Vote of 2/3 of the
members or of stockholders representing 2/3 of the outstanding capital stock will be needed.
Appraisal rights, when proper, must be respected.
(c) Execution of the formal agreement, referred to as the articles of merger o[r] consolidation, by the
corporate officers of each constituent corporation. These take the place of the AOI of the
consolidated corporation, or amend the AOI of the surviving corporation.
(d) Submission of said articles of merger or consolidation to the SEC for approval.
(e) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least 2 weeks
before.
38
269
Remo, Jr. v. IAC, 1989.
270
PNB v. Andrada Electric & Engineering Co., 2002.
Page
271
Bank of Commerce v. Radio Philippines Network, Inc., 2014.
272
Philippine Competition Act
273
Bank of Commerce v. RPN, 2014.
Cruz, J. | 2020
(f) Issuance of certificate of merger or consolidation.274
Effects of Merger and Consolidation under the RCC:

1. The constituent corporation shall become a single corporation;
2. The separate existence of the constituent corporations shall cease, except that of the surviving or
consolidated corporation;
3. The surviving or consolidated corporation shall possess all rights, privileges, immunities and
powers and shall be subject to all the duties and liabilities of a corporation organized under the
Corporation Code;
4. The surviving or consolidated corporation shall thereupon and thereafter possess all the rights,
privileges, immunities and franchises of each of the constituent corporations; and
5. All property (real or personal) and all receivables due on whatever account ( including subscriptions
to shares and other choses in action), and all and every other interest of, or belong to, or due to
each constituent corporation, shall be deemed transferred and vested in such surviving or
consolidated corporation without further act or deed (Sec. 79, RCC).
No person who has a claim against a juridical entity can claim any constitutional right to the perpetual
existence of such entity.275
Voluntary Dissolution where no creditors are affected: the dissolution may be effected by majority vote of
the board of directors or trustees, and by a resolution adopted by the affirmative vote of the stockholders
owning at least majority of the outstanding capital stock or majority of the members of a meeting to be held
upon the call of the directors or trustees (Sec. 134, RCC).
Voluntary Dissolution where creditors are affected: A verified petition for dissolution shall be filed with the
SEC. The petition shall be signed by a majority of the corporation‖s board of directors or trustees, verified by
its president or secretary or one of its directors or trustees, and shall set forth all claims and demands against
it, and that its dissolution was resolved upon by the affirmative vote of the stockholders representing at least
2/3 of the outstanding capital stock or at least 2/3 of the members at a meeting of its stockholders or
members called for that purpose.
The petition shall likewise state: (a) the reason for the dissolution; (b) the form, manner, and time
when the notices were given; and (c) the date, place, and time of the meeting in which the vote
was made.
The corporation shall submit to the SEC the following: (1) a copy of the resolution authorizing the
dissolution, certified by a majority of the board of directors or trustees and countersigned by the
secretary of the corporation; and (2) a list of all its creditors (Sec. 135, RCC).
Voluntary Dissolution by shortening the corporate term: A voluntary dissolution may be effected by
amending the AOI to shorten the corporate term pursuant to the provisions of the RCC. A copy of the
amended AOI shall be submitted to the SEC.
Upon the expiration of the shortened term, as stated in the approved amended AOI, the
corporation shall be deemed dissolved without any further proceedings, subject to the provisions
of the RCC on liquidation.
In the case of expiration of corporate term, dissolution shall automatically take effect on the day
following the last day of the corporate term stated in the AOI, without the need for the issuance by
the SEC of a certificate of dissolution (Sec. 136, RCC).
Withdrawal of the request for dissolution: A withdrawal of the request for dissolution shall be made in
writing, duly verified by any incorporator, director, trustee, shareholder, or member and signed by the same
number of incorporators, directors, trustees, shareholders, or members necessary to request for dissolution.
The withdrawal shall be submitted no later than 15 days from receipt by the SEC of the request for
dissolution. Upon receipt of a withdrawal of request for dissolution, the SEC shall withhold action
on the request for dissolution and shall, after investigation:
(a) make a pronouncement that the request for dissolution is deemed withdrawn;
(b) direct a joint meeting of the board of directors or trustees and the stockholders or members
for the purpose of ascertaining whether to proceed with dissolution; or
(c) issue such other orders as it may deem appropriate (Sec.137, RCC).
Grounds for Involuntary Dissolution: A corporation may be dissolved by the SEC motu proprio or upon filing
of a verified complaint by any interested party. The following may be grounds for dissolution of the
corporation:
(a) Non-use of corporate charter as provided under Section 21 of this Code;
39
(b) Continuous inoperation of a corporation as provided under Section 21 of this Code;

(c) Upon receipt of a lawful court order dissolving the corporation;
Page
274
Mindanao Savings and Loan Association, Inc. v. Edward Willkom, 2010.
275
Gonzales v. Sugar Regulatory Authority, 1989.
Cruz, J. | 2020
(d) Upon finding by final judgment that the corporation procured its incorporation through fraud;
(e) Upon finding by final judgment that the corporation:
(1) Was created for the purpose of committing, concealing or aiding the SEC of securities
violations, smuggling, tax evasion, money laundering, or graft and corrupt practices;
(2) Committed or aided in the SEC of securities violations, smuggling, tax evasion, money
laundering, or graft and corrupt practices, and its stockholders knew; and
(3) Repeatedly and knowingly tolerated the SEC of graft and corrupt practices or other
fraudulent or illegal acts by its directors, trustees, officers, or employees (Sec. 138, RCC).
CORPORATE LIQUIDATION
The SEC‖s jurisdiction does not extend to the liquidation of a corporation. While the SEC has jurisdiction to
order the dissolution of a corporation, jurisdiction over the liquidation of the corporation now pertains to the
appropriate RTCs. Liquidation of a corporation requires the settlement of claims for and against the
corporation, which clearly falls under the jurisdiction of the regular courts.276
[Section 139 of the RCC] empowers every dissolved corporation to continue as a body corporate
for 3 years after the time when it would have been dissolved for the purposes of "prosecuting and
defending suits by or against it and enabling it to settle and close its affairs, to dispose of and
convey its property and to distribute its assets."277
Under [Sec. 139 of the RCC], it is provided that the time during which the corporation, through its
own officers, may conduct the liquidation of its assets and sue and be sued as a corporation is
limited to 3 years from the time the period of dissolution commences; but there is no time limit
within which the trustees must complete a liquidation placed in their hands. It is provided only
that the conveyance to the trustees be made within the 3-year period.278
The methods of corporate liquidation are:

1. The Board of Directors or Trustees pursing the liquidation – subject to the 3-year period;279
2. Liquidation pursued thru a Court-appointed receiver – not subject to the 3-year period;280 and
3. Liquidation pursued through a Trustee – the trustee may continue to prosecute a case commenced
by the corporation within 3 years from its dissolution until rendition of final judgment, even if such
judgment is rendered beyond the 3-year period.281
A foreign corporation owes its existence to the laws of another state, and generally, has no legal existence
within the state in which it is foreign. A foreign corporation illegally doing business here because of its
refusal or neglect to obtain the required license may not unfairly plead such lack to avoid service and
thereby impugn the jurisdiction of the local courts. Such danger, however, does not exist among foreign
corporations that are indubitably not doing business in the Philippines: there would be no reason for it to be
subject to the State‖s regulation; in so far as the State is concerned, they have no legal existence.282
Revocation of License: Without prejudice to other grounds provided under special laws, the license of a
foreign corporation to transact business in the Philippines may be revoked or suspended by the SEC upon
any of the following grounds:
(a) Failure to file its annual report or pay any fees as required by this Code;
(b) Failure to appoint and maintain a resident agent in the Philippines as required by this Title;
(c) Failure, after change of its resident agent or address, to submit to the SEC a statement of such
change as required by the RCC;
(d) Failure to submit to the SEC an authenticated copy of any amendment to its AOI or bylaws or of
any articles of merger or consolidation within the time prescribed by this Title;
(e) A misrepresentation of any material matter in any application, report, affidavit or other document
submitted by such corporation;
(f) Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the
Philippine Government or any of its agencies or political subdivisions;
(g) Transacting business in the Philippines outside of the purpose or purposes for which such
corporation is authorized under its license;
(h) Transacting business in the Philippines as agent of or acting on behalf of any foreign corporation or
entity not duly licensed to do business in the Philippines; or
(i) Any other ground as would render it unfit to transact business in the Philippines (Sec. 151, RCC).
Doctrine of doing business: Under the Foreign Investments Act, any act or acts that imply a continuity of
commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or
the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial
gain or of the purpose and object of the business organization (Sec. 3(d), R.A. No. 7042).
276
Consuelo Metal Corporation v. Planters Development Bank, 2008.
40
277
Dr. Gil J. Rich v. Guillermo Paloma III, et al., 2018.
278
Alabang Development Corp. v. Alabang Hills Village Association, 2014.
279
National Abaca Corp. v. Pore, 1961.
Page
280
Sumera v. Valencia, 1939.
281
Alabang Dev. Corp. v. Alabang Hills Village Association, 2014.
282
Avon Insurance PLC v. CA, 1997.
Cruz, J. | 2020
Jurisprudence has adopted the twin characterization test involving the substance and continuity
test. A foreign corporation shall be considered as doing business in the Philippines when:
1. Substance test - Whether the foreign corporation is maintaining or continuing in the
Philippines the body or substance of the business for which it was organized or whether it
has substantially retired from it and turned it over another; and
2. Continuity test - Whether there is continuity of commercial dealings and arrangements,
contemplating 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.283
The following are deemed acts constituting “doing business”: (SAM-C)

1. Soliciting orders, service contracts, opening offices, whether called “liaison” offices or
branches;
2. Appointing representatives or distributors domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods totaling 180 days or more;
3. Participating in the Management, supervision or control of any domestic business, firm or
entity or corporation in the Philippines;
4. Any other act or acts that imply a Continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive prosecution of, commercial gain or of the
purpose of the business organization (Sec. 3(d), R.A. No. 7042).
The following are not considered as doing business: (MAP-MCCA)

1. Mere investment as a shareholder in a domestic corporation and/or the exercise of rights as
such investor;
2. Appointing a representative or distributor domiciled in the Philippines which transacts
business in its own name and for its own account;
3. Publication of a general advertisement through any print or broadcast media;
4. Maintaining a stock of goods in the Philippines solely for the purpose of having the same
processed by another entity in the Philippines;
5. Consignment by the foreign corporation of equipment with a local company to be used in
the processing of products for export;
6. Collecting information in the Philippines; and,
7. Performing services Auxiliary to an existing isolated contract of sale which are not on a
continuing basis (Sec. 1, IRR of R.A. No. 7042).
RIGHT TO SUE AND BE SUED OF A FOREIGN CORPORATION

