WEEK 2 accomplish its purposes.

In turn, a corporation exercises

said powers through its Board of Directors and/or its duly
Revised Corporation Code (RA 11232) authorized officers and agents. (Monfort Hermanos
Agricultural Dev. Corp. v. Monfort III, 2004).
Corporation

A corporation is an artificial being created by operation of

DOCTRINE OF SEPARATE JURIDICAL
law, having the right of succession and the powers,
PERSONALITY
attributes, and properties expressly authorized by law or
incident to its existence.
A corporation has a personality separate and distinct
from that of its stockholders and members and is not
Elements of Corporation:
affected by the personal rights, obligations, and
transactions of the latter.
1. It is an artificial being DOCTRINE OF PIERCING THE CORPORATE VEIL
2. Created by operation of law
3. Having the right of succession Piercing the veil of corporate entity is merely an
4. The powers, attributes and properties expressly equitable remedy, and may be granted only in cases
authorized by law or incident to its existence (Section 2, when the corporate fiction is used to defeat public
RA 11232) convenience, justify wrong, protect fraud or defend crime
(Yutivo Sons v. CTA, 1961) or where the corporation is a
1. AN ARTIFICIAL BEING mere alter ego or business conduit of a person. (Koppel
Phil v. Yatco)
A corporation exists by fiction of law. Hence, it can act
only through its directors, officers and employees.
GROUNDS FOR APPLICATION OF DOCTRINE
Being only a juridical entity, the physical acts of the (1) If done to defraud the government of taxes due it.
corporation, like the signing of documents, can be (2) If done to evade payment of civil liability.
performed only by natural persons duly authorized for (3) If done by a corporation which is merely a conduit or
the purpose by corporate by-laws or by a special act of alter ego of another corporation.
the Board of Directors (Shipside, Inc. v. Court of (4) If done to evade compliance with contractual
Appeals, 2001). obligations.
(5) If done to evade financial obligation to its employees.

Q: Is a corporation liable for the individual acts of its

2. CREATED BY OPERATION OF LAW
stockholders or members? Is there an exception to the
general rule?
Mere consent of the parties to form a corporation is not
sufficient. The State must give its consent either through
A: It is settled that a corporation has a personality
a special law (in case of government corporations) or a
separate and distinct from its individual stockholders or
general law (i.e., Corporation Code in case of private
members, and is not affected by the personal rights,
corporations).
obligations and transactions of the latter. The corporation
may not be held liable for the obligations of the persons
3. HAS THE RIGHT OF SUCCESSION
composing it, and neither can its stockholders be held
liable for its obligation. Of course, this Court has
Its continued existence during its stated term cannot be
recognized instances when the corporation’s separate
affected by any change in the members or stockholders
personality may be disregarded. However, we have also
or by any transfer of shares by a stockholder to a 3rd
held that the same may only be done in cases where the
person.
corporate vehicle is being used to defeat public
convenience, justify wrong, protect fraud, or defend
crime. Moreover, the wrongdoing must be clearly and
4. The powers, attributes and properties expressly convincingly established. It cannot be presumed. (Seaoil
authorized by law or incident to its existence vs Autocorp Group, 2008, Nachura)

A corporation has no power except those expressly DOCTRINE OF LIMITED CAPACITY

conferred on it by the Corporation Code and by its
articles of incorporation, those which may be incidental Corporation may exercise only powers expressly
to such conferred powers, those that are implied from its authorized by law or incident to its existence
existence, and those reasonably necessary to
THEORY OF CORPORATION Exception: Moral Damages cannot be awarded in favor
of corporations because they do not have feelings and
1. Theory of Concession mental state. They may not even claim moral damages
for besmirched reputation (NAPOCOR v. Philipp
It is a principle in creation of corporation, under which a Brothers Oceanic, 2001).
corporation is an artificial creature without any existence
until it has received the imprimatur of the state acting However, a corporation can recover moral damages
according to law, through Securities and Exchange under Art 2219 (7) if it was the victim of defamation
Commission. The life of the Corporation is a concession (Pilipinas Broadcasting Network v. Ago Medical and
made by the State. Educational Center, 2005).

2. Genossenschaft Theory
CLASSES OF CORPORATIONS
It is the reality of group of social and legal entity,
independent of state recognition and concession. It STOCK CORPORATION
exists because partners want it to exist.
Corporations which have capital stock divided into
shares and are authorized to distribute to the holders of
such shares dividends or allotments of the surplus profits
on the basis of shares held (Sec. 3)
PRIVATE CORPORATION CAN ONLY BE CREATED
BY CORPORATION CODE (B.P 68 amended by RA It is organized for profit.
11232)
The governing body of a stock corporation is usually the
Under Art. XII, Section 16 of 1987 Corporation which Board of Directors (except in certain instances, e.g.
provides as follow: close corporations).

“The congress shall not, except by general law, provide There are two elements for a stock corporation to exist:
for the formation, organization or regulation of private
corporations, Government Owned and Controlled (1) Capital stock divided into shares, and
Corporations may be created or established by special
characters in the interest of the common good and (2) An authority to distribute to the holders of such
subject to the test of economic viability” shares, dividends or allotments of the surplus profits on
the basis of shares held
Special Law can create only
Even if there is a statement of capital stock, the
1. Public Corporation corporation is still NOT a stock corporation if dividends
2. Government owned and controlled corporations are NOT supposed to be declared, that is, there is no
provided distribution of retained earnings. (CIR v. Club Filipino de
a. In the interest of common good Cebu, 1962)
b. Subject to test of economic viability
Note: Under Sec. 43 of the Corporation Code, a
corporation is deemed to have the power to declare
dividends. Thus, so long as the corporation has capital
stock and there is no prohibition in its Articles of
Incorporation or in its by-laws for it to declare dividends,
such corporation is a stock corporation.
LIABILITY FOR TORTS AND CRIMES

As a separate juridical personality, a corporation can be NON-STOCK CORPORATION

held liable for torts committed by its officers for corporate
purpose (PNB v. CA, 1978). All other corporations are non-stock corporations (Sec.
3)

RECOVERY OF MORAL DAMAGES One where no part of the income is distributable as

dividends to its members, trustees, or officers, subject to
General rule: A corporation has the power to sue in its the provisions of the Code on dissolution(Sec. 87).
corporate name. (Sec. 36)
Not organized for profit.
Its governing body is usually the Board of Trustees.
ELEEMOSYNARY CORPORATION

OTHER CORPORATIONS One organized for a charitable purpose

DOMESTIC CORPORATION
PUBLIC CORPORATION
One formed, organized, or existing under the laws of the
One formed or organized for the government of a portion Philippines.
of the state. Its purpose is for the general good and
welfare (Sec. 3, Act 1456). FOREIGN CORPORATION

