BUSINESS ORGANIZATION II A corporate term for a specific period may be extended or

shortened by amending the articles of incorporation: Provided, That no

Xandredg Sumpt L. Latog extension may be made earlier than three (3) years prior to the original
or subsequent expiry date(s) unless there are justifiable reasons for an
earlier extension as may be determined by the Commission: Provided,
I further, That such extension of the corporate term shall take effect only
INCORPORATION AND ORGANIZATION OF on the day following the original or subsequent expiry date(s).
PRIVATE CORPORATIONS A corporation whose term has expired may apply for revival
of its corporate existence, together with all the rights and privileges
A. NUMBER AND QUALIFICATIONS OF under its certificate of incorporation and subject to all of its duties,
INCORPROATORS debts and liabilities existing prior to its revival. Upon approval by the
Commission, the corporation shall be deemed revived and a certificate
of revival of corporate existence shall be issued, giving it perpetual
Section 10. Number and Qualifications of Incorporators. – existence, unless its application for revival provides otherwise.
Any person, partnership, association or corporation, singly or jointly No application for revival of certificate of incorporation of
with others but not more than fifteen (15) in number, may organize a banks, banking and quasi-banking institutions, preneed, insurance and
corporation for any lawful purpose or purposes: Provided, That trust companies, non-stock savings and loan associations (NSSLAs),
natural persons who are licensed to practice a profession, and pawnshops, corporations engaged in money service business, and other
partnerships or associations organized for the purpose of practicing a financial intermediaries shall be approved by the Commission unless
profession, shall not be allowed to organize as a corporation unless accompanied by a favorable recommendation of the appropriate
otherwise provided under special laws. Incorporators who are natural government agency.
persons must be of legal age.
Each incorporator of a stock corporation must own or be a
subscriber to at least one (1) share of the capital stock. Since the privilege of extension is purely statutory, all of
A corporation with a single stockholder is considered a One the statutory conditions precedent must be complied with in order
Person Corporation as described in Title XIII, Chapter III of this that the extension may be effected.
Code. Where the extension is by amendment of the articles of
incorporation, the amendment must be adopted before that time and
SEC Memorandum Circular No. 16-19 similarly the and recording of a certificate of extension after that
time cannot relate back to the passage of a resolution by the
Qualifications of Incorporators stockholders in favor of the extension so as to save the life of the
The incorporators may be composed of any combination of corporation.
natural persons SEC registered partnerships SEC registered domestic
corporations or associations as well as foreign corporations.
Pamintuan Enterprises v. Company Registration and
Partnership as incorporated
In the event that a SEC recorded partnership is made as Monitoring Department
incorporator, the application for registration must be accompanied by a Held: Section 11 of the Corporation Code provides that a
Partners’ Affidavit duly executive by all of the partners to the effect that corporation shall exist for a period not exceeding fifty (50) years from the
they have authorized the partnership to invest in the corporation about to be date of incorporation unless sooner dissolved or unless said period is
formed and that they have designated one of the partners to become a extended. The corporate term as originally stated in the articles of
signatory to the incorporation documents. incorporation may be extended for periods not exceeding fifty (50) years in
In the event that a SEC registered domestic corporation or any single instance by an amendment of the articles of incorporation, in
association is made an incorporator, its investment in the new corporation accordance with this Code; Provided, That no extension can be made earlier
must be approved by majority of the board of directors or trustees and than five (5) years prior to the original or subsequent expiry date(s) unless
ratified by the stockholders representing the third shares of the outstanding there are justifiable reasons for an earlier extension as may be determined
capital stocks, or by at least one third of the member in the case of non- by the Securities and Exchange Commission.
stock corporations at a meeting duly called for the purpose. In the instant case, before the expiration of its corporate term,
Designation of incorporators as directors or trustees Appellant’s BOD approved the extension and this was thereafter ratified by
An individual who signs the articles of incorporation on behalf the appellant’s stockholders, representing at least 2/3 of the outstanding
of an incorporator which is not a natural person may not be named as a capital stock. However, its application for extension of its corporation term
director or trustee and the same articles of incorporation, unless when the was denied because of its failure to submit a Certificate of No Intra-
said individual is also the owner of at least one share of stock, or is also a Corporate Dispute.
member, of the corporation being formed. The Commission En Banc passed SEC RES. No. 222, s. of
Additional requirements for bank etc. 2017, which adopted the liberal approach in cases for extension for
No articles of incorporation of banks, banking and quasi corporate term adopted by the Supreme Court in its decisions in the cases
banking institutions, preneed insurance and trust companies, NSSLAS, of: CRMD and SEC vs. Ching Bee Trading Corporation (G.R. No. 205921,
pawnshops and other financial intermediaries should be approved unless 12 November 2014) and 3-D Industries vs. Northern Islands Company, Inc.
accompanied by a favorable recommendation of the appropriate (GR No. 194891, 9 January 2017). In those cases, the SC allowed the
government agency to the effect that the articles of incorporation are in application for extension of corporate term of CBTC and NICI. This new
accordance with law. liberal approach is intended for corporations applying to extend their
corporate existence even if there are some deficiencies in their application.
It was likewise resolved that those corporations similarly situated with
B. CORPORATE TERM CBTC and NICI, relative to corporate term extensions, will be allowed to
file their application to amend their AOI to extend their corporate term
Section 11. Corporate Term. - A corporation shall have before the CRMD, which shall present it for approval of the Commission
perpetual existence unless its articles of incorporation provides En Banc so as to continue as a going concern, provided that (1) The intent
otherwise. to continue operations is supported by approvals given by the Board and
Corporations with certificates of incorporation issued prior Stockholders prior to the expiration of the term, as certified in a written
to the effectivity of this Code and which continue to exist shall have document; (2) the application is filed before the CRMD and all the
perpetual existence, unless the corporation, upon a vote of its requirements of the latter are satisfied; and (3) all appropriate filing fees are
stockholders representing a majority of its articles of paid for.
incorporation: Provided, That any change in the corporate right of In the light of liberal approach, appellant should now be allowed
dissenting stockholders in accordance with the provisions of this Code. to file its application for extension of corporate term before the CRMD. An
outright denial of such application will result in the closure of a going

Page 1 of 25
concern, which is the second oldest hotel in the country. There would be Some corporations cannot issue no-par value shares:
economic implication if the appellant’s application will be denied. Also, the banks, public utilities, insurance companies, and building and loan
State or the general public will not be prejudiced if the application for associations.
extension is approved. Likewise, Appellant’s stockholders do not intend for The reason behind such a prohibition is there are certain
the closure of the corporation for the reason that they themselves are
businesses or activities vested with public interests and proper
contending with the control of the corporation in the intra-corporate case.
The Certificate of No Intra-Corporate Dispute is merely
accountability is served if nominal amounts are assigned to their
intended to ensure that the corporation has complied with the required shares which would be the basis of their capital structure.
number of votes of its stockholder as provided by law. Thus, it would be
unwise if the application is denied simply because of the absence of such D. ARTICLES OF INCORPORATION
certificate.
However, the Commission is only allowing the filing of Section 13. Contents of the Articles of Incorporation. - All
Appellant’s application for extension of its corporate term, this should not corporations shall file with the Commission articles of incorporation in
be considered as the approval of the same. any of the official languages, duly signed and acknowledged or
authenticated, in such form and manner as may be allowed by the
C. MINIMUM CAPITAL STOCK NOT REQUIRED OF Commission, containing substantially the following matters, except as
STOCK CORPORATIONS otherwise prescribed by this Code or by special law:
(a) The name of corporation;
(b) The specific purpose or purposes for which the
Section 12. Minimum Capital Stock Not Required of Stock
corporation is being formed. Where a corporation has more than one
Corporations. - Stock corporations shall not be required to have
stated purpose, the articles of incorporation hsall indicate the primary
minimum capital stock, except as otherwise specially provided by
purpose and the secondary purpose or purposes: Provided, That a
special law.
nonstock corporation may not include a purpose which would change
or contradict its nature as such;
1. Capital Stock (c) The place where the principal office of the corporation is
Capital Stock is the amount fixed in the Articles of to be located, which must be within the Philippines;
Incorporation procured to be subscribed and paid in. It is settled (d) The term for which the corporation is to exist, if the
that shares issued in excess of the authorized capital stock is void. corporation has not elected perpetual existence;
(e) The names, nationalities, and residence addresses of the
incorporators;
2. Outstanding Capital Stock (f) The number of directors, which shall not be more than
Outstanding capital stock is the total shares of stock fifteen (15) or the number of trustees which may be more than fifteen
issued to subscribers or stockholders, whether or not fully or (15);
partially paid (as long as there is a binding subscription (g) The names, nationalities, and residence addresses of
agreement), except treasury shares. persons who shall act as directors or trustees until the first regular
directors or trustees are duly elected and qualified in accordance with
Subscription Agreement this Code;
(h) If it be a stock corporation, the amount of its authorized
Subscription is the mutual agreement of the corporation
capital stock, number of shares into which it is divided, the par value of
and subscriber to take and pay for the stock of a corporation. each, names, nationalities, and subscribers, amount subscribed and
paid by each on the subscription, and a statement that some or all of
Principle of Indivisibility of Subscription the shares are without par value, if applicable;
This is the rule that subscribed stocks cannot be divided (i) If it be a nonstock corporation, the amount of its capital,
into portion so that the stockholder shall not be entitled to a the names, nationalities, and residence addresses of the contributors,
certificate of stock until he has remitted the full payment of his and amount contributed by each; and
subscription. As a result, a stockholder cannot transfer portion or (j) Such other matters consistent with law and which the
incorporators may deem necessary and convenient.
part of his stock in view of the indivisible nature of the
An arbitration agreement may be provided in the articles of
incorporation pursuant to Section 181 of this Code.1âwphi1
3. Issuance of Par Value of Shares of Stock The Articles of incorporation and applications for
Par value share is one in the certificate of stock of which amendments thereto may be filed with the Commission in the form of
appears an amount in pesos as the nominal value of shares. an electronic document, in accordance with the Commission's rule and
Such par value must be stated in the articles of regulations on electronic filing.
incorporation and par share cannot be issued at less than such par
value, which can be changed only by an amendment of the articles 1. Examination and Approval by SEC
of incorporation. Articles of incorporation do not become binding as the
If no par value shares will be issued by the corporation, charter of the corporation unless they have been filed and
such fact must be stated in the articles of incorporation, and the registered with, and certified by the SEC. In the case of articles of
consideration of their issuance cannot be less than the issued value incorporation of special types of corporations, such as banks and
which in turn cannot be less than five pesos each. insurance companies, they will not be certified by the SEC unless
said articles are accompanied by a favorable recommendation like
Consideration a certificate of authority from the BSP for the banks.
The consideration for which no par value shares may be Upon filing of the articles of incorporation, the SEC will
issued is referred to as “issued value”, may be fixed by: examine, whether the provisions thereof are in accordance with
law. If the articles of incorporation are not in conformity with law,
a. By the AOI the SEC shall give the incorporators, reasonable time within which
b. BY the BOD when authorized by AOI or by laws to correct or modify the objectionable portions. A mandamus can
c. By the stockholders representing at least a majority of be filed to compel issuance.
the outstanding capital stock
2. Contents of Articles of Incorporation

Page 2 of 25
 a. Corporation Name d) A name that consist solely of special symbols, punctuation
marks or specially designed characters shall not be registered.
Section 17. Corporation Name. - No corporate name shall be 4. Business or trade name which is different from the corporate
allowed by the Commission if it is not distinguishable from that already or partnership name shall be indicated in the articles of incorporation or
reserved or registered for the use if another corporation, or if such partnership. A company may have more than one business or trade name.
name is already protected by law, rules and regulations. 5. A trade name or trademark registered with the
A name is not distinguishable even if it contains one or more Intellectual Property Office may be used as part of the corporate or
of the following: partnership name of a party other than its owner if the latter gives its
(a) The word "corporation", "company", incorporated", consent to such use.
"limited", "limited liability", or an abbreviation ofone if such words;
and 6. a) The full name or surname of a person may be used in a
(b) Punctuations, articles, conjunctions, contractions, corporate or partnership name if he or she is a stockholder, member or
prepositions, abbreviations, different tenses, spacing, or number of the partner of the said entity and has consented to such use; if the person is
same word or phrase. already deceased, the consent shall be given by his or her estate;
The Commission upon determination that the corporate b] A single stockholder of a One Person Corporation (OPC) may
name is: (1) not distinguishable from a name already reserved or use his/her name; provided, that said name shall be accompanied with
registered for the use of another corporation; (2) already protected by descriptive words aside from the suffix OPC.
law; or (3) contrary to law, rules and regulations, may summarily The single stockholder may also use the name of another person
order the corporation to immediately cease and desist from using such provided consent was given by the said person or if deceased, his estate.
name and require the corporation to register a new one. The Provided that the name shall be accompanied by the descriptive words other
Commission shall also cause the removal of all visible signages, marks, than the suffix OPC.
advertisements, labels prints and other effects bearing such coroporate c] The Commission may require a registrant to explain to its
name. Upon the approval of the new corporate name, the Commission satisfaction the reason for the use of a person's name;
shall issue a certificate of incorporation under the amended name. d] The meaning of initials used in a name shall be stated by the
If the corporation fails to comply with the Commission's registrant in the Articles of Incorporation, Articles of Partnership or in a
order, the Commission may hold the corporation and its responsible separate document signed by an incorporator, director or partner, as the
directors or officers in contempt and/or hold them administratively, case may be.
civilly and/or criminally liable under this Code and other applicable 10. The practice of a profession regulated by a special law
laws and/or revoke the registration of the corporation. which, among others, provides for the permissible use of the profession's
name in a firm, partnership orassociation shall govern the use of the name,
e.g. "Engineer" or "Engineering" (R.A. 1582), "Architect" (R.A. 9266), or
SEC Memorandum Circular 13-19 21 June 2019 "Geodetic Engineer" (R.A. 8560).
To keep abreast with developments in business and information
technology in the country, the Commission is adopting the following Notwithstanding the limitations mentioned above, any
guidelines and procedures in the registration of corporate, one person association registered by entities engaged in the listed activities may use the
corporate and partnership names: profession's name, e.g. Association of Engineers of the Philippines, Inc.
1. a) The corporate name shall contain the word "Corporation"
or "Incorporated," or the abbreviations "Corp." or "Inc." respectively; 11. Unless otherwise authorized by the Commission, the words
b) In the case of a One Person Corporation, the corporate name and phrases enumerated below can be used only by the entities mentioned:
shall contain the word "OPC" either below or at the end of its corporate
name; a) "Investment(s)" or "Capital" by entities organized as
c) The partnership name shall bear the word "Company" or investment house or investment company;
"Co." and if it is a limited partnership, the word "Limited" or "Ltd.". A
professional partnership name may bear the word "Company," b) "Capital" by entities organized as investment house,
"Associates," or "Partners," or other similar descriptions; investment company or holding company;
d) The corporate name of a foundation shall use the word
"Foundation"; c) "Asset/Investment/Fund/Financial Management," or
e) The corporate name of all non-stock, non-profit corporations, "Asset/Investment/Fund/Financial Adviser," or any similar words or
including non- governmental organizations and foundations, engaging in phrases by entities organized as investment company adviser or holders of
microfinance activities shall use the word "Microfinance" or investment management activities (IMA) license from the Bangko Sentral
"Microfinancing"; provided that said corporations shall state in the purpose ng Pilipinas;
clause of their Articles of Incorporation that they shall conduct d) "National," "Bureau," "Commission," "State," and
microfinance operations pursuant to Republic Act No. 8425 or the Social other similar words, acronyms, abbreviations that have gained wide
Reform and Poverty Alleviation Act; acceptance in the Philippines by entities that perform governmental
2. A term that describes the business of a corporation in its name functions;
should refer to its primary purpose. If there are two such terms, the first e) "Association" and "Organization" or similar words
should refer to the primary purpose and the second to the secondary which pertain to non-stock corporations by entities primarily engaged in
purpose. non-profit activities; and
3. a) The name shall be distinguishable from other corporate or
partnership name registered with the Commission, or with the Department f) "Stock Exchange/Futures Exchange/Derivatives
of Trade and Industry, in the case of sole proprietorships; Exchange," "Stock Broker/Securities Broker/Derivatives
b) If the name applied for is similar to that of a registered Broker," "Commodity/Financial Futures Merchant/Broker," "Securities
corporation or partnership, the applicant shall add one or more distinctive Clearing Agency/Stock Clearing Agency," "Plans" or any similar words or
words to the proposed name to remove the similarity or differentiate it from phrases by entities organized as an exchange, broker dealer, commodity
the registered name; futures broker, clearing agency, or pre-need company under the Securities
However, the addition of one or more distinctive words shall not Regulation Code (RA. 8799).
be allowed if the registered name is coined or unique unless the board of
directors or majority of the partners of the subject corporation or 12. Pursuant to Republic Act 10530, or "The Act
partnership gives its consent to the applied name. Defining The Use and Protection Of The Red Cross, Red Crescent and Red
c) Punctuation marks, spaces, signs, symbols, and other similar Crystal Emblems", the use of the words "red cross", "red crescent", or "red
characters, regardless of their form or arrangement, shall not be acceptable crystal" or their translation in any official language and dialect cannot be
as distinguishing words for purposes of differentiating a proposed name used or registered as part of a corporate or partnership name, unless with
from a registered name. the consent of the Philippine Red Cross.