Summary of Rulings on Right to Sue of Foreign Corporations:
(1) if a foreign corporation does business in the Philippines without a license, it cannot sue before
Philippine courts;
(2) if a foreign corporation is not doing business in the Philippines, it needs no license to sue before
Philippine courts on an isolated transaction or on a cause of action entirely independent of any
business transaction;
(3) if a foreign corporation does business in the Philippines without a license, a Philippine citizen or
entity which has contracted with said corporation may be estopped from challenging the foreign
corporation‖s corporate personality in a suit brought before the Philippine courts; and
(4) if a foreign corporation does business in the Philippines with the required license, it can sue before
Philippine courts on any transaction.284
Foreign corporation‖s failure to obtain a license renders its standing to sue in local courts missing but it may
be remedied by the subsequent acquisition of license to do business.285
The doctrine of isolated transactions states that foreign corporations, even unlicensed ones, can sue or be
sued on a transaction or series of transactions set apart from their common business in the sense that there
is no intention to engage in a progressive pursuit of the purpose and object of business transaction.286
The instances when an unlicensed foreign corporation may be allowed to sue are:
1. To seek redress for an isolated business transaction;287
2. To protect its corporate reputation, name, and goodwill (Sec. 160, R.A. No. 8293);288
3. To enforce a right not arising out of a business transaction, e.g. tort that occurred in the
Philippines;
4. When the parties have contractually stipulated that Philippines is the venue of actions;
5. When the party sued is barred by the principle of estoppel and/or principle of unjust
enrichment from questioning the capacity of the foreign corporation; and
6. Recovery of misdelivered property.289
283
Mentholatum v. Mangaliman, 1941.
284
MR. Holdings, Ltd. V. Bajar, 2002.
41
285
Home Insurance Co. v. Eastern Shipping Lines, 1983.
286
Eriks PTE v. CA, 1997.
Page
287
Antam Consolidated Inc. v. CA, 1986.
288
Intellectual Property Code of the Philippines
289
DE LEON, Corporation Law, pp. 799-802.
Cruz, J. | 2020
The purpose of appointing a resident agent is to receive in behalf of the corporation notices, summons and
other legal processes in connection with actions against such corporation. A resident agent cannot sign the
certificate of non-forum shopping that is a requirement for the filing of an initiatory pleading in court
because while a resident agent may be aware of actions filed against the principal, he may not be aware of
the actions initiated by the principal.290
A resident agent may be either an individual residing in the Philippines or a domestic corporation
lawfully transacting business in the Philippines: Provided, That an individual resident agent must
be of good moral character and of sound financial standing: Provided further, that in case of a
domestic corporation who will act as a resident agent, it must likewise be of sound financial
standing and must show proof that it is in good standing as certified by the SEC (Sec. 144, RCC).
A non-stock corporation may only be formed or organized for charitable, religious, educational, professional,
cultural, fraternal, literary, scientific, social, civic or other similar purposes. It may not engage in investment
business where profit is the main or underlying purpose. Although it may obtain profits as an incident to its
operation, such profits are not to be distributed among its members but must be used for the furtherance of
its purposes.291
The test of being a non-stock corporation is the non-distribution of dividends and not that it has
no shares of stocks. A non-stock corporation is one where no part of its income is distributable as
dividends to its members, trustees, or officers (Sec. 3, RCC).
Non-Applicability of the Nationalization Laws to Non-stock Corporations: A foreigner may become a

member or an officer of a non-stock corporation. Save for the position of the Secretary, who must be a
Filipino citizen and a resident of the Philippines, the prohibition of foreign citizens becoming officers in
corporations engaged in business does not apply to the activities of a non-stock corporation which do not
fall within the coverage of a nationalized industry or area of business reserved by law exclusively to Filipino
citizens. 292
Voting Rights of Members: Under the bylaws, membership in the corporation shall, among others, be
terminated by the death of the member. Further, applying [Section 90] that provides that termination
extinguishes all the rights of a member of the corporation, unless otherwise provided in the articles of the
incorporation or the bylaws, we hold that dead members who are dropped from the membership roster in
the manner for the cause provided for in the Bylaw are not to be counted in determining the requisite vote
in corporate matters or the requisite quorum for the annual members‖ meeting.293
When membership has not been terminated in accordance with the provisions provided for in the
AOI and/or bylaws, then such termination is void, and such individual remains a member of the
corporation with concomitant rights inspect corporate books and to demand accounting of the
corporate funds.294
Delinquency of Membership Dues: [Section 66 of RCC] refers specifically to unpaid subscriptions to capital
stock, the sale of which is governed by [Section 67 of RCC], and utterly inapplicable to non-stock
corporations. In such recovery claims, Article 1140 of the Civil Code governs and provides that an action to
recover movables shall prescribe in 8 years.295
A non-stock corporation may seize and dispose of a fully-paid membership share on account of his
unpaid monthly dues, when such corporation is authorized to do so under the bylaws, even when
no provision on the matter appears in the AOI, and in spite of the fact that [Section 67 of RCC] on
delinquency sale pertains to payment of shares subscription. [Section 90 of RCC] provides that
membership shall be terminated in the manner and for causes provided in the AOI or the bylaws of
a non-stock corporation, then the right of a non-stock corporation to expel a member through the
forfeiture of such member‖s share may be established in the bylaws alone, and need not be
embodied in the AOI.296
Board of Trustees and Corporate Officers:297 [Section 106 of RCC], although setting the term of the members
of the Board of Trustees of educational institutions at 5 years, has a proviso subjecting the duration to what
is otherwise provided in the AOI or bylaws of the educational corporation—that contrary provision control on
the term of office. A trustee occupying his office in a hold-over capacity could be removed at any time,
without cause, upon the election or appointment of his successor. 298
290
Expert Travel & Tours Inc. v. CA, 2005.
291
People v. Menil, 2000.
292
SEC Opinion No. 12, 21 Nov. 2002.
42
293
Tan v. Sycip, 2006.
294
Agdao Landless Residents Assn. v. Maramion, 2016.
295
Calatagan Golf Club, Inc. v. Clemente, Jr., 2009.
Page
296
Valle Golf & Country Club v. Vda. De Caram, 2009.`
297
See Sec. 91, RCC.
298
Barayuga v. Advestist University of the Philippines, 2011.
Cruz, J. | 2020
Bylaws provisions which allows the election of members of the Board of Trustees distributed to 2
per district, is not contrary to [Section 23 of RCC] which requires that in the election of trustees of a
non-stock corporation it is necessary that at least “a majority of the members entitled to vote” must
be present. [Section 88 of RCC] pertaining to non-stock corporations provides that “[t]he right of
the members of any class or classes (of a non-stock corporation) to vote may be limited, broadened
or denied to the extent specified in the AOI or the bylaws.” This is an exception to Section 6 that
provides that “no share may be deprived of voting rights except those classified and issued as
―preferred‖ or ―redeemable‖ shares, unless otherwise provided in this Code.”299
Conversion of Non-stock Corporation to Stock Corporation: The conversion of a non-stock educational

