LAW ON CORPORATIONS

(WITH SECURITIES REGULATION CODE)

DEFINITION AND ATTRIBUTES

DEFINITION: A corporation is an artificial being created by operation of law, having

the right of succession and the powers, attributes and properties expressly
authorized by law or incident to its existence.

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

CORPORATE ENTITY THEORY

As a legal entity, the corporation is possessed with a juridical personality separate

and distinct from the individual stockholders or members and is not affected by the
personal rights, obligations or transactions of the latter.

PIERCING THE VEIL OF CORPORATE ENTITY: The applicability of the corporate

entity theory is confined to legitimate transactions and is subject to equitable
limitations to prevent its being used as a cloak or cover for fraud or illegality, or to
work injustice.

When the notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud, defend crime, the law will regard the corporation as a mere association
of persons, or in the case of two corporations, merge them into one, the one being
merely regarded as part or instrumentality of the other. The same is true where a
corporation is a mere dummy and serves no business purpose and is intended only
as a blind, or an alter-ego or business conduit for the sole benefit of the
stockholders.

In cases where the doctrine of piercing the veil of corporate fiction, the concept of a
separate juridical personality shall be set aside.

CREATED BY OPERATION OF LAW – the formal requirement of the State’s

consent through compliance with the requirements imposed by law is necessary for
its creation such that the mere agreement of the persons composing it or intending to
organize it does not warrant the grant of its independent existence as a juridical
entity.

COMMENCEMENT OF CORPORATE EXISTENCE: is at the time of the issuance of

the Certificate of Incorporation or Registration. It is only from this time that it acquires
juridical personality and legal existence, EXCEPT: a. Corporations by Estoppel;
Those created by special laws;
Sole Corporation – which is reckoned from the filing of verified articles.
RIGHT OF SUCCESSION – unlike in a partnership, the death, incapacity or civil
interdiction of one or more of its stockholder does not result in its dissolution; this is
otherwise referred to as the corporation’s “strong” juridical personality.

POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTDHORIZED BY

LAW – it can exercise only such powers and can hold only such properties as are
granted to it by the enabling statutes unlike natural persons who can do anything as
they please.

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

Under the Corporation Code, a Corporation has power and capacity: a. To sue
and be sued in its corporate name;
Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
To adopt and use a corporate seal;
To amend its articles of incorporation in accordance with the provisions of this Code;
To adopt by-laws, not contrary to law, morals, or public policy, and to amend or
repeal the same in accordance with this Code;
In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks
to subscribers and to sell treasury stocks in accordance with the provisions of this
Code; and to admit members to the corporation if it be a non-stock corporation;
To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds
of other corporations, as the transaction of the lawful business of the corporation
may reasonably and necessarily require, subject to the limitations prescribed by law
and the Constitution;
To enter into merger or consolidation with other corporations as provided in this
Code (now, a corporation can also enter into a partnership and joint venture);

To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, that no
corporation, domestic or foreign (now only foreign), shall give donations in aid of
any political party or candidate or for purposes of partisan political activity;
To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and
Implied Powers: To exercise such other powers as may be essential or necessary
to carry out its purpose or purposes as stated in the articles of incorporation.

ULTRA VIRES ACTS are those which cannot be executed or performed by a

corporation because they are not within its express, inherent, or implied powers as
defined by its Articles of Incorporation. of 25
CLASSES OF CORPORATIONS
STOCK Corporations which have capital stock divided into shares and
CORPORATIONS are authorized to distribute to the holders of such shares
dividends or allotments of the surplus profits on the basis of
the shares held are stock corporations.
NON-STOCK Corporations which are not authorized to distribute surplus
CORPORATIONS profits.
DOMESTIC are those organized or created under or by virtue of the
CORPORATION Philippine laws, either by legislative act or under the
provisions of the General Corporation Law.
FOREIGN are those formed, organized or existing under any laws other
CORPORATION than those of the Philippines
CLOSE are those whose shares of stock are held by a limited number
CORPORATIONS of persons like the family or other closely-knit group. There
are no public investors and the shareholders are active in the
conduct of the corporate affairs.
OPEN are those formed to openly accept outsiders as stockholders
CORPORATIONS or investors. They are authorized and empowered to list in the
stock exchange and to offer their shares to the public such
that stock ownership can widely be dispersed. In which case,
they are called PUBLICLY-LISTED CORPORATIONS.
PRIVATE those formed for some private purpose, benefit, aim or end.
CORPORATIONS They are created for the immediate benefit and advantage of
the individuals or members composing it and their franchise
may be considered as privileges conferred by the State to be
exercised and enjoyed by them in the form of the corporation.
PUBLIC those formed or organized for the government of a portion of
CORPORATIONS the State or any of its political subdivisions and which have for
their purpose the general good and welfare.
ECCLESIASTICAL are composed exclusively of ecclesiastics organized for
CORPORATIONS spiritual purposes or for administering properties held for
religious ones. They are organized to secure public worship or
perpetuating the right of a particular religion.
LAY CORPORATIONS are those organized for purposes other than religion. They
may further be classified as:
ELEEMOSYNARY: created for charitable and benevolent
purposes such as those organized for the purpose of
maintaining hospitals and houses for the sick, aged or poor.
CIVIL: organized not for the purpose of public charity but for
the benefit, pecuniary or otherwise, of its members.
AGGREGATE are those composed of a number of individuals vested with
CORPORATIONS corporate powers.
CORPORATION SOLE those consist of one person or individual only and who are
made as bodies corporate and politic in order to give them
some legal capacity and advantage which, as natural persons,
they cannot have. Under the Code, a corporation sole may be
formed by the chief archbishop, bishop, priest, minister, rabbi,
 or other presiding elder or religious denominations, sects or
churches.

Classes of Corporations according to validity of formation:

Compliance with Separate and Questioning the personality

requirements for valid distinct of the corporation
incorporation personality from Direct Attack* Collateral
stockholders Attack**
De Jure Full compliance Yes No No
Corporation
De Facto Requisites for existence: Yes Yes, via quo No
Corporation There exists a valid law under warranto
which it may be incorporated;
An attempt in good faith to
incorporate (colorable
compliance)
Use of corporate powers
Corporation No compliance at all. The None, Yes Yes
by Estoppel persons who compose it only stockholders are
set themselves out as a liable as general
corporation. partners

*Direct Attack: means the very subject of the case is the legal existence or
personality of the corporation. This is allowed in a de facto corporation via a quo
warranto proceeding.

**Collateral Attack: means that the main subject of the case is other than attacking
the personality of the corporation, but it is questioned as a side subject.

ORGANIZATION AND INCORPORATION

PROMOTIONAL STAGE: undertaken by the organizers or promoters who bring

together persons interested in the business venture. They enter into contract either
in their own names or in the name of the proposed corporation.

A promoter, although he may assume to act for and on behalf of a projected

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

PROCESS OF INCORPORATION: includes the drafting of the Articles of

Incorporation, preparation and submission of additional and supporting documents,
filing with the SEC, and the subsequent issuance of the Certificate of Incorporation.

Contents of the Articles of Incorporation: a. The name of the corporation;

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

Thus, the organizers must make sure that the name they intend to use as a
corporate name is not similar or confusingly similar to any other name already
registered and protected by law since the SEC would refuse registration if such be
the case.

This requirement is now specifically indicated in the Revised Corporation Code.

The specific purpose or purposes for which the corporation is being
incorporated. Where a corporation has more than one stated purpose, the
articles of incorporation shall state which is the primary purpose and which
is/are the secondary purpose or purposes: Provided, that a non-stock
corporation may not include a purpose which would change or contradict its
nature as such;

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

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

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

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

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

The place where the principal office of the corporation is to be located, which
must be within the Philippines;

It must be located within the Philippines. The AOI must not only specify the province,
but also the City or Municipality where it is located.
The principal office serves as the residence of the corporation and is thus important
in: i. venue of actions; ii. registration of chattel mortgage of shares; iii.
validity of meetings of stockholders in so far as venue thereof is concerned.

The term for which the corporation is to exist, if the corporation has not
elected perpetual existence;

A corporation now generally has perpetual existence since the Revised Corporation
Code removed the limitation of 50 years unless the Articles of Incorporation would
provide otherwise.

This equally applies to already existing corporations, except if by majority vote of its
stockholders, it notifies the SEC to retain its specific corporate term.

Definite Term: If the corporation would opt to have a definite term for its existence,
any extension thereof can be made no earlier than 3 years (from 5 years) prior to
expiry date, unless there are justifiable reasons to allow earlier extension.

Revival: Also under Sec. 11, after the expiration of the corporate term, a
corporation may file for revival of its corporate existence. 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 existence, unless its
application for revival provides otherwise.

The names, nationalities and residence addresses of the incorporators;

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

INCORPORATORS are those mentioned in the AOI as originally forming the

corporation and who are signatories in the AOI.

An incorporator may be considered as a corporator as long as he continues to be a

stockholder or a member, but not all corporators are incorporators.

Number of Incorporators: not more than 15 (previously 5 to 15)

Qualifications:
Must be natural persons (now can also include a partnership, association or
corporation) 2. Of Legal Age (still a requirement for natural person-incorporators
under SEC MC No. 16-2019)
Must own or subscribe to at least 1 share.
Majority must be residents of the Philippines (already removed)

The number of directors which shall not be more than fifteen (15) or the
number of trustees which may be more than fifteen (15);

DIRECTORS compose the governing board in stock corporations which should not
exceed 15.
TRUSTEES pertain to non-stock corporations which may exceed 15.
INDEPENDENT DIRECTORS: Section 22 of the RCC, the following corporations
vested with public interest shall have independent directors constituting at least
20% of such board:
Corporations covered by the Securities Regulations Code;
Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money
service business, pre-need, trust and insurance companies, and other financial
intermediaries; and
Other corporations engaged in business vested with public interest similar to the
above, as may be determined by the SEC.