Page 3 of 25
 13. The enumeration in paragraphs 10,11 and 12 are not Provided, however, that another corporation may use the names
exclusive and may increase or decrease depending on future legislative of absorbed/constituent corporation if consent of the surviving corporation
issuances or administrative orders of the appropriate or duly authorized is obtained such as:
government offices. a) Directors' Certificate of the surviving corporation permitting
the usage of the said absorbed/constituent corporation by another
14. The name of a corporation or partnership that has corporation; and
been dissolved or whose registration has been revoked shall not be used by b) Secretary's Certificate of non-existence of intracorporate
another corporation or partnership within five (5) years from the approval dispute of the Corporation from the Surviving Corporation.
of dissolution or five (5) years from the date of revocation, unless its use 17. a) The reservation or notice of availability of a name shall
has been allowed at the time of the dissolution or revocation by the not constitute an approval of the use of such name or an application for a
stockholders, members or partners who represent a majority of the change of name;
outstanding capital stock or membership of the dissolved corporation or b) No erasures, changes, modifications or alterations on a name
partnership, as the case may be. reservation form shall be allowed; and
No application for re-registration of the expired corporation, c) Appeals from or opposition to the approval of corporate and
however, shall be processed by the Commission unless the application is partnership names of new companies, or complaints against proposed new
accompanied by the following documents: names of existing companies or partnerships, shall be resolved by the
i. Board Resolution, executed and signed under oath by the Company Registration and Monitoring Department (CRMD). The decisions
hold-over board of directors/trustees of the expired corporation, attesting of CRMD may be appealed to the Commission En Banc through the Office
that: of the General Counsel.
a) the applicant for re-registration is a new corporation intending 18. At the time of its registration, a corporation or partnership
to use the name of the expired corporation (specially identifying the shall submit an affidavit containing an unqualified undertaking to change
corporate name and registration number); its change the name immediately upon receipt of notice from the
b) the re-registration is approved by the majority vote of the Commission that another corporation, partnership or person has acquired a
directors or trustees and the vote of the stockholders representing the prior right to the use of such name, that the name has been declared not
majority of the outstanding capital stock or membership; distinguishable from a name already registered or reserved for the use of
c) they shall include a statement in the articles of incorporation another corporation, or that it is contrary to law, public morals, good
of the new corporation that the same is using the name of the expired customs or public policy. The affidavit shall be signed by at least two
corporation; and incorporators or partners in the form prescribed by the Commission. This
d) if applicable, they will no longer file a petition to set aside the affidavit shall not be required if the undertaking is already included as one
order of revocation. of the provisions of the Articles of Incorporation or Partnership of the
ii. Latest General Information Sheet of the expired corporation, registrant.
stamped "received" by the Commission; and
iii. Affidavit, executed under oath by the hold-over corporate Section 17 of the Corporation Code expressly prohibits
secretary, attesting that:
the use of a corporate name which is “identical or deceptively or
a) there are no properties owned by the dissolved/revoked
corporation due for liquidation, or in case there are properties owned by the confusingly similar to that of any existing corporation or to any
expired corporation, no property is transferred to the new corporation or, in other name already protected by law or is patently deceptive,
case of stock corporations, used for subscription payment without confusing or contrary to existing laws”. The policy behind the
undergoing corporate liquidation process; foregoing prohibition is to avoid fraud upon the public that will
b) there is no pending intra-corporate dispute or claim involving have occasion to deal with the entity concerned, the evasion of
the expired corporation (**provision from mc no. 14 2017); and legal obligations and duties, and the reduction of difficulties of
c) that the expired corporation has no derogatory information administration and supervision over corporation [Industrial
with the Commission at the time of its application for re- registration.
Refractories v. Court of Appeals].
Upon approval of the re-registration, the certificate of
registration to be issued to the new corporation shall indicate its new SEC Pursuant thereto, the Revised Guidelines in the Approval
registration number and pre-generated Tax Identification Number (TIN) as of Corporate and Partnership Names specifically requires that:
confirmation that the same is a separate and distinct entity from the expired (1) a corporate name shall not be identical, misleading or
corporation. confusingly similar to one already registered by another
15. A corporate or partnership name, which was previously used corporation with the Commission; and (2) if the proposed name is
but become the subject of amendment, shall not be re- registered or used by similar to the name of a registered firm, the proposed name must
another corporation or partnership for a period of three (3) years from the contain at least one distinctive word different from the name of the
date of the approval of the adoption of the new corporate or partnership
company already registered.
name.
An earlier period may be allowed for the registration or use of As held in Philips Export B.V. vs. Court of Appeals, to
the former corporate or partnership name provided that the corporation or fall within the prohibition of the law, two requisites must be
partnership, which previously owned the used corporate or partnership proven, to wit:
name, gives its consent. The requirement to wit, as:
For Corporations:
a) Directors/Trustees' Certificate approved by the majority of the (1) that the complainant corporation acquired a prior
Directors/Trustees approving the use of the former name by another right over the use of such corporate name; and
corporation or partnership; and
(2) the proposed name is either: (a) identical, or (b)
b) Secretary Certificate of non-existence of intracorporate
dispute from the Corporation that use the former corporate name. deceptively or confusingly similar to that of any
For Partnerships: existing corporation or to any other name already
a) Partnership's Resolution approved by the majority of the protected by law; or (c) patently deceptive,
Partners approving the use of the former name by another corporation or confusing or contrary to existing law.
partnership.
For One Person Corporations: It has been held that the right to the exclusive use of a
a) The consent of the sole stockholder or, in cases of incapacity
corporate name with freedom from infringement by similarity is
or death, his/her designated nominee, given in a notarized instrument and
determined by priority of adoption. In determining the existence of
countersigned by the Corporate Secretary.
16. Names of absorbed/constituent corporation may not be used confusing similarity in corporate names, the test is whether the
unless it is the surviving corporation intending to use the said similarity is such as to mislead a person using ordinary care and
absorbed/constituent corporate name.

Page 4 of 25
discrimination and the Court must look to the record as well as the Sec. 8. To ease the burden on the part of the affected
names themselves [Industrial Refractories v. Court of Appeals]. corporations and partnerships in effecting an amendment of their Articles
whenever they transfer or move to a new location, the following shall be
b. Purpose Clause observed:
a. In the event that a corporation whose principal office address
It is well settled principle that a corporation has only
as indicated in its Articles is already specific and complete, has moved or
such powers as are expressly granted in its charter or in the statutes moves to another location within the same city or municipality, the
under which it is created or such powers as are necessary for the corporation is not required to file an Amended Articles of Incorporation.
purpose of carrying out its express powers. However, it is encouraged to declare its new or current specific
It is settled that it is only in the business, for which it was address in its GIS. “Metro Manila” shall not be considered a city or
lawfully organized and which is stated in the articles of municipality for this purpose;
incorporation, that a corporation should engage in. But if the b. Notwithstanding the above provision, a corporation is not
business is necessary for the accomplishment of the purpose of the precluded from filing an Amended Articles of Incorporation to indicate its
new location within the same city or municipality of its former address.
corporation or incident to it, the corporation may also engage in
c. In all other cases, the corporation must file an Amended
such business. Articles of Incorporation to indicate its new location in another city or
municipality within fifteen (15) days from transfer to said location;
As a matter of fact, it is even legal to “stretch” the d. Failure on the part of the corporation to file an Amended
meaning of the purpose clause to cover new and unexpected Articles of Incorporation for change in address to another city or
situations. municipality within the prescribed period shall
(1) constitute a violation of Section 16 of the Corporation Code
c. Place of Business of the Philippines and
(2) shall subject the corporation to the imposition of penalty in
accordance with the existing scale of fines;
SEC Memorandum Circular 06-16 e. With respect to corporations with secondary licenses issued
Sec. 1. All corporations and partnerships applying for by the Commission, the concerned corporation shall
registration with the SEC should state in their Articles of Incorporation or (1) file amendment for change in principal office address and
Articles of Partnership the following: branch office address, if applicable
(i) specific address of their principal office, which shall include, (2) to reflect its new location within the same or another city or
if feasible, the street number, street name, barangay, city or municipality, municipality for purposes of issuance of its Certificate of Authority; and
and if applicable, the name of the building, number of the building, and f. In the case of a partnership, considering that it has no
name or number of the room or unit; and obligation to file a GIS, it is required to file an Amended Articles of
(ii) specific residence address of each incorporator, Partnership every time it transfers to a new location within the same or
stockholder, director, trustee or partner. another city or municipality.
Sec. 2. All foreign corporations applying for license to do Sec. 9. All five (5) circulars on principal office address
business in the country should indicate in their applications the following: enumerated in the Whereas clause are hereby repealed.
(i) specific address of the principal office address of the Sec. 10. This Circular shall take effect immediately after its
corporation in the country or state of incorporation; publication in a newspaper of general circulation. (9 June 2016)
(ii) specific address of the resident agent;
(iii) specific location where the corporation shall hold office and
place in the Philippines where the corporation intends to operate; and 3. Amendment of Articles of Incorporation
(iv) specific address of the present directors and officers of the
corporation Section 15. Amendment of Articles of Incorporation. - Unless
Sec. 3. All corporations are required to state in their GIS the otherwise prescribed by this Code or by special law, and for legitimate
specific principal office address and the specific residence address of each purposes, any provision or matter stated in the articles of
stockholder, officer, director, or trustee. incorporation may be amended by a majority vote of the board of
Sec. 4. Pursuant to Memorandum Circular No. 9 series of 2015 directors or trustees and the vote or written assent of the stockholders
Final Extension for Amendment of the Principal Office Address, all representing at least two-thirds (2/3) of the outstanding capital stock,
existing corporations and partnerships whose Articles of Incorporation or without prejudice to the appraisal right of dissenting stockholders in
Articles of Partnership indicate a general address as their principal office accordance with the provisions of this Code. The articles of
address, such that it refers only to a city, town or municipality or “Metro incorporation of a nonstock corporation may be amended by the vote
Manila” were given until 31 December 2015 to file an Amended Articles of or written assent of majority of the trustees and at least two-thirds
Incorporation or Amended Articles of Partnership in order to specify their (2/3) of the members.
complete address. The original and amended articles together shall contain all
Sec. 5. Affected corporations which fail to effect a change in provisions required by law to be set out in the articles of incorporation.
their principal office address within the deadline set (i.e., 31 December Amendments to the articles shall be indicated by underscoring the
2015) shall be imposed a “one-time” penalty under SEC Office Order no. change or changes made, and a copy thereof duly certified under oath
298, series of 2010 Internal Guidelines on the Monitoring of Corporations by the corporate secretary and a majority of the directors or trustees,
and Verification of Annual Reports in relation to Articles 144 and 16 of the with a statement that the amendments have been duly approved by the
Corporation Code of the Philippines, amounting to Five Thousand Pesos required vote of the stockholders or members, shall be submitted to the
(P5,000.00) for stock corporations and Two Thousand Five Hundred Pesos Commission.
(P2,500.00) for non- stock corporations. The amendments shall take effect upon their approval by the
Sec. 6. In case an affected corporation or partnership has an Commission or from the date of filing with the said Commission if not
application for amendment of its Articles of Incorporation or Articles of acted upon within six (6) months from the date of filing for a cause not
Partnership pertaining to other provisions thereof, the corporation or attributable to the corporation.
partnership shall be required to include in the proposed amendments the
change in the principal office address. 4. Grounds When Articles of Incorporation or
Sec. 7. For foreign corporations, a “Notification Update Form”
Amendment May be Disapproved
signed under oath by the president or resident agent of the concerned
foreign corporation must be submitted within thirty (30) days from the
occurrence of change in its principal office address in relation to SEC Section 16. Grounds When Articles of Incorporation or
Memorandum Circular No. 22, series of 2014 Guidelines for the Use of Amendment May be Disapproved. The Commission may disapprove the
Notification Update Form for Foreign Corporations. articles of incorporation or any amendment thereto if the same is not
compliant with the requirements of this Code: Provided, That the
Commission shall give the incorporators, directors, trustees, or officers