PRIVATE CORPORATION One formed, organized or existing under any laws other
than those of the Philippines and whose law allows
One formed for some private purpose, benefit, aim or Filipino citizens and corporations to do business in its
end (Sec. 3, Act 1456); it may be either stock or non- own country and state (Sec. 123).
stock, government-owned or controlled or quasi-public.
CORPORATION CREATED BY SPECIAL LAWS OR
The test to determine whether a corporation is CHARTER
government owned or –controlled, or private in nature, is
if a corporation is created by its own charter for the Corporations which are governed primarily by the
exercise of a public function, or by incorporation under provisions of the special law or charter creating them.
the general corporation law (Baluyot v. Holganza, 2000). Corporation Code has suppletory application. (Sec. 4)

CLOSE CORPORATION SUBSIDIARY CORPORATION

One whose articles of incorporation provide that: One in which control, usually in the form of ownership of
majority of its shares, is in another corporation (the
(1) All the corporation's issued stock of all classes, parent corporation).
exclusive of treasury shares, shall be held of record by
not more than a specified number of persons, not PARENT CORPORATION
exceeding twenty (20);
Its control lies in its power, directly or indirectly, to elect
2) all the issued stock of all classes shall be subject to the subsidiary’s directors thus controlling its
one or more specified restrictions on transfer permitted management policies.
by this Title; and

(3) The corporation shall not list in any stock exchange CORPORATION DE JURE
or make any public offering of any of its stock of any
class (see Sec. 96). A corporation organized in accordance with the
requirements of the law.
Notwithstanding the foregoing, a corporation shall not be
deemed a close corporation when at least two-thirds DE FACTO CORPORATION
(2/3) of its voting stock or voting rights is owned or
controlled by another corporation which is not a close A corporation where there exists a flaw in its
corporation within the meaning of this Code. incorporation

Rule on De Facto Corporations

EDUCATIONAL CORPORATION
The due incorporation of any corporation claiming in
One organized for educational purposes (Sec. 106). good faith to be a corporation under this Code, and its
right to exercise corporate powers, shall not be inquired
RELIGIOUS CORPORATIONS into collaterally in any private suit to which such
corporation may be a party. Such inquiry may be made
Corporation sole is one formed for the purpose of by the Solicitor General in a quo warranto proceeding
administering and managing, as trustee, the affairs, (Sec. 20).
property and temporalities of any religious denomination,
sect, or church, by the chief archbishop, bishop, priest, Grant of juridical personality is an exercise of State
rabbi, or other presiding elder of such religious power and not a matter of private affair. Consequently,
denomination, sect or church (Sec.110) under the de facto corporation doctrine, the defect in the
juridical personality of a corporation cannot be inquired of Incorporation and stated in the certificate of stock
into by private individuals, much less used as a defense (Sec. 6)
to avoid claims, except in quo warranto proceedings
brought on behalf of the State where the main action is COMMON SHARES
to question the validity or existence of such juridical
personality. The most common type of shares, which enjoy no
preference but the owners thereof are entitled to
Requisites of De Facto Corporation management of the corporation and to equal pro-rata
division of profits after preference. It represents a
(1) Organized under a valid law residual ownership interest in the corporation.
(2) Bona fide compliance with formalities of law
(3) User of corporate powers PREFERRED SHARES
(4) SEC issuance of certificate of incorporation (Hall v.
Piccio, 86 Phil 603 [1950]) Stocks which are given preference by the issuing
corporation in dividends and the distribution of assets of
the corporation in case of liquidation or such other
preferences as may be stated in the Articles of
CORPORATION BY ESTOPPEL Incorporation which do not violate the Corporation Code.

Where a group of persons misrepresent themselves as a

corporation, they are subsequently estopped from
claiming lack of corporate life in order to avoid liability. PAR VALUE SHARES

All persons who assume to act as a corporation knowing These are shares with a stated value set out in the
it to be without authority to do so shall be liable as Articles of Incorporation. This remains the same
general partners for all debts, liabilities and damages regardless of the profitability of the corporation. This
incurred or arising as a result thereof. gives rise to financial stability and is the reason why
banks, trust corporations, insurance companies and
One Person Corporation (Sec 116, RCCP) building and loan associations must always be organized
with par value shares.
One Person Corporation (OCP) is a corporation with a
single stockholder, who may be a natural person, a trust, Par value is minimum issue price of such share in the
or an estate. Articles of Incorporation which must be stated in the
certificate

CLASSES OF SHARES OF STOCK NO-PAR VALUE SHARES

Shares of stock of stock corporations may be divided These are shares without a stated value.
into classes or series of shares or both. Each class or
series of shares may have rights, privileges or A no par share does not purport to represent any stated
restrictions, as stated in the Articles of Incorporation. proportionate interest in the capital stock measured by
value, but only an aliquot part of the whole number of
such shares of the issuing corporation.
Classification of shares:
Limitations:
(1) Common shares
(2) Preferred shares (1) No-par value shares cannot have an issue price of
(3) Par value shares less than P5.00 per share (Sec. 6).
(4) No-par value shares
(5) Founder’s shares (2) They shall be deemed fully paid and non-assessable
(6) Redeemable shares and the holders of such shares shall not be liable to the
(7) Treasury shares corporation or to its creditors in respect thereto (Sec. 6).
(8) Convertible shares
(9) Non-voting shares (3) Entire consideration received by the corporation for
its no-par value shares shall be treated as capital and
Doctrine of Equality of Shares: shall not be available for distribution as dividends (Sec.
6).
Each share shall be EQUAL in ALL respects to every
other share, except as otherwise provided in the Articles
(4) Articles of Incorporation must state the fact that the
corporation issues no par shares and the number of TREASURY SHARES (SEC. 9)
shares.
These are shares which have been issued and fully paid
(5) Banks, insurance companies, trust companies, for, but subsequently re-acquired by the issuing
building and loan associations, and public utilities cannot corporation by purchase, redemption, donation or
issue no-par value shares (Sec. 6). through some other lawful means. Such shares may
again be disposed of for a reasonable price fixed by the
(6) The issued price may be fixed in the Articles of Board of Directors
Incorporation, or by the Board of Directors pursuant to
authority conferred upon it by the ) Articles of NON-VOTING SHARES (SEC. 6)
Incorporation, or, in the absence thereof, by majority
vote of the outstanding shares in a meeting called for the General rule: Non-Voting Shares are not entitled to vote.
purpose (Sec. 62).
Exceptions:
FOUNDER’S SHARES (SEC. 7)
(1) Amendment of the Articles of Incorporation
These are shares, classified as such in the Articles of (2) Adoption and amendment of by-laws
Incorporation, which are given certain rights and (3) Sale, lease, exchange, other disposition of all or
privileges not enjoyed by the owners of other stocks. substantially all of the corporate property
Where exclusive right to vote and be voted for in the (4) Incurring, creating or increasing bonded
election of directors is granted, such right must be for a indebtedness
limited period not to exceed 5 years subject to approval (5) Increase or decrease of capital stock
by Securities and Exchange Commission. (6) Merger and consolidation
(7) Investment of corporate funds in another corporation
The 5 year period shall exclusive rights starts from date or business
of Incorporation (8) Dissolution of the corporation.

