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Summary Notes in Corporation Law

(Based on the Revised Coverage per Bar Bulletin No. 31, S.2022)

Dean Serge M. Ceniza

Classes of Corporations

Stock Corporations

Nature: are those 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 the shares held. (Sec. 3, R.A. No. 11232)
Those who compose: Stockholders who may be:

Corporators - those who compose a corporation, whether as stockholders or

shareholders
Incorporators- are those stockholders or members mentioned in the articles of
incorporation as originally forming and composing the corporation
and who are signatories thereof.

(Sec.5, R.A. No. 11232)

Governing Body : Board of Directors

Shares of Stocks : Yes. The shares in stock corporations may be divided into classes or series
of shares, or both. The shares or series of shares may or may not have a
par value:
Exception: banks, trust, insurance, and preneed companies, public
utilities, building and loan associations, and other corporations
authorized to obtain or access funds from the public, whether publicly
listed or not, shall not be permitted to issue no- par value shares of stock.

Classes of Shares:

Preferred shares of stock are those which may be given preference in the
distribution of dividends and in the distribution of corporate assets in case
of liquidation, or such other preferences. (Sec.6, R.A. No. 11232)

Founders’ shares may be given certain rights and privileges not enjoyed
by the owners of other stocks. (Sec. 7, R.A. No. 11232)

Redeemable shares are those shares which may be purchased by the

corporation from the holders of such shares upon the expiration of a fixed
period, regardless of the existence of unrestricted retained earnings in the
books of the corporation, and upon such other terms and conditions stated
in the articles of incorporation and the certificate of stock representing
the shares, subject to rules and regulations issued by the SEC. (Sec. 8,
R.A. No. 11232)

Payment of Dividend: Yes. Dividend payment may be in the form of :

a) cash
b) property
c) stock

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 Before a stock corporation can pay dividend, the following
requirements must be complied:

1) For Cash Dividend - there must be approval by a majority of

the board of directors;

2) For Stock Dividend

a) There must be approval by a majority of the board of

directors; and
b) There must approval of stockholders representing at least
two-thirds (2/3) of the outstanding capital stock at a
regular or special meeting duly called for the purpose.

The law provides that board of directors of a stock corporation may

declare dividends out of the unrestricted retained earnings of the
corporation.

Basis of dividend payouts shall be the stockholder’s outstanding

stock held by him as appearing in the books of the corporation.

(Sec. 42, R.A. No. 11232)

Non-stock Corporation

Nature: is a corporation where no part of its income is distributable as dividends to its

members, trustees, or officers. (Sec. 86, R.A. No. 11232)
Those who compose: Members
Governing Body : Board of Trustees
Shares of Stocks : None
Payment of Dividend: No

Educational Corporations

Nature: those established for the purpose of providing educational or academic services.
Education corporations shall be governed by special laws and by the general
provisions of the Revised Corporation Code