Page 5 of 25
as reasonable time from receipt of the disapproval within which to laws, unless accompanied by a certificate of the appropriate
modify the objectionable portions of the articles or amendment. The government agency to the effect that such by laws or amendments are
following are ground for such disapproval: in accordance with law.
(a) The articles of incorporation or any amendment thereto
is not substantially in accordance with the form prescribed herein; It is recognized that 'every corporation has the inherent
(b) The purpose or purposes of the corporation are patently
power to adopt by-laws 'for its internal government, and to regulate
unconstitutional, illegal, immoral or contrary to government rules and
regulations; the conduct and prescribe the rights and duties of its members
(c) The certification concerning the amount of capital stock towards itself and among themselves in reference to the
subscribed and/or paid is false; and management of its affairs [Gokongwei v. SEC].
(d) The required percentage of Filipino ownership of the In this jurisdiction, a corporation may prescribe in its by-
capital stock under existing laws or the Constitution has not been laws "the qualifications, duties and compensation of directors,
complied with. officers and employees. This must necessarily refer to a
No articles of incorporation or amendment to articles of qualification which provides that every director must own in his
incorporation of banks, banking and quasi-banking institutions,
right at least one share of the capital stock of the stock corporation
preneed, insurance and trust companies, NSSLAs, pawnshops and
other financial intermediaries shall be approved by the Commission of which he is a director [Ibid].
unless accompanied by a favorable recommendation of the appropriate In Government v. El Hogar, the Court sustained the
government agency to the effect that such articles or amendment is in validity of a provision in the corporate by-law requiring that
accordance with law. persons elected to the Board of Directors must be holders of shares
of the paid up value of P5,000.00, which shall be held as security
E. REGISTRATION AND INCORPORATION for their action, on the ground that section 21 of the Corporation
Law expressly gives the power to the corporation to provide in its
Section 18. Registration, Incorporation and Commencement by-laws for the qualifications of directors and is "highly prudent
of Corporation Existence. - A person or group of persons desiring to and in conformity with good practice. "
incorporate shall submit the intended corporate name to the
Commission for verification. If the Commission finds that the name is China Banking v. Court of Appeals
distinguishable from a name already reserved or registered for the use Held: In order that by-law provisions can be binding upon third
of another corporation, not protected by law and is not contrary to law, parties, such third-parties must have acquired knowledge of the pertinent
rules and regulation, the name shall be reserved in favor of the by-laws at the time of transaction or agreement between said third person
incorporators. The incorporators shall then submit their articles of and the shareholders was entered into, in this case, at the time the pledge
incorporation and bylaws to the Commission. agreement was executed.
If the Commission finds that the submitted document s and Corporation could have easily informed Chinabank of its by-
information are fully compliant with the requirements of this Code, laws when it sent notice formally recognizing pledgee of its shares
other relevant laws, rules and regulations, the Commission shall issue registered in the name of stockholder of record. The corporation’s belated
the certificate of incorporation. notice of said by-laws at the time of foreclosure did not suffice to overturn
A private corporation organized under this Code the rights of the pledgee.
commences its corporate existence and juridical personality from the Non-Binding Effect of By-Laws to Third Parties
date the Commission issues the certificate of incorporation under its By-laws signify the rules and regulations, or private laws
official seal thereupon the incorporators, stockholders/members and enacted by the corporation to regulate, govern and control its own actions,
their successors shall constitute a body corporate under the name affairs and concerns and its stockholders or members and directors and
stated in the articles of incorporation for the period of time mentioned officers with relations thereto and among themselves in relation to it.
therein, unless said period is extended or the corporation is sooner In other words, by-laws are the relatively permanent and
dissolved in accordance with law. continuing rules of action adopted by the corporation for its own
government and that of the individuals composing it and having the
F. BY-LAWS directions, management and control of its affairs, in whole or in part, in the
management and control of its affairs and activities.
1. Adoption of Bylaws The purpose of a by-law is to regulate the conduct and define the
duties of the members towards the corporation and among themselves.
They are self-imposed and, although adopted pursuant to statutory
Section 45. Adoption of Bylaws. - For the adoption of bylaws
authority, have no status as public law.
by the corporation, the affirmative vote of the stockholders
Therefore, it is the generally accepted rule that third persons are
representing at least a majority of the outstanding capital stock, or of
not bound by by-laws, except when they have knowledge of the provisions
at least a majority of the members in case on nonstock corporations,
either actually or constructively.
shall be necessary. The bylaws shall be signed by the stockholders or
members voting for them and shall be kept in the principal office of the
corporation, subject to the inspection of the stockholders or members Non-Submission of Bylaws
during office hours. A copy thereof, duly certified by a majority of the Without such provisions governing the internal
directors or trustees and countersigned by the secretary of the governance of the organization, such as rules on meetings and
corporation, shall be filed with the Commission and attached to the quorum requirements, there would be no apparent basis on how the
original articles of incorporation. union could operate. Without a set of by-laws which provides how
Notwithstanding the provisions of the preceding paragraph,
the local/chapter arrives at its decisions or otherwise wields its
bylaws maybe adopted and filed prior to incorporation; in such case,
such bylaws shall be approved and signed by all incorporators and attributes of legal personality, then every action of the local/chapter
submitted to the Commission, together with the articles of may be put into legal controversy.
incorporation. However, if those key by-law provisions on matters such
In all cases, bylaws shall be effective only upon the issuance as quorum requirements, meetings, or on the sinternal
by the Commission of a certification that the bylaws are in accordance governance of the local/chapter are themselves already
with this Code. provided for in the constitution, then it would be feasible to
The Commission shall not accept for filing the bylaws or any overlook the requirement for by-laws. In such an event, to insist on
amendment thereto of any bank, banking institution, building and loan
the submission of a separate document denominated as "By-Laws"
association, trust company, insurance company, public utility,
educational institution, or any other corporations governed by special would be an undue technicality, as well as a redundancy [San
Miguel Corp. v. Mandaue Packing].
Page 6 of 25
 Whenever the bylaws are amended or new bylaws are
Failure to Submit Bylaws adopted, the corporation shall file with the Commission such amended
In Loyola Grand Villas v. Court of Appeals, it was held or new bylaws and, if applicable, the stockholders' or members'
that: resolution authorizing the delegation of the power to amend and/or
adopt new bylaws, duly certified under oath by the corporate secretary
and majority of the directors or trustees.
The failure to file the by-laws within the period does
The amended or new bylaws shall only be effective upon the
not imply the demise of the corporation. Bylaws may be
issuance by the Commission of certification that the same is in
necessary for the government of the corporation, but these are
accordance with this Code and other relevant laws.
subordinate to the articles of incorporation as well as to the
Corporation Code and related statutes. There are in fact cases
where by-laws are unnecessary to corporate existence or to the Majority 2/3 Majority of Majority OCS
valid exercise of corporate powers. OCS BOD
It is said that the adoption of by-laws is a matter of Adoption of Delegate to Board Amend or Revocation of
practical not one of legal, necessity. Moreover the peculiar By- Laws of Director the Repeal By- Delegated
circumstances attending the formation of a corporation may
Power to Laws Power to
impose the obligation to adopt certain by-laws.
Although the Corporation Code requires the filing of Amend/Repeal Amend By-
by-laws, it does not expressly provide for the consequences of By-Laws Laws
non- filing of the same within the period.
There can be no automatic corporate dissolution G. BOARD OF DIRECTORS/TRUSTEES/OFFICERS
simply because the incorporators failed to abide by the required
filing of by-laws. There is no outright demise of corporate Section 22. The Board of Directors or Trustees of a
existence. Corporation; Qualification and Term. - Unless otherwise provided in
this Code, the board of directors or trustees shall exercise the
2. Contents of Bylaws corporate powers, condict all business, and control all properties of the
corporation.
Section 46. Contents of Bylaws. - A private corporation may Directors shall be elected for a term of one (10 Year from
provide the following in its bylaws; among the holders of stocks registered in the corporation's book while
(a) The time, place and manner of calling and conducting trustees shall be elected for a term not exceeding three (3) years from
regular or special meetings of the directors or trustees; among the members of the corporation. Each director and trustee shall
(b) The time and manner of calling and conducting regular hold office until the successor is elected and qualified. A director who
or special meetings and mode of notifying the stockholders or members ceases to own at least one (1) share of stock or a trustee who ceases to
thereof; be a member of the corporation shall cease to be such.
(c) The required quorum in meetings of stockholders or The board of the following corporations vested with public
members and the manner of voting therein; interest shall have independent directors constituting at least twenty
(d) The modes by which a stockholder, member, director or percent (20%) of such board:
trustees may attend meetings and cast their votes; (a) Corporations covered by Section 17.2 of Republic Act
(e) The form for proxies of stockholders and members and No. 8799, otherwise known as "The Securities Regulation Code",
the manner of voting them; namely those whose securities are registered with the Commission,
(f) The directors' or trustees' qualifications, duties and corporations listed with an exchange or with assets of at least Fifty
responsibilities, the guidelines for setting the compensation of directors million pesos (50,000,000.00) and having two hundred (200) or more
or trustees and officers, and the maximum number of other board holders of shares, each holding at least one hundred (100) shares of a
representations that an independent director or trustee may have class of its equity shares;
which shall, in no case, be more than the number prescribed by the (b) Banks and quasi-banks, NSSLAs, pawnshops,
Commission; corporations engaged in money service business, preneed, trust and
(g) The time for holding the annual election of directors or insurance companies and other financial intermediaries; and
trustees and the mode or manner of giving notice thereof; (c) Other corporations engaged in businesses vested with
(h)The manner of election or appointment and the term of public interest similar to the above, as may be determined by the
officers other than directors or trustees; Commission, after taking into account relevant factors which are
(i) The penalties for violation of the bylaws; germane to the objective and purpose of requiring the election of an
(j) In the case of stock corporations, the manner of issuing independent director, such as the extent of minority ownership, type of
stock certificates; and financial products or securities issued or offered to investors, public
(k) Such other matters as may be necessary for the proper or interest involved in the nature of business operations, and other
convenient transaction of its corporate affairs for the promotion of analogous factors.
good governance and anti-graft and corruption measures. An independent director is a person who apart from
An arbitration agreement maybe provided in the bylaws shareholdings and fees received from any business or other
pursuant to Section 181 of this Code. relationship which could, or could reasonable be received to materially
interfere with the exercise of independent judgment in carrying out the
responsibilities as a director.
3. Amendment to Bylaws
Independent directors must be elected by the shareholders
present or entitled to vote in absentia during the election of directors.
Section 47. Amendment to Bylaws. - A majority of the board Independent directors shall be subject to rules and regulations
of directors or trustees, and the owners of at least a majority of the governing their qualifications, disqualifications, voting requirements,
outstanding capital stock, or at least a majority of the members of a duration of term and term limit, maximum number of board
nonstock corporation, at a regular or special meeting duly called for membership and other requirements that the Commission will
the purpose, may amend or repeal the bylaws or adopt new bylaws. prescribed to strengthen their independence and align with
The owner of two-thirds (2/3) of the outstanding capital stock or two- international best practices.
third (2/3) of the members in a nonstock corporation mat delegate to
the board of directors or trustees the power to amend or repeal the
1. Doctrine of Centralized Management
bylaws or adopt new bylaws: Provided, That any power delegated to
the board of directors or trustee to amend or repeal the bylaws or Section 22 of the Corporation Code expresses the
adopt new bylaws shall be considered as revoke whenever stockholders fundamental character of Centralized Management, and thereby
owning or representing a majority of the outstanding capital stock or mandates that corporate powers to be directly vested in the Board
majority of the members shall so vote at a regular or special meeting.
Page 7 of 25
of Directors or Trustees rather being considered as delegated [E] Brokers and dealers of securities;
powers coming from the stockholders or members. [F] Investment companies;
A corporation acts through a centralized management, [G] Pre-need companies;
which promotes efficiency and prevents confusions arising from [H] Subsidiaries or branches of foreign corporations which
operate in the Philippines and are listed in the PSE;
diffused corporate powers. Investors and creditors of the
[I] Stock and other securities exchange/s.
corporation, as well as those who deal with it, can rely upon the II. DEFINITION
law-directed fact that the corporation shall be bound only through [A] Independent director means a person who, apart from his
its Board of Directors. In any organizational set-up, the congruence fees and shareholdings, is independent of management and free from any
of authority and responsibility in the same person or board always business or other relationship which could, or could reasonably be
promotes efficiency. perceived to, materially interfere with his exercise of independent judgment
In this jurisdiction, a corporation’s board of directors is in carrying out his responsibilities as a director in any corporation that
understood to be that body which meets the requirements of Section 17.2 of the SRC and includes, among
others, any person who:
[i] Is not a director or officer or substantial stockholder of the
(1) exercises all powers provided for under the corporation or of its related companies or any of its substantial shareholders
Corporation Code; (other than as an independent director of any of the foregoing);
(2) conducts all business of the corporation; and [ii] Is not a relative of any director, officer or substantial
(3) controls and holds all property of the corporation shareholder of the corporation, any of its related companies or any of its
[Hornilla v. Salunat] substantial shareholders. For this purpose, relatives includes spouse, parent,
child, brother, sister, and the spouse of such child, brother or sister;
Its members have been characterized as trustees or [iii] Is not acting as a nominee or representative of a substantial
shareholder of the corporation, any of its related companies or any of its
directors clothed with a fiduciary character. It is clearly separate
substantial shareholders;
and distinct from the corporate entity itself. Where corporate [iv] Has not been employed in any executive capacity by that
directors have committed a breach of trust either by their frauds, public company, any of its related companies or by any of its substantial
ultra vires acts, or negligence, and the corporation is unable or shareholders within the last five (5) years;
unwilling to institute suit to remedy the wrong, a stockholder may [v] Is not retained as professional adviser by that public
sue on behalf of himself and other stockholders and for the benefit company, any of its related companies or any of its substantial shareholders
of the corporation, to bring about a redress of the wrong done within the last five (5) years, either personally of through his firm; [The 5-
directly to the corporation and indirectly to the stockholders. This year period is also termed as the ‘cooling off’ period]
[vi] Has not engaged and does not engage in any transaction
is what is known as a derivative suit, and settled is the doctrine that
with the corporation or with any of its related companies or with any of its
in a derivative suit, the corporation is the real party in interest substantial shareholders, whether by himself or with other persons or
while the stockholder filing suit for the corporations behalf is only through a firm of which he is a partner or a company of which he is a
nominal party. The corporation should be included as a party in the director or substantial shareholder, other than transactions which are
suit [Ibid]. conducted at arm’s length and are immaterial or insignificant.
[B] When used in relation to a company subject to the
Tom v. Rodriquez requirement above:
[i] Related company means another company which is:
Held: The well-entrenched rule that a corporation exercises its
(a) its holding company,
powers through its board of directors and/or its duly authorized officers and
(b) its subsidiary, or
agents, except in instances where the Corporation Code requires
(c) a subsidiary of its holding company; and
stockholders’ approval for certain specific acts. Accordingly, it cannot be
[ii] Substantial shareholder means any person who is directly or
doubted that the management and control of GDITI, being a stock
indirectly the beneficial owner of more than ten percent (10%) of any class
corporation, are vested in its duly elected Board of Directors.
of its equity security.
Thus, by denying Richard Tom's prayer for the issuance of a
Qualifications of an Independent Director
TRO and/or writ of preliminary injunction, the CA effectively placed the
[C] An independent director shall have the following
management and control of GDITI to Rodriguez, a mere intervenor, on the
qualifications:
basis of a MOA between the latter and Basalo, in violation of the foregoing
[i] He shall have at least one (1) share of stock of the
provision of the Corporation Code.
corporation;
[ii] He shall be at least a college graduate, or he shall have been
2. Independent Directors engaged or exposed to the business of the corporation for at least five (5)
In the advent of Revised Corporation Code, the provision years;
on independent directors has been etched. Corporations that are [iii] He shall possess integrity/probity; and
vested with public interest are required to have independent [iv] He shall be assiduous [means diligent or hardworking].
directors, but the concept is not new, and was actually present in Disqualifications of an Independent Director [D] No person enumerated
under Section II (5) of the Code of Corporate Governance shall qualify as
the Securities Regulation Code.
an independent director. He shall likewise be disqualified during his tenure
under the following instances or causes:
SEC MEMORANDUM CIRCULAR NO. 16 s. 2002 (i) He becomes an officer or employee of the corporation where
Guidelines on the Nomination and Election of Independent he is such member of the board of directors/trustees, or becomes any of the
Directors persons enumerated under letter (A) hereof;
I. COVERAGE (ii) His beneficial security ownership exceeds 10% of the
This circular shall be applicable to public companies and those outstanding capital stock of the company where he is such director; [now
subject to secondary licenses from the Commission as follows: not more than 2% SEC Opinion 13-04]
[A] Issuers of registered securities to the public whether or not (iii) Fails, without any justifiable cause, to attend at least 50% of
listed in the Philippine Stock Exchange the total number of Board meetings during his incumbency unless such
[B] Public companies or those with assets of at least Fifty absences are due to grave illness or death of an immediate family.
Million Pesos (P50,000,000.00) or such other amount as the Commission (iv) Such other disqualifications which the company's Manual
shall prescribe, and having Two hundred (200) or more holders each on Corporate Governance provides.
holding at least One hundred (100) shares of a class of its equity securities; III. NUMBER OF INDEPENDENT DIRECTORS
[C] Finance companies; [A] All companies are encouraged to have independent
[D] Investment houses; directors. However, issuers of registered securities and public companies

Page 8 of 25
are required to have at least two (2) independent directors or at least 20% of allowed others to believe that persons, through their usual exercise
its board size, whichever is the lesser. Provided further that said companies of corporate powers, were conferred with authority to deal on the
may choose to have more independent directors in their boards than as corporation's behalf [University of Mindanao v. BSP].
above required. The doctrine of apparent authority does not go into the
[B] The Exchange/s are required to have at least three (3)
question of the corporation's competence or power to do a
independent directors and an independent director President. To effectively
carry out the provisions of Section 33.2(g) of the Securities Regulation
particular act. It involves the question of whether the officer has the
Code, the independent directors must not be allowed to solicit votes for power or is clothed with the appearance of having the power to act
himself or for others or be subject to election by the stockholders until the for the corporation. A finding that there is apparent authority is not
shares are listed, or Exchange's outstanding capital stock are no longer the same as a finding that the corporate act in question is within the
majority owned by the brokers. corporation's limited powers. A corporation is estopped by its
silence and acts of recognition because we recognize that there is
SEC MEMORANDUM CIRCULAR NO. 4, s. 2017 information asymmetry between third persons who have little to no
Term Limit of Independent Directors information as to what happens during corporate meetings, and the
1. A company's independent director shall serve for a maximum corporate officers, directors, and representatives who are insiders to
cumulative term of nine (9) years; corporate affairs [Ibid].
2. After which, the independent director shall be perpetually
barred from re-election as such in the same company, but may continue to
qualify as a non-independent director; Prime White Cement v. IAC
3. In the instance that a company wants to retain an independent Held: Under the Corporation Law, which was then in force at
director who has served for nine (9) years, the Board should provide the time this case arose, as well as under the Corporation Code [and the
meritorious justification/s and seek shareholders' approval during the present Revised Corporation Code], all corporate powers shall be exercised
annual shareholders' meeting; and by the Board of Directors, except as otherwise provided by law. Although it
4. Reckoning of the cumulative nine-year term is from 2012. cannot completely abdicate its power and responsibility to act for the
juridical entity, the Board may expressly delegate specific powers to its
President or any of its officers. In the absence of such express delegation, a
3. Doctrine of Estoppel contract entered into by its President, on behalf of the corporation, may still
corporation should enter into a contract that will bind the bind the corporation if the board should ratify the same expressly or
corporation is lodged in its board of directors, subject to the articles impliedly.
of incorporation, by-laws, or relevant provisions of law, yet, just as Furthermore, even in the absence of express or implied authority
a natural person may authorize another to do certain acts for and on by ratification, the President as such may, as a general rule, bind the
his behalf, the board of directors may validly delegate some of its corporation by a contract in the ordinary course of business, provided the
same is reasonable under the circumstances. These rules are basic, but are
functions and powers to officers, committees, or agents. The
all general and thus quite flexible. They apply where the President or
authority of such individuals to bind the corporation is generally
other officer, purportedly acting for the corporation, is dealing with a
derived from law, corporate by-laws, or authorization from the third person, i. e., a person outside the corporation.
board, either expressly or impliedly by habit, custom, or The situation is quite different where a director or officer is
acquiescence in the general course of business [Lipat v. Pacific dealing with his own corporation. In the instant case Te was not an
Bank]. ordinary stockholder; he was a member of the Board of Directors and
Auditor of the corporation as well. He was what is often referred to as a
"self- dealing" director.
Yasumi v. Heirs of De Villa
A director of a corporation holds a position of trust and as such,
Held: The act of obtaining a loan in behalf of the corporation is
he owes a duty of loyalty to his corporation.9 In case his interests conflict
among the acts requiring a special power of attorney. However, there was
with those of the corporation, he cannot sacrifice the latter to his own
no authorization from the corporation to De Villa to obtain the loan. The
advantage and benefit. As corporate managers, directors are committed to
promissory notes signed by De Villa did not contain a stipulation that he
seek the maximum amount of profits for the corporation. This trust
was procuring it in behalf of the corporation.
relationship "is not a matter of statutory or technical law. It springs from the
Moreover, the act of the corporation of receiving the proceeds of
fact that directors have the control and guidance of corporate affairs and
the loan did not amount to a ratification on their part. Ratification means
property and hence of the property interests of the stockholders."
that the principal voluntarily adopts, confirms and gives sanction to some
Notably, a director's contract with his corporation is not in all
unauthorized act of its agent on its behalf. It is this voluntary choice,
instances void or voidable. If the contract is fair and reasonable under
knowingly made, which amounts to a ratification of what was
the circumstances, it may be ratified by the stockholders provided a
theretofore unauthorized and becomes the authorized act of the party so
full disclosure of his adverse interest is made.
making the ratification. The substance of the doctrine is confirmation after
Now, the issue is whether dealership agreement is fair and
conduct, amounting to a substitute for a prior authority.
reasonable. It is of the opinion of the Supreme Court that the contract was
In this case, the corporation could not have known for what
neither fair nor reasonable.
purpose it was receiving the said amount, whether it was an investment or a
Te is a businessman himself and must have known, or at least
loan. Thus, it could not have ratified the procurement of the same.
must be presumed to know, that at that time, prices of commodities in
general, and white cement in particular, were not stable and were expected
4. Doctrine of Apparent Authority to rise. At the time of the contract, Prime White Cement had not even
For the principle of apparent authority to apply, the commenced the manufacture of white cement, the reason why delivery was
petitioner was burdened to prove the following: not to begin until 14 months later. He must have known that within that
period of six years, there would be a considerable rise in the price of white
a) the acts of the respondent justifying belief in the cement. In fact, in September 1970, the price per bag was P14.50, and by
the middle of 1975, it was already P37.50 per bag. Despite this, no
agency by the petitioner;
provision was made in the "dealership agreement" to allow for an increase
b) knowledge thereof by the respondent which is in price mutually acceptable to the parties. Instead, the price was pegged at
sought to be held; and P9.70 per bag for the whole five years of the contract. Fairness on his part
c) reliance thereon by the petitioner consistent with as a director of the corporation from whom he was to buy the cement,
ordinary care and prudence. would require such a provision. In fact, this unfairness in the contract is
also a basis which renders a contract entered into by the President, without
This court has recognized presumed or apparent authority authority from the Board of Directors, void or voidable, although it may
or capacity to bind corporate representatives in instances when the have been in the ordinary course of business. The Supreme Court believes
corporation, through its silence or other acts of recognition,
Page 9 of 25
that the fixed price of P9.70 per bag for a period of five years was not fair (vi) He is made, by a specific provision of law, to
and reasonable. personally answer for his corporate action
As director, specially since he was the other party in interest, [Tramat Mercantile v. Court of Appeals].
Te's bounden duty was to act in such manner as not to unduly prejudice the
corporation. In the light of the circumstances of this case, it is quite clear
that he was guilty of disloyalty to the corporation; he was attempting in
effect, to enrich himself at the expense of the corporation. There is no
b. Two Aspects
showing that the stockholders ratified the "dealership agreement" or that There are 2 aspects of the Business Judgment Rule:
they were fully aware of its provisions. The contract was therefore not valid
and the Court cannot allow him to reap the fruits of his disloyalty. (i) Resolutions and transactions entered into by the
Board of Directors within the powers of the
5. Business Judgment Rule corporation cannot be reversed by the courts not
The corporate principle recognizing corporate power and even on the behest of the stockholders of the
competence to be lodged primarily with the Board of Directors is corporation;
embodied in the “Business Judgment Rule.” A resolution or (ii) Directors and officers acting within such business
transaction pursued within the corporate powers and business judgment cannot be held personally liable for the
operation of the corporation, and passed in good faith by the Board consequences of such acts.
of Directors is valid and binding; and generally the courts have no
authority to review the same or substitute their own judgment, even In Montelibano v. Bacolod-Murcia Milling, the court
when it can be proven that the exercise of such power may cause established the principle that when is passed in good faith by the
losses to the corporation or decrease it profits. This rule creates a board of directors, it is valid and binding, and whether or not it will
strong presumption in favor of the board of directors of a cause losses or decrease the profits of the corporation, the court has
corporation freeing its members from the possible liability for no authority to review them, adding that, it is a well-known rule of
decisions that would result in harm to the corporation. It insists that law that questions of policy or management are left solely to the
the board will not suffer from a legal action simply from a bad honest decision of officers and directors of a corporation, and the
decision. court is without authority to substitute its judgment of the board of
The general rule is that in corporate affairs, the will of directors; the board is the business manager of the corporation as
the majority controls, and that contracts intra vires entered into by long as it acts in good faith its orders are not reviewable by the
the board of directors are binding upon the corporation and that the courts.
court will not interfere unless such contracts are unconscionable
and oppressive as to amount to a wanton destruction of the rights of 6. Election of Directors or Trustees
the minority [Ingerson v. Malabon Sugar].
There is no doubt whatever that actions of said Section 23. Election of Directors or Trustees. - Except when
stockholders and their counsel were taken in entire good faith and the exclusive right is reserved for holders of founders' shares under
that they, in view of the large amount of work done by Ingersoll, Section 7 of this Code, each stockholder or member shall have the right
to nominate any director or trustee who possesses all of the
considered his fees reasonable. From a practical point of view,
qualifications and none of the disqualifications and none of the
some of his efforts were no doubt misdirected, but it is not at all disqualifications set forth in this Code.
certain that the advice given by him, as it appears from the record, At all elections of directors or trustees, there must be
was unsound from a purely legal standpoint [Ibid]. present, either in person or through a representative authorized to act
by written proxy, the owners of majority of the outstanding capital
a. Presumption stock, or if there be no capital stock, a majority of the members entitled
The business judgment rule is premised on the fact that to vote. When so authorized in the bylaws or by a majority of the board
the decisions made independently without conflict of interest and of directors, the stockholders or members may also vote through
remote communication or in absentia: Provided, That the right to vote
were reasonable and made in good faith. To overthrow this
through such modes may be exercised in corporations vested with
presumption the following is to proven: public interest, notwithstanding the absence of a provision in the
bylaws of such corporations.
(i) There exists a conflict of interest; A stockholder or member who participates through remote
(ii) The decision is not reasonable; communication or in absentia, shall be deemed present for purposes of
(iii) The decision is not made in good faith. quorum.
The election must be by ballot if requested by any voting
Personal liablity of a corporate director, trustee, or officer stockholder or member.
In stock corporations, stockholders entitled to vote shall
along, although not necessarily, with the corporation may so
have the right to vote the number of shares of stock standing in their
validly attach, as a rule, only when: own names in the stock books of the corporation at the time fixed in the
bylaws or where the bylaws are silent at the time of the election. The
(i) He assents to a patently unlawful act of the said stockholder may: (a) vote such number of shares for as many
corporation, or persons as there are directors to be elected; (b) cumulate said shares
(ii) He assents for bad faith, or gross negligence in and give one (1) candidate as many votes as the number of directors to
directing its affairs, or be elected multiplied by the number of shares owned; or (c) distribute
(iii) He assents for conflict of interest, resulting in them on the same principle among as many candidates as may be seen
fit: Provided, That the total number of votes cast shall not exceed the
damages to the corporation, its stockholders or
number of shares owned by the stockholders as shown in the books of
other persons; the corporation multiplied by the whole number of directors to be
(iv) He consents to the issuance of watered stocks elected: Provided, however, That no delinquent stock shall be voted.
or who, having knowledge thereof, does not Unless otherwise provided in the articles of incorporation or in the
forthwith file with the corporate secretary his bylaws, members of nonstock corporations may cast as many votes as
written objection thereto; there are trustees to be elected by may not cast more than one (1) vote
(v) He agrees to hold himself personally and for one (1) candidate. Nominees for directors or trustees receiving the
solidarily liable with the corporation; or highest number of votes shall be declared elected.