An independent director is a person who, apart from shareholdings and fees

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

The names, nationalities and residences of persons who shall act as directors
or trustees until the first regular directors or trustees are duly elected and
qualified in accordance with this Code;

If it be a stock corporation, the amount of its authorized capital stock, the

number of shares into which it is divided, the par value of each, the names,
nationalities and residences of the original subscribers, and the amount
subscribed and paid by each on his subscription, and a statement that some
or all of the shares are without par value, if applicable;

This requirement that at least 25% of the authorized capital stock must be
subscribed and that 25% of the subscription must be paid-up has already been
removed under the Revised Corporation Code, but still applies to increase in
authorized capital stock.

AUTHORIZED CAPITAL signifies the MAXIMUM amount fixed in the articles to be

subscribed and paid-in or secured to be paid by the subscribers. It may also refer to
the maximum number of shares that a corporation can issue.

SUBSCRIBED CAPITAL STOCK is the total number of shares and its total value for
which there are contracts for their acquisition or subscription.

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

Considerations for stocks:

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

AMENDMENT: Consideration for stocks under Section 61 (formerly Section 60) now
includes:
1. Shares of stock in another corporation; and/or 2. Other generally accepted form
of consideration.

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

OUTSTANDING CAPITAL STOCK: total number of shares issued, including those

which are subscribed and not yet fully paid, but excluding treasury shares.

If it be a non-stock corporation, the amount of its capital, the names,

nationalities and residence addresses of the contributors and the amount
contributed by each; and

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

RESTRICTIONS AND PREFERENCES:

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

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

OTHER MATTERS TO BE INDICATED IN THE ARTICLES OF INCORPORATION:

The name of the Treasurer duly elected by the subscribers
No Transfer Clause: in case a corporation is required to maintain a required
minimum Filipino ownership, committing that no transfer shall be made which shall
reduce the ownership of Filipino citizens to less than the required percentage.
The Execution Clause: which will contain the names and signatures of the
incorporators
Notarial Acknowledgment

AMENDMENT: The following were specifically included as those who would be

needing a favorable recommendation from the concerned government agency:
Non-Stock Savings and Loans Associations; and
Pawnshops.

On the other hand, the following were removed from the enumeration of entities
requiring favorable recommendations:
Educational Institutions; and
Other corporations governed by special laws.
AMENDMENT OF THE ARTICLES OF INCORORPATION, IN GENERAL WOULD
REQUIRE:
Majority approval of the members of the Board;
Written assent of stockholders representing 2/3 of the outstanding stocks or 2/3 of
the members in case of non-stock corporations.
Approval of the SEC. If the SEC did not act on the application within 6 months from
the date of filing, the amended is deemed approved.

BOARD OF DIRECTORS

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

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

Classification of powers of the board members/corporate officers: The general

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

QUALIFICATIONS AND DISQUALIFICATIONS: The by-laws of a corporation may

provide for additional qualifications and disqualifications of its members of the board
of directors or trustees. However, it may not do away with the minimum qualifications
and disqualifications.

Qualifications of a Director/Trustee: Must own at least 1 share in their own names

or a member (in the case of trustees).

A director who ceases to own at least 1 share or a trustee who ceases to be a

member of the corporation shall cease to be as such.

Residency: the requirement that majority of the directors must be residents has
already been removed by the Revised Corporation Code.
Disqualifications of a Director/Trustee: A person shall be disqualified from being a
director, trustee or officer of any corporation:
If, within 5 years prior to election or appointment as such, the person was Convicted
by Final Judgment
Of an offense punishable by imprisonment for a period exceeding 6 years;
Violation of the Corporation Code;
Violation of the Securities Regulations Code
Found administratively liable for any offense involving fraud acts; and
By a foreign court or equivalent foreign regulatory authority for acts, violations or
misconduct similar to the disqualifications under the Code.
Such other disqualifications that may be provided in the by-laws.

ELECTION OF MEMBERS OF THE BOARD/TRUSTEES

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

Report Requirement: Section 25 of the RCC requires a report within 30 days to be

submitted to the SEC in case of nonholding of elections, which shall include a new
date for the election, which shall not be later than 60 days from the scheduled date.
If no new date has been designated, or if the rescheduled election is likewise not
held, the SEC may, upon the application of a stockholder, member, director or
trustee, summarily order that an election be held.

Should a director, trustee or officer die, resign or in any manner cease to hold office,
the secretary, or the director, trustee or officer of the corporation, or in case of death,
the officer’s heirs shall, within seven (7) days from knowledge thereof, report in
writing such fact to the SEC.

METHODS OF VOTING:

Straight Voting – every stockholder may vote such number of shares for as many
persons as there are directors to be elected. E.g., If a stockholder has 1,000 shares,
he gets 1,000 votes.
Cumulative Voting:
Cumulative voting gives the stockholder entitled to vote the right to give a candidate
as many votes as the number of directors to be elected multiplied by the number of
his shares shall equal (Cumulative Voting for one candidate) or he may distribute
them among the candidates as he may see fit (Cumulative voting by distribution)
This is granted by law to each stockholder with voting rights. However, in non-stock
corporations, cumulative voting is generally not allowed, UNLESS allowed by the
AOI or by-laws.
PURPOSE: to allow the minority to have a rightful representation in the board of
directors.
 REMOVAL AND FILLING-UP OF VACANCIES
By-laws may provide for causes or grounds for removal of a director;
A director representing the minority may not be removed except for those causes;
A director NOT representing the minority may be removed even without a cause.

AMENDMENT: The SEC is now empowered to motu proprio (not just upon verified
complaint) and after due notice and hearing, order the removal of a director or
trustee elected despite the disqualification, or whose disqualification arose or is
discovered subsequent to an election.

Requirements for a valid removal:

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

Vacancy:

CAUSE OF VACANCY WHO WILL FILL THE WHEN ELECTION WILL BE HELD
VACANCY
Removal Stockholders Same day of the meeting authorizing
the removal
Expiration of the term Stockholders No later than the day of such
expiration at a meeting called for that
purpose
Other causes Board of Directors – if they No later than 45 days from the time
(death, still the vacancy arose
resignation, constitute a quorum;
abandonment)
Stockholders – if the
Directors no longer
constitute a quorum
Increase in the number Stockholders In a general or special meeting called
of for the purpose or in the same
Directors meeting authorizing the increase in
the number of directors

Replacement of Hold-Over Directors: in the event that a director, after the

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

EMERGENCY BOARD: When the vacancy prevents the remaining directors from
constituting a quorum and emergency action is required to prevent grave,
substantial, and irreparable loss or damage to the corporation, the vacancy may be
temporarily filled from among the officers of the corporation by unanimous
vote of the remaining directors or trustees.

The action by the designated director or trustee shall be limited to the emergency
action necessary, and the term shall cease within a reasonable time from the
termination of the emergency or upon election of the replacement director or trustee,
whichever comes earlier. The corporation must notify the SEC within 3 days from the
creation of the emergency board, stating therein the reason for its creation.

DIRECTORS’ DUTY OF LOYALTY

CORPORATE OPPORTUNITY DOCTRINE: it places a director of a corporation in

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

Ratification: if a director acquires a business opportunity which should belong to the

corporation, he is bound to account for such profits unless his act is ratified by the
stockholders owing or representing at least 2/3 of the outstanding capital stock.

ACQUIRING ADVERSE INTEREST ON A MATTER REPOSED IN HIM IN

CONFIDENCE: A director liable is to account for profits if he attempts to acquire or
acquires any interest adverse to the corporation in respect to any matter
reposed in him in confidence as to which equity imposes a disability upon him to
deal in his own behalf. This is not subject to ratification.

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

Generally, A contract entered into by a director with his own corporation is voidable
at the latter’s option. This is because the director might take advantage of his
position to make the terms of the transaction more favorable to him to the detriment
of the corporation.

Except (in which case the transaction will be valid) 1. All of the following are
present:
That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such
meeting;
That the vote of such director or trustee was not necessary for the approval of the
contract (see amendment below);
The approval for transactions of self-dealing directors of corporations vested with
public interest shall require: • At least two-thirds (2/3) of the entire membership
of the board, with • At least a majority of the independent directors.

That the contract is fair and reasonable under the circumstances; and

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

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

Self-Dealing Officers: Generally voidable as well, except if the contract has been
previously authorized by the board of directors.

INTERLOCKING DIRECTOR: is a director in one corporation who deals or transacts

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

General Rule: The contract between corporations with interlocking director is valid
provided it is reasonable under the circumstances;

Exceptions:
If there is fraud; or
If the interest of the interlocking director in one corporation exceeds 20%
(substantial) and in the other merely nominal, the contract becomes voidable at the
latter corporation’s option. In effect, the director would be treated as a self-dealing
director discussed above.

If the interest in both companies is either both substantial or both nominal, the
transaction is valid.

REMEDIES AGAINST ERRING OFFICERS/DIRECTORS: In case of a wrongful or

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

COMMITTEES

EXECUTIVE COMMITTEE: The by-laws of a corporation may create an executive

committee, composed of not less than three members of the Board, to be
appointed by the Board.