institution into a stock corporation is not legally feasible, as it violates [Section 86 of RCC] that no part of the
income of a non-stock corporation may be distributable as dividends to its members, trustees or officers.
“Thus, the [SEC] has previously ruled that a non-stock corporation cannot be converted into a stock
corporation by a mere amendment of the AOI. For purposes of transformation, it is fundamental that the
non-stock corporation be dissolved first under any of the methods specified in [Title XIV of the RCC].
Thereafter, the members may organize as a stock corporation directed to bring profits or pecuniary gains to
themselves.”300
Right of Members to Proportionate Share of Remaining Assets upon Dissolution: As provided for under
[Sections 93 and 94 of RCC], in the event of dissolution of a non-stock corporation, its assets shall be
distributed in accordance with the rules. Unless, it is so provided in the AOI or bylaws, the members are not
entitled to any beneficial or vested interest over the assets of the non-stock corporation. In other words,
non-stock, non-profit corporations hold their funds in trust for the carrying out of the objectives and
purposes expressed in its charter.301
A close corporation is one whose AOI provides that:

(a) 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 20;
(b) All the issued stock of all classes shall be subject to one or more specified restrictions on transfer
permitted by this Title; and
(c) The corporation shall not list in any stock exchange or make any public offering of its stocks of any
class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when
at least 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 (Sec. 95, RCC).
Any corporation may be incorporated as a close corporation, except mining or oil companies, stock
exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared
to be vested with public interest (Sec. 95, RCC).
“Close” emphasizes a determination on the part of the participants in the enterprise to keep outsiders from
acquiring any interest in the business and may indicate that they have taken steps to accomplish that
objective by shareholders‖ agreement or provision in the AOI or by-laws. “Closed” pertains to corporations
which have ceased to engage in business as an on-going concerned, has dissolved its corporate personality,
and has or is undergoing liquidation. “Closely held” corporations are corporations where at least 50% in value
of the outstanding capital stock or at least 50% of the total combined voting power of all class of stock is
owned directly or indirectly be not more than 20 individuals (Sec. 29, Tax Reform Act of 1997, as amended).
Unless the by-laws provide otherwise, any action taken by the directors of a close corporation without a
meeting called properly and with due notice shall nevertheless be deemed valid if:
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
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 a prompt objection in writing.
An action within the corporate powers taken at a meeting held without proper call or notice, is deemed
ratified by a director who failed to attend, unless after having knowledge thereof, the director promptly files
his written objection with the secretary of the corporation (Sec. 100, RCC).
The AOI of a close corporation may provide for:

(a) A classification of shares or rights, the qualifications for owning or holding the same, and
restrictions on their transfers, subject to the provisions of the following section;
(b) A classification of directors into 1 or more classes, each of whom may be voted for and elected
solely by a particular class of stock; and
(c) Greater quorum or voting requirements in meetings of stockholders or directors than those
provided in this Code (Sec. 96, RCC).
43
Page
299
Ao-as v. Court of Appeals, 2006.
300
SEC Opinion dated 10 December 1992; SEC Opinion dated 24 February 2003.
301
SEC Opinion dated 24 February 2003; SEC Opinion dated 13 May 1992.
Cruz, J. | 2020
The AOI of a close corporation may provide that the business of the corporation shall be managed
by the stockholders of the corporation rather than by a board of directors. So long as this provision
continues in effect, no meeting of stockholders need be called to elect directors.
The stockholders of the corporation shall be deemed to be directors and the stockholders
of the corporation shall be subject to all liabilities of directors (Sec. 96, RCC).
Liability of the Stockholders for Managing the Corporation: It was wrong for the CA, citing [Section 96 of
RCC], to conclude that “in a close corporation, the stockholders and/or officers usually manage the business
of the corporation and are subject to all liabilities of directors, i.e., personally liable for corporate debts and
obligations.” [Section 96] only specifies that “the stockholders of the corporation shall be subject to all
liabilities of directors.” Nowhere in that provision do we find any inference that stockholders of a close
corporation are automatically liable for corporate debts and obligations. Parenthetically, only [Section 99(e)
of RCC] explicitly provides for personal liability of stockholders of close corporation, viz.:
To the extent that the stockholders are actively engaged in the management or operation of the
business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties
to each other and among themselves. Said stockholders shall be personally liable for corporate
torts unless the corporation has obtained reasonably adequate liability insurance.” As can be read
in that provision, several requisites must be present for its applicability.”302
Restrictions on the right to transfer shares must appear in the AOI, in the by-laws, as well as in the
certificate of stock; otherwise, the same shall not be binding on any purchaser in good faith. Said restrictions
shall not be more onerous than granting the existing stockholders or the corporation the option to purchase
the shares of the transferring stockholder with such reasonable terms, conditions or period stated. If upon
the expiration of said period, the existing stockholders or the corporation fails to exercise the option to
purchase, the transferring stockholder may sell their shares to any third person (Sec. 97, RCC).
The application of [Section 97 of RCC (validity of restrictions on transfer of shares)] applies only to
close corporations. Before courts can allow the operation of [Section 97 of RCC] to a case, there
must first be a factual determination that the corporation is indeed a close corporation. There
needs to be a presentation of evidence on the relevant restrictions in the articles and bylaws.303
Effects of Issuance or Transfer of Stock in Breach of Qualifying Conditions:

(a) If a stock of a close corporation is issued or transferred to any person who is not eligible thereof
under any provision of the AOI, and if the certificate for such stock conspicuously shows the
qualifications of the persons entitled to be holders of record thereof, such person is conclusively
presumed to have notice of the fact of the ineligibility to be a stockholder.
(b) If the AOI of a close corporation states the number of persons, not exceeding 20, who are entitled
to be stockholders of record, and if the certificate for such stock conspicuously states such
number, and the issuance or transfer of stock to any person would cause the stock to be held by
more than such number of persons, the person to whom such stock is issued or transferred is
conclusively presumed to have notice of this fact.
(c) If a stock certificate of a close corporation conspicuously shows a restriction on transfer of the
corporation‖s stock and the transferee acquires the stock in violation of such restriction, the
transferee is conclusively presumed to have notice of the fact that the stock was acquired in
violation of the restriction.
(d) Whenever a person to whom stock of a close corporation has been issued or transferred has, or is
conclusively presumed under this section to have notice of:
(1) the person‖s ineligibility to be a stockholder of the corporation, or
(2) that the transfer of stock would cause the stock of the corporation to be held by more than
the number of persons permitted under its AOI; or
(3) that the transfer violates a restriction on transfer of stock and the corporation may, at its
option, refuse to register the transfer in the name of the transferee (Sec. 98, RCC).
Even if the transfer of stock is made in violation of the restrictions enumerated under [Section 98 of RCC],
such transfer is still valid if it has been consented to by all the stockholders of the close corporation and the
corporation cannot refuse to register the transfer of stock in the name of the transferee.304
A One Person Corporation is a corporation with a single stockholder: Provided, That only a natural person,
trust, or an estate may form a One Person Corporation
Banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed companies, and non-
chartered government-owned and -controlled corporations may not incorporate as One Person
Corporations: Provided further, That a natural person who is licensed to exercise a profession may
not organize as a One Person Corporation for the purpose of exercising such profession except as
otherwise provided under special laws (Sec. 116, RCC).
44
Page
302
Bustos v. Millians Shoe, Inc., 2017.
303
Andaya v. Rural Bank of Cabadbaran, 2016.
304
Florete, Sr. v. Florete, Jr., 2018.
Cruz, J. | 2020
A One Person Corporation shall not be required to have a minimum authorized capital stock
except as otherwise provided by special law (Sec. 117, RCC).
A One Person Corporation shall file AOI in accordance with the requirements under Section 14 of
this Code. It shall likewise substantially contain the following:
(a) If the single stockholder is a trust or an estate, the name, nationality, and residence of the
trustee, administrator, executor, guardian, conservator, custodian, or other person
exercising fiduciary duties together with the proof of such authority to act on behalf of the
trust or estate; and
(b) Name, nationality, residence of the nominee and alternate nominee, and the extent,
coverage and limitation of the authority (Sec. 118, RCC).
The One Person Corporation is not required to submit and file corporate by-laws (Sec. 119, RCC).
A One Person Corporation shall indicate the letters “OPC” either below or at the end of its
corporate name (Sec. 120, RCC).
Within 15 days from the issuance of its certificate of incorporation, the One Person Corporation
shall appoint a treasurer, corporate secretary, and other officers as it may deem necessary, and
notify the SEC thereof within 5 days from appointment (Sec. 122, RCC).
When action is needed on any matter, it shall be sufficient to prepare a written resolution, signed
and dated by the single stockholder, and recorded in the minutes book of the One Person
Corporation. The date of recording in the minutes book shall be deemed to be the date of the
meeting for all purposes (Sec. 128, RCC).
Conversion from an Ordinary Corporation to a One Person Corporation: When a single stockholder acquires
all the stocks of an ordinary stock corporation, the latter may apply for conversion into a One Person
Corporation.
The One Person Corporation converted from an ordinary stock corporation shall succeed the latter
and be legally responsible for all the latter‖s outstanding liabilities as of the date of conversion (Sec.
131, RCC).
Conversion from a One Person Corporation to an Ordinary Stock Corporation: A One Person Corporation
may be converted into an ordinary stock corporation after due notice to the SEC of such fact and of the
circumstances leading to the conversion, and after compliance with all other requirements for stock
corporations under this Code and applicable rules.
Such notice shall be filed with the SEC within 60 days from the occurrence of the circumstances
leading to the conversion into an ordinary stock corporation. If all requirements have been
complied with, the SEC shall issue an amended certificate of incorporation reflecting the
conversion.
In case of death of the single stockholder, the nominee or alternate nominee shall transfer the
shares to the duly designated legal heir or estate within 7 days from receipt of either an affidavit of
heir-ship or self-adjudication executed by a sole heir, or any other legal document declaring the
legal heirs of the single stockholder and notify the SEC of the transfer. Within 60 days from the
transfer of the shares, the legal heirs shall notify the SEC of their decision to either wind up and
dissolve the One Person Corporation or convert it into an ordinary stock corporation.
The ordinary stock corporation converted from a One Person Corporation shall succeed the latter
and be legally responsible for all the latter‖s outstanding liabilities as of the date of conversion (Sec.
132, RCC).
The single stockholder shall be the sole director and president of the One Person Corporation (Sec. 121, RCC).
The single stockholder may not be appointed as the corporate secretary (Sec. 122, RCC).
A single stockholder who is likewise the self-appointed treasurer of the corporation, shall give a
bond to the SEC in such a sum as may be required. The bond shall be renewed every 2 years or as
often as may be required (Sec. 122, RCC).
The single stockholder shall designate a nominee and an alternate nominee who shall, in the event
of the single stockholder‖s death or incapacity, take the place of the single stockholder as director
and shall manage the corporation‖s affairs. Their consent may be withdrawn any time before the
death of the stockholder (Sec. 124, RCC).
When the incapacity of the single stockholder is temporary, the nominee shall sit as director
45
and manage the affairs of the One Person Corporation until the stockholder, by self-
determination, regains the capacity to assume such duties.
Page
In case of death or permanent incapacity of the single stockholder, the nominee shall sit as
director and manage the affairs of the One Person Corporation until the legal heirs of the
Cruz, J. | 2020
single stockholder have been lawfully determined, and the heirs have designated one of
them or have agreed that the estate shall be the single stockholder of the One Person
Corporation (Sec. 125, RCC).
In case of death of the single stockholder, the nominee or alternate nominee shall
transfer the shares to the duly designated legal heir or estate within 7 days from
receipt of either an affidavit of heir-ship or self-adjudication executed by a sole heir,
or any other legal document declaring the legal heirs of the single stockholder and
notify the SEC of the transfer (Sec. 132, RCC).
The alternate nominee shall sit as director and manage the One Person Corporation in case
of the nominee‖s inability, incapacity, death, or refusal to discharge the functions as director
and manager of the corporation, and only for the same term and under the same conditions
applicable to the nominee (Sec. 125, RCC).
The single stockholder may, at any time, change its nominee and alternate nominee by
submitting to the SEC the names of the new nominees and their corresponding written
consent. For this purpose, the AOI need not be amended (Sec. 126, RCC).
Liability of the Single Stockholder: A sole shareholder claiming limited liability has the burden of
affirmatively showing that the corporation was adequately financed.
Where the single stockholder cannot prove that the property of the One Person Corporation
is independent of the stockholder‖s personal property, the stockholder shall be jointly and
severally liable for the debts and other liabilities of the One Person Corporation.
The principle of piercing the corporate veil applies with equal force to One Person
Corporations as with other corporations (Sec 130, RCC).
EDUCATIONAL CORPORATIONS
Educational corporations shall be governed by special laws and the general provisions of the RCC (Sec. 105,
RCC).
Trustees of educational institutions organized as non-stock corporations shall not be less than 5
nor more than 15: Provided that the number of trustees shall be in multiples of 5.
Unless otherwise provided in the AOI or by-laws, the board of trustees of incorporated schools,
colleges, or other institutions of learning shall, as soon as organized, so classify themselves that
the term of office of 1/5 of their number shall expire every year. Trustees thereafter elected to fill
vacancies, occurring before the expiration of a particular term, shall hold office only for the
unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall
hold office for 5 years.
A majority of the trustees shall constitute a quorum for the transaction of business. The
powers and authority of trustees shall be defined in the bylaws.
For institutions organized as stock corporations, the number and term of directors shall be
governed by the provisions on stock corporations (Sec. 106, RCC).
RELIGIOUS CORPORATIONS
Classes of Religious corporations: Religious corporations may be incorporated by one or more persons. Such
corporations may be classified into corporation sole and religious societies.
Religious corporations shall be governed by Title XIII and by the general provisions on non-stock
corporations insofar as applicable (Sec. 107, RCC).
Corporation Sole: For the purpose of administering and managing, as trustee, the affairs, property and
temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi, or other presiding elder of such religious denomination, sect, or
church (Sec. 108, RCC).
In order to become a corporation sole, the chief archbishop, bishop, priest, minister, rabbi or
presiding elder of any religious denomination, sect or church must file with the SEC its AOI setting
forth the following:
(a) That the applicant chief archbishop, bishop, priest, minister, rabbi, or presiding elder
represents the religious denomination, sect, or church who desires to become a corporation
sole;
46
(b) That the rules, regulations and discipline of the religious denomination, sect or church are
consistent with becoming a corporation sole and do not forbid it;
(c) That such chief archbishop, bishop, priest, minister, rabbi, or presiding elder is charged with
Page
the administration of the temporalities and the management of the affairs, estate and
Cruz, J. | 2020
properties of the religious denomination, sect, or church within the territorial jurisdiction, so
described succinctly in the articles of incorporation;
(d) The manner by which any vacancy occurring in the office of chief archbishop, bishop, priest,
minister, rabbi, or presiding elder is required to be filled, according to the rules, regulations
or discipline of the religious denomination, sect, or church; and
(e) The place where the principal office of the corporation sole is to be established and located,
which place must be within the territory of the Philippines.
The AOI may include any other provision not contrary to law for the regulation of the affairs of the
corporation (Sec. 109, RCC).
The articles of incorporation must be verified, by affidavit or affirmation of the chief