Page 10 of 25
 If no election is held, or the owners of majority of the SEC. 3. Complaint. – In addition to the requirements in section
outstanding capital stock or majority of the members entitled to vote 4, Rule 2 of these Rules, the complaint in an election contest must state the
are not present in person, by proxy, or through remote communication following:
or not voting in absentia at the meeting, such meeting may be 1. The case was filed within fifteen (15) days from the date of
adjourned and the corporation shall proceed in accordance with the election if the by-laws of the corporation do not provide for a procedure
Section 25 of this Code. for resolution of the controversy, or within fifteen (15) days from the
The directors or trustees elected shall perform their duties resolution of the controversy by the corporation as provided in its by-laws;
as prescribed by law, rules of good corporate governance, and bylaws and
of the corporation. 2. The plaintiff has exhausted all intra-corporate remedies in
election cases as provided for in the by-laws of the corporation.
a. Straight Voting and Cumulative Voting SEC. 4. Duty of the court upon the filing of the complaint. –
Within two (2) days from the filing of the complaint, the court, upon a
consideration of the allegations thereof, may dismiss the complaint outright
Straight Voting Cumulative Voting if it is not sufficient in form and substance, or, if it is sufficient, order the
A shareholder votes A shareholder is entitled to as issuance of summons which shall be served, together with a copy of the
the number of shares many votes as he has shares complaint, on the defendant within two (2) days from its issuance.
he owns for each multiplied by the number of SEC. 5. Answer. – The defendant shall file his answer to the
candidate directors who are to be elected. complaint, serving a copy thereof on the plaintiff, within ten (10) days from
for office service of summons and the complaint. The answer shall contain the
Shareholders owning a Holders of 49 percent of stock can matters required in section 6, Rule 2 of these Rules.
majority of 51 percent elect four out of nine directors. SEC. 6. Affidavits, documentary and other evidence. – The
or more of the shares The owners of 51 percent of the parties shall attach to the complaint and answer the affidavits of witnesses,
can elect all nine shares, no matter how they will documentary and other evidence in support thereof, if any.
directors; the minority marshal their votes will be able to
elects none. elect no more than five our of nine c. Hold-Over Principle
directors.
It has to be emphasized however, that a hold-over
If nine directors are to He may concentrate all of his votes
situation arises only when no successors are elected due to valid
be elected and the on one candidate or distribute
shareholder owns 100 them among as many candidates and justifiable reasons. The Commission considered the resolution
shares he may cast as he sees fit. of an election protest, or a political upheaval which barred the
100 votes for each of holding of an election as valid and justifiable reasons for the hold-
nine over term of the incumbent directors. However, to give the
candidates incumbent “more time to learn” and to extend the term indefinitely
Shareholders can attain is not a valid reason. But a hold-over because there was a failure of
representation on corporate election is valid (SEC-OGC Opinion 07-08).
boards that is approximately The following are considered as valid grounds:
proportionate to the number of
shares they own.
1. Resolving an election protest
2. Political upheaval in barring the holding of election
SEC-OGC OPINION 14-09 3. Failure of election due to lack of quorum.
Election of Trustees: Less than Number of Seats
Stockholders or members of a corporation may opt to elect a
d. Non-Permanency of Board Seats
number of directors or trustees less than the number of directors/trustees as
fixed in the articles of incorporation. Such a situation would merely give The Supreme Court in Grace Christian High School v.
rise to vacancy in the board, which may be later filled up. The power of the Court of Appeals has held as unlawful any attempt to grant to any
board is not suspended by vacancies unless the number is reduced below a person a permanent seat in the Board of a corporation
quorum.
The grant of corporate power is to the Board as a body, and not In cases of vacancy
to the individual members thereof. In relation to this, the Board can only In cases of vacancy not caused by removal or expiration
transact business if it reaches a quorum which is at least a majority of the of term, the vacancies may be filled by at least majority of the
trustees as fixed in the articles or by-laws unless it provides a greater
remaining directors or trustees, if still constituting a quorum and
number
only for the unexpired term.
But in cases the vacancy is caused by removal or by the
b. Election Contests
expiration of term, the vacancies must be filled then by the
stockholders or members in a regular or special meeting called for
Proposed Interim Rules of Procedure Governing that purpose.
Intra- Corporate Controversies under R.A. No. 8799, A.M. No. The word "term" has acquired a definite meaning in
1-2-04- SC, March 13, 2001 jurisprudence. In several cases, we have defined "term" as the time
RULE 6
during which the officer may claim to hold the office as of right.
ELECTION CONTESTS
SECTION 1. Cases covered. – The provisions of this rule shall It represents the term during which the incumbent
apply to election contests in stock and non-stock corporations. actually holds office. The tenure may be shorter (or, in case of
SEC. 2. Definition. – An election contest refers to any holdover, longer) than the term for reasons within or beyond the
controversy or dispute involving title or claim to any elective office in a power of the incumbent.
stock or non-stock corporation, the validation of proxies, the manner and
validity of elections, and the qualifications of candidates, including the Theory of delegated power
proclamation of winners, to the office of director, trustee or other officer The board of directors is the directing and controlling
directly elected by the stockholders in a close corporation or by members of
body of the corporation. It is a creation of the stockholders and
a non-stock corporation where the articles of incorporation or by-laws so
provide. derives its powers to control and direct the affairs of the
corporation from them. The board of directors occupies a position
of trusteeship in relation to the stockholders, in the sense that the

Page 11 of 25
board should exercise not only care and diligence but utmost good considered an intra-corporate controversy that arises between a
faith in the management of corporate affairs. This theory of stockholder and a corporation. The question also of remuneration
delegated power explains why in cases where the vacancy is not of officer is not a simple labor problem but a matter that comes
caused by removal or expiration, it is only for the unexpired term within the area of corporate affairs and management and is a
[Valle Verde Country Club v. Africa]. corporate controversy in contemplation of the Corporation Code
[Okol v. Slimmers World].
7. Removal of Corporate Officers This is not a case of dismissal; the situation is that of a
corporate office having been declared vacant and of Tan’s not
Section 27. Removal of Director or Trustees. - Any director having been elected thereafter. The matter of whom to elect is a
or trustee of a corporation may be removed fro office by vote of the prerogative that belongs to the Board, and involves the exercise of
stockholders holding or representing at least two-thirds (2/3) of the deliberate choice and the faculty of discriminative selection
outstanding capital stock, or in a nonstock corporation, by a vote of at [Philippine School of Business v. Leano].
least two-thirds (2/3) of the member entitled to vote: Provided, That
such removal shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose, and in either
8. Corporate Officers
case, after previous notice to stockholders or members of the
corporation of the intention to propose such removal at the meeting. A Section 24. Corporate Officers. - Immediately after their
special meeting of the stockholders or members for the purpose of election, the directors of a corporation must formally organize an elect:
removing any director or trustee must be called by the secretary on (a) a president, who must be a director; (b) a treasurer, who must be a
order of the president, or upon written demand of stockholders resident of the Philippines; and (d) such other officers as may be
representing or holding at least a majority of the outstanding capital provided in the bylaws. If the corporation is vested with public interest,
stock, or a majority of the members entitled to vote. If there is no the board shall also elect compliance officer. The same person may
secretary, or the secretary, despite demand, fails or refuses to call the hold two (2) or more positions concurrently, except that no one shall
special meeting or to give notice thereof, the stockholder or member of act as president and secretary or as president and treasurer at the
the corporation signing the demand may call the special meeting or to same time, unless otherwise allowed in this Code.
give notice thereof, the stockholder or member of the corporation The officers shall manage the corporation and perform such
signing the demand may call for the meeting by directly addressing the duties as may be provided in the bylaws and/or as resolved by the
stockholders or members. Notice of the time and place of such meeting, board of directors.
as well as of the intention to propose such removal, must be given by
publication or by written notice prescribed in this Code. Removal may a. President
be with or without cause: Provided, That removal without cause may Inasmuch as a corporate president is often given general
not be used to deprive minority stockholders or members of the right
supervision and control over corporate operations, the strict rule
representation to which they may be entitled under Section 23 of this
Code. that said officer has no inherent power to act for the corporation is
The Commission shall, motu propio or upon verified slowly giving way to the realization that such officer has certain
complaint, and after due notice and hearing, order the removal of a limited powers in the transaction of the usual and ordinary business
director or trustee elected despite the disqualification, or whose of the corporation. In the absence of a charter or bylaw provision to
disqualification arose or is discovered subsequent to an election. The the contrary, the president is presumed to have the authority to act
removal of a disqualified director shall be without prejudice to other within the domain of the general objectives of its business and
sanctions that the Commission may impose on the board of directors or within the scope of his or her usual duties [People’s Aircargo v.
trustees who, with knowledge of the disqualification, failed to remove
Court of Appeals].
such director or trustee.
Hence, it has been held in other jurisdictions that the
president of a corporation possesses the power to enter into a
Under the Corporation Code, three officers are
contract for the corporation, when the conduct on the part of both
specifically provided for which a corporation must have: president,
the president and the corporation [shows] that he had been in the
secretary, and treasurer. The law, however, does not limit corporate
habit of acting in similar matters on behalf of the company and that
officers to these three. Section 24 gives corporations the widest
the company had authorized him so to act and had recognized,
latitude to provide for such other offices, as they may deem
approved and ratified his former and similar actions. Furthermore,
necessary. The bylaws may and usually do provide for such other
a party dealing with the president of a corporation is entitled to
officers, e.g., vice-president, cashier, auditor, and general manager
assume that he has the authority to enter, on behalf of the
[Pamplona Plantation v. Acosta].
corporation, into contracts that are within the scope of the powers
Since the power to remove directors is vested with the
of said corporation and that do not violate any statute or rule on
stockholders, then such power cannot be exercised by the Board of
public policy [Ibid].
Directors, even when such power is provided for in the articles of
incorporation. It is the submission of Dean Villanueva that implied
b. Corporate Secretary
with this is that the board does not have the power to discipline
In absence of provisions to the contrary, a Corporate
also.
Secretary is the legal custodian of corporate records, he keeps the
stock and transfer book and makes proper and necessary entries
Matling Industrial v. Coros therein. It is the duty and obligation of the corporate secretary to
Held: Under Section 25 [24] of the Corporation Code, three
register valid transfers of stock in the books.
officers are specifically provided for which a corporation must have:
president, secretary, and treasurer. The law, however, does not limit
The following are the corporate secretary’s duties:
corporate officers to these three. Section 25 gives corporations the widest
latitude to provide for such other offices, as they may deem necessary. The (i) Be responsible for the safekeeping and
bylaws may and usually do provide for such other officers, e.g., vice- preservation of the integrity of the minutes of
president, cashier, auditor, and general manager. the meetings of the Board and its committees,
as well as the other official records.
Jurisdiction (ii) Be loyal to the mission, vision, and objectives
In a number of cases, the Supreme Court has held that a of the corporation.
corporate officer’s dismissal is always a corporate act, and such is