INCORPORATION AND ORGANIZATION

REDEEMABLE SHARES (SEC. 8) NUMBER AND QUALIFICATIONS OF

INCORPORATORS
These are shares which permit the issuing corporation to
redeem or purchase its shares. (1) Juridical or Natural Persons
(2) Any number from 1-15
Limitations: (3) In case of Natural person: Must be in Legal Age
(4) Each incorporator must own or be a subscriber to at
1) Redeemable shares may be issued only when
least 1 share of the capital stock of the corporation
expressly provided for in the Articles of Incorporation
(5) Natural Persons may organize a Corporation for the
(Sec.8).
2) The terms and conditions affecting said shares must Practice of Profession when Authorized by Special Law.
be stated both in the Articles of Incorporation and in the (Sec. 10)
certificate of stock(Sec. 8).
3) Redeemable shares may be deprived of voting rights CORPORATE TERM
in the Articles of Incorporation
4) The corporation is required to maintain a sinking fund Perpetual Corporate Term as the Default Rule:
to answer for redemption price if the corporation is
required to redeem. Under Section 11, the default rule for all existing
5) The redeemable shares are deemed retired upon corporations and those to be formed under revised
redemption unless otherwise provided in the Articles of corporation code is that they have perpetual term.
Incorporation (i.e., if the Articles of Incorporation allows
for reissuance of such shares).
6) Unrestricted Return Earnings is NOT necessary
Pre-Revised Corporation Code Corporations
before shares can be redeemed but there must be
sufficient assets to pay the creditors and to answer for
operations (Republic Planters Banks v. Agana, 1997). Those corporations exist before the promulgation of
Redemption cannot be made if such redemption will Revised Corporation Code may choose to revert to a
result in insolvency or inability of the corporation to meet specific term only upon vote of its stockholders
its obligations (SEC Opinion, 24 Aug 1987). representing majority of its outstanding capital stock
 the capital stock of the second must be owned by
Revival of an Expired Corporation citizens of the Philippines. The participation of foreign
investors in the governing body of a corporation engaged
A corporation whose term has expired may apply for a in the advertising industry shall be limited to their
revival of its corporate existence, together with all the proportionate share in the capital thereof, and all the
rights and privileges under its certificate of incorporation executive and managing officer of such corporation must
and subjects of all its duties, debts, and liabilities existing be Filipino citizens.
prior to its revival. Upon approval by the Commission,
the corporation shall be deemed revived and the (5) Banking corporations. — at least 60% of the capital
certificate of revival of corporate existence shall be stock of any bank or banking institution which may be
issued, giving it perpetual existence, unless its established after the approval of the General Banking
application for revival provides otherwise. Act (July 24, 1948) shall be owned by citizens of the
Philippines
(6) Corporations engaged in retail trade. — the capital of
which must be wholly owned by citizens of the
Philippines (R.A. No. 1180, Sec. 1.);

Minimum Capital Stock Required in Stock (7) Rural banks. — the capital stock of which must be
Corporation (Sec 12) fully owned and held directly or indirectly by Filipino
citizens or corporations, associations, or cooperatives
Stock Corporation shall not be required to have minimum qualified under Philippine laws to own or hold such
authorized capital stock except as otherwise specifically capital stock (R.A. No. 7353, Sec. 4.);
provided for by special laws.
(8) Corporations engaged in coastwise shipping. — at
Filipino percentage ownership requirement least 60% of the capital stock of which or of any interest
regarding corporate capital. in said capital is totally owned by citizens of the
Philippines (Pres. Decree No. 1464 [Tariff and Customs
By specific constitutional and legal provisions, Filipino Code], Sec. 806.);
ownership of a certain percentage of the capital stock or
capital is required in certain cases, such as: (9) Financing companies. — at least 60% of the capital
stock shall be owned by citizens of the Philippines (R.A.
(1) Corporations for exploration, development, and No. 5980, as amended, Sec. 16.);
utilization of natural resources. — at least 60% of the
capital of which is owned by citizens of the Philippines. (10) Corporations engaged in the pawnshop business.
(Constitution of the Philippines, Art. XII, Sec. 2.) The — at least 70% of the voting capital stock shall be owned
word "capital" in the above constitutional provision by citizens of the Philippines (Pres. Decree No. 114,
should be understood to mean "outstanding capital Sec. 8.);
stock" in case of stock corporation;
(11) Corporations engaged in the recruitment and
(2) Public service corporations. — at least 60% of the placement of workers, locally or overseas. — at least
capital of which is owned by citizens of the Philippines. 75% of the authorized and voting capital stock is owned
The participation of foreign investors in the governing and controlled by Filipino citizens (Pres. Decree No. 442
body of any public utility enterprise shall be limited to [Labor Code], as amended, Sec. 27.);
their proportionate share in its capital, and all the
executive and managing officers of such corporation (12) Corporations engaged in the operation of a private
must be Filipino citizens. detective, watchman or security guard agencies. — Must
be 100% Filipino owned (R.A. No. 5487, Sec. 4.);
(3) Educational corporations. — Other than those
established by religious orders and mission boards, at (13) Under the Flag Law. — In the purchase of articles
least 60% of the capital of which is owned by citizens of for the Government, preference shall be given to
the Philippines. The control and administration of materials and supplies produced, made, or
educational institutions shall be vested in Filipino citizens manufactured in the Philippines, and to domestic
entities. The term "domestic entities" means any citizen
(4) Corporations engaged in mass media and advertising of the Philippines or any corporate body or commercial
industry - The first must be wholly (i.e., 100%) owned company at least 75% of the capital of which is owned
and managed by Filipino citizens, while at least 70% of by citizens of the Philippines. (C.A. No. 138, Sec. 1.)
 should not contradict or change the nature of the
Business activities wherein foreigner’s ownership could corporation (Sec. 14(2)
be more than 40% up to 100%
(b) Must not be patently unconstitutional, illegal, immoral,
1. Export Enterprise and contrary to government rules and regulations
2. Domestic market enterprises with paid-in equity
capital of atleast the equivalent of US 200,00.00 dollars. (3) Principal Office
3. Domestic market enterprises, which involved
advanced technology or employ atleast fifty direct (a) Must be within the Philippines
employees with paid-in equity capital of at least the (b) AOI must specify both province or city or town where
equivalent of US 100,000 dollars. it is located