archbishop, bishop, priest, minister, rabbi, or presiding elder, as the case may be, and
accompanied by a copy of the commission, certificate of election or letter of appointment
of such chief archbishop, bishop, priest, minister, rabbi, or presiding elder, duly certified to
be correct by any notary public.
From and after filing with the SEC of the said AOI, verified by affidavit or affirmation, and
accompanied by the documents mentioned in the preceding paragraph, such chief
archbishop, bishop, priest, minister, rabbi, or presiding elder shall become a corporation
sole and all temporalities, estate and properties of the religious denomination, sect or
church theretofore administered or managed as such chief archbishop, bishop, priest,
minister, rabbi, or presiding elder shall be personally held in trust as a corporation sole, for
the use, purpose, exclusive benefit and on behalf of the religious denomination, sect, or
church, including hospitals, schools, colleges, orphan asylums, parsonages, and cemeteries
thereof (Sec. 110, RCC).
Filling of vacancies: The successors in office of any chief archbishop, bishop, priest, minister, rabbi, or
presiding elder in a corporation sole shall become the corporation sole on their accession to office and shall
be permitted to transact business as such upon filing a copy of their commission, certificate of election, or
letters of appointment, duly certified by any notary public with the SEC.
During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi, or presiding elder of any
religious denomination, sect or church incorporated as a corporation sole, the person or persons authorized
by the rules, regulations or discipline of the religious denomination, sect, or church represented by the
corporation sole to administer the temporalities and manage the affairs, estate, and properties of the
corporation sole shall exercise all the powers and authority of the corporation sole during such vacancy (Sec.
112, RCC).
Dissolution: A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the SEC a
verified declaration of dissolution, setting forth:
(a) The name of the corporation;
(b) The reason for dissolution and winding up;
(c) The authorization for the dissolution of the corporation by the particular religious denomination,
sect or church;
(d) The names and addresses of the persons who are to supervise the winding up of the affairs of the
corporation.
Upon approval of such declaration of dissolution by the SEC, the corporation shall cease to carry on its
operations except for the purpose of winding up its affairs (Sec. 113, RCC).
Religious Societies: Unless forbidden by competent authority, the Constitution, pertinent rules, regulations,
or discipline of the religious denomination, sect, or church of which it is a part, any religious society, religious
order, diocese, synod, or district organization of any religious denomination, sect, or church, may, upon
written consent and/or by an affirmative vote at a meeting called for the purpose of at least 2/3 of its
membership, incorporate for the administration of its temporalities or for the management of its affairs,
properties, and estate by filing with the SEC, AOI verified by the affidavit of the presiding elder, secretary, or
clerk or other member of such religious society or religious order, or diocese, synod, or district organization
of the religious denomination, sect, or church, setting forth the following:
(a) That the religious society or religious order, or diocese, synod, or district organization is a religious
organization of a religious denomination, sect or church;
(b) That at least 2/3 of its membership has given written consent or has voted to incorporate, at a duly
convened meeting of the body;
(c) That the incorporation of the religious society or religious order, diocese, synod, or district
organization is not forbidden by competent authority or by the Constitution, rules, regulations or
discipline of the religious denomination, sect, or church of which it forms part;
(d) That the religious society or religious order, diocese, synod, or district organization desires to
incorporate for the administration of its affairs, properties and estate;
(e) The place within the Philippines where the principal office of the corporation is to be established
and located; and
47
(f) The names, nationalities, and residence addresses of the trustees, not less than 5 nor more than 15,
elected by the religious society or religious order, or the diocese, synod, or district organization to
serve for the first year or such other period as may be prescribed by the laws of the religious
Page
society or religious order, or of the diocese, synod, or district organization (Sec. 114, RCC).
Cruz, J. | 2020
Power to acquire and alienate property: A corporation sole may purchase and hold real estate and personal
property for its church, charitable, benevolent, or educational purposes, and may receive bequests or gifts
for such purposes.
Such corporation may sell or mortgage real property held by it by obtaining an order for that
purpose from the RTC of the province where the property is situated upon proof that the notice of
the application for leave to sell or mortgage has been made through publication or as directed by
the Court, and that it is in the interest of the corporation that leave to sell or mortgage be granted.
The application for leave to sell or mortgage must be made by petition, duly verified, by the chief
archbishop, bishop, priest, minister, rabbi, or presiding elder acting as corporation sole, and may
be opposed by any member of the religious denomination, sect, or church represented by the
corporation sole: Provided, That in cases where the rules, regulations, and discipline of the
religious denomination, sect, or church, religious society, or order concerned represented by such
corporation sole regulate the method of acquiring, holding, selling, and mortgaging real estate and
personal property, such rules, regulations and discipline shall control, and the intervention of the
courts shall not be necessary (Sec. 111, RCC).
POWERS OF THE SECURITES AND EXCHANGE COMMISSION