Said committee may act, by majority vote of all its members, on such specific
matters within the competence of the board, as may be delegated to it in the
by-laws or on a majority vote of the board, except with respect to:
Approval of any action for which shareholders’ approval is also required;
The filing of vacancies in the board;
The amendment or repeal of bylaws or the adoption of new by-laws;
The amendment or repeal of any resolution of the board which by its express terms
is not so amendable or repealable; and
A distribution of cash dividends to the shareholders.

AMENDMENT: The board of directors may create special committees of temporary

or permanent nature and to determine the members’ term, composition,
compensation, powers, and responsibilities.

COMPENSATION OF DIRECTORS

Compensation of Directors/Trustees: General Rule: Directors are not entitled to

receive any compensation this is because the office of a director is usually filled up
by those chiefly interested in the welfare of the institution by virtue of their interest in
stock or other advantages and such interests are presumed to be the motive for
executing duties of the office without compensation. Except: 1. Reasonable per
diems;
As provided in the by-laws
Upon a majority vote of the stockholders; and
If they are performing functions other than that of a director.

Limit: In no case shall the total yearly compensation of the directors (except number
4 above), exceed 10% of the net income before tax of the corporation during the
preceding year. (Section 30)

CORPORATE OFFICERS

ELECTION OF CORPORATE OFFICERS: Except in a close corporation where the

corporate officers may be elected directly by the stockholders, the Code requires the
BOD to elect the said officers;

The officers that may be elected are the:

President – who must be a director;
Treasurer – who may or may not be a director (now required to be a resident); 3.
Secretary – who should be a resident and citizen of the Philippines;
4. Such other officers as may be provided for in the by-laws.
Compliance Officer – is now a required corporate officer in corporations vested with
public interest.

Any two or more positions may be held concurrently by the same person, except: 1.
The president and the secretary;
2. The president and the treasurer.

AUTHORITY OF CORPORATE OFFICERS TO ACT IN BEHALF OF THE

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

LIABILITY OF CORPORATE OFFICERS: The general rule is that unless the law
specifically provides a corporate officer or agent is not civilly or criminally liable for
acts done by him as such officer or agent, or when absent bad faith or malice.

PERSONAL LIABILITY of a corporate director, trustee or officer along (although not

necessarily) with the corporation may so validly attach, as a rule, only when:
He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or (c)
gross negligence in directing its affairs, or (d) conflict of interest, resulting in
damages to the corporation, its stockholders or other persons;
He consents to the issuance of watered stocks or who, having knowledge thereof,
does not forthwith file with the corporate secretary his written objection thereto;
He agrees to hold himself personally and solidarily liable with the corporation;
He is made, by a specific provision of law, to personally answer for his corporate
action.
ELECTION OF CORPORATE OFFICERS: require the majority of ALL MEMBERS of
the Board, not just the usual majority of those present in the meeting. Meaning, if
there are 15 members of the Board, and 9 are present, 8 votes would be necessary
to elect a corporate officer.

SHARES OF STOCK

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

Certificate of Stock is a document or instrument evidencing the interest of a

stockholder in the corporation.
COMMON STOCKS are those which entitles its owner to an equal or pro-rata
division of profits, if there are any, but without any preference or advantage in that
respect over any other stockholder or class of stockholders.

Voting Rights: A common share usually carries with it the right to vote, and
frequently, the exclusive right to do so. The only time a common stock’s right to vote
may be limited is where there exists Founders’ Shares.

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

The period of 5 years is non-extendable because it may result in the almost

perpetual disqualification of other stockholders to elect or be elected as members of
the BOD resulting to the lack of proper representation thereat.

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

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

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

Preference as to Dividends: They have the privilege of being paid dividends first
before any other stockholders are paid theirs.

Participating and Non-Participating Preferred Shares

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

Cumulative and Non-cumulative Preference Shares

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

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

Voting Rights of Preferred Shares: same with redeemable shares, preferred

shares are usually denied voting rights – but this right must be clearly withheld.
However, even if the right to vote is withheld, they shall have the right to vote on the
following:
Amendment of the articles of incorporation;
Adoption and amendment of by-laws;
Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all
of the corporate property;

AMENDMENTS: In determining whether the sale involved covers all or substantially

all the properties and assets of the corporation, the old Section 40 only provides “if
thereby the corporation would be rendered incapable of continuing the business or
accomplishing the purpose for which it was incorporated”.

Section 39, amending the above-mentioned provision now includes “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 statements.”

Incurring, creating or increasing bonded indebtedness;

Increase or decrease of capital stock;
Merger or consolidation of the corporation with another corporation or other
corporations;
Investment of corporate funds in another corporation or business in accordance with
this Code; and
Dissolution of the corporation.

Preference upon liquidation: this preference must be stated in the contract to

accordingly grant such preference in the distribution of the assets ahead of the
common stockholders, including dividends in arrears in case the preferred shares
are cumulative.

PAR AND NO-PAR VALUE SHARES

Par Value Shares are those whose values are fixed in the Articles and shown on the
certificate. The par value is the minimum subscription or original issue price of the
shares.

No Par Value Shares are those whose issued price are not stated in the certificate of
stock but may be fixed in the AOI, or by the BOD when so authorized the articles or
the by-laws, or in the absence thereof, the stockholders themselves.

The Code allows the issuance of no par value shares, subject to the following
limitations:
Such shares once issued, are deemed fully paid and thus, non-assessable;
The consideration for its issuance should not be less than P5;
The entire consideration constitutes capital, hence, not available for dividend
declaration;
They cannot be issued as preferred stock; and
They cannot be issued by banks, trust companies, insurance companies, public
utilities and building and loans associations.
WATERED STOCKS: Watering of stocks happened when the shares are issued at
less than its par value or issue price.
REDEEMABLE SHARES: are those subject to redemption, as indicated in the
contract. This type of shares grants the corporation the right to repurchase the
shares at its option or at the option of the holder based on the face or issued value
plus a specified premium. The redemption may be optional or mandatory at a fixed
future date.

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

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

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

SUBSCRIPTION CONTRACT: Any contract for the acquisition of unissued stock in

an existing corporation or a corporation still to be formed shall be deemed a
subscription, notwithstanding the fact that the parties refer to it as a purchase or
some other contract.

Pre-incorporation subscriptions: refer to subscriptions for shares of stock of a

corporation still to be formed and are deemed irrevocable:
For a period of at least 6 months from the date of subscription unless (a) all the
subscribers consent to the revocation; or (b) the incorporation fails to materialize
within said period or within a longer period as may stipulated in the contract of
subscription; and
After submission of the AOI to the SEC

While post-incorporation subscriptions are those made or executed after the

formation or organization of the corporation.

Issuance of certificates of stock; requisites:

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

Indivisibility: Subscription to shares of stock are deemed indivisible and no certificate

of stock can be issued unless and until the full amount of his subscription including
interest and expenses, if any is paid.

Rights of a SUBSCRIBER: a subscriber, even if not yet fully paid, is entitled to

exercise all the rights of a stockholder and the corresponding liability that attach
thereunder, except:
1. For the issuance of a certificate of stock; 2. If his shares are declared delinquent;
or
3. When he exercises appraisal right.
Delinquent Shares of Stock: a subscription to shares of stock become delinquent if
there no payment made on the balance of all or any portion of the subscription within
30 days on the date or dates fixed in the contract of subscription without need of call,
or on the date specified by the BOD pursuant to a call.

Effect of Delinquency:
General Rule: the stockholder thereof immediately loses the right to vote and be
voted upon or represented in any stockholders meeting as well as all the rights
pertaining to a stockholder

Except: the right to receive dividends:

Cash dividend - shall first be applied to the unpaid balance on his subscription plus
cost and expenses; while
Stock dividends - shall be withheld until his unpaid subscription is paid in full.

Delinquent shares; enforcement of payment of subscriptions: Unpaid

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

To enforce payment, the following remedies are available:

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

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

Delinquency Sale:
Amount to be paid includes:
The balance due on each subscription
All accrued interest
Costs of advertisement
Expenses of sale

Bids: shall all be for the amount due above and shall differ only on the number of
shares that the bidders are willing to accept in exchange of the said amount.
Highest Bidder: shall be the bid made for the least number of shares in exchange for
the total amount due.
Effect of Delinquency Sale: The stock so purchased shall be transferred to such
purchaser in the books of the corporation and a certificate for such stock shall be
issued in his favor. The remaining shares, if any, shall be credited in favor of the
delinquent stockholder who shall likewise be entitled to the issuance of a certificate
of stock covering such shares.
No bidder: Should there be no bidder at the public auction, the corporation may bid
for the same, and the total amount due shall be credited as paid in full in the books
of the corporation. Title to all the shares of stock covered by the subscription shall be
vested in the corporation as treasury shares.

RIGHTS OF A STOCKHOLDER

Participation in the management of the corporate affairs by exercising their right

to vote and be voted upon either personally or by proxy;

Instances where the concurrence of the stockholders are necessary for the
exercise of the powers of the corporations
Requiring majority vote of the BOD and concurrence of the stockholders
representing 2/3 of the outstanding capital stock:
Increase/decrease corporate stock ii. Incur or create bonded indebtedness; iii. Sell,
dispose, lease, encumber all or substantially all of corporate assets; iv. Invest in
another corporation other than the primary purpose; v. Amend the articles of
incorporation.
Merger or consolidation
Voluntary dissolution of the corporation

AMENDMENT: Voluntary dissolution now requires a majority vote only of the

stockholders for instances with NO creditors affected. For voluntary dissolutions
where creditors are affected, the voting requirement remains to be 2/3.