(4) Corporate Term

(5) The number of directors, which shall not be more

GRANDFATHER RULE than fifteen (15) or the number of trustees which may be
more than fifteen (15);
Method used to determine the nationality of a
corporation, in cases where corporate shareholders are (6) The names, nationalities, and residence addresses of
present in the situation, by which the percentage of persons who shall act as directors or trustees until the
Filipino equity in a corporation engaged in nationalized first regular directors or trustees are duly elected and
and/or partly nationalized areas of activities, is computed qualified in accordance with this Code;
by attributing the nationality of second or even
subsequent tier ownership to determine the nationality of (7) If it be a stock corporation, the amount of its
the corporate shareholder. authorized capital stock, number of shares into which it
is divided, the par value of each, names, nationalities,
There are two rules for determining the corporate and subscribers, amount subscribed and paid by each
on the subscription, and a statement that some or all of
nationality of a corporation: Under the "incorporation
the shares are without par value, if applicable;
test," the nationality of a corporation is that of the state of
incorporation regardless of the nationality of its
(8) If it be a non-stock corporation, the amount of its
stockholders. Under the "control test," it depends on the
capital, the names, nationalities, and residence
nationality of the controlling stockholders. The
addresses of the contributors, and amount contributed
application of either test depends on the particular by each; and
situation.
(9) Such other matters consistent with law and which the
ARTICLES OF INCORPORATION NATURE AND incorporators may deem necessary and convenient.
FUNCTION OF ARTICLES
An arbitration agreement may be provided in the articles
(1) Constitutes the charter of the corporation and sets of incorporation pursuant to section 181 of RA 11232.
forth the rules and conditions upon which the association The articles of incorporation and applications for
or corporation is founded. amendments thereto may be field with the Commission
(2) Defines the contractual relationships between the in the form of an electronic document, in accordance
State and the corporation, the stockholders and the with the Commissioner’s rules and regulation on
State, and the corporation and the stockholders. electronic filing (Sec 13)
The Articles must be filed with the SEC for the issuance
of the Certificate of Incorporation
AMENDMENT OF ARTICLES OF INCORPORATION
Contents of Articles of Incorporation (Sec 15)
(1) Corporate Name Amendment of the Articles of Incorporation Any provision
(2) Purpose Clause or matter stated in the articles of incorporation may be
amended
(a) Must indicate the PRIMARY and SECONDARY (1) By a majority vote of the board of directors or
purposes if there is more than one purpose, which trustees
(2) And the vote or written assent of:
a) 2/3 of the outstanding capital stock, without prejudice
to the appraisal right of dissenting stockholders in When there has been no attempt in good faith to create
accordance with the provisions of this Code, a corporation de jure, there can be no de facto
(b) 2/3 of the members if it be a non-stock corporation. corporation. Any other rule might well open the door to
fraud upon the public. Mere intent is not sufficient. In
addition, there must be a bona fide attempt to comply
with the requirements of the law. To constitute a
CORPORATE NAME (SEC. 17) corporation de facto, there must be, it is true, a colorable
compliance with the statute, but there need not be a
LIMITATIONS ON USE CORPORATE NAME substantial compliance. A substantial compliance makes
the body a corporation de jure.
(1) Must not distinguishable from that already reserved
or registered for the use of another corporation.
(2) If such name is already protected by law (3) Actual user or exercise in good faith of corporate
(3) When it is use is contrary to existing law, rules and powers conferred upon it by law.
regulation.
To create a corporation de facto, it is not sufficient to
SEC Power off Summary Order to Cease and Desist show the existence of a law under which a corporation
might be formed and an honest attempt to comply with
SEC has determined any of the 3 grounds for disallowing the requirements thereof, but it is also necessary to
a corporate name, it may summarily order the show an actual user or exercise of corporate powers or
corporation to immediately cease and desist from using franchise.
such name and require corporation to register a new
one.
CORPORATION BY ESTOPPEL (SEC 20)
REGISTRATION, INCORPORATION AND
COMMENCEMENT OF CORPORATE EXISTENCE Where a group of persons misrepresent themselves as a
(SEC 18) corporation, they are subsequently estopped from
claiming lack of corporate life in order to avoid liability All
COMMENCEMENT OF CORPORATE TERM persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general
Corporation existence and juridical personality shall partners for all debts, liabilities and damages incurred or
commence from the date the SEC issues the certificate arising as a result thereof.
of incorporation under its official seal
Effects of non-use of corporate charter and
DE FACTO CORPORATION (SEC 19) continuous inoperation of the corporation (Sec 21)

If a corporation does not formally organize and

The due incorporation of any corporation claiming in
commence its business within five (5) year from the date
good faith to be a corporation under this Code, and its
of its incorporation, its certificate of incorporation shall be
right to exercise corporate powers, shall not be inquired
deemed revoked as of the day following the end of the
into collaterally in any private suit to which such
five (5)-year period.
corporation may be a party. Such inquiry may be made
by the Solicitor General in a quo warranto proceeding. A delinquent corporation shall have a period of 2 years
to resume operations and comply with all requirements
Requisites of De Facto Corporation that the Commission shall prescribe. Upon compliance
by the corporation, the Commission shall issue an order
(1) Organized under a valid law lifting the delinquent status. Failure to comply with the
requirements and resume operation within the period
In order that there can be a de facto corporation, there given by the Commission shall cause the revocation of
must be a law authorizing it to be a corporation de jure the corporation’s certificate of incorporation.
for there cannot be a corporation de facto when there
cannot be one de jure, even though there may have
been an assumption of corporate powers.
BOARD OF DIRECTORS/TRUSTEES/ OFFICERS
(2) Bona fide compliance with formalities of law
Tri-level structure 10 years from among the holders of stocks registered in
the corporation's book
— The standard operating procedure for corporations,
frequently referred to as a corporate norm, might be 3 years for trustees from among the members of the
described as pyramidal in form. corporation.

At the base are the shareholders (or members) whose Each director and trustee shall hold office until the
vote is required to elect the board of directors (or successor is elected and qualified.
trustees) and to pass on other major corporate actions.
A director who ceases to own at least one (1) share of
The next level is represented by directors who constitute stock or a trustee who ceases to be a member of the
the policy-making body of the corporation and select the corporation shall cease to be such.
officers annually, as a rule. The keystone of corporate
procedure is the provision common to most corporate Independent Director
laws that the business of a corporation shall be managed
by its board of directors. An independent director is a person who apart from
shareholdings and fees received from the corporation, is
Finally, at the top of the pyramid are the officers who independent of management and free from any business
have some discretion but in general deemed to execute or other relationship which could or could reasonably be
policies formulated by the board. perceived to materially interfere with the exercise of
independent judgment in carrying out the responsibilities
The board of directors and corporate officers are as a director.
frequently referred to as management. In its strict sense,
the term refers to the corporate officers given the Independent directors must be elected by the
authority to implement the policies determined by the shareholders present or entitled to vote in absentia
board of directors as the governing body of the during the election of directors. Independent directors
corporation. shall be subject to the rules and regulation governing
their qualifications, disqualifications, voting requirements,
Corporate powers exercised by board of directors or duration of term and term limit, maximum number of
trustees. board membership and other requirements that the
Commission will prescribe to strengthen their
All corporations being invisible, existing only in independence and align with international best practices.
contemplation of law, can only act and contract through
the aid and by means of individuals. Such individuals
may be those holding corporate offices or agents
properly appointed by such officers. The same general
principles of law which govern the relation of agency for Requirements of Independent director for
a natural person govern the officer or agent of a corporation vested with public interest
corporation in respect to his power or authority to act for
the corporation. The board of the following corporations vested with
public interest shall gave independent directors
Number and Qualification of Directors (Sec 22) constituting atleast 20% of such board:

1. Not more than 15 directors and may be more than 1. Corporation covered the Securities Regulation Code
15 trustees (Sec 13) (R.A 8799), namely;
2. Owner of atleast one share
3. The owner (Legal not beneficial ownership such as a) Whose securities are registered with the Commission
mortgagor) must be stand in the name of the director In b) Corporation listed with an exchange or
the boo of the corporation. c) With assets of atleast 50,000,000.00 and having 200
4. Possess all the qualification and none of the or more holders of share, each holding atleast 100
disqualification (Sec 26 and 23) shares of a class of its equality shares.
5. If the corporation is vested with public interest, the
board shall also elect a compliance officer 2. Banks and quasi-banks, NSSLA’s, pawnshops,
corporation engaged in money service business,
Directors shall be elected for a term of one
preneed, trust and insurance companies and other The owners of majority of the outstanding capital stock,
financial intermediaries and or if there be no capital stock, a majority of the members
entitled to vote must all be present either in person or
3. Other corporations engaged “in business vested with through a representative authorized to act by written
pubic interest similar to the above, as may be proxy in the elections of directors or trustee.
determined by the Commission, after taking into account
relevant factors which are germane to the objective and When so authorized in the bylaws or by a majority of the
purpose of requiring the election of an independent board of directors, the stockholders or members may
director, such as extent of minority ownership, types of also vote through remote communication or in
financial products or securities, issued or offered to absentia: Provided, that the right to vote through such
investors, public interest involved in the nature of modes may be exercised in corporations vested with
business operations, and other analogous factors. public interest, notwithstanding the absence of a
provision in the bylaws of such corporations.

Election of Directors or Trustees (Sec. 23) The election must be by ballot if requested by any voting
stockholder or member.

CUMULATIVE VOTING Qualification of Corporate Officer (Sec 24)

Cumulative voting for one candidate A stockholder is 1. President – Must be a director

allowed to concentrate his votes and give one candidate 2. Secretary – Resident and Citizen of the Philippines
as many votes as the number of directors to be elected 3. Treasurer- Must be resident
multiplied by the number of his shares shall equal. 4. Other officers as may be provided in by the by laws

Illustration: If there are 5 directors to be elected and Apply to all:

Pedro, as shareholder, has 100 shares, Pedro can give
500 (5 x 100 shares) votes to just one candidate. Possess all qualifications and none of the
disqualifications.
CUMULATIVE VOTING BY DISTRIBUTION

A stockholder may cumulate his shares by multiplying Concurrent positions of corporate officer
the number of his shares by the number of directors to
be elected and distribute the same among as many 1. President + Secretary = Not allowed
candidates as he shall see fit. 2. President + Treasurer = Not allowed
3. Secretary + Treasurer = Allowed
Illustration: In the illustration above, Pedro instead may
choose to give 100 votes to candidate 1, 100 votes to By laws may provide for the qualifications of the director
candidate 2, 100 votes to candidate 3, 150 votes to such as:
candidate 4, and 50 votes to candidate 5.
a. At least 25 years old
STRAIGHT VOTING b. Have some experiences in business, finance or law
c. Disqualify anyone who is competing with a corporation
Every stockholder may vote such number of shares for
as many persons as there are directors to be elected. As long as the qualifications imposed are reasonable
and not meant to unjustly or unfairly deprive the minority
General Rule: of the rightful representation in the Board of Directors, it
is valid.
Each stockholder or member shall have the right to
nominate any director or trustee who possesses all of Disqualification of Directors, Trustees or Officers
the qualifications and none of the disqualifications and (Sec 26)
none of the disqualifications set forth in this Code.
A person shall be disqualified from being a director,
Exception: trustee or officer of any corporation if, within five (5)
years prior to the election or appointment as such, the
Except when the exclusive right is reserved for holders person was:
of founders' shares under Section 7 of this Code
(a) Convicted by final judgment:

(1) Of an offense punishable by imprisonment Vacancies in the office of director (Sec . 28)
for a period exceeding six (6) years;
1. Other than removal by the stockholders or members
(2) For violating this Code; and or expiration of term – Majority of the remaining directors
or trustees if still constituting quorum.
(3) For violating Republic Act No. 8799,
otherwise known as "The Securities Regulation Code"; 2. Removal by stockholder or members or expiration of
term or increase in number of director other than
(b) Found administratively liable for any offense involving (removal, expiration or increase) but was referred to the
fraudulent acts; and BOD to the stockholders- Stockholders or members in
the regular or special meeting called for that purpose.
(c) By a foreign court or equivalent foreign regulatory
authority for acts, violations or misconduct similar to When the vacancy is due to term expiration, the election
those enumerated in paragraphs (a) and (b) above. shall be held no later that the day of such expiration at a
meeting called for that purpose. When the vacancy
The foregoing is without prejudice to qualifications or arises as a result of removal by the stockholders or
other disqualifications, which the Commission, the members, the election may be held on the same day of
primary regulatory agency, or Philippine Competition the meeting authorizing the removal and this fact must
Commission may impose in its promotion of good be so stated in the agenda and notice of said meeting. In
corporate governance or as a sanction in its all other cases, the election must be held no later than
administrative proceedings. forty-five (45) days from the time the vacancy arose. A
director or trustee elected to fill vacancy shall be referred
to as replacement director or trustee elected to fill a
vacancy shall be referred to as replacement director or
trustee and shall serve only for the unexpired term of the
Removal of Director or Trustees (Sec. 27)
predecessor in office.
Any Director or Trustee of a corporation may be
However, when the vacancy prevents the remaining
removed from office, with or without cause.
directors from constituting a quorum and emergency
action is required to prevent grave, substantial, and
Removal without cause may not be used to deprive irreparable loss or damage to the corporation, the
minority stockholders or members of the right of vacancy may be temporarily filled from among the
representation to which they may be entitled under officers of the corporation by unanimous vote of the
Section 23. remaining directors or trustees. The action by the
designated director or trustee shall be limited to the
Other requisites: emergency action necessary, and the term shall cease
within a reasonable time form the termination of the
(1) By a vote of the stockholders holding or representing emergency or upon election of the replacement director
2/3 of the outstanding capital stock, or if the corporation or trustee, whichever comes earlier. The corporation
be a non-stock corporation, by a vote of 2/3 of the must notify the Commission within three (3) days from
members entitled to vote the creation of the emergency board, stating therein the
reason for its creation.
2) At a regular or special meeting after proper notice is
given Compensation of Directors (Sec 29)