The SEC has been granted the following powers:
a. To investigate and prosecute offenses defined under the RCC and to publish its findings, orders,
opinions, advisories, or information (Sec. 154, RCC);
b. To issue cease and desist orders (Sec. 156, RCC);
c. To hold parties in contempt and impose fine (Sec. 157, RCC);
d. To impose administrative sanctions (Sec. 158, RCC):
i. Impose a fine ranging from 5,000 to 2 million and not more than 1,000 for each day of
continuing violation, but not to exceed 2 million;
ii. Issuance of a permanent cease and desist order;
iii. Suspension or revocation of Certificates of Incorporation; and
iv. Dissolution of the corporation and forfeiture of its assets.
e. Granted fiscal autonomy to collect, retain, and use fees, fines, and other charges pursuant to the
RCC and its IRR (Sec. 175, RCC);
f. SEC‖s visitorial powers and confidential nature of examination results (Sec. 178, RCC);
g. SEC‖s power to administer oaths, subpoena witnesses and documents (Sec. 155, RCC);
h. Powers, functions, and Jurisdiction of the SEC (Sec. 179, RCC);
i. SEC‖s mandate to develop and implement electronic filing and monitoring system (Sec. 180, RCC);
and
j. BSP and Insurance Commission shall exercise primary authority over Special Corporations such as
banks, non-bank financial institutions, and insurance companies (Sec. 183, RCC).
VIOLATIONS, OFFENSES, AND PENALTIES UNDER THE RCC

1. Wilful holding of office despite knowledge of disqualification or wilful concealing of such
disqualification (Sec. 160, RCC);
2. Violation of the duty to maintain records, to allow their inspection or reproduction without
prejudice to the SEC‖s exercise of contempt powers (Sec. 161, RCC);
3. Wilful certification of incomplete, inaccurate, false, misleading statements or reports (Sec. 162,
RCC);
4. Independent auditor‖s collusion with directors or representatives, certifies to incomplete or

inaccurate reports on the Corporation‖s condition (Sec. 163, RCC);
5. Obtaining corporate registration through fraud: Those responsible for the formation of a
corporation through fraud , or who assisted directly or indirectly therein, shall be fined (Sec. 164,
RCC);
6. Corporation‖s conduct of business through fraud (Sec. 165, RCC);
7. Acting as intermediaries for graft and corrupt practices: Corporation used for fraud, or for
committing or concealing graft and corrupt practices (Sec. 166, RCC);
8. Engaging intermediaries for graft and corrupt practices: Corporation‖s appointment of an