Extend or shorten the corporate term; ix. Deny pre-emptive right

Declare stock dividends
Enter into a management contract - where
a stockholder(s) representing the same interest in the managed and the managing
corporation, owns or controls 1/3 of the capital stock of the managing corporation; or
where a majority of the members of the board of the managing corporation also
constitute a majority of the board of the managed corporation.

Majority of the BOD + majority of the outstanding capital:

Enter into a management contract, as a general rule (other than above); ii. adopt,
amend or repeal the by-laws

Without board resolution, 2/3 of the stockholders may:

Delegate to the board the power to amend the by-laws ii. Remove a member of the
Board of Directors – vote required
iii. Ratify a business opportunity entered into by a member of the Board (corporate
opportunity doctrine) iv. Ratification of contracts of self-dealing directors, where his
presence is required to constitute a quorum and/or his vote is required for its
approval by the BOD.

Without board resolution, majority of the stockholders may:

Revoke delegated power to amend by-laws ii. Calling a special meeting to remove
directors iii. To fix compensation of directors iv. To fix the issue price or stated value
of no-par value shares.

To enter into a voting trust agreement;

To receive DIVIDENDS and to compel their declaration if warranted;

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

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

If there are no retained earnings, dividends, as a rule, cannot be declared out of

capital stock. EXCEPT: a. Liquidating dividends
b. Investments in wasting assets such as mining, oil, well, etc.

To transfer shares of stock subject only to reasonable restrictions such as the

options and preferences as may be allowed by law inclusive of the right of the
transferee to compel the registration of the transfer in the books of the corporation;
To be issued a certificate of stock for fully paid-up shares;
To exercise pre-emptive rights;

A pre-emptive right is the shareholder’s right to subscribe to all issues or disposition

of shares of any class in proportion to his present holdings, the purpose being to
enable the shareholder to retain his proportionate control in the corporation and to
retain his equity in the surplus. Except in the following cases:
Shares to be issued to comply with the laws requiring stock offering or minimum
stock ownership by the public;
Shares issued in good faith in exchange for property needed for corporate purposes;
Shares issued in payment for previously contracted debt;
In case the right is denied in the Articles of Incorporation;

If one shareholder does not want to exercise his pre-emptive right, the other
shareholders are not entitled to purchase the corresponding shares of the
shareholder who declined. But if nobody purchased the same and later on the board
re-issued the shares, the pre-emptive right applies.

To exercise their appraisal right

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

When may it be exercised:

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

Not all amendments: the right may only be exercised in cases of amendment which
“has the effect of changing or restricting the rights of any stockholder or class of
shares, or of authorizing preferences in any respect superior to those of outstanding
shares of any class, or of extending or shortening the term of corporate existence”.
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Accordingly, if the amendment is to increase or decrease the number of directors, or
change the corporate name, or change of principal office, the appraisal right is not
available.

In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of

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

Suspension of rights: the stockholder concerned is regarded as having made an

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

To institute and file a derivative suit;

To recover shares of stock unlawfully sold for delinquency;
To inspect the books of the corporation;

AMENDMENTS: Section 73 (formerly Section 74) introduced the following

amendments:
Includes an enumeration of, and specified, the records to be kept in the principal
place of business.
Specifies that the inspection of the books and records are bound by the Intellectual
Property Law, the Data Privacy Act, the Securities Regulations Code and the Rules
of Court.
A requesting party who is not a stockholder or member of record, or is a competitor
or otherwise represents the interests of a competitor shall have no right to inspect or
demand reproduction of corporate records.
Abuse of the right to inspect is punishable under Section 158.
If the corporation denies or does not act on a demand for inspection and/or
reproduction, the aggrieved party may report such to the SEC. Within five (5) days
from receipt of such report, the SEC shall conduct a summary investigation and
issue an order directing the inspection or reproduction of the requested records.
the SEC may require stock corporations which transfer and/or trade stocks in
secondary markets to have an independent transfer agent.

To be furnished by the most recent financial statement of the corporation;

AMENDMENT: Changes introduced by Section 74 (formerly Section 75) concerning

the issuance of the corporation’s financial statements are as follows:

Section 75 (old) Section 74 (RCC)

Certification Independent CPA In accordance with the Code and the
rules the SEC may prescribe

Alternative If paid-up capital is less than If the total assets or total liabilities of
Certification P50,000, the FS may be certified the corporation is less than
under oath by the Treasurer or any P600,000, or such other amount as
responsible officer of the corporation may be determined appropriate by
the Department of Finance, the
financial statements may be certified
under oath by the treasurer and the
president.

To participate in the distribution of assets of the corporation upon dissolution;

In the case of a close corporation, to petition the SEC to arbitrate in the event of a
deadlock;
Also, in the case of a close corporation, to withdraw therefrom, for any reason, and
compel the corporation to purchase his shares.

BY-LAWS

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

Effectivity: After approval by the SEC.

Adoption of by-laws: may be made:

Prior to incorporation – it must be signed by all the incorporators without need of the
majority vote of outstanding stocks or members as long as it is submitted together
with the AOI;
After incorporation – must be submitted within 1 month after receipt of the notice of
issuance of certificate of registration or incorporation and must be approved by
majority of the outstanding capital stock or members. Failure to file within the 1
month period may be a ground for suspension or revocation of the corporate
franchise.
AMENDMENT: Section 45 (amending Section 46) of the RCC removed the one-
month (from receipt of the notice of issuance of the certificate of incorporation)
requirement to submit the by-laws.

Amendment of by-laws; two modes:

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

AMENDMENTS: Section 46(d) of the RCC now includes “The modes by which a
stockholder, member, director, or trustee may attend meetings and cast their vote.”

It likewise includes that an arbitration agreement may be provided in the bylaws.

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The submission of the amended by-laws no longer requires that it be filed with the
SEC attached to the original articles of incorporation and original bylaws.

MEETINGS

DIRECTORS STOCKHOLDERS
Quorum Majority Majority of the Outstanding Capital Stock

Date of Monthly as fixed in Annual as fixed in the by-laws. If no such date is fixed, any
Regular the by-laws date after April 15.
Meeting
Date of At any time At any time deemed necessary or as provided for in the by-
Special deemed laws
Meeting necessary or as
provided for in the
by-laws
Notice Regular/Special Regular Meetings – 21 days (from 2 weeks) Special
Meetings – 2 days Meetings – 1 week
prior to the
meeting (from 1
day prior to the
meeting)
Place Anywhere (even The meeting shall not be at the principal office itself,
outside the unless it is not practicable, in the city or municipality where
Philippines) the principal office is located.

Moreover, Metro Cebu and Metro Davao, as well as other

Metropolitan Areas are now considered a city or
municipality.
 Proxy Voting Not allowed for a Generally allowed
director or trustee,
since he was
supposedly
elected because
of his personal
qualifications and
thus must
personally attend
and vote on
matters brought
before the
meeting.

Voting General Rule: Refer to voting requirements under Rights of Stockholders

Requiremen Majority of those
t present shall be
valid as a
corporate act.

Exceptions:
Election of
corporate officers:
majority of all the
members of the
board.
When the by-laws
provide for higher
voting
requirement.

Validity of Stockholders’ Meetings despite defect: If the voting requirement is met,

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

AMENDMENT: The meeting is still considered valid even if improperly held as long
as ALL the stockholders or members are present or duly represented, EXCEPT if the
purpose of their attendance is only object to the transaction of any business because
the meeting is not lawfully called or convened.

Notice: Notice of any meeting may be waived, expressly or impliedly, by any

stockholder or member.
 However, under the revised Section 49 of the RCC, general waivers of notice in
the articles of incorporation or the bylaws shall not be allowed.

The attendance at a meeting shall constitute a waiver of notice of such meeting,

except when the person attends a meeting for the express purpose of objecting to
the transaction of any business because the meeting is not lawfully called or
convened.

Attending the meeting in absentia: In the stockholders’ meeting for the election of
directors/trustees, Section 23 of the RCC now specifically allows the stockholders or
members to vote through remote communication or in absentia, in case the by-laws
or majority of the BOD authorizes the same, or even without such authorization in
case of corporations vested with public interest.

Directors/trustees are also now allowed to attend the meeting through remote
communication such as videoconferencing, teleconferencing, or other alternative
modes of communication that allow them reasonable opportunities to participate.

A stockholder or member who participates through remote communication or in

absentia, shall be deemed present for purposes of quorum.

STOCK AND TRANSFER BOOK OR MEMBERSHIP BOOK: The stock and transfer
book contains a record of:
All stocks in the names of the stockholders alphabetically arranged;
The installments paid and unpaid on all stocks for which subscriptions has been
made, the date of payment of any installment;
A statement of every alienation, sale or transfer of stock made, the date thereof, by
and to whome made;
Such other entries as the bylaws may prescribe

Unless the bylaws provide for a longer period, the stock and transfer book or
membership book shall be closed at least 20 days for regular meetings and 7
days for special meetings before the scheduled date of the meeting

REORGANIZATION; MERGER AND CONSOLIDATION

REORGANIZATION: is generally entered into to put the company upon a sound

financial basis and to enable it to take care of its obligations thereby avoiding
liquidation or bankruptcy. But in some cases, a reorganization is effected
notwithstanding the fact that the corporation is solvent.