Page 12 of 25
 (iii) Work fairly and objectively with the Board, Section 26. Disqualification of Directors, Trustees or
Management and stockholders. Officers. - A person shall be disqualified from being a director, trustee
(iv) Have appropriate administrative and or officer of any corporation if, within five (5) years prior to the
interpersonal skills. election or appointment as such, the person was:
(a) Convicted by final judgment:
(v) If he is not at the same time the corporation’s
(1) Of an offense punishable by imprisonment for a period
legal counsel, be aware of the laws, rules and exceeding six (6) years;
regulations necessary in the performance of his (2) For violating this Code; and
duties and responsibilities. (3) For violating Republic Act No. 8799, otherwise known as
(vi) Have a working knowledge of the operations of "The Securities Regulation Code";
the corporation; (b) Found administratively liable for any offense involving
(vii) Inform members of the Board, in accordance of fraudulent acts; and
the bylaws, of the agenda of their meetings and (c) By a foreign court or equivalent foreign regulatory
authority for acts, violations or misconduct similar to those
ensure that the members have before them
enumerated in paragraphs (a) and (b) above.
accurate information that will enable them to The foregoing is without prejudice to qualifications or other
arrive at intelligent decisions on matters that disqualifications, which the Commission, the primary regulatory
require their approval; agency, or Philippine Competition Commission may impose in its
(viii) Attend all Board meetings, except when promotion of good corporate governance or as a sanction in its
justifiable causes, such as illness, death in the administrative proceedings.
immediate family and serious accidents,
prevent him from doing so; 10. Vacancies in the Office of Director or Trustee;
(ix) Ensure that all Board procedures, rules and Emergency Board
regulations are strictly followed by the
members; and Section 28. Vacancies in the Office of Director or Trustee;
(x) If he is also a compliance officer, perform all Emergency Board. - Any vacancy occurring in the board of directors or
duties and responsibilities of the said officer as trustees other that by removal or expiration of term may be filled by
provided for in this Code. the vote of at least a majority of the remaining directors or trustees, if
still constituting a quorum; otherwise, said vacancies must be filled by
the stockholders or members in a regular or special meeting called for
c. Compliance Officer that purpose.
In the Revised Corporation Code, the law now When the vacancy is due to term expiration, the election
incorporates the Compliance Officer as one of the statutory officers shall be held no later that the day of such expiration at a meeting called
in cases of corporations vested with public interest. Note that a for that purpose. When the vacancy arises as a result of removal by the
Compliance Officer shall have the rank of at least VicePresident stockholders or members, the election may be held on the same day of
who shall report directly to the Chair of the Board. the meeting authorizing the removal and this fact must be so stated in
The following are his duties: the agenda and notice of said meeting. In all other cases, the election
must be held no later than forty-five (45) days from the time the
vacancy arose. A director or trustee elected to fill vacancy shall be
(i) Monitor compliance by the corporation with referred to as replacement director or trustee elected to fill a vacancy
the Code and the rules and regulations of shall be referred to as replacement director or trustee and shall serve
regulatory agencies and, if any violations are only for the unexpired term of the predecessor in office.
found, report the matter to the Board and However, when the vacancy prevents the remaining
recommend the imposition of appropriate directors from consituting a quorum and emergency action is required
disciplinary action on the responsible parties to prevent grave, substantial, and irreparable loss or damage to the
and the adoption of measures to prevent a corporation, the vacancy may be temporarily filled from among the
officers of the corporation by unanimous vote of the remaining
repetition of the violation.
directors or trustees. The action by the designated director or trustee
(ii) Appear before the Commission when shall be limited to the emergency action necessary, and the term shall
summoned in relation to compliance with this cease within a reasonable time form the termination of the emergency
Code; and or upon election of the replacement director or trustee, whichever
(iii) Issue a certification every January 30th of the comes earlier. The corporation must notify the Commission within
year on the extent of the corporation’s three (3) days from the creation of the emergency board, stating
compliance with this Code for the completed therein the reason for its creation.
year and if there are any deviations, explain the Any directorship or trusteeship to be filled by a reason of an
increase in the number of directors or trustees shall be filled only by an
reason for such deviation.
election at a regular or at a special meeting of stockholders or members
duly called for the purpose, or in the same meeting authorizing the
d. Corporate Treasurer increase of directors or trustees if so stated in the notice of the meeting.
Unless duly authorized, a Corporate Treasurer’s powers In all elections to fill vacancies under this section, the
are limited, and he cannot bind the corporation in a sale of assets, procedure set forth in Section 23 and 25 of this Code shall apply.
since selling is obviously foreign to a Corporate Treasurer’s
function. Unmistakably, its treasurer is not cloaked with actual or a. Vacancy by Death For Non-Stock
apparent authority beyond the scope of her general authority. Acts Corporations
of corporate officers within the scope of their authority are binding Applying Section (90), since membership is terminated
on the corporation. But when these officers exceed their authority, due to death of a member in accordance with their By-Laws, then
their actions cannot bind the corporation, unless it has ratified such the dead members are not to be counted in the determination of the
acts or is estopped from disclaiming them [San Juan Structural v. quorum.
Court of Appeals].
b. For Stock Corporations
9. Disqualification of Directors Shareholders may generally transfer their shares. Thus,
on the death of a shareholder, the executor or administrator duly

Page 13 of 25
appointed by the Court is vested with legal title to the stock and The personal liability of corporate officers validly
entitled to vote. attaches only when:
For stock corporations, the “quorum” referred to in
Section 52 of the Corporation Code is based on the number of a. they assent to a patently unlawful act of the
outstanding voting stocks. For nonstock corporations, only those corporation; or
who are actual, living members with voting rights shall be counted b. they are guilty of bad faith or gross negligence in
in determining the existence of a quorum during members’ directing its affairs; or
meetings. Dead members shall not be counted [Tan v. SyCip]. c. They consent to the issuance of watered stocks or
who, having knowledge thereof, do not forthwith
11. Compensation of Directors or Trustees file with the corporate secretary their written
objection thereto;
Section 29. Compensation of Directors or Trustees. - In the d. He is made, by a specific provision of law, to
absence of any provision in the bylaws fixing their compensation, the personally answer for his corporate action [Tramat
directors or trustees shall not received any compensation in their Mercantile v. Court of Appeals]
capacity as such, except for reasonable per diems: Provided, e. they incur conflict of interest, resulting in damages
however, That the stockholders representing at least a majority of the
to the corporation, its stockholders or other persons
outstanding capital stock or majority of the members may grant
directors or trustees with compensation and approve the amount
[HR Carl Construction vs. Marina Properties].
thereof at a regular or special meeting.
In no case shall the total yearly compensation of directors Carag v. NLRC
exceed ten percent (10%) of the net income before income tax of the Held: Section [30] makes a director personally liable for
corporation during the preceding year. corporate debts if he wilfully and knowingly votes for or assents to patently
Directors or trustees shall not participate in the unlawful acts of the corporation. Section [30] also makes a director
determination of their own per diems or compensation. personally liable if he is guilty of gross negligence or bad faith in directing
Corporations vested with public interest shall submit to the affairs of the corporation. Complainants did not allege in their
their shareholders and the Commission, an annual report of the total complaint that Carag wilfully and knowingly voted for or assented to any
compensation of each of their directors or trustees. patently unlawful act of MAC. Neither does bad faith arise automatically
just because a corporation fails to comply with the notice requirement of
Founded upon presumption that directors/trustees render labor laws on company closure or dismissal of employees. The failure to
give notice is not an unlawful act because the law does not define such
service gratuitously, and that the return upon their shares
failure as unlawful. Such failure to give notice is a violation of procedural
adequately furnishes the motives for service, without due process but does not amount to an unlawful or criminal act. Such
compensation. Under the foregoing section, there are only two (2) procedural defect is called illegal dismissal because it fails to comply with
ways by which members of the board can be granted compensation mandatory procedural requirements, but it is not illegal in the sense that it
apart from reasonable per diems: (1) when there is a provision in constitutes an unlawful or criminal act.
the by-laws fixing their compensation; and (2) when the For a wrongdoing to make a director personally liable for debts
stockholders representing a majority of the outstanding capital of the corporation, the wrongdoing approved or assented to by the director
stock at a regular or special stockholders' meeting agree to give it must be a patently unlawful act. Mere failure to comply with the notice
requirement of labor laws on company closure or dismissal of employees
to them [Western Institute of Technology v. Salas].
does not amount to a patently unlawful act. Patently unlawful acts are those
This proscription, however, against granting declared unlawful by law which imposes penalties for commission of such
compensation to directors/trustees of a corporation is not a unlawful acts. There must be a law declaring the act unlawful and
sweeping rule. Worthy of note is the clear phraseology of Section penalizing the act.
30 which states: [T]he directors shall not receive any
compensation, as such directors," the phrase as such directors is not Seaoil v. Autocorp Group
without significance for it delimits the scope of the prohibition to Held: Rodriguez, as stockholder and director of Uniline, cannot
compensation given to them for services performed purely in their be held personally liable for the debts of the corporation, which has a
capacity as directors or trustees. The unambiguous implication is separate legal personality of its own. While Section [30] of the Corporation
that members of the board may receive compensation, in addition Code lays down the exceptions to the rule, the same does not apply in this
to reasonable per diems, when they render services to the case. Section [30] makes a director personally liable for corporate debts if
corporation in a capacity other than as directors/trustees [Ibid]. he willfully and knowingly votes for or assents to patently unlawful acts of
the corporation. Section [30] also makes a director personally liable if he is
guilty of gross negligence or bad faith in directing the affairs of the
12. Liability corporation.
The bad faith or wrongdoing of the director must be established
Section 30. Liability of Directors, Trustees or Officers. - clearly and convincingly. Bad faith is never presumed. The burden of
Directors or trustees who willfully and knowingly vote for or assent to proving bad faith or wrongdoing on the part of Rodriguez was, on
patently unlawful acts of the corporation or who are guilty of gross petitioner, a burden which it failed to discharge. Thus, it was proper for the
negligence or bad faith in directing the affairs of the corporation or trial court to have dismissed the third-party complaint against Rodriguez on
acquire any personal or pecuniary interest in conflict with their duty as the ground that he was not a party to the sale of the excavator.
such directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons. Magaling v. Ong
A director, trustee or officer shall not attempt to acquire, or Held: As explained above, to hold a director, a trustee or an
any interest adverse to the corporation in respect of any matter which officer personally liable for the debts of the corporation and, thus, pierce
has been reposed in them in confidence, and upon which, equity the veil of corporate fiction, bad faith or gross negligence by the director,
imposes a disability upon themselves to deal in their own behalf; trustee or officer in directing the corporate affairs must be established
otherwise, the said director, trustee or officer shall be liable as a trustee clearly and convincingly. Bad faith is a question of fact and is evidentiary.
for the corporation and must account for the profits which otherwise Bad faith does not connote bad judgment or negligence. It imports a
would have accrued to the corporation. dishonest purpose or some moral obliquity and conscious wrongdoing.
In the present case, there is nothing substantial on record to
show that Reynaldo Magaling, as President of Termo Loans, has, indeed,
acted in bad faith in inviting Ong to invest in Termo Loans and/or in

Page 14 of 25
obtaining a loan from Ong for said corporation in order to warrant his (c) The contract is fair and reasonable under the
personal liability. From all indications, the proceeds of the investment circumstances;
and/or loan were indeed utilized by Termo Loans. Likewise, bad faith does (d) In case of corporations vested with public interest,
not arise just because a corporation fails to pay its obligations, because the material contracts are approved by at least a majority of the
inability to pay one's obligation is not synonymous with fraudulent intent independent directors voting to approved the material contract; and
not to honor the obligations. (e) In case of an officer, the contract has been previously
Reynaldo Magaling's very own testimony gave reason for the authorized by the board of directors.
appellate court's finding of gross negligence on his part. Instead of the Where any of the first three (3) conditions set forth in the
intended effect of refuting the supposition that Termo Loans was preceding paragraph is absent, in the case of a contract with a director
assiduously managed, Reynaldo Magaling's foregoing testimony only or trustee, such contract may be ratified by the vote of the stockholders
convincingly displayed his gross negligence in the conduct of the affairs of representing at least two-thirds (2/3) of the outstanding capital stock or
Termo Loans. From our standpoint, his casual manner, insouciance and of at least two-thirds (2/3) of the members in a meeting called for the
nonchalance, nay, indifference, to the predicament of the distressed purpose: Provided, That full disclosure of the adverse interest of the
corporation glaringly exhibited a lackadaisical attitude from a top office of directors or trustees involved is made at such meeting and the contract
a corporation, a conduct totally abhorrent in the corporate world. Reynaldo is fair and reasonable under the circumstances.
Magaling is not a novice in the field of commerce. He is a seasoned
businessman running several lending companies. Although the general rule when it comes to President
entering into a contract for a corporation is that when the contract
Majority Rule Doctrine is in the ordinary course of business, provided the same is
The majority rule states that a director has a fiduciary reasonable under the circumstances, the contract binds the
duty with respect to the corporation as an entity and not to the corporation, nevertheless, the rule does not apply when the contract
stockholders as individuals. Consequently, he is subject to the duty is entered into with a director or officer of the corporation itself. A
to disclose all material facts only to the corporation and not to the director holds a position of trust and as such, he owes a duty of
stockholders (American T. Co. v. California Ins. Co. 15 Cal. 2d. loyalty to his corporation, and his contracts with the corporation
42, 1950). must always be at reasonable terms, otherwise the contract is void
or voidable at the option of the corporation [Prime White Cement
Special Fact Doctrine v. IAC].
The special fact doctrine is an exception to the majority
rule doctrine. It states that where special circumstances or facts are 14. Contracts Between Corporations with
present which make it inequitable for the director to withhold Interlocking Directors
information from the stockholder/s, the duty to disclose arises and
concealment is fraud (American T. Co v. California Ins. Co. supra). Section 32. Contaracts Between Corporations with
The special fact doctrine has been applied: Interlocking Directors. - Except in cases of fraud, and provided the
contract is fair and reasonable under the circumstances a contract
a. Where director actively participates in the between two (2) or more corporations having interlocking directors
negotiations for a transfer of corporate property shall not be invalidated on that ground alone: Provided, That if the
(Strong v. Repide, 213 US 419) interest of the interlocking director in one (1) corporation is substantial
and the interest in the other corporation or corporations is merely
b. Where a director undertakes to speak or become
nominal, the contract shall be subject to the provisions of the preceding
active in inducing the sale (Poole v. Camden) section insofar as the latter corporation or corporations are concerned.
c. Where a director personally seeks a stockholder for Stockholding exceeding twenty percent (20%) of the
the purpose of buying his shares without making outstanding capital stock shall be considered substantial for purposes
disclosure of material facts within his peculiar of interlocking directors.
knowledge and not within reach of the stockholders,
the transaction will be closely scrutinized As long as the contract is reasonable, such fact of having
interlocking directors along will not invalidate the contract.
Doctrine of Corporate Opportunity If an interlocking director has substantial interest in
The doctrine of “corporate opportunity” is precisely a Corporation A and nominal interest in Corporation B, the
recognition by the courts that the fiduciary standards could not be provisions under Section 31 on self-dealing contracts shall be
upheld where the fiduciary was acting for two entities with followed. An interest is substantial if stockholdings exceed 20% of
competing interests. This doctrine rests fundamentally on the the outstanding capital stock.
unfairness, in particular circumstances, of an officer or director
taking advantage of an opportunity for his own personal profit 15. Disloyalty of a Director
when the interest of the corporation justly calls for protection
[Gokongwei, Jr. v. SEC]. Section 33. Disloyalty of a Director. - Where a director, by
virtue of such office, acquires a business opportunity which should
13. Dealings of Directors, Trustees or Officers with belong to the corporation, thereby obtaining profits to the prejudice of
the Corporation such corporation, the director must account for and refund to the
latter all such profits, unless the act has been ratified by a vote of the
stockholders owning or representing at least two-thirds (2/3) of the
Section 31. Dealings of Directors, Trustees or Officers with
outstanding capital stock. This provision shall be
the Corporation. - A contract of the corporation with one (1) or more of
applicable, nothwithstanding the fact that the director risked one's own
its directors, trustees, officers or their spouses and relatives within the
funds in the venture.
fourth civil degree of consanguinity or affinity is voidable, at the option
of such corporation, unless all the following conditions are present:
(a) The presence of such director or trustee in the board 16. Executive Management, and Other Special
meeting in which the contract was approved was not necessary to Committees
constitute a quorum for such meeting;
(b) The vote of such director or trustee was not necessary for Section 34. Executive Management, and Other Special
the approval of the contract; Committees. - If the bylaws so provide, the board may create an