intermediary who engages in graft and corrupt practices for the corporation‖s benefit or interest
(Sec. 167, RCC);
9. Tolerating graft and corrupt practices: A director, trustee, or officer who knowingly fails to
48
sanction, report, or file the appropriate action, allows or tolerates graft and corrupt practices or
fraudulent acts committed by a corporation‖s directors, trustees, officers, or employees (Sec. 168,
RCC);
Page
Cruz, J. | 2020
10. Retaliation against whistle-blowers: Any person who and with intent to retaliate, commit acts
detrimental to a whistle-blower such as interfering with the lawful employment or livelihood of
the whistle-blower (Sec. 169, RCC); and
11. Violations of the RCC and its amendments not specifically penalized: If violation is committed by a
Corporation, it shall be dissolved in an appropriate proceeding by the SEC and the liability for the
foregoing shall be separate from any other administrative, civil, and criminal liability under the RCC
and other laws (Sec. 170, RCC).
Historical Background of Sec. 170 (Sec. 144 of the old Corporation Code; Sec. 190 of the old
Corporation Law): Sec. 190 was not intended to make every casual violation of one of the
Corporation Law provisions ground for involuntary dissolution of the corporation and that
the court was entitled to exercise discretion in such matters.305
Penalties imposed in Sec. 190(A) of the old Corporation Law for the violation of the
prohibition in question are of such nature that they can be enforced only by a criminal
prosecution or by an action of quo warranto. These proceedings can be maintained
only by the Solicitor General in representation of the Government.306
Doctrine on the Coverage of Section 144 of the Old Corporation Code: Section 133 of the old
Corporation Code, unlike its counterpart Sec. 69 in the old Corporation Law which
specifically provided for penal sanctions for foreign corporations engaging in business in the
Philippines without obtaining the requisite license, should be deemed to have a penal
sanction by virtue of Sec. 144 of the Corporation Code.307
The lack of language imposing criminal liability in Section 31 and 34 of the old
Corporation Code shows the legislative intent to limit the consequences of their
violation to the civil liabilities mentioned therein. Had it been the intention of the
drafters of the law to define Sections 31 and 34 as offenses, they could have easily
included similar language as that found in Section 74 of the old Corporation Code.
The Corporation Code was intended as a regulatory measure, not primarily as a penal
statute.308
LIABLE PERSONS
Liability of Directors, Trustees, Officers, or Other Employees: If the offender is a corporation, the penalty
may, at the discretion of the court, be imposed upon such corporation and/or upon its directors, trustees,
stockholders, members, officers, or employees responsible for the violation or indispensable to its
commission (Sec. 171, RCC).
Aiders and Abettors: “Anyone who shall aid, abet, counsel, command, induce, or cause any violation of the
[RCC, its IRR, or SEC orders] shall be punished with a fine not exceeding that imposed on the principal
offenders, at the discretion of the court, after taking into account their participation in the offense” (Sec. 172,
RCC).
Effect of the repeal of the RCC: No right or remedy in favour or against any corporation, its stockholders,
members, directors, trustees, or officers, nor any liability incurred shall be removed or impaired either by the
subsequent amendment or repeal of the RCC (Sec. 184, RCC).
Existing Corporations at adoption of the RCC: A corporation lawfully existing and doing business in the
Philippines affected by the new requirements of the RCC shall be given a period of not more than 2 years
from its effectivity (23 February 2019) within which to comply (Sec. 185, RCC).
Ω
49
305
Government of P.I. v. El Hogar Filipino, 1927.
Page
306
Harden v. Benguet Consolidated Mining Co., 1933.
307
Home Insurance Co. v. Eastern Shipping Lines, 1983.
308
Ient v. Tullett Prebon (Phils.), Inc., 2017.

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San Beda University: College of Law

This endeavor is based on the following references:

1. Revised Corporation Code and other related laws;

Based on Sec. 2, a corporation has the following attributes: (J-LAC)

Rules on liability of Corporate Employees: The employee of a corporation engaged in unlawful

“Corporate Criminal” under Secs. 165-167, RCC:

The control test has the following sub-sets:

The following are the indicators of doubt (FTM):

Hence, we do not apply the Grandfather rule when there is no doubt.

No Foreign Equity (100% Filipino-owned) (CROP2-FUM-SMB)

Up to 20% Foreign Equity

Up to 25% Foreign Equity

Up to 30% Foreign Equity

Up to 40% Foreign Equity (C2AP-MO5DE)

Up to 60% Foreign Equity

General Credit Corp. v. Alsons Dev. and Investment Corp., 2007.

TYPES OF PIERCING CASES

Probative Factors in Piercing the Corporate Veil: (MIMS)

Examples of Equity Piercing: Juridical personality cannot be employed to:

Lipat v. Pacific Banking Corp, 2003.

Natural persons must be of legal age to be an incorporator.103 Partnerships with dissolved or

Distinguishability Test: A name is not distinguishable even if it contains the following:

Sec. 3, SEC Memorandum 16-2019.

The grounds for disapproval of the AOI are the following:

Stock corporation may be converted to non-stock corporation by amendment of the AOI.

Section 45 of the RCC removed the One-Month-from-Incorporation Period to Adopt Bylaws.

An arbitration agreement may be provided in the bylaws (Sec. 46, RCC).

Adoption of Corporate Bylaws, required votes:

Pre-incorporation subscription: A subscription of shares in a corporation still to be formed shall be

Deposit on Stock Subscription: It is an amount of money received by the corporation as a deposit

The following are the requisites of a de facto corporation:

Instances when there is a de facto corporation:

Instances when there is no de facto corporation due to invalid law:

When an ostensible corporation or corporation by estoppel is sued on any transaction entered by it

It is established doctrine that subscriptions to the capital of a corporation constitute a fund to

Application of the Trust Fund Doctrine:

Kinds of Preferred Shares:

Effects of Delinquency: No delinquent stock shall be voted for, be entitled to vote, or be

Procedure for Delinquency Sale under Sec. 67, RCC: (ReNo-PuSa-TC)

Winning Bidder in a Delinquency Sale

expenses of sale, for the smallest number of shares.

Kinds of Watered Stocks:

Liability for Watered Stock

Holder of watered stock cannot escape liability by transferring the same to an

4. Transferor or party to the fraud - It can be made liable for damages

HOWEVER, a contractual undertaking on restriction of transfer of shares that has a

Registration of a transfer of shares of stock is a ministerial duty on the part of the

REGISTRATION OF TRANSFERS OF STOCK TO CORPORATE RECORDS

MEETINGS OF THE BOARD

Abstention in a Board meeting is presumed to be counted as an affirmative vote insofar as it may

Director or Trustee Corporate Officer

FIDUCIARY DUTIES OF DIRECTORS/TRUSTEES, AND OFFICERS

Under the duty to maintain records are (Sec. 161, RCC):

1. The corporation is Financially able to undertake;

When Corporate Opportunity Ceases: A business opportunity ceases to be corporate opportunity

Pre-emptive Right Right of First Refusal

Cash Dividends Stock Dividends

Cash Dividends Stock Dividends