MERGER: is a union effected by absorbing one or more existing corporations by

another which survives and continues the combined business. It is the uniting of two
or more corporations by the transfer of property to one of them which continue in
existence, the other or the others being dissolved and merged therein.
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CONSOLIDATION: is the uniting or amalgamation of two or more existing
corporations to form a new corporation. It signifies a union as necessarily results in
the creation of a new corporation and the termination of existence of old ones. The
united concern resulting from such union is called consolidated corporation.
In effect, in a consolidation, the constituent corporations are all dissolved, while in a
merger, the absorbing or surviving corporation is not, only the absorbed.

REQUIREMENTS AND PROCEDURE TO ACCOMPLISH MERGER OR

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

EFFECTS OF MERGER OR CONSOLIDATION:

There will only be a single corporation - the surviving corporation or the
consolidated corporation.
The termination of corporate existence of the constituent corporations and the
absorbed corporation.
The surviving or consolidated corporation shall possess all the rights, privileges,
immunities and franchises of the constituent corporations, and all property and all
receivables due, including subscriptions to shares and other choses in action, and
every other interest of, or belonging to or due to the constituent corporations shall be
deemed transferred to and vested in such surviving or consolidated
corporation without further act or deed; and
The rights of creditors or any lien on the property of the constituent corporations
shall not be impaired by the merger or consolidation.
There would be no need to liquidate or wind-up the affairs of the absorbed or
constituent corporation because (1) there are no assets to distribute; (2) no debts
and liabilities to pay – since all these are transferred to the surviving or consolidated
corporation.
NON-STOCK CORPORATIONS
A non-stock corporation is one where no part of its income is distributable as
dividends to its members, trustees, or officers, except upon dissolution. Any profit
which a non-stock corporation may obtain as an incident to its operations shall,
whenever necessary or proper, be used for the furtherance of the purpose or
purposes for which the corporation was organized.

The provisions governing stock corporation, when pertinent, shall be applicable to

non-stock corporations, except as may be covered by specific provisions pertaining
to non-stock corporations.

Differences:

STOCK CORPORATION NON-STOCK CORPORATION

Purpose Generally, for profit Primarily organized for charitable, religious,
educational, professional, cultural, scientific,
social, civic service, or similar purposes, like
trade, industry, agricultural and like
chambers or any combination thereof
Distribution of Authorized Not authorized
dividend
Term of office of 1 year until their 3 years
the successor is
directors/trustees elected and qualified

Voting Cumulative Straight voting unless cumulative voting is

authorized under the by-laws or AOI
Manner of voting Either in person or by By mail or other similar means as may be
proxy authorized by the by-laws

Transferability of Transferable Membership is personal and non-

interest transferable, unless the AOI or by-laws
provide otherwise
Ownership of At least one share Member
director
Independent trustees are not required to be
a member

CLOSE CORPORATIONS

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

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

Notwithstanding the foregoing, a corporation shall not be deemed a close

corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned
or controlled by another corporation which is not a close corporation.

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

Differences with an Ordinary Stock Corporation:

CLOSE CORPORATION ORDINARY STOCK CORPORATION

The number of stockholders cannot exceed 20 No limitation as to number of shareholder
Shares of stock are subject to specified Generally no restriction on transfer of
restrictions shares
Shares of stock are prohibited from being listed in No prohibition
the stock exchange or offered for sale to the
public
Stockholders may take an active part in corporate Management is lodged in the Board of
management by vesting management to them Directors
rather than a Board of Director
To the extent that all stockholders can be deemed Maximum number of directors is 15
directors, the number of directors can effectively
be upto 20.
To the extent that directors may be classified into Ordinarily, no such classification and no
one or more classes and to be voted solely by a restrictions on cumulative voting
particular class of stock, cumulative voting may, in
effect, be restricted
The articles of incorporation may provide that all Officers are elected by the Board of
officers shall be elected or appointed by the Directors
stockholders
Restriction on transfer of shares should be Valid and binding if indicated in the articles
indicated in the articles of incorporation, stock of incorporation and stock certificates
certificates and by-laws.
Pre-emptive right of stockholders is broader as it Pre-emptive rights may be denied on
 includes all issues without exception certain grounds
Appraisal right may be exercised for any reason Appraisal right may be exercised only on
with the limitation only that the corporation has specific grounds.
sufficient assets to cover its liabilities exclusive of
capital stock

ONE PERSON CORPORATION

A One Person Corporation (OPC) is one formed by a natural person, a trust or an

estate, who is the sole stockholder thereof. The provision of the new Chapter III of
the Revised Corporation Code shall apply to an OPC and other provisions of the
Code shall apply suppletorily.

Corporate Name: must contain “OPC”.

Not Applicable to OPC:

Authorized Capital Stock
By-Laws
Minutes of the Meetings of the Board of Directors (in lieu of which shall be the
resolutions recorded in a Minutes Book)

Not allowed to incorporate as an OPC:

Banks, quasi-banks, pre-need, trust, insurance companies
Public and publicly-listed companies
Non-chartered GOCCs
Natural persons for the purpose of exercising their profession.

Articles of Incorporation: shall be the same as an ordinary corporation with the

following additional provisions:
If the single stockholder is a trust or an estate, the name, nationality, and residence
of the trustee, administrator, executor, guardian, conservator, custodian, or other
person exercising fiduciary duties together with the proof of such authority to act on
behalf of the trust or estate; and
Name, nationality, residence of the nominee and alternate nominee, and the extent,
coverage and limitation of the authority.

Corporate Officers: The sole stockholder shall automatically be the sole director
and the President. Within 15 days from the issuance of its certificate of incorporation,
an OPC shall appoint a treasurer, corporate secretary, and other officers as it may
deem necessary, and notify the SEC thereof within 5 days from appointment.

Other positions of the president/sole stockholder:

Corporate Secretary: not allowed

Corporate Secretary: In addition to the functions designated by the OPC, the

corporate secretary shall: a. Be responsible for maintaining the minutes book and/or
records of the corporation;
Notify the nominee or alternate nominee of the death or incapacity of the single
stockholder, which notice shall be given no later than 5 days from such occurrence;
Notify the SEC of the death of the single stockholder within 5 days from such
occurrence and stating in such notice the names, residence addresses, and contact
details of all known legal heirs; and
Call the nominee or alternate nominee and the known legal heirs to a meeting and
advise the legal heirs with regard to, among others, the election of a new director,
amendment of the articles of incorporation, and other ancillary and/or consequential
matters.

Treasurer: allowed provided e shall give a bond to the SEC in such a sum as may be
required and a written undertaking to faithfully administer the OPC’s funds to be
received as treasurer, and to disburse and invest the same according to the Articles
as approved by the SEC.

Nominee and Alternate Nominee: The single stockholder shall designate a

nominee and an alternate nominee who shall, in the event of the single
stockholder’s death or incapacity, take the place of the single stockholder as
director and shall manage the corporation’s affairs.

The articles of incorporation shall state the names, residence addresses and contact
details of the nominee and alternate nominee, as well as the extent and limitations of
their authority in managing the affairs of the OPC.

The written consent of the nominee and alternate nominee shall be attached to the
application for incorporation. Such consent may be withdrawn in writing any time
before the death or incapacity of the single stockholder

Term of the Nominee: When the incapacity of the single stockholder is temporary,
the nominee shall sit as director and manage the affairs of the OPC until the
stockholder, by self-determination, regains the capacity to assume such duties.

In case of death or permanent incapacity of the single stockholder, the nominee

shall sit as director and manage the affairs of the OPC until the legal heirs of the
single stockholder have been lawfully determined, and the heirs have designated
one of them or have agreed that the estate shall be the single stockholder of the
OPC.

The alternate nominee shall sit as director and manage the OPC in case of the
nominee’s inability, incapacity, death, or refusal to discharge the functions as director
and manager of the corporation, and only for the same term and under the same
conditions applicable to the nominee.

Change of Nominee: The single stockholder may, at any time, change its nominee
and alternate nominee by submitting to the SEC the names of the new nominees
and their corresponding written consent. For this purpose, the articles of
incorporation need not be amended.

Liability of Single Stockholder: A sole shareholder claiming limited liability has the
burden of affirmatively showing that the corporation was adequately financed.
Where the single stockholder cannot prove that the property of the OPC is
independent of the stockholder’s personal property, the stockholder shall be jointly
and severally liable for the debts and other liabilities of the OPC.

The principle of piercing the corporate veil applies with equal force to OPC as with
other corporations.

Conversion from Ordinary Corporation to OPC: When a single stockholder

acquires all the stocks of an ordinary stock corporation, the latter may apply for
conversion into n OPC, subject to the submission of such documents as the SEC
may require.

If the application for conversion is approved, the Commission shall issue certificate
of filing of amended articles of incorporation reflecting the conversion. The OPC
converted from an ordinary stock corporation shall succeed the latter and be legally
responsible for all the latter’s outstanding liabilities as of the date of conversion.

Conversion from OPC to Ordinary Corporation: An OPC may be converted into

an ordinary stock corporation after due notice to the SEC (within 60 days from
occurrence) of such fact and of the circumstances leading to the conversion, and
after compliance with all other requirements for stock corporations under the RCC. If
all requirements have been complied with, the Commission shall issue an amended
certificate of incorporation reflecting the conversion.

In case of death of the single stockholder, the nominee or alternate nominee shall
transfer the shares to the duly designated legal heir or estate within 7 days from
receipt of either an affidavit of heirship or self-adjudication executed by a sole heir, or
any other legal document declaring the legal heirs of the single stockholder and
notify the SEC of the transfer. Within 60 days from the transfer of the shares, the
legal heirs shall notify the SEC of their decision to either wind up and dissolve the
OPC or convert it into an ordinary stock corporation.