Page 15 of 25
executive committee composed of at least three (3) directors. Said F.Investment companies;
committee may act, by majority of vote of all its members, on such G.Pre-need companies;
specific matters within the competence of the board, as may be H.Subsidiaries or branches of foreign corporations which
delegated to it in the bylaws or by majority vote of the board, except operate in the Philippines and are listed in the PSE;
with respect to the: (a) approval of any action for which shareholders' I.Stock and other securities exchange/s.
approval is also required; (b) filing of vacancies in the board; (c)
amendment or repeal of bylaws or the adoption of new bylaws; (d) II.DEFINITION
amendment or term is not amendable or repealable; and (e) A.Independent director means a person who, apart from his fees
distribution of cash divendends to the shareholders. and shareholdings, is independent of management and free from any
The board of directors may create special committees of business or other relationship which could, or could reasonably be
temporary or permanent nature and determine the members' term, perceived to, materially interfere with his exercise of independent judgment
composition, compensation, powers, and responsibilities. in carrying out his responsibilities as a director in any corporation that
meets the requirements of Section 17.2 of the Securities Regulation Code
By the language of Section 34 of the Revised and includes, among others, any person who:
i.Is not a director or officer or substantial stockholder of the
Corporation Code, the ultimate power must remain with the Board
corporation or of its related companies or any of its substantial shareholders
of Directors, and it would be against corporate principle to power (other than as an independent director of any of the foregoing);
the Executive Committee with authority that the Board itself ii.Is not a relative of any director, officer or substantial
cannot countermand. shareholder of the corporation, any of its related companies or any of its
The ExeCom is for the operations of the business such as substantial shareholders. For this purpose, relatives includes spouse, parent,
the hiring of officers, as it would be unprofitable to require, let’s child, brother, sister, and the spouse of such child, brother or sister;
say, all of the 15 directors in usual business operations. The law iii.Is not acting as a nominee or representative of a substantial
however provided the five instances which cannot be delegated to shareholder of the corporation, any of its related companies or any of its
substantial shareholders;
the ExeCom.
iv.Has not been employed in anyexecutive capacity by that
public company, any of its related companies or by any of its substantial
Filipinas Port Services v. Go shareholders within the last five (5) years;
Held: Notwithstanding the silence of Filport’s bylaws on the v.Is not retained as professional adviser by that public
matter, we cannot rule that the creation of the executive committee by the company, any of its related companies or any of its substantial shareholders
board of directors is illegal or unlawful. One reason is the absence of a within the last five (5) years, either personally of through his firm;
showing as to the true nature and functions of said executive committee vi.Has not engaged and does not engage in any transaction with
considering that the "executive committee," referred to in Section [34] of the corporation or with any of its related companies or with any of its
the Corporation Code which is as powerful as the board of directors and in substantial shareholders, whether by himself or with other persons or
effect acting for the board itself, should be distinguished from other through a firm of which he is a partner or a company of which he is a
committees which are within the competency of the board to create at any director or substantial shareholder, other than transactions which are
time and whose actions require ratification and confirmation by the board. conducted at arms length and are immaterial or insignificant.
Another reason is that, ratiocinated by both the two (2) courts below, the B.When used in relation to a company subject to the
Board of Directors has the power to create positions not provided for in requirements above:
Filport’s bylaws since the board is the corporation’s governing body, i.Related company means another company which is:
clearly upholding the power of its board to exercise its prerogatives in (a) its holding company,
managing the business affairs of the corporation. (b) its subsidiary, or
As well, it may not be amiss to point out that, as testified to and (c) a subsidiary of its holding company; and ii.Substantial
admitted by petitioner Cruz himself, it was during his incumbency as shareholder means any person who is directly or indirectly the beneficial
Filport president that the executive committee in question was created, and owner of more than ten percent (10%) of any class of its equity security.
that he was even the one who moved for the creation of the positions of the C.An independent director shall have the following
AVPs for Operations, Finance and Administration. By his acquiescence qualifications:
and/or ratification of the creation of the aforesaid offices, Cruz is virtually i.He shall have at least one (1) share of stock of the corporation;
precluded from suing to declare such acts of the board as invalid or illegal. ii.He shall be at least a college graduate or he shall have been
And it makes no difference that he sues in behalf of himself and of the other engaged or exposed to the business of the corporation for at least five (5)
stockholders. Indeed, as his voice was not heard in protest when he was still years;
Filport’s president, raising a hue and cry only now leads to the inevitable iii.He shall possess integrity/probity; and
conclusion that he did so out of spite and resentment for his non-reelection iv.He shall be assiduous.
as president of the corporation. D.No person enumerated under Section II (5) of the Code of
Corporate Governance shall qualify as an independent director. He shall
17. Independent Director likewise be disqualified during his tenure under the following instances or
causes:
i.(i)He becomes an officer or employee of the corporation where
SEC MEMORANDUM CIRCULAR NO. 16 he is such member of the board of directors/trustees, or becomes any of the
Series of 2002 persons enumerated under letter (A) hereof;
GUIDELINES ON THE NOMINATION AND ELECTION ii.(ii)His beneficial security ownership exceeds 10% of the
OF INDEPENDENT DIRECTORS outstanding capital stock of the company where he is such director;
iii.(iii) Fails, without any justifiable cause, to attend at least 50%
I. COVERAGE of the total number of Board meetings during his incumbency unless such
This Circular shall be applicable to public companies and those absences are due to grave illness or death of an immediate family.
subject to secondary licenses from the Commission, as follows: iv.(iv) Such other disqualifications which the company's Manual
A.Issuers of registered securities to the public whether or not on Corporate Governance provides.
listed in the Philippine Stock Exchange (PSE);
B.Public companies or those with assets of at least Fifty Million III.NUMBER OF INDEPENDENT DIRECTORS
Pesos (P50,000,000.00) or such other amount as the Commission shall A.All companies are encouraged to have independent directors.
prescribe, and having Two hundred (200) or more holders each holding at However, issuers of registered securities and public companies are required
least One hundred (100) shares of a class of its equity securities; to have at least two (2) independent directors or at least 20%of its board
C.Finance companies; size, whichever is the lesser. Provided further that said companies may
D.Investment houses; choose to have more independent directors in their boards than as above
E.Brokers and dealers of securities; required.

Page 16 of 25
 B.The Exchange/s are required to have at least three (3) SEC Memorandum Circular No. 04-17, [March 9,
independent directors and an independent director-President. To effectively 2017]
carry out the provisions of Section 33.2(g) of the Securities Regulation To promote and reinforce board independence and to be
Code, the independent directors must not be allowed to solicit votes for consistent with recognized regional best practice, the Commission in its en
himself or for others or be subject to election by the stockholders until the bane meeting on 09 March 2017 resolved to amend its rules on the term
shares are listed, or Exchange's outstanding capital stock are no longer limit of independent directors as follows:
majority owned by the brokers. 1. A company's independent director shall serve fora maximum
cumulative term of nine (9) years;
IV.NOMINATION AND ELECTION OF INDEPENDENT 2. After which, the independent director shall be perpetually
DIRECTOR/S barred from re-election as such in the same company, but may continue to
The following rules shall be applicable to all covered qualify as a non-independent director;
companies: 3. In the instance that a company wants to retain an
A.The Nomination Committee shall have at least three (3) independent director who has served for nine (9) years, the Board should
members, one of whom is an independent director. It shall promulgate the provide meritorious justification/s and seek shareholders' approval during
guidelines or criteria to govern the conduct of the nomination. The same the annual shareholders' meeting; and
shall be properly disclosed in the company's information or proxy statement 4. Reckoning of the cumulative nine-year term is from 2012.
or such other reports required to be submitted to the Commission. The
members of the Nomination Committee of the Exchange shall be cleared by
the Commission. SEC OPINION No. 13-04
B.Nomination of independent director/s shall be conducted by The 10% limit, provided for in paragraph 5 (b) of rule 38 of the
the Committee prior to a stockholders' meeting. All recommendations shall Amended IRR is used only to determine whether or not a person (natural or
be signed by the nominating stockholders together with the acceptance and juridical) is a substantial shareholder of a covered company.
conformity by the would-be nominees. A person is qualified to be elected as an independent director
C.It shall pre-screen the qualifications and prepare a final list of provided he is independent of management and free from any business or
all candidates and put in place screening policies and parameters to enable other relationship which could reasonably perceived to, materially interfere
it to effectively review the qualifications of the nominees for independent with his exercise of independent judgment in carrying out his
director/s. responsibilities as a director in any covered company, and includes, among
D.After the nomination, the Committee shall prepare a Final List others, any person who does not own more than 2% of the shares of the
of Candidates which shall contain all the information about all the covered company and/or its related companies or any of its substantial
nominees for independent directors, as required under Part IV(A) and (C) shareholders.
of Annex "C" of SRC Rule 12, which list, shall be made available to the
Commission and to all stockholders through the filing and distribution of II
the Information Statement or Proxy Statement, in accordance with SRC
POWERS OF THE CORPORATION
Rule 17.1(b) or SRC Rule 20, respectively, or in such other reports the
company is required to submit to the Commission. The name of the person
or group of persons who recommended the nomination of the independent A. CORPORATE POWERS AND CAPACITY
director shall be identified in such report including any relationship with the
nominee. Section 35. Corporate Powers and Capacity. - Every
E.Only nominees whose names appear on the Final List of corporation incorporated under this Code has the power and capacity:
Candidates shall be eligible for election as Independent Director/s. No other (a) To sue and be sued in its corporate name;
nomination shall be entertained after the Final List of Candidates shall have (b) To have perpetual existence unless the certificate of
been prepared. No further nomination shall be entertained or allowed on the incorporation provides otherwise;
floor during the actual annual stockholders'/memberships' meeting. (c) To adopt and use a corporate seal;
F.Election of Independent Director/s (d) To amend its articles of incorporation in accordance with
i.Except as those required under this Circular and subject to the provisions of this Code;
pertinent existing laws, rules and regulations of the Commission, the (e) To adopt bylaws, not contrary to law, morals or public
conduct of the election of independent director/s shall be made in policy, and to amend or repeal the same in accordance with this Code;
accordance with the standard election procedures of the company or its by- (f) In case of stock corporations, to issue or sell stocks to
laws. subscribers and to sell treasury stocks in accordance with the
ii.It shall be the responsibility of the Chairman of the Meeting to provisions of this Code; and to admit members to the corporation if it
inform all stockholders in attendance of the mandatory requirement of be a nonstock corporation;
electing independent director/s. He shall ensure that an independent (g) To purchase, receive, take or grant, hold, convey, sell,
director/s are elected during the stockholders' meeting. lease, pledge, mortgage, and otherwise deal with such real and personal
iii.Specific slot/s for independent directors shall not be filled-up property, including securities and bonds of other corporations, as the
by unqualified nominees. transaction of the lawful business of the corporation may reasonably
iv.In case of failure of election for independent director/s, the and necessarily require, subject to the limitations prescribed by law
Chairman of the Meeting shall call a separate election during the same and the constitution;
meeting to fill up the vacancy. (h) To enter into a partnership, joint venture, merger,
v.The covered companies shall amend its by-laws in accordance consolidation, or any other commercial agreement with natural and
with the foregoing requirements as soon as practicable. juridical persons;
(i) To make reasonable donations, including those for the
V.TERMINATION/CESSATION OF INDEPENDENT public welfare or for hospital, charitable, cultural, scientific, civic, or
DIRECTORSHIP similar purposes: Provided, That no foreign corporation shall give
In case of resignation, disqualification or cessation of donations in aid of any political party or candidate or for purpose s of
independent directorship and only after notice has been made with the partisan political activity;
Commission within five (5) days from such resignation, disqualification or (j) To establish pension, retirement, and other plans for the
cessation, the vacancy shall be filled by the vote of at least a majority of the benefit of its directors, trustees, officers, and employees; and
remaining directors, if still constituting a quorum, uponthe nomination of (k) To exercise such other powers as may be essential or
the Nomination Committee otherwise, said vacancies shall be filled by the necessary to carry out its purpose or purposes as stated in the articles
stockholders in a regular or special meeting called for that purpose.An of incorporation.
independent director so elected to fill a vacancy shall serve only for the
unexpired term of his predecessor in office.
B. POWER TO EXTEND OR SHORTEN CORPORATE
TERM

Page 17 of 25
 Commission where such approval is necessary, or if the Commission
Section 36. Power to Extend or Shorten Corporate Term. - A where such stockholder is not entitled to the appraisal right, then the
private corporation may extend or shorten its term as stated in the right of the stockholder to be paid the fair value of the shares shall
articles of incorporation when approved by a majority vote of the cease, the status as the stockholder shall be restored, and all dividend
board of directors or trustees, and ratified at a meeting by the distributions which would have accrued on the shares shall be paid to
stockholders or members representing at least two-thirds (2/3) of the the stockholder.
outstanding capital stock or of its members. Written notice of the
proposed action and the time and place of the meeting shall be sent to Section 84. Who Bears Costs of Appraisal. - The costs and
the stockholders or members at their respective place of residence as expenses of appraisal shall be borne by the corporation, unless the fair
shown in the books of the corporation, and must be deposited to the value ascertained by appraisers is approximately the same as the price
addressee in the post office with postage prepaid, served personally, or which the corporation may have offered to pay the stockholder, in
when allowed in the bylaws or done with the consent of the which the corporation may have offered to pay the stockholder, in
stockholder, sent electronically in accordance with the rules and which case they shall be borne by the latter. In the case of an action to
regulations of the Commission on the use of electronic data messages. recover such fair value, all costs and expenses shall be assessed against
In case of extension of corporate term, a dissenting stockholder may the corporation, unless the refusal of the stockholder or receive
exercise the right of appraisal under the conditions provided in this payment was unjustified.
Code.

Section 85. Notation on Certificates; Rights of Transferee. -

Section 80. When the Right of Appraisal May Be Exercised. - Within ten (10) days after demanding payment for shares held, a
Any stockholder of a corporation shall have the right to dissent and dissenting stockholder shall submit the certificates of stock
demand payment of the fair value of the shares in the following representing the shares to the corporation for notation that such
instances: representing the shares to the corporation for notation that such shares
(a) In case an amendment to the articles of incorporation has are dissenting shares. Failure to do so shall, at the option of the
the effect of changing or restricting the rights of any stockholder or corporation, terminate the rights under this Title. If shares represented
class of shares, or of authorizing preferences in any respect superior to by the certificates bearing such notation are transferred, and the
those of outstanding shares of any class, or of extending or shortening certificates consequently cancelled, the rights of the transferor as a
the term of corporate existence; dissenting stockholder under this Title shall cease and the transferee
(b) In case of sale, lease, exchange, transfer, mortgage, shall have all the rights of a regular stockholder; and all dividend
pledge or other disposition of all or substantially all of the corporate distributions which would have accrued on such shares shall be paid to
property and assets as provided in this Code; the transferee.
(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. The corporate powers conferred upon the board of
directors usually refer only to ordinary business transactions of the
corporation and do not extend beyond the management of ordinary
Section 81. How Right is Exercised. - The dissenting
stockholder who votes against a proposed corporate action may corporate affairs nor beyond the limits of its authority [SEC
exercise the right of appraisal by making a written demand on the Opinion No. 43-04, (October 26, 2004)].
corporation for the payment of the fair value of shares held within
thirty (30) days from the date on which the vote was C. POWER TO INCREASE OR DECREASE CAPITAL
taken: Provided, That failure to make the demand within such perios STOCK; INCUR, CREATE OR INCREASE BONDED
shall be deemed a waiver of the appraisal right. If the proposed INDEBTEDNESS
corporate action is implemented, the corporation shall pay the
stockholder, upon surrender of the certificate or certificates of stock
Section 37. Power to increase or Decrease Capital Stock;
representing the stockholder's shares, the fair value thereof as of the
Incur, Create or Increase Bonded Indebtedness. - No corporation shall
day before the vote was taken excluding any appreciation or
increase or decrease its capital stock or incur, create or increase any
depreciation in anticipation of such corporate action.
bonded indebtedness unless approved by a majority vote of the board
If, within sixty (60) days form the approval of the corporate
of directors and by two-thirds (2/3) of the outstanding capital stock at a
action by the stockholders, the withdrawing stockholder and the
stockholders' meeting duly called for the purpose. Written notice of the
corporation cannot agree on the fair value of the shares, it shall be
time and place of the stockholders' meeting and the purpose for said
determined and appraised by three (3) disinterested persons, one of
meeting must be sent to the stockholders at their places of residence as
whom shall be named by the stockholder, another by the corporation
shown in the books of the corporation served on the stockholders
and the third by the two (2) thus chosen. The findings of the majority
personally, or through electronic means recognized in the corporation's
of the appraisers shall be final, and their award shall be paid by the
bylaws and/or the Commission's rules as a valid mode for service of
corporation within thirty (30) days after such award is
notices.
made: Provided, That no payment shall be made to any dissenting
A certificate must be signed by a majority of the directors of
stockholder or unless the corporation has unrestricted retained
the corporation and countersigned by the chairperson and secretary of
earnings in its books to cover such payment: Provided, further, That
the stockholders' meeting, setting forth:
upon payment by the corporation of the agreed or awarded price, the
(a) That the requirements of this section have been complied
stockholder shall forthwith transfer the shares to the corporation.
with;
(b) The amount of the increase or decrease of the capital
Section 82. Effect of Demand and Termination of Right. - stock;
From the time of demand for payment of the fair value of a (c) In case of an increase of the capital stock, the amount of
stockholder's shares until either the abandonment of the corporate capital stock or number of shares of no-par stock thereof actually
action involved or the purchase of the said shares by the corporation, subscribed, the names nationalities and addresses of the persons
all rights accruing to such shares, including voting and dividend rights subscribing, the amount of capital stock or number of no-par stock
shall immediately be restored. subscribed, the names, nationalities and addresses of the persons
subscribing, the amount of capital stock or number of no-par stock
Section 83. When Right to Payment Ceases. - No demand for subscribed by each, and the amount paid by each on the subscription in
payment under this Title may be withdrawn unless the corporation cash or property, or the amount of capital stock or number of shares of
consents thereto. If, however, such demand for payment is withdrawn no-par stock allotted to each stockholder if such increase is for the
with the consent of the corporation, or if the proposed corporate action purpose of making effective stock dividend therefor authorized;
is abandoned or rescinded by the corporation or disapproved by the (d) Any bonded indebtedness to be incurred, created ot
increased;