The Securities and Exchange Commission shall, motu General Rule:

propio or upon verified complaint, and after due notice
and hearing, order the removal of a director or trustee No compensation except for reasonable per diems
elected despite the disqualification, or whose
disqualification arose or is discovered subsequent to an Exception:
election. The removal of a disqualified director shall be
without prejudice to other sanctions that the Commission Provided for in by laws
may impose on the board of directors or trustees who,
with knowledge of the disqualification, failed to remove 1. Vote of the stockholders representing at least a
such director or trustee. majority of the outstanding capital stock at regular or
special meeting.
2. Total yearly compensation shall not exceed 10% of Ratification:
the net income before income tax of the preceding year.
In case of absence of the first 3 conditions above,
The position of being chairman and Vice-Chairman, like contract may be ratified if:
that of treasurer and secretary, are not considered
directorship positions but officership positions that would (1) Stockholders representing at least 2/3 of the
entitle the occupants to compensation. Likewise, the outstanding capital stock or at least 2/3 of the members
limitation placed under Sec. 29 of the Revised in a meeting called for the purpose voted to ratify the
Corporation Code that directors cannot receive contract.
compensation exceeding 10% of the net income of the (2) Full disclosure of the adverse interest of the directors
corporation would not apply to the compensation given or trustees involved is made at such meeting.
to such positions since it is being given in their capacity (3) Contract is fair and reasonable under the
as officers of the corporation and not as board members. circumstances
(Western Institute of Technology v. Salas, 1997)
Interlocking Directors (Section 32)
Directors or trustees shall not participate in the
determination of their own per diems or compensation. Section 32 recognizes as valid a contract between two or
Liability of Corporate Officers (Sec 30) more corporations which have interlocking directors (i.e.,
one, some, or all of the directors in one corporation is /
are also director / directors in another corporation) as
Liability: Jointly and severally for all damages suffered by long as there is no fraud and the contract is fair and
the corporation, stockholders or members and other reasonable under the circumstances. However, if the
person when such director is trustee interest of the interlocking director in one corporation is
substantial, i.e., his stockholdings exceed 20% of the
1. Knowingly vote for or assent to patently unlawful acts outstanding capital stock and in the other merely
of the corporation (Duty of obedience) nominal, i.e., his stockholdings do not exceed 20%, the
2. Guilty of gross negligence or bad faith in directing the rules of Section 31 on self-dealing directors shall apply
affairs of the corporation (Duty of Diligence) insofar as the latter corporation is concerned.
3. Acquire any personal or pecuniary interest in conflict
with their duty as director or trustee (Duty of loyalty)

Dealings of directors, trustees or officers with the

corporation (Sec 31) If the interests of the interlocking director in the
corporations are both substantial (stockholdings
General rule: A contract of the corporation with one or exceed 20% of outstanding capital stock).
more of its directors or trustees is VOIDABLE, at the
option of such corporation. General rule: A contract between two or more
corporations having interlocking directors shall not be
Exception: Such contract is VALID if all of the following invalidated on that ground alone.
conditions are present:
Exception: If contract is fraudulent or not fair and
(1) That the presence of such director or trustee in the reasonable under the circumstance.
board meeting in which the contract was approved was
not necessary to constitute a quorum for such meeting; If the interest of the interlocking director in one of the
(2) That the vote of such director or trustee was not corporations is nominal (stockholdings 20% or less)
necessary for the approval of the contract while substantial in the other, the contract shall be
(3) That the contract is fair and reasonable under the VALID, if the following conditions are met:
circumstances;
(4) In case of corporations vested with public interest, (1) The presence of such director or trustee in the board
material contracts are approved by atleast (2/3) of the meeting in which the contract was approved was NOT
entire membership of the board, with atleast a majority of necessary to constitute a quorum for such meeting
the independent directors voting to approve the material (2) That the vote of such director or trustee was not
contract; and necessary for the approval of the contract
(5) In case of an officer, the contract has been previously (3) That the contract is fair and reasonable under the
authorized by the board of directors. circumstances
Where (1) and (2) are absent, the contract can be ratified b. Said committee may act, by majority vote of all its
by the vote of the stockholders representing at least 2/3 members, on such specific matters within the
of the outstanding capital stock or at least 2/3 of the competence of the board, as maybe delegated to it in the
members in a meeting called for the purpose voted to by-laws or on a majority vote of the board.
ratify the contract, provided that: Executive committees have no power to:

(a) Full disclosure of the adverse interest of the a) Approval of any action for which shareholders'
directors/trustees involved is made on such meeting; approval is also required;
(b) The contract is fair and reasonable under the (b) Filing of vacancies in the board;
circumstances (c) Amendment or repeal of bylaws or the adoption of
new bylaws;
(d) Amendment or term is not amendable or repealable;
ILLUSTRATION: and
(e) Distribution of cash divendends to the shareholders.
X Corporation sold a parcel of land worth P500,000.00 to
Y Corporation for only P300,000.00. Z is a board 2. The board of directors may create special committees
member of both corporations. of temporary or permanent nature and determine the
members, term, composition, compensation, powers and
Evidently, the contract is not fair and reasonable and is, responsibilities.
therefore, voidable on that ground. But if the contract is
fair and reasonable under the circumstances and Z's
interest in X Corporation is merely nominal and in Y CORPORATE POWERS AND CAPACITY
Corporation substantial, the conditions in Section 31
must be present insofar as X Corporation is concerned,
on the theory that the contract of X Corporation is with Z. Every corporation incorporated under this Code has the
power and capacity: (Sec 36)
However, if Z's interest in both corporations is nominal or
is substantial, the provisions of Section 31 do not apply (a) To sue and be sued in its corporate name;
but the contract shall be valid only if there is no fraud
and the contract is fair and reasonable under the (b) To have perpetual existence unless the
circumstances. The corporation which seeks to uphold certificate of incorporation provides otherwise;
the contract has the burden to show that it is fair and
reasonable. (c) To adopt and use a corporate seal;