The ordinary stock corporation converted from an OPC shall succeed the latter and
be legally responsible for all the latter’s outstanding liabilities as of the date of
conversion.

FOREIGN CORPORATIONS

A FOREIGN CORPORATION is one formed, organized or existing under any laws

other than those of the Philippines.

Incorporation Test: is applied in determining whether a corporation is domestic or

foreign. If it is incorporated under Philippine laws, it is deemed a domestic
corporation; if it is incorporated in another state, it is a foreign corporation, while if it
is created, irrespective of the nationality of its stockholders.

Control Test or Liberal Rule and the Grandfather Rule/Test: The Control Test is
used to determine corporate nationality for purposes of applying laws, e.g.,
prohibition to acquire lands applicable to corporations more than 40% of which is
owned by non-Filipinos.
Under the liberal Control Test, there is no need to further trace the ownership of the
60% (or more) Filipino stockholdings of the Investing Corporation since a corporation
which is at least 60% Filipino-owned is considered as Filipino.

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

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

ownership.

Basically, there are two acknowledged tests in determining the nationality of a

corporation: the control test and the grandfather rule. Paragraph 7 of DOJ Opinion
No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the
requirement of the Constitution and other laws pertaining to the controlling interests
in enterprises engaged in the exploitation of natural resources owned by Filipino
citizens, provides:
Shares belonging to corporations or partnerships at least 60% of the capital of which
is owned by Filipino citizens shall be considered as of Philippine nationality. (Control
Test)
But if the percentage of Filipino ownership in the corporation or partnership is less
than 60%, only the number of shares corresponding to such percentage shall be
counted as of Philippine nationality. (Grandfather Rule)

Thus, if 100,000 shares are registered in the name of a corporation or partnership at

least 60% of the capital stock or capital, respectively, of which belong to Filipino
citizens, all of the shares shall be recorded as owned by Filipinos. But if less than
60%, or say, 50% of the capital stock or capital of the corporation or partnership,
respectively, belongs to Filipino citizens, only 50,000 shares shall be counted as
owned by Filipinos and the other 50,000 shall be recorded as belonging to aliens.

In Narra Nickel Mining and Development Corporation vs. Redmont Consolidated

Mines Corporation (GR No. 195580, Jan.
28, 2015), the SC held that the grandfather rule shall be applied when:
The Corporation’s Filipino equity falls below the threshold required; or
There exists “doubt” as to the Filipino or Foreign equity

This would thus require the application first of the control test. When after applying
the Control Test, and it meets the required nationality requirement but there exists a
“doubt” as to the Filipino ownership of the Corporation, the grandfather rule would be
supplementally applied.

RESIDENT AGENT: As a condition precedent to the grant of license to do or transact

business in the Philippines, the foreign corporation is required to designate its
resident agent on whom summons and other legal processes may be served in all
actions or legal proceedings against such corporation.
AMENDMENT: A resident agent corporation for a foreign corporation is now required
that it is of sound financial standing and must show proof that it is in good standing
as certified by the SEC.

LICENSE REQUIREMENT AND DOING BUSINESS WITHOUT ONE: A foreign

corporation must secure the necessary license before it can transact or do business
in the Philippines.

What constitutes “doing business”: Doing business in the Philippines may be

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

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

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

Doing Business without a license: a foreign corporation shall NOT be permitted

to maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.

“It is not the lack of required license but doing business without a license
which bars a foreign corporation from access to our courts” (Universal
Shipping vs. IAC)
EXCEPTIONS:
Foreign corporations can sue before the Philippine Courts if the act or transaction
involved is an “isolated transaction” or the corporation is not seeking to enforce
any legal or contractual rights arising from, or growing out of, any business which it
has transacted in the Philippines (Western Equipment Supply vs. Reyes)
Neither is a license required before a foreign corporation may sue before the forum if
the purpose of the suit is to protect its trademark, trade name, corporate name,
reputation or goodwill; (Western Equipment Supply vs. Reyes)
Or where it is based on a violation of the Revised Penal Code (Le Chemise
Lacoste, SA vs. Fernandez);
Or merely defending a suit filed against it (Time, Inc. vs. Reyes)
Or where a party is estopped to challenge the personality of the corporation by
entering into a contract with it (Communications Materials and Design, Inc. vs. CA
and ITEC)

DISSOLUTION

DISSOLUTION is the extinguishment of the corporate franchise and the termination

of corporate existence.

When a corporation is dissolved, it ceases to be a juridical entity and can no longer

pursue the business for which it was incorporated. It will nevertheless continue as a
body corporate for another period of three years from the time it is dissolved but only
for the purpose of winding up its affairs and the liquidation of its assets.
THREE WAYS OF DISSOLUTION:
Expiration of its corporate term

Extension: should be made before the expiration of the original term, but not earlier
than 3 years prior to such expiration, otherwise the corporation is dissolved, ipso
facto.

Dissolution by shortening the term of corporate existence: The stockholders may

cause the amendment of the Articles to shorten the term and have the corporation
dissolved. This, however, requires the vote of the stockholders to be cast in a
meeting therefor, not only “written assent” as for general amendments. Moreover,
this requires the approval of the SEC and its inaction is not deemed an approval
therefor.

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

Formal and Procedural Requirements when no creditors are affected. a. Majority

vote of the board of directors or trustees;
Sending of notice of each stockholders or member either by registered mail or
personal delivery at least thirty (30) days prior (now 20 days) to the meeting
(scheduled by the board for the purpose of submitting the board action to dissolve
the corporation for approval of the stockholder or members.);
Publication of the notice of time, place and subject of the meeting for three (3)
consecutive weeks (now once) in a newspaper published in the place where the
principal office of said corporation is located or in a newspaper of general circulation
in the Philippines;
Resolution adopted by the affirmative vote of the stockholders owning at least 2/3 of
the outstanding capital stock or
2/3 of the members (now majority) at the meeting duly called for the purpose;
A copy of the resolution authorizing the dissolution must be certified by a majority of
the board of directors or trustees and countersigned by the corporate secretary (now
A verified request for dissolution shall be filed with the SEC stating: (a) the reason
for the dissolution; (b) the form, manner, and time when the notices were given; (c)
names of the stockholders and directors or members and trustees, who approved
the dissolution; (d) the date, place, and time of the meeting in which the vote was
made; and (e) details of publication.)

Withdrawal:
A withdrawal of the request for dissolution shall be made in writing, duly verified by
any incorporator, director, trustee, shareholder, or member and signed by the same
number of incorporators, directors, trustees, shareholders, or members necessary to
request for dissolution.
The withdrawal shall be submitted no later than fifteen (15) days from receipt by the
SEC of the request for dissolution.
Upon receipt of a withdrawal of request for dissolution, the SEC shall withhold action
on the request for dissolution and shall, after investigation: (a) make a
pronouncement that the request for dissolution is deemed withdrawn; (b) direct a
joint meeting of the board of directors or trustees and the stockholders or members
for the purpose of ascertaining whether to proceed with dissolution; or (c) issue such
other orders as it may deem appropriate. f. Issuance of a certificate of dissolution
by the SEC.

Where creditors are affected, the voting requirement remains to be 2/3 of the
stockholders and what is filed with the SEC is a petition not a request.

The revocation of its corporate franchise (involuntary dissolution)

Grounds:
Serious misrepresentation as to what the corporation can do or is doing to the
great prejudice of or damage to the general public;
Refusal to comply or defiance of any lawful order of the Commission restraining
commission of acts which would amount to a grave violation of its franchise;
Continuous inoperation for a period of at least five (5) years;

Continuous inoperation: If a corporation has commenced its business but

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

AMENDMENTS: In case of continuous non-operation for 5 years, it is no longer

considered a ground for revocation, at least not immediately. In such case, the
SEC may, after due hearing and notice, place the corporation under delinquent
status and allow the corporation to resume operations within 2 years upon
compliance with the requirements of the SEC; where upon compliance, the SEC
shall issue an order lifting the delinquent status.

In case of non-compliance, with the requirements and to resume operations, only

then will the SEC cause the revocation of the corporation’s certificate of
incorporation.

Notably, the Section 21 no longer includes the exception that the provision on
failure to commence and continuous nonoperation shall not apply if the failure to
organize, commence the transaction of its businesses or the construction of its
works, or to continuously operate is due to causes beyond the control of the
corporation as may be determined by the SEC.

COMMENCEMENT OF BUSINESS: Once the certificate of incorporation has been

issued, the corporation MUST formally organize and commence its business.

Non-Use of Corporation Charter: the failure of the corporation to organize within

2 years would result in it automatic dissolution, unless, of course, its failure to do
so is due to causes beyond its control.

AMENDMENT: The period for the automatic revocation of the corporate charter has
been increase from 2 to 5 years in case of failure to organize.

Formal Organization: refers to the process of structuring the corporation to enable it

to effectively pursue the purpose for which it was organized.

Failure to file by-laws within the required period;

Failure to file required reports in appropriate forms as determined by the
Commission within the prescribed period.

Other grounds provided under the Corporation Code:

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

AMENDMENTS: Aside from empowering the SEC to motu proprio dissolve a corporation,
the following grounds are now specified under Section 138:
Non-use of corporate charter
Continuous inoperation of a corporation
Upon receipt of a lawful court order dissolving the corporation
Upon finding by final judgment that the corporation procured its incorporation through fraud
5. Upon finding by final judgment that the corporation:
Was created for the purpose of committing, concealing or aiding the commission of
securities violations, smuggling, tax evasion, money laundering, or graft and corrupt
practices;
Committed or aided in the commission of securities violations, smuggling, tax evasion,
 money laundering, or graft and corrupt practices, and its stockholders knew; and
Repeatedly and knowingly tolerated the commission of graft and corrupt practices or other
fraudulent or illegal acts by its directors, trustees, officers, or employees.