Page 18 of 25
 (e) The amount of stock represented at the meeting; and substantially all the corporate property and assets if thereby the
(f) The vote authorizing the increase or decrease of capital corporation would be rendered incapable of continuing the business or
stock, or incurring, creating or increasing of bonded indebtedness. accomplishing the purpose of which it was incorporated.
Any increase or decrease in the capital stock or the Written notice of the proposed action and of the time and
incurring, creating or increasing of any bonded indebtedness shall place for the meeting shall be addressed to stockholders or members at
require prior approval of the Commission and where appropriate, of their places of residence as shown in the books of the corporation and
the Philippine Competition Commission. The application with the deposited to the addressee in the post office with postage prepaid,
Commission shall be made within six (6) months from the date of served personally, or when allowed by the bylaws or done with the
approval of the board of directors and stockholders, which period may consent of the stockholder, sent electronically: Provided, That any
be extended for justifiable reasons. dissenting stockholder may exercise the right of appraisal under the
Copies of the certificate shall be kept on file in the office of conditions provided in this Code.
the corporation and filed with the Commission and attached to the After such authorization or approval by the stockholders or
original articles of incorporation. After approval by the Commission members, the board of directors or trustees may, nevertheless, in its
and the issuance by the Commission of its certificate of filing may discretion, abandon such sale, lease, exchange, mortgage, pledge, or
declare: Provided, That the Commission shall not accept for filing any other disposition of property and assets, subject to the rights of third
certificate of increase of capital stock unless accompanied by a sworn parties under any contract relating thereto, without further action or
statement of the treasurer of the corporation accompanied by a sworn approval by the stockholders or members.
statement of the treasurer of the corporation lawfully holding office at Nothing in this section is intended to restrict the power of
the time of the filing of the certificate, showing that at least twenty-five any corporation, without the authorization by the stockholders or
percent (25%) of the increase in capital stock has been subscribed and members, to sell, lease, exchange, mortgage, pledge, or otherwise
that at least twenty-five percent (25%) of the amount subscribed has dispose of any of its property and assets if the same is necessary in the
been paid in actual cash to the corporation or that property, the usual and regular course of business of the corporation or if the
valuation of which is equal to twenty-five percent (25%) of the proceeds of the sale or other disposition of such property and assets
subscription, has been transferred to the corporation: Provided, shall be appropriated for the conduct of its remaining business.
further, That no decrease in capital stock shall be approved by the
Commission if its effect shall prejudice the rights of corporate Here, Section 39 enumerates transactions which are
creditors.
onerous contracts contrasted from gratuitous contracts, and
Nonstock corporations may incur, create or increase bonded
indebtedness when approved by a majority of the board of trustees and therefore in each instance, the corporation always receives
of at least two-thirds (2/3) of the members in a meeting duly called for something equal value to what has been sold, disposed or
the purpose. encumbered.
Bonds issued by a corporation shall be registered with the
Commission, which shall have the authority to determine the Bulk Sales Law
sufficiency of the terms thereof. Aside from the requirement of Section 39, the sale of all
or substantially all of the corporate assets or property may require
D. POWER TO DENY PREEMPTIVE RIGHT compliance with the Bulk Sales Law (Act No. 3952), when the
transaction falls within the classification of the law as “sale in
Section 38. Power to Deny Preemptive Right. - All bulk” and would require the seller to execute a sworn statement
stockholders of a stock corporation shall enjoy preemptive right to listing the corporate creditors and the amount and nature of their
subscribe to all issues or disposition of shares of any class, in claims, giving notice of the sale, and applying the proceeds of the
proportion to their respective shareholdings, unless such right is denied
sale proportionately to the payment of the listed obligations.
by the articles of incorporation or an amendment
thereto: Provided, That such preemptive right shall not extend to
Under the Bulk Sales Law, failure to comply with
shares issued in compliance with laws requiring stock offerings or requirements renders the transactions fraudulent and void,
minimum stock ownership by the public; or to shares issued in good irrespective of the intentions of the parties to the transaction.
faith with the approval of the stockholders representing two-thirds
(2/3) of the outstanding capital stock in exchange for property needed Pena v. Court of Appeals
for corporate purposes or in payment of previously contracted debt. Held: The requisite majority has not been complied with. The
by-laws of a corporation are its own private laws which substantially have
E. SALE OR OTHER DISPOSITION OF ASSETS the same effect as the laws of the corporation. They are in effect, written,
into the charter. In this sense they become part of the fundamental law of
the corporation with which the corporation and its directors and officers
Section 39. Sale or Other Disposition of Assets. - Subject to
must comply.
the provisions of Republic Act No. 10667, otherwise known as the
Under Section 25 of the Corporation Code of the Philippines,
"Philippine Competition Act", and other related laws a corporation
the articles of incorporation or by-laws of the corporation may fix a greater
may, by a majority vote of its board of directors or trustees, sell, lease,
number than the majority of the number of board members to constitute the
exchange, mortgage, pledge, or otherwise dispose of its property and
quorum necessary for the valid transaction of business. Any number less
assets, upon such terms and conditions and for such consideration,
than the number provided in the articles or by-laws therein cannot
which may be money, stock, bonds, or other instruments for the
constitute a quorum and any act therein would not bind the corporation; all
payment of money or other property or consideration, as its board of
that the attending directors could do is to adjourn.
directors or trustees may deem expedient.
In the case at bar, the bylaws fixed the number of directors who
A sale of all or substantially all of the corporation's
may vote on decisions to 4, not to 3. Thus, the requisite number of votes
properties and assets, including its goodwill, must be authorized by the
have not been complied with.
vote of stockholders representing at least two-thirds (2/3) of the
Also, the corporation had already been dormant for 25 years. Its
outstanding capital stock, or at least two-thirds (2/3) of the members,
only remaining assets were the mortgaged properties. To dispose of the
meeting duly called for the purpose.
same, it is required that in addition to a proper board resolution, the
In nonstock corporations where there are no members with
affirmative votes of the stockholders holding at least two-thirds (2/3) of the
voting rights, the vote of at least a majority of the trustees in office will
voting power in the corporation in a meeting duly called for that purpose.
be sufficient authorization for the corporation to enter into any
This was not complied with in the case at bar.
transaction authorized by this section.
Thus, the assignment of the right of redemption was not valid.
The determination of whether or not the sale involves all or
substantially all of the corporation's properties and assets must be
computed based on its net asset value, as shown in its latest financial Islamic Department v. Court of Appeals
statemments. A sale or other disposition shall be deemed to cover

Page 19 of 25
 Held: Consent is essential for the existence of a contract, and 4. Where the transaction is entered into fraudulently in order to
where it is wanting, the contract is non-existent. In this case, the IDP, escape liability for such debts. (Art. 1388)
owner of the subject parcels of land, never gave its consent, thru a BASIS: BUSINESS ENTERPRISE TRANSFER RULE
legitimate Board of Trustees, to the disputed Deed of Absolute Sale The legal basis of the four (4) exceptions to the Nell Doctrine is
executed in favor of INC. This is, therefore, a case not only of vitiated this Business Enterprise Transfer rule, where transferee has purchased not
consent, but one where consent on the part of one of the supposed only the assets of the transferor but also its business. As a result of the sale
contracting parties is totally wanting. Ineluctably, the subject sale is void the transferor is merely left with its juridical existence, devoid of its
and produces no effect whatsoever. industry and earning capacity. Given that the transferee corporation
The Tandang Sora property, constitutes, the only property of the acquired not only the assets but also the business of the transferor, then the
IDP. Hence, it sale to Inc is a sale or disposition of all corporate property liabilities of the latter are inevitably assigned to the former in such instance
and assets of IDP. Thus for the sale to have been valid, the majority vote of (Y-I Leisure v. Yu, 2015).
the legitimate Board of Trustees, concurred in by the vote of at least 2/3 of In a business-enterprise transfer, the transferee is liable for the
the bona fide members of the corporation should have been obtained. These debts and liabilities of his transferor arising from the business enterprise
twin requirements were not met as the Carpizo Group which voted to sell conveyed.
the Tandang Sora property was a fake Board of Trustees, and those whose The Caltex case, thus, affirmed that the transfer of all or
names and signatures were affixed by the Carpizo Group together with the substantially all the proper from one corporation to another under Section
sham Board Resolution authorizing the negotiation for the sale were, from [39] necessarily entails the assumption of the assignor's liabilities,
all indications, not bona fide members of the IDP as they were made to notwithstanding the absence of any agreement on the assumption of
appear to be. Apparently, there are only fifteen (15) official members of obligations. The transfer of all its business, properties and assets without
petitioner corporation including the eight (8) members of the Board of the consent of its creditors must certainly include the liabilities; or else, the
Trustees. assignment will place the assignor's assets beyond the reach of its creditors.
In order to protect the creditors against unscrupulous conveyance of the
entire corporate assets, Caltex justifiably concluded that the transfer of
Caltex v. PNOC Shipping
assets of a corporation under Section [39] must likewise carry with it the
Held: PSTC may be held liable for the obligations of
transfer of its liabilities.
LUSTEVECO to Caltex.
NELL DOCTRINE DOES NOT NECESSARILY
First, Caltex may recover the judgment debt from PSTC because
REQUIRE FRAUD
the Agreement provides that PSTC shall assume all the obligations of
A cursory reading of the exception shows that it does not require
LUSTEVECO.
the existence of fraud against the creditors before it takes full force and
In the said agreement, LUSTEVECO transferred, conveyed and
effect. Indeed, under the Nell Doctrine, the transferee corporation may
assigned to PSTC all of LUSTEVECO’s business, properties and assets
inherit the liabilities of the transferor despite the lack of fraud due to the
pertaining to its tanker and bulk business "together with all the obligations
continuity of the latter's business. The purpose of the business-enterprise
relating to the said business, properties and assets." When PSTC assumed
transfer is to protect the creditors of the business by allowing them a
all the properties, business and assets of LUSTEVECO pertaining to
remedy against the new owner of the assets and business enterprise.
LUSTEVECO’s tanker and bulk business, PSTC also assumed all of
Otherwise, creditors would be left "holding the bag," because they may not
LUSTEVECO’s obligations pertaining to such business. Even without the
be able to recover from the transferor who has "disappeared with the loot,"
Agreement, PSTC is still liable to Caltex.
or against the transferee who can claim that he is a purchaser in good faith
The Corporation Code under Section 40 allows the transfer of
and for value. Based on the foregoing, as the exception of the Nell doctrine
all or substantially all the properties and assets of a corporation. However,
relates to the protection of the creditors of the transferor corporation, and
the transfer should not prejudice the creditors of the assignor. The only way
does not depend on any deceit committed by the transferee -corporation,
the transfer can proceed without prejudice to the creditors is to hold the
then fraud is certainly not an element of the business enterprise doctrine.
assignee liable for the obligations of the assignor. The acquisition by the
Two Requisites of Business Enterprise Transfer Rule
assignee of all or substantially all of the assets of the assignor necessarily
1. The transferor corporation sells all or substantially all
includes the assumption of the assignor’s liabilities, unless the creditors
of its assets to another entity; and
who did not consent to the transfer choose to rescind the transfer on the
2. The transferee corporation continues the business of the
ground of fraud. To allow an assignor to transfer all its business, properties
transferor corporation.
and assets without the consent of its creditors and without requiring the
Both requisites are present in this case. First, it was found that
assignee to assume the assignor’s obligations will defraud the creditors. The
the since all the MADCI landholdings were transferred to YILPI then to
assignment will place the assignor’s assets beyond the reach of its creditors.
YICRI, Yu had no other way of collected his refund. It was also admitted
Even if PSTC did not expressly assume to pay the creditors of
that MADCI had no more properties left after the sale of lands. Second, it
LUSTEVECO, PSTC would still be liable to Caltex up to the value of the
was shown that the purchaser YIL bought the shares because it had some
assets transferred. The transfer of all or substantially all of the
interest to development also a golf course. In addition, the purchaser was
unencumbered assets of LUSTEVECO to PSTC cannot work to defraud the
fully aware of the business of MADCI but they continued to acquire its
creditors of LUSTEVECO. A creditor has a real interest to go after any
lands through YICRI. There is absolutely no certainty that Yu can still
person to whom the debtor fraudulently transferred its assets
claim its refund from MADCI with the latter losing all its assets. To allow
an assignor to transfer all its business, properties and assets without the
Y-I Leisure v. Yu consent of its creditors will place the assignor's assets beyond the reach of
Held: NELL DOCTRINE [Nell Company v. Pacific Farms, its creditors. Thus, the only way for Yu to recover his money would be to
1965]: When the issue involves the transfer of all assets of one corporation assert his claim against the petitioners as transferees of the assets.
to another, it was discussed that: F. POWER TO ACQUIRE OWN SHARES
General Rule: Where one corporation sells or otherwise
transfers all of its assets to another corporation, the latter is not liable for
Section 40. Power to Acquire Own Shares. - Provided, That
the debts and liabilities of the transferor.
the corporation has unrestricted retained earnings in its books to cover
the shares to be purchased or acquired, a stock corporation shall have
Exceptions: If any of the following exceptions are present, then
the power to purchased or acquired, a stock corporation shall have the
the transferee corporation shall assume liabilities of transferor:
power to purchase or acquire its own shares for a legitimate corporate
1. Purchasers expressly or impliedly agrees to assume such
purpose or purposes, including the following cases:
debts; (Article 2047, where person binds himself solidarily with the
(a) To eliminate fractional shares arising out of stock
debtor).
dividends;
2. Where the transaction amounts to a consolidation or merger
(b) To collect or compromise an indebtedness to the
of the corporations;
corporation, arising out of unpaid subscription, in a delinquency sale,
3. Where the purchasing corporation is merely a
and to purchase delinquent shares sold during said sale; and
continuation of the selling corporation; and

Page 20 of 25
 (c) To pay dissenting or withdrawing stockholders entitled to least two-thirds (2/3) of the total outstanding capital stock entitled to
payment for their shares under the provisions of this Code. vote, or by at least two-thirds (2/3) of the members in the case of a
nonstock corporation.
G. POWER TO INVEST CORPORATE FUNDS IN These shall apply to any contract whereby a corporation
undertakes to manage or operate all or substantially all of the called
ANOTHER CORPORATION OR BUSINESS OR FOR
services contracts, operating agreements or otherwise: Provided,
ANY OTHER PURPOSE however, That such service contracts or operating agreements which
relate to the exploration, development exploitation or utilization of
Section 41. Power to Invest Corporate Funds in Another natural resources may entered into such periods as may be provided by
Corporation or Business or for Any Other Purpose. - Subject to the the pertinent laws or regulations.
provisions of this Code, a private corporation may invest its funds in No management contracts shall be entered into for period
any other corporation, business, or for any purpose other than the longer that five (5) years for any one term.
primary purpose for which it was organized, when approved by a
majority of the board of directors or trustees and ratified by the
J. ULTRA VIRES ACTS OF THE CORPORATIONS
stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or by at least two-thirds (2/3) of the outstanding capital
stock, or by at least two-thirds (2/3) of the members in the case of Section 44. Ultra Vires Acts of the Corporations. - No
nonstock corporations at a meeting duly called for the purpose. Notice corporation shall possess or exercise corporate powers other than those
of the proposed investment and the time place of residence as shown in conferred by this Code or by its articles of incorporation and except as
the books of the corporation and deposited to the addressee in the post necessary or incidental to the exercise of the powers conferred.
office with the postage prepaid. Served personally, or sent
electronically in accordance with the rules and regulations of the It is a question therefore, in each case of the logical
Commission on the use of electronic data message, when allowed by the relation of the act to the corporate purpose expressed in the charter.
bylaws or done with the consent of the stockholders: Provided, That If that act is one which is lawful in itself, and not otherwise
any dissenting stockholder shall have appraisal right as provided in
prohibited, is done for the purpose of serving corporate ends, and is
this Code: Provided, however, That where the investment by the
corporation is reasonably necessary to accomplish its primary purpose reasonably tributary to the promotion of those ends, in a
as stated in the articles of incorporation, the approval of the substantial, and not in a remote and fanciful sense, it may fairly be
stockholders or members shall not be necessary. considered within charter powers. The test to be applied is:
Whether the act in question is in direct and immediate furtherance
H. POWER TO DECLARE DIVIDENDS of the corporation’s business, fairly incident to the express powers
and reasonably necessary to their exercise. If so, the corporation
Section 42. Power to Declare Dividends. - The board of has the power to do it; otherwise, not [Montebilano v. Bacolod-
directors of a stock corporation may declare dividends out of the Murcia Milling].
unrestricted retained earnings which shall be payable in cash,
property, or in stock to all stockholders on the basis of outstanding Zomer Development v. International Exchange Bank
stock held by them: Provided, That any cash dividends due on Held: As it was, the Petitioner finally awoke from its slumber
delinquent stock shall be first be applied to the unpaid balance on th when the Private Respondent filed its "Petition" for the extrajudicial
subscription plus costs and expenses, while stock holders until their foreclosure of the "Real Estate Mortgage", with the Sheriff, and assailed the
unpaid subscription is fully paid: Provided, further, That no stock authority of its Board of Directors to approve the said "Resolution" and of
dividend shall be issued without the approval of stockholders its Treasurer and General Manager to execute the deed and brand the said
representing at least two-thirds (2/3)of the outstanding capital stock at "Resolution" and the said deed as "ultra vires" and hence, not binding on
a regular or special meeting duly called for the purpose. the Petitioner, and hurried off to the Respondent Court and prayed for
Stock corporations are prohibited from restraining surplus injunctive relief.
profits in excess of one hundred percent (100%} of their paid-in capital Before then, the Petitioner maintained a stoic silence and
stock, except: (a) when justified by the definite corporate expansion adopted a "hands off" stance. We find the Petitioner's stance grossly
projects or programs approved by the board of directors; or (b) when inequitable. We must take heed and pay obeisance to the equity rule that if
the corporation is prohibited under any loan agreement with financial one maintains silence when, in conscience he ought to speak, equity will
institutions or creditors, whether local or foreign, from declaring debar him from speaking when, in conscience, he ought to remain silent. He
dividends without their consent, and such consent has not yet been who remains silent when he ought to speak cannot be heard to speak when
secured; or (c) when it can be clearly shown that such retention is he ought to be silent.
necessary under special circumstances obtaining in the corporation, More, the transactions between the Petitioner and the Private
such as when there is need for special reserve for probable Respondent over its properties are neither malum in se or malum
contingencies. prohibitum. Hence, the Petitioner cannot hide behind the cloak of "ultra
vires" for a defense. The plea of "ultra vires" will not be allowed to prevail,
I. POWER TO ENTER INTO MANAGEMENT whether interposed for or against a corporation, when it will not advance
CONTRACT justice but, on the contrary, will accomplish a legal wrong to the prejudice
of another who acted in good faith.
Section 43. Power to Enter into Management Contract. - No
corporation shall conclude a management contract with another Republic v. Acoje Mining
corporation unless such contract is approved by the board of directors Held: Acoje Mining cannot use ultra vires as defense. It is clear
and by the stockholders owning at least the majority of the outstanding that company had signified its willingness to comply and even sent letter
capital stock, or by at least a majority of the members in the case of a stating that a board resolution has been made making it as a guarantor for
nonstock corporation, or both the managing and the managed the postmaster for the funds. Thus, the company cannot now be heard to
corporation, at a meeting duly called for the purpose: Provided, That complain that it is not liable for the irregularity of employee upon technical
(a) where a stockholder or stockholders representing the same interest plea of ultra vires. The least that can be said is that it is already estopped.
of both the managing and the managed corporations own or control Thus, it has been held that "although not expressly authorized to
more than one-third (1/3) of the total outstanding capital stock entitled do so a corporation may become a surety where the particular transaction is
to vote of the managing corporation; or (b) where a majority if the reasonably necessary or proper to the conduct of its business," and here it is
members of the board of directors of the managing corporation also undisputed that the establishment of the local post office is a reasonable and
constitute a majority of the members of the board of directors of the proper adjunct to the conduct of the business of appellant company. Indeed,
managed corporation, then the management contract must be such post office is a vital improvement in the living condition of its
approved by the stockholders of the managed corporation owning at employees and laborers who came to settle in its mining camp which is far