Disloyalty of a director (Section 33) (d) To amend its articles of incorporation in

accordance with the provisions of this Code;
Where a director, by virtue of his office, acquires for
himself a business opportunity which should belong to (e) To adopt bylaws, not contrary to law, morals
the corporation thereby obtaining profits to the prejudice or public policy, and to amend or repeal the
of such corporation, he must account to the latter for all same in accordance with this Code;
such profits by refunding the same, unless his acts has
been ratified by a vote of the stockholders owning or (f) In case of stock corporations, to issue or sell
representing atleast 2/3 of the outstanding capital stock. stocks to subscribers and to sell treasury stocks
This provision shall be applicable notwithstanding the in accordance with the provisions of this Code;
facts that the director risked his own funds in the and to admit members to the corporation if it be
venture. a nonstock corporation;

(g) To purchase, receive, take or grant, hold,

Executive, Management and other Special convey, sell, lease, pledge, mortgage, and
Committees (Section 34) otherwise deal with such real and personal
property, including securities and bonds of other
corporations, as the transaction of the lawful
1. Executive Committee
business of the corporation may reasonably and
necessarily require, subject to the limitations
a. The by-laws of a corporation may create and prescribed by law and the constitution;
executive committee, composed of not less than 3
members of the board, to be appointed by the board.
 (h) To enter into a partnership, joint venture, to the stockholders at their places of residence as shown
merger, consolidation, or any other commercial in the books of the corporation served on the
agreement with natural and juridical persons; stockholders personally, or through electronic means
recognized in the corporation's bylaws and/or the
(i) To make reasonable donations, including Commission's rules as a valid mode for service of
those for the public welfare or for hospital, notices
charitable, cultural, scientific, civic, or similar
purposes: Provided, That no foreign corporation
shall give donations in aid of any political party
Certificate must be signed by a majority of the directors
or candidate or for purpose s of partisan political
of the corporation and countersigned by the chairperson
activity;
and secretary of the stockholders' meeting, setting forth:
(j) To establish pension, retirement, and other
(a) That the requirements of this section have
plans for the benefit of its directors, trustees,
been complied with;
officers, and employees; and

(b) The amount of the increase or decrease of

(k) To exercise such other powers as may be
the capital stock;
essential or necessary to carry out its purpose or
purposes as stated in the articles of
incorporation. (c) In case of an increase of the capital stock,
the amount of capital stock or number of shares
of no-par stock thereof actually subscribed, the
The Corporation has implied powers which are deemed
names nationalities and addresses of the
to exist because of the following provisions:
persons subscribing, the amount of capital stock
or number of no-par stock subscribed, the
(1) “Except such as are necessary or incidental to the names, nationalities and addresses of the
exercise of the powers so conferred” persons subscribing, the amount of capital stock
(2) “Such powers as are essential or necessary to carry or number of no-par stock subscribed by each,
out its purpose or purposes as stated in the AOI” – and the amount paid by each on the subscription
catch-all phrase in cash or property, or the amount of capital
stock or number of shares of no-par stock
allotted to each stockholder if such increase is
Power to Extend or Shorten Corporate Term (Sec 37) for the purpose of making effective stock
dividend therefor authorized;
Under this code, a corporation has perpetual existence.
This rule applies to an existing corporation, whose article (d) Any bonded indebtedness to be incurred,
of incorporation shall be deemed to reflect its perpetual created ot increased;
term, unless the corporation (by majority vote of
shareholders or member) elects to retain its limited term. (e) The amount of stock represented at the
meeting; and
With regards with corporation limited term, such term
may be extended or shortened through amendments of (f) The vote authorizing the increase or decrease
its article of incorporation when approved by a majority of capital stock, or incurring, creating or
increasing of bonded indebtedness.
vote of the board of directors or trustees, and ratified at a
meeting by the stockholders or members representing at
least two-thirds (2/3) of the outstanding capital stock or Any increase or decrease in the capital stock or the
of its members. Generally, an extension may be made incurring, creating or increasing of any bonded
no earlier than 3 years prior to the end of its term. indebtedness shall require prior approval of the
Commission and where appropriate, of the Philippine
Power to increase or Decrease Capital Stock; Incur, Competition Commission. The application with the
Create or Increase Bonded Indebtedness (Sec 37) Commission shall be made within six (6) months from
the date of approval of the board of directors and
Approved by a majority vote of the board of directors and stockholders, which period may be extended for
by two-thirds (2/3) of the outstanding capital stock at a justifiable reasons.
stockholders' meeting duly called for the purpose. 
Increase in Capital Stock
Written notice of the time and place of the stockholders'
meeting and the purpose for said meeting must be sent
In case of increase in capital stock, 25% of the increase stock, in exchange for property needed for corporate
must be subscribed and 25% of such subscription and purposes or in payment of a previously contracted debt.
25% of such subscription must be paid.
Sale or other disposition of assets (Sec 39)
Decrease in Capital Stock
1. Sell, lease, exchange, mortgage, pledge, or otherwise
Decrease in capital stock generally results in the return dispose of its property and assets (not all or substantially
of capital. Such return of capital must not prejudice the all)
rights of creditors. * Majority vote of its board of directors or trustees

There is no prejudice to creditors if they have been 2. A sale of all or substantially all of the corporation’s
informed of such possible or planned returned of capital properties and assets, including its goodwill.
at the time they extend credit to the corporation. A sale or other disposition shall be deemed to cover
substantially all of the corporate property and assets if
thereby the corporation would be rendered incapable of
Nonstock corporations continuing the business or accomplishing the purpose for
which it was incorporated.
They may incur, create or increase bonded indebtedness
when approved by a majority of the board of trustees The determination of whether or not the sale involves all
and of at least two-thirds (2/3) of the members in a or substantially all of the corporation’s properties and
meeting duly called for the purpose. assets must be computed based on its net asset value,
as shown in its latest financial statements.
Bonds issued by a corporation shall be registered with
the Commission, which shall have the authority to 1. Subject to the provisions of RA 10667 or Philippine
determine the sufficiency of the terms thereof. Competition Act and other related laws

2. Majority vote of its board of directors or trustee and

Power to Deny Pre-emptive Right (Sec 38) authorized by the vote of the stockholders representing
at least (2/3) of the outstanding capital stock or at least
A share subscription gives the subscriber certain 2/3 of the members in a stockholders or members
proportionate economic and political rights. Economic meeting duly called for the purpose.
right refers to the right to receive dividends and capital in
case of liquidation, while Political rights refer to the right 3. Written notice of the proposed action and of the time
to be nominated to the board and to approve certain and place for the meeting shall be addressed to
corporate actions. stockholders or members at their places of residence as
shown in the books of the corporation and deposited to
To maintain such rights, the law permits a shareholder to the addressee in the post office with postage prepaid or
proportionately subscribe to new issuance or re-issuance served personally.
of the corporation shares. This is called “Pre-emptive
rights” 4. Exercise Appraisal right

All Shareholders of a Stock Corporation have pre- Right of appraisal is the right to withdraw from the
emptive right to subscribe to all issues or disposition of corporation and demand payment of the fair value of the
shares of any class, in proportion to their respective shares after dissenting from certain corporate acts
shareholdings involving fundamental changes in corporate structure.