If the corporation is ordered dissolved by final judgment pursuant to the above grounds (a),
(b) and (c) under no. 5, its assets, after payment of its liabilities, shall, upon petition of the
SEC with the appropriate court, be forfeited in favor of the national government. Such
forfeiture shall be without prejudice to the rights of innocent stockholders and employees
for services rendered, and to the application of other penalty or sanction under the RCC or
other laws

EFFECTS OF DISSOLUTION: Dissolution terminates its power to enter into

contracts or to continue the business as a going concern.

Despite its dissolution, a corporation nonetheless, continues to be a body corporate

for a period of 3 years for purposes of liquidation and winding up its affairs
(Sec. 122, now Sec. 139). Upon expiration of the 3-year period to wind up its affairs,
the juridical personality of the corporation ceases for all intent and purposes, and as
a general rule, it can no longer sue and be sued.

But if the liquidation is to be pursued by appointing a trustee or a receiver, the 3-year

period will not apply.

LIQUIDATION AND WINDING-UP:

The assets are collected and sold;
The rights and claims of creditors are settled;
The remaining assets, if any, are distributed to the stockholders.
THE SECURITIES REGULATION CODE

PURPOSE: The Securities Regulations Code or RA No. 8799 aims to protect the
investing public primarily through a system of disclosure and provide punishment
for fraudulent practices.

PROTECTION OF THE PUBLIC: The Securities Regulations Code protects the

public as follows:
Requiring full disclosure of information to the public regarding the securities that
are being offered and the issuers, including the filing and approval of the registration
statement and the approval of the prospectus;
The requirement of regularly submitting material information to the SEC;
Close monitoring of the securities and other circumstances that may affect the
same as well as the persons involved including brokers, issuers, the exchange itself,
etc. in order to ensure compliance with pertinent laws and regulations;
Prohibiting and penalizing different fraudulent practices and transactions; and
Providing the SEC the powers and functions.

SECURITIES

Securities are shares, participation or interests in a corporation or in a commercial

enterprise or profit-making venture and evidenced by a certificate, contract,
instruments, whether written or electronic in character. (Section 3.1)
The main feature of a security is that a person purchases or acquires the same in the
expectation of obtaining passive income or asset appreciation, that is income or gain
obtained through the effort of another person. This feature makes them attractive
and desirable and necessitates the protection of the investing public.

They include:
Shares of stocks, bonds, debentures, notes evidences of indebtedness, asset-
backed securities;
Investment contracts, certificates of interest or participation in a profit sharing
agreement, certifies of deposit for a future subscription;
Fractional undivided interests in oil, gas or other mineral rights;
Derivatives like option and warrants;
Certificates of assignments, certificates of participation, trust certificates, voting trust
certificates or similar instruments
Proprietary or nonproprietary membership certificates in corporations; and 7. Other
instruments as may in the future be determined by the Commission.

Investment contract is a contract, transaction, or scheme whereby a person invests

his money in a common enterprise and is led to expect profits primarily from the
efforts of others.

Requisites:
An investment of money;
In a common enterprise;
With expectation of profits;
Primarily from the efforts of others (this modifies the Howey Test which requires
profits to be derived “solely” from the efforts of others)

REGISTRATION AND REPORTORIAL REQUIREMENTS

REGISTRATION

The Securities Regulations Code (SRC) provides that securities shall not be sold or
offered for sale or distribution within the Philippines, without a registration statement
duly filed with and approved by the SEC (Commission). Prior to such sale,
information on the securities, in such form and with such substance as the
Commission may prescribe, shall be made available to each prospective purchaser.

The Commission may audit the financial statements, assets and other information of
firm applying for registration of its securities whenever it deems the same necessary
to insure full disclosure or to protect the interest of the investors and the public in
general.

Procedure:
Filing of SWORN REGISTRATION STATEMENT containing the information as the
SEC may by rule require.
Signatories to registration statement: Executive officer, principal operating officer,
principal financial officer, comptroller, principal accounting officer, corporate
secretary.
Written consent of the expert named as having certified any part of the registration
statement, whenever necessary.
Where the registration statement includes shares to be sold by selling shareholders,
a written certification by such selling shareholders as to the accuracy of any part of
the registration statement contributed to by such selling shareholders shall also be
filed.
PAYMENT of the filing fees which shall not exceed 1/10 of 1% of the aggregate price
at which such securities are proposed to be offered.
PUBLICATION of notice of the filing of the registration statement in two newspapers
of general circulation once for two consecutive weeks.
Within 45 days after the date of filing, or by such later date to which the issuer has
consented, the SEC shall give an ORDER declaring the registration statement
effective or rejecting it.
PROSPECTUS under oath that all requirements satisfied and all statements in
registration statement and in such prospectus are correct.

SECURITIES exempt from registration: (GRIB)

Any security issued or guaranteed by the Government of the Philippines, or by any
political subdivision or agency thereof, or by any person controlled or supervised by,
and acting as an instrumentality of said Government.
Any security issued or guaranteed by the government of any country with which
the Philippines maintains diplomatic relations, or by any state, province or political
subdivision thereof on the basis of reciprocity: Provided, That the SEC may require
compliance with the form and content for disclosures the SEC may prescribe.
Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the
proper adjudicatory body.
Any security or its derivatives the sale or transfer of which, by law, is under the
supervision and regulation of the Office of the Insurance Commission, Housing
and Land Use Rule Regulatory Board, or the Bureau of Internal Revenue.
Any security issued by a bank except its own shares of stock.

TRANSACTIONS exempt from registration: (BISCEPS SMILE)

BROKER’S transaction, executed upon customer’s orders, on any registered
Exchange or other trading market.
An ISOLATED transaction in which any security is sold, offered for sale,
subscription or delivery by the owner thereof, or by his representative for the owner’s
account, such sale or offer for sale or offer for sale, subscription or delivery not being
made in the course of repeated and successive transaction of a like character by
such owner, or on his account by such representative and such owner or
representative not being the underwriter of such security.
The distribution by a corporation actively engaged in the business authorized by its
articles of incorporation, of securities to its stockholders or other security holders as
a STOCK dividend or other distribution out of surplus.
The issue and delivery of any security in exchange for any other security of the same
issuer pursuant to a right of CONVERSION entitling the holder of the security
surrendered in exchange to make such conversion: Provided, That the security so
surrendered has been registered under the SRC or was, when sold, exempt from the
provision of the SRC, and that the security issued and delivered in exchange, if sold
at the conversion price, would at the time of such conversion fall within the class of
securities entitled to registration under the SRC. Upon such conversion the par value
of the security surrendered in such exchange shall be deemed the price at which the
securities issued and delivered in such exchange are sold.
EXCLUSIVE SALE: The sale of capital stock of a corporation to its own
stockholders exclusively, where no commission or other remuneration is paid or
given directly or indirectly in connection with the sale of such capital stock.
PRIVATE PLACEMENT: The sale of securities by an issuer to fewer than twenty
(20) persons in the Philippines during any twelve-month period.
SUBSCRIPTIONS for shares of the capitals stocks of a corporation prior to the
incorporation thereof or in pursuance of an increase in its authorized capital
stocks under the Corporation Code, when no expense is incurred, or no
commission, compensation or remuneration is paid or given in connection with the
sale or disposition of such securities, and only when the purpose for soliciting, giving
or taking of such subscription is to comply with the requirements of such law as to
the percentage of the capital stock of a corporation which should be subscribed
before it can be registered and duly incorporated, or its authorized, capital increase.
Sale to SOPHISTICATED (Qualified) Buyers: The sale of securities to any number of
the following qualified buyers: a. Bank;
Registered investment house;
Insurance company;
Pension fund or retirement plan maintained by the Government of the Philippines or
any political subdivision thereof or manage by a bank or other persons authorized by
the Bangko Sentral to engage in trust functions; e. Investment company or
f. Such other person as the SEC may rule by determine as qualified buyers, on the
basis of such factors as financial sophistication, net worth, knowledge, and
experience in financial and business matters, or amount of assets under
management
MORTGAGE-BACKED SECURITIES: The issuance of bonds or notes secured by
mortgage upon real estate or tangible personal property, when the entire mortgage
together with all the bonds or notes secured thereby are sold to a single purchaser
at a single sale.
At any judicial sale, or sale by an executor, administrator, guardian or receiver or
trustee in INSOLVENCY or bankruptcy.
By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder
selling of offering for sale or delivery in the ordinary course of business and not for
the purpose of avoiding the provision of SRC, to LIQUIDATE a bonafide debt, a
security pledged in good faith as security for such debt.
The EXCHANGE of securities by the issuer with the existing security holders
exclusively, where no commission or other remuneration is paid or given directly or
indirectly for soliciting such exchange.

The SEC may exempt other transactions where not necessary in public interest or
for protection of investors such as small amount or limited character of public
offering. However, an exemption fee of 1/10 of 1% of the maximum aggregate price
or issued value of the securities should be paid.

REPORTORIAL REQUIREMENTS
Annual report composed of a Balance Sheet, Profit and Loss Statement, and a
Statement of Cash Flows certified by a CPA and a management discussion and
analysis of results of operation
Other periodical reports for interim fiscal periods and current reports on significant
developments of the issuer as the SEC may prescribe as necessary to keep current
information on the operation of the business and financial condition of the issuer.