Page 21 of 25
removed from the postal facilities or means of communication accorded to or if not so fixed, on any date After April 15 of every year as
people living in a city or municipality. determined by the board of directors or trustees: Provided,
further, That written notice of regular meetings may be sent to all
stockholders or members of record through electronic mail or such
Harden v. Benguet Consolidated Mining
other manner as the Commission shall allow under its guidelines.
Held: In this case, the mining company was in violation of the
At each regular meeting of stockholders or members, the
express prohibitions of the old Corporation Law. Benguet Mining held
board of directors or trustees shall endeavor to present to stockholders
shares of stock in another mining corporation, the Balatoc Mining
or members the following:
Company. The shareholders of Balatoc filed against Benguet Mining to
(a) The minutes of the most recent regular meeting which
annul the certificates of stock issued in favor of Benguet Mining and to
shall include, among others:
recover money that was collected by the latter from the arrangements.
(1) A description of the voting and the vote tabulation
Although the contract between the two mining corporations was
procedures used in the previous meetings;
illegal for contravening Corporation Law, the statutory provision was
(2) A description of the opportunity given to stockholders or
adopted with the legislative intent that public policy should be controlling
members to ask questions and record of the question s asked and
in the granting of mining rights. It held that the violation of the prohibition
answers given;
is of such a nature that it can be proceeded only by way of quo warranto or
(3) The matters discussed and resolutions reached;
a criminal prosecution. Here, even where corporate contracts are illegal per
(4) A record of the voting results for each agenda item;
se, when only public or government policy is at stake and no private wrong
(5) A list of the director or trustees, officers and stockholders
was committed, the court will leave the parties as they are, in accordance
or members who attended the meeting; and
with their original contractual expectations.
(6) Such other items that the Commission may require in the
interest of good corporate governance and protection of minority
Magallanes v. Watercraft Auguis stockholders;
Held: The suspension was not ultra vires. Under Section 3(a) (b) A members' list for nonstock corporations and, for stock
and Section 3(c) Article V of MWAI's ByLaws, its members are bound corporations, material information on the current stockholders, and
"[t]o obey and comply with the by-laws, rules and regulations that may be their voting rights;
promulgated by the association from time to time" and "[t]o pay (c) A detailed, descriptive, balanced and comprehensible
membership dues and other assessments of association." assessment of the corporation's performance, which shall include
Thus, the respondents were obligated to pay the membership information on any material change in the corporation's business
dues of which they were delinquent. MWAI could not be faulted in strategy, and other affairs;
suspending the rights and privileges of its delinquent members. (d) A financial report for the preceding year, which shall
The fact alone that neither the articles of incorporation nor the include financial statements duly signed and certified in accordance wit
by-laws of MWAI granted its Board the authority to discipline members this Code and the rules and the Commission may prescribe, a
does not make the suspension of the rights and privileges of the respondents statement on the adequacy of the corporation's internal controls or risk
ultra vires. For if that act is one which is lawful in itself and not otherwise management systems, and a statement of all external audit and non-
prohibited, and is done for the purpose of serving corporate ends, and audit fees;
reasonably contributes to the promotion of those ends in a substantial and (e) An explanation of the dividend policy and the fact of
not in a remote and fanciful sense, it may be fairly considered within the payment of dividends or the reasons for nonpayment thereof;
corporation's charter powers. This Court is guided by jurisprudence in the (f) Director or trustee profiles which shall include, among
application of the above standard. others, their qualifications and relevant experience, length of service in
The Court affirmed the rule that a corporation is not restricted to the corporation, trainings and continuing education attended, and their
the exercise of powers expressly conferred upon it by its charter, but has the board representation in other corporations;
power to do what is reasonably necessary or proper to promote the interest (g) A director or trustee attendance report, indicating the
or welfare of the corporation. attendance of each of the meetings of the board and its committees and
Based on the foregoing, MWAI can properly impose sanctions in regular or special stockholder meetings;
on Auguis and Basnig for being delinquent members considering that the (h) Appraisals and performance reports for the board and
payment of membership dues enables MWAI to discharge its duties and the criteria and procedure for assessment;
functions enumerated under its charter. Moreover, respondents were (i) A director or trustee compensation report prepared in
obligated by the by-laws of the association to pay said dues. accordance with this Code and the rules the Commission may
The suspension of their rights and privileges is not an ultra vires prescribe;
act as it is reasonably necessary or proper in order to further the interest and (j) Director disclosures on self-dealings and related party
welfare of MWAI. transactions; and/or
Also, the imposition of the temporary ban on the use of MWAI's (k) The profiles of directors nominated ir seeking election or
berthing facilities until Auguis and Basnig have paid their outstanding reelection.
obligations was a reasonable measure that the former could undertake to A director, trustee, stockholder, or member may propose
ensure the prompt payment of its membership dues. Otherwise, MWAI will any other matter for inclusion in the agenda at may regular meeting of
be rendered inutile as it will have no means of ensuring that its members stockholders or members.
will promptly settle their obligations. It will be exposed to deleterious Special meetings of stockholders or members shall be held at
consequences as it will be unable to continue with its operations if the any time deemed necessary or as provided in the bylaws: Provided,
members continue to be delinquent in the payment of their obligations, however, That at least one (1) week written notice shall be sent to all
without fear of possible sanctions. stockholders or members, unless a different period is provided in the
bylaws, law or regulation.
A stockholder or member may propose the holding of a
III special meeting and items to be included in the agenda.
MEETINGS Notice of any meeting may be waived, expressly or impliedly,
by any stockholder or member: Provided, That general waivers of
A. KINDS OF MEETINGS notice in the articles of incorporation or the bylaws shall not be
allowed: Provided, further, That attendance at a meeting shall
constitute a waiver of notice of such meeting, except when the person
Section 48. Kinds of Meetings. - Meeting of the directors,
attends a meeting for the express purpose of objecting to the
trustees, stockholders, or members may be regular or special.
transaction of any business because the meeting is not lawfully called
or convened.
Section 49. Regular and Special Meetings of Stockholders or Whenever for any cause, there is no person authorized or
Members. - Regular meetings of stockholders or members shall be held the person authorized unjustly refuses to call a meeting, the
annually on a date fixed in the bylaws, or if not so fixed in the bylaws, Commission, upon petition of a stockholder or member on a showing of

Page 22 of 25
good cause therefor, may issue an order, directing the petitioning B. PLACE AND TIME OF MEETINGS OF
stockholder or member to call a meeting of he corporation by giving STOCKHOLDERS OR MEMBERS
proper notice required by this Code or the bylaws. The petitioning
stockholder or member shall preside thereat until at least a majority of Section 50. Place and Time of Meetings of Stockholders or
the stockholders or members present have chosen from among Members. - Stockholders' or members' meetings, whether regular or
themselves, a presiding officer. special, shall be held in the principal office of the corporation as set
Unless the bylaws provide for a longer period, the stock and forth in the articles of incorporation, or if not practicable, in the city or
transfer book or membership book shall be closed at least twenty (20) municipality where the principal office of the corporation is
days for regular meetings and seven (7) days for special meetings located: Provided, That any city of municipality in Metro Manila,
before the scheduled sate of the meeting. Metro Cebu, Metro Davao, and other Metropolitan areas shall, for
In case of postponement of stockholders' or members' purposes of this section, be considered a city or municipality.
regular meetings, written notice thereof and the reason therefor shall Notice of meetings shall be sent through the means of
be sent to all stockholders or members of record at least two (2) weeks communication provided in the bylaws, which notice shall state the
prior to the date of the meeting, unless a different period is required time, place and purpose of the meetings.
under the bylaws, law or regulation. Each notice of meeting shall further be accompanied by the
The right to vote of stockholders or members may be following:
exercised in person, through remote communication or in absentia. The (a) The agenda for the meeting;
Commission shall issue the rules and regulations governing (b) A proxy which shall be submitted to the corporate
participation and voting through remote communication or in absentia, secretary within a reasonable time prior to the meeting;
taking into account the company’s scale, number of stockholders or (c) When attendance, participation, and voting are allowed
members, structure, and other factors consistent with the protection by remote communication or in absentia, the requirements and
and promotion of shareholders' or members' meetings. procedures to be followed when a stockholder or member elects either
option; and
The signing of the minutes by all the members of the (d) When the meeting is for the election of directors or
board is not required. There is no provision in the Corporation trustees, the requirements and procedure for nomination and election.
Code of the Philippines that requires that the minutes of the All proceedings and any business transacted at a meeting of
meeting should be signed by all the members of the board [People the stockholders or members, if within the powers or authority of the
corporation, shall be valid even if the meeting is improperly held or
v. Dumlao].
called: Provided, That all the stockholders or members of the
corporation are present or duly represented at the meeting and not one
Lopez Realty v. Sps. Tanjangco of them expressly states at the beginning of the meeting that the
Held: Generally, non-signing of the Board Members of the purpose of their attendance is to object to the transaction of any
minutes does not mean that the resolution was not approved by the board. business because the meeting is not lawfully called or convened.
The signing of the minutes by all members of the board is not required. It is
not provided for in the Corporation Code.
C. QUORUM IN MEETINGS
However, it was not stated who prepared the minutes, given that
Asuncion as the Corporate Sec. refused to prepare the same. It was not
explained why Leo was not able to affix his signature in the said minutes. Section 51. Quorum in Meetings. - Unless otherwise provided
It is the signature of the corporate secretary, as the one who is in this Code or in the bylaws, a quorum shall consist of the
tasked to prepare and record the minutes, that gives the minutes of the stockholders representing a majority of the outstanding capital stock
meeting probative value and credibility. pr a majority of the members in the case of nonstock corporations.
Thus, without the certification of the corporate secretary, it is
incumbent upon the other directors or stockholders as the case may be, to To be clear, the basis in determining the presence of
submit proof that the minutes of the meeting is accurate and reflective of quorum in non-stock corporations is the numerical equivalent of all
what transpired during the meeting. members who are entitled to vote, unless some other basis is
In the case at bar, in the absence of Asuncion’s certification,
provided by the By-Laws of the corporation. The qualification
only Juanito, Benjamin and Rosendo, whose signatures appeared on the
minutes, could be considered as to have ratified the sale to the spouses "with voting rights" simply recognizes the power of a non-stock
Tanjangco. (Leo’s signature excluded) corporation to limit or deny the right to vote of any of its members.
To include these members without voting rights in the total number
of members for purposes of quorum would be superfluous for
Lao v. Yao Bao Lim
Held: Section 50 of the Corporation Code prescribes that
although they may attend a particular meeting, they cannot cast
“regular meetings of stockholders shall be held annually on a date fixed in their vote on any matter discussed therein [Lim v. Moldex Land].
the by-laws. Article VIII (3) of the PSI’s by-laws fixed the annual meeting
of stockholders on the third Friday of March every year. The SC took D. REGULAR AND SPECIAL MEETINGS OF
judicial notice that March 15, 2002 was the third Friday of March 2002 DIRECTORS OR TRUSTEES; QUORUM
which characterizes the meeting as the general shareholder’s meeting.
Regarding the time for serving notice of the meeting to all Section 52. Regular and Special Meetings of Directors or
stockholders, Section 50 of the Corporation Code provides that the written Trustees; Quorum. - Unless the articles of incorporation or the bylaws
notice of regular meetings shall be sent at least 2 weeks prior to the meeting provides for a greater majority, a majority of the directors or trustees
unless a different period is required by the by-laws. as stated in the articles of incorporation shall constitute a quorum to
Under the PSI’s by-laws, notice of every regular or special transact corporate business, and every decision reached by at least a
meeting must be mailed or personally delivered to each stockholder not less majority of the directors or trustees constituting a quorum, except for
than 5 days prior to the date set for the meeting. the election of officers which shall require the vote of a majority of all
In this case, the PSI’s by-laws providing only for a five (5)-day the members of the board, shall be valid as a corporate act.
prior notice must prevail over the two (2)-week notice under the Regular meetings of the board of directors or trustees of
Corporation Code. By its terms, the Corporation Code allows the every corporation shall be held monthly, unless the bylaws provide
“shortening (or lengthening) of the period within which to send the notice otherwise.
to call a special (or regular meeting). Thus, the mailing of the Notice to Special meetings of the board of directors or trustees may be
respondents on March 5, 2002 calling for the annual stockholders’ meeting held at any time upon the call of the president or as provided in the
to be held on March 15, 2002 is not irregular, since it complies with what bylaws.
was stated in the PSI’s by-laws. Meetings of directors or trustees of corporations may be
held anywhere in or outside the Philippines, unless the bylaws provide

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otherwise. Notice of regular or special meetings stating the date, time scale, number of shareholders or members, structure and other factors
and place of the meeting must be sent to every director or trustee at consistent with the basic right of corporate suffrage.
least two (2) days prior to the scheduled meeting, unless a longer time Proxies shall be in writing, signed and filed, by the
is provided in the bylaws. A director or trustee may waive this stockholder or member, in any form authorized in the bylaws and
requirement, either expressly or impliedly. received by the corporate secretary within a reasonable time before the
Directors or trustees who cannot physically attend or vote at scheduled meeting. Unless otherwise provided in the proxy form, it
board meetings can participate and vote through remote shall be valid only for the meeting for which it is intended. No proxy
communication such as videoconferencing, teleconferencing, or other shall be valid and effective for a period longer than five (5) years at any
alternative modes of communication that allow them reasonable one time.
opportunities to participate. Directors or trustees cannot attend or vote
by proxy at board meetings. J. VOTING TRUSTS
A director or trustee who has a potential interest in any
related party transaction must recuse from voting on the approval of
the related party transaction without prejudice to compliance with the Section 58. Voting Trusts. - One or more stockholders of
requirments of Section 31 of this Code. stock corporation may create a voting trust for the purpose of
conferring upon a trustee or trustees the right to vote and other rights
pertaining to the shares for a period not exceeding five (5) years at any
E. WHO SHALL PRESIDE AT MEETINGS time: Provided, That in the case of a voting trust specially required as a
condition in a loan agreement, said voting trust may be for a period
Section 53. Who Shall Preside at Meetings. - The chairman exceeding five (5) years but shall automatically expire upon full
or, in his absence, the president shall preside at all meetings of the payment of the load. A voting trust agreement must be in writing and
directors or trustees as well as of the stockholders or members, unless notarized, and shall specify the terms and conditions thereof.
the bylaws provide otherwise. A certified copy of such agreement shall be filed with the
corporation and with the Commission; otherwise, the agreement is
F. RIGHT TO VOTE OF SECURED CREDITORS AND ineffective and uneforceable. The certificate or certificates of stock
covered by the voting trust agreement shall be cancelled and new ones
ADMINISTRATORS
shall be issued pursuant to said agreement. The books of the
corporation shall state that the transfer in the name of the trustee or
Section 54. Right to Vote of Secures Creditors and trustees is made pursuant to the voting trust agreement.
Administrators. - In case a stockholder grants security interest in his or The trustee or trustees shall execute and deliver to the
her shares in stock corporations, the stockholder-grantor shall have the transferors, voting trust certificates, which shall be transferable in the
right to attend and vote at meetings of stockholders, unless the secured same manner and with the same effect as certificates of stock.
creditor is expressly given by the stockholder-grantor such right in The voting trust agreement filed with the corporation shall
writing which is recorded in the appropriate corporate books. be subject to examination by any stockholder of the corporation in the
Executors, administrators, receivers, and other legal same manner as any other corporate book or record: Provided, That
representatives duly appointed by the court may attend and vote on both the trustor and the trustee or trustees may exercise the right of
behalf of the stockholders or members without need of any written inspection of all corporate books and records in accordance with the
proxy. provisions of this Code.
Any other stockholder may transfer the shares to the same
G. VOTING IN CASE OF JOINT OWNERSHIP OF trustee or trustees upon the term and conditions stated in the voting
STOCK trust agreement, and thereupon shall be bound by all the provisions of
said agreement.
No voting trust agreement shall be entered into for purposes
Section 55. Voting in Case of Joint Ownership of Stock. - The of circumventing the laws against anti-competitive agreements, abuse
consent of all the co-owners shall be necessary in voting shares of stock of dominant position, anti-competitive mergers and acquisitions,
owned jointly by two (2) or more persons, unless there is a written violation of nationality and capital requirements, or for the
proxy, signed by all the co-owners, authorizing one (1) or some of them perpetuation of fraud.
or any other person to vote such share or shares: Provided, That when Unless expressly renewed, all rights granted in a voting trust
the shares are owned in an "and/or" capacity by the holders thereof, agreement shall automatically expire at the end of the agreed period.
any one of the joint owners can vote said shares or appoint a proxy The voting trust certificates as well as the certificate of stock in the
therefor. name of the trustees shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the name of the trustors.
H. VOTING RIGHT FOR TREASURY SHARES The voting trustee or trustees may vote by proxy or in any
manner authorized under the bylaws unless the agreement provides
Section 56. Voting Right for Treasury Shares. - Treasury otherwise.
shares shall have no voting right as long as such shares remain in the
Treasury.

I. MANNER OF VOTING; PROXIES

Section 57. Manner of Voting; Proxies. - Stockholders and

members may vote in person or proxy in all meetings of stockholders
or members
When so authorized in the bylaws or by a majority of the
board of directors, the stockholders or members of corporations may
also vote through remote communication or in absentia: Provided, That
the votes are received before the corporation finishes the tally of votes.
A stockholder or member who participates through remote
communication or in absentia shall be deemed present for purposes of
quorum.
The corporation shall establish the appropriate
requirements and procedures for voting through remote
communication and in absentia, taking into account the company's

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