5. After such authorization or approval by the

Except: stockholders or members, the board of directors or
1. If such right is denied by the AOI or an amendment trustees may abandon such sale, lease, exchange,
thereto mortgage, pledge, or other disposition of property and
2. Shares to be issued in compliance with laws requiring assets, subject to the rights of third parties without
stock offerings or minimum stock ownership by the further approval by the stockholder or member
public
3. Shares to be issued in good faith with the approval of
2/3 of the stockholders representing outstanding capital
No vote of stockholder is required
 the postage prepaid. Served personally, or sent
1. Sale of asset which is necessary in the usual and electronically in accordance with the rules and
regular course of business or regulations of the Commission on the use of electronic
2. If the proceeds of the sale or other disposition of such data message, when allowed by the bylaws or done with
property and assets be appropriated for the conduct of the consent of the stockholders.
its remaining business.
3. Any dissenting stockholder shall have appraisal right
Power to acquire shares (Sec 40) provided that the investment by the corporation is
reasonably necessary to accomplish its primary purpose
The power to purchase or acquire its own shares for a as stated in the articles of incorporation, the approval of
legitimate corporate purpose or purposes, including the the stockholders or members shall not be necessary.
following cases:
Power to declare Dividend (Sec 42)
(a) To eliminate fractional shares arising out of
stock dividends; Cash/Property Stock Dividend
Dividend
(b) To collect or compromise an indebtedness to Delinquent 1st applied to Withheld until his
the corporation, arising out of unpaid unpaid balance unpaid
subscription, in a delinquency sale, and to on the subscription is fully
purchase delinquent shares sold during said subscription plus paid
sale; and cost and
expense
(c) To pay dissenting or withdrawing Approval of Without approval Approval of the
stockholders entitled to payment for their shares the of stockholders outstanding capital
under the provisions of this Code. stockholder stock
(Regular/special
meeting called for
2. Corporation has unrestricted retained earnings in the
the purpose)
books to cover the shares to be purchased or acquired.

Unrestricted retained earnings means the amount of

Prohibited from retaining surplus profit
accumulated profits and gains realized out of the normal
and continuous operation of the company after deducting
Corporation prohibited to retain surplus profit
therefrom distributions to stockholders and transfers to
(unaapropriated retained earnings) in exceed of 100% of
capital stock or other accounts and which is (1) not
their paid in capital
appropriated by its Board of Directors for corporate
expansion projects or programs; (2) not covered by a
Exception:
restriction for dividend declaration under a loan
agreement and (3) not required to be retained under
(a) when justified by the definite corporate expansion
special circumstances obtaining in the corporation such
projects or programs approved by the board of directors;
as when there is a need for a special reserve for
or
probable contingencies.
(b) when the corporation is prohibited under any loan
Investment of Fund in another Corporation (Not
agreement with financial institutions or creditors, whether
primary purpose) (Sec 41)
local or foreign, from declaring dividends without their
consent, and such consent has not yet been secured; or
1. Majority of the board of directors or trustees and
ratified by the stockholders representing at least two-
(c) when it can be clearly shown that such retention is
thirds (2/3) of the outstanding capital stock, or by at least
necessary under special circumstances obtaining in the
two-thirds (2/3) of the outstanding capital stock, or by at
corporation, such as when there is need for special
least two-thirds (2/3) of the members in the case of
reserve for probable contingencies.
nonstock corporations at a meeting duly called for the
purpose.
(d) Additional provided by law
2. Notice of the proposed investment and the time place
Power to enter into management contract (Sec 43)
of residence as shown in the books of the corporation
and deposited to the addressee in the post office with
No corporation shall conclude a management contract
with another corporation (Also apply to any contract Ultra Vires acts of Corporation (Sec 44)
where by a corporation undertakes to manage or operate
all or substantially all of the business of another No corporation shall possess or exercise corporate
corporation, whether such contracts are called service powers other than those conferred by this Code or by its
contract, operating agreements or otherwise) unless articles of incorporation and except as necessary or
such contract shall have been approved by the Board of incidental to the exercise of the powers conferred.
Directors and by Stockholders owning at least majority of
the outstanding capital stock or by at least majority of the ULTRA VIRES AND INTRA VIRES
member in case of non-stock corporation of both the
managing and the managed corporation at a meeting According to the strict construction of the term, an ultra
dully called for the purpose. vires act is one not within the express, implied, and
incidental powers of the corporation conferred by the
Corporation Code or articles of incorporation. It is an act
which is not positively forbidden, but impliedly forbidden
Exception: because not expressly or impliedly authorized or
necessary or incidental in the exercise of the powers so
The management contract must be approved by the conferred.
stockholders of the managed corporation owning at least
two-thirds (2/3) of the total outstanding capital stock Acts or transactions within the legitimate powers of a
entitled to vote, or by at least two-thirds (2/3) of the corporation or are related to its purposes are said to be
members in the case of a nonstock corporation, in the intra vires.
following instances:

(a) where a stockholder or stockholders representing the

same interest of both the managing and the managed
corporations own or control more than one-third (1/3) of
the total outstanding capital stock entitled to vote of the Illustration:
managing corporation; or
(1) A corporation was organized for the purpose of
(b) where a majority if the members of the board of engaging in the buying and selling of home appliances.
directors of the managing corporation also constitute a The act of buying and selling motor vehicles would be
majority of the members of the board of directors of the ultra vires although it is itself lawful because it is outside
managed corporation the object for which the corporation is created and,
therefore, beyond its powers.
These shall apply to any contract whereby a corporation
undertakes to manage or operate all or substantially all The buying and selling of refrigerators would be intra
of the called services contracts, operating agreements or vires.
otherwise, that such service contracts or operating
agreements which relate to the exploration, development (2) A corporation was organized to engage in the
exploitation or utilization of natural resources may business of manufacturing a particular product.
entered into such periods as may be provided by the Marketing and selling the product may be logically
pertinent laws or regulations. necessary to the business of manufacturing, considering
that there must be an end-user for the goods
Term of Management Contract manufactured or produced.

No management contracts shall be entered into for A seller, trader, dealer or importer of goods is not
period longer that five (5) years for any one term. necessarily or indispensably the manufacturer of the
goods. Therefore, manufacturing cannot be treated as
Exception: reasonably necessary to the business of the selling thus
it is Ultra Vires.
That such service contracts or operating agreements
which relate to the exploration, development exploitation Ratification of ultra vires acts
or utilization of natural resources may entered into such
periods as may be provided by the pertinent laws or (1) Where the contract or act is illegal per se, it is wholly
regulations. void or inexistent. It cannot be ratified or validated
(2) Where the contract or act is not illegal per se but
merely beyond the power of a corporation, the same is
merely voidable and may be enforced by performance,
ratification, or estoppel, or on equitable grounds.