These reportorial requirements shall apply to an issuer:

Which has sold a class of its securities pursuant to a registration
With a class of securities listed for trading in an Exchange
With assets of at least Fifty million pesos (50,000,000.00) or such other amount as
the SEC shall prescribe, and having two hundred (200) or more holders each holding
at least one hundred (100) share of a class of its equity securities: Provided,
however, That the obligation of such issuer to file report shall be terminated ninety
(90) days after notification to the SEC by the issuer that the number of its holders
holding at least one hundred (100) share reduced to less than one hundred (100)

The issuer shall likewise furnish to each holder of such equity security an annual
report in such form and containing such information as the SEC shall prescribe.

FILING OF GENERAL INFORMATION SHEET (GIS)

All corporations shall file their GIS within 30 calendar days from:
Stock Corporations – date of annual stockholders’ meeting
Non-Stock Corporations – date of annual members’ meeting
Foreign Corporations – anniversary date of the issuance of SEC license

FILING OF ANNUAL FINANCIAL STATEMENTS (AFS)

Corporations using the calendar year: depending on the last numerical digit of their
SEC registration or license number in accordance with the schedule set by the SEC.

However, any corporations may file their AFS regardless of the last numerical digit or
license number on or before the first day stated in the coding schedule.
Corporations using the fiscal year:
General Rule: 120 calendar days from the end of the fiscal year;
Exceptions:
i. Broker dealers – 110 calendar days from the end of the fiscal year; ii. Listed
companies and Public Companies – 105 days from the end of the fiscal year.

The AFS, other than the consolidated financial statements, shall have the stamped
“received by the Bureau of Internal Revenue (BIR)” or its authorized banks, unless
the BIR allows an alternative proof of submission for its authorized banks.

INSIDER TRADING AND OTHER FRAUDULENT TRANSACTIONS

INSIDER TRADING: is committed whenever an insider, in possession of a material

non-public information, transacts on the securities.
Material Non-Public Information: Information that will affect the price of the
security or would influence a person in deciding whether to buy, sell, or hold a
security which is not available to the public.

Insider:
The issuer.
A director or officer of the issuer or a person controlling the issuer.
A person whose relationship or former relationship to the issuer gives or gave him
access to material non-public information.
A government employee, or director, or officer of an exchange, clearing agency,
and/or self-regulatory organization who has access to material non-public
information.
A person who learns such information by a communication from any of the foregoing
insiders.

Exceptions: a person in possession of material non-public information can buy or

sell securities: 1. When he can prove that the information was not gained from an
insider; 2. If the other party is identified and that he:
Disclosed the information; or
Had reason to believe that the other party is also in possession of the information.

Presumption: a purchase or sale of a security of the issuer made by an insider or

such insider’s spouse or relatives by affinity or consanguinity within the 2 nd degree,
legitimate or common-law, shall be presumed to have been effected while in
possession of material non-public information if transacted: 1. After such information
came into existence;
2. But prior to the dissemination of such information to the public and the lapse of a
reasonable time for the market to absorb such information.
Insider Trading vis a vis Tender Offer: the answer above (Illustration 2) will not
apply if the information is relative to a tender offer, because it is unlawful for any
person (other than the tender offeror, and not just an “insiders”) who is in
possession of material nonpublic information relating to such tender offer, to buy or
sell the securities of the issuer that are sought or to be sought by such tender offer if
such person knows or has reason to believe that the information is nonpublic and
has been acquired directly or indirectly from the tender offeror, those acting on its
behalf, the issuer of the securities sought or to be sought by such tender offer, or any
insider of such issuer.

Liability for disclosure: It shall be unlawful for any insider to communicate material
nonpublic information about the issuer or the security to any person who, by virtue of
the communication, becomes an insider, where the insider communicating the
information knows or has reason to believe that such person will likely buy or sell a
security of the issuer whole in possession of such information.

This is regardless of whether the one to whom the communication was given actually
traded on the securities.

FRAUDULENT TRANSACTIONS AND OTHER MARKET MANIPULATIONS

Wash sale – any transaction in a security which involves no change in the beneficial
ownership. A series of buy and sale transaction may be placed by one and the same
beneficial owner in the exchange which would not affect any change of ownership of
the shares transacted.

Matched Order – refers to an order or orders for the purchase or sale of security
with the knowledge that a simultaneous order or orders of substantially the same
size, time and price for the sale or purchase of such security has, or wil be entered
by or for the same or different parties.

Wash Sale and Matched Orders are not in themselves illegal. But they are
considered fraudulent whenever they are resorted to in order to create a false or
misleading appearance of active trading.

Marking the close – placing of purchase or sale order, at or near the close of the
trading period in order to affect the closing price likewise affecting the opening price
the following day.

Painting the tape – akin to marking the close but the activity is made during normal
trading hours which involves buying activity among nominee accounts at increasingly
higher or lower prices or causing fictitious reports to appear on the ticker tape.

Squeezing the float – part or portion of the issue/security which is outstanding but
intentionally held by dealers or other person with a view of reselling them later for
profit. Thereby affecting supply of the security or its availability while demand
remains the same or increases, driving the prices up.

Hype and Dump – involves the following steps:

Purchase of outstanding capital stock of a dormant public shell company for a
nominal amount;
Merger of the shell company with the privately held company of the person or group
of persons involved to gain control of the majority of the stocks of the merged entity;
Reverse-split of the shares
Reissuance of the shares certificates in the name of the merged entity to relatives
and associates;
Hiring a broker-dealer who would market the stocks of the newly merged entity;
Hiring a promoter to “hype” the virtues of the company;
When the market reaches the high price, they would “dump” their shareholdings and
bail out.

Boiler Room Operations – involves an intensive selling campaign through

numerous salesmen by telephone or through direct mail offerings for securities of
either a certain type or from a specific issuer. Investors are induced to purchase
through hard-sell techniques based on unfounded predictions and mailing of
misleading market letters.

All 5 above (3 to 7) become illegal/unlawful if its effected to:

Raise the price or induce the purchase of a security or of a controlling, controlled or
commonly controlled company by others;
Depresses their price to induce the sale of a security, whether of the same or of a
different class, of the same issuer or of a controlling, controlled company, or
commonly controlled company by others; and
Creates active trading to induce such purchase or sale through said devices or
schemes.

Circulating or Disseminating Information On Share Price Movement – involves

people providing information that the price of any security listed in the exchange will
or is likely to rise or fall because of manipulative market operations of any one or
more persons conducted for the purpose of raising or depressing the price of the
security and thus inducing the purchase or sale of such security.

Making False or Misleading Statements – with respect to any material fact, which
he knew or had some reasonable grounds to believe was so false or misleading for
the purpose of inducing the purchase or sale of any security.

Pegging or Fixing or Stabilizing the price of security effected either alone or with
others through any series of transactions for the purchase or sale thereof, if done for
such purpose.

Short Sale – selling the security which the vendor does not own and borrowed only
from another. This is not illegal per se but only regulated.

MANDATORY TENDER OFFER RULE

A tender offer is an offer by a person or group of persons to the stockholders of a

corporation to tender their shares for purchase.

Purpose: The rule on mandatory tender offer seeks to protect minority shareholders
and provide them with a fair price for their share whenever a person or group of
persons intends to buy a sizable number of shares in the company.
Mandatory Tender Offer: applies to any person who intends to acquire at least
35% over a period of 12 months (previously 30, increased by the SEC pursuant to
Section 72.1 of the SRC) of any class of any equity security of a:
1. Listed corporations; or 2. Corporations with:
Assets of at least P50M and
Having at least 200 shareholders who each have at least 100 shares

The rule shall likewise apply even if the acquisition is less than 35% but will result in
ownership of over 50% of the total outstanding equity securities of the public
company.

The offeror would be required to accept any and all securities thus tendered.

Note that the percentage requirements likewise applies even in indirect acquisitions.

Transactions EXEMPT from the Mandatory Tender Offer Requirement:

Any purchase of shares from the unissued capital stock provided that the
acquisition will not result to a 50% or more ownership of shares by the purchaser;
Any purchase of shares from an increase in authorized capital stock.
Purchase in connection with foreclosure proceedings involving a duly constituted
pledge or security arrangement where the acquisition is made by the debtor or
creditor.
Purchases in connection with privatization undertaken by the government of the
Philippines.
Purchases in connection with corporate rehabilitation under court supervision. 6.
Purchases through an open market at the prevailing market price
7. Merger or consolidation.

Process:
The offeror will make an announcement of his intention in a newspaper of general
circulation, prior to the commencement of the offer;
At least 2 business days prior to the date of the commencement of the tender offer:
File SEC Form 19-1 with the SEC including all exhibits thereto and pay the
prescribed filing fees
Hand deliver a copy of such form including all exhibits to the target company at its
principal executive office and to each Exchange where such class of the target
company’s securities are listed for trading.
Report the results of the tender offer by filing with the Commission, not later than ten
(10) calendar days after the termination of the tender offer, copies of the final
amendments to the form.

INSIDER TRADING WHERE INFORMATION RELATES TO A TENDER OFFER: if

the information is relative to a tender offer, it is unlawful for any person (other than
the tender offeror) who is in possession of material nonpublic information relating to
such tender offer, to buy or sell the securities of the issuer that are sought or to be
sought by such tender offer if such person knows or has reason to believe that the
information is nonpublic and has been acquired directly or indirectly from the tender
offeror, those acting on its behalf, the issuer of the securities sought or to be sought
by such tender offer, or any insider of such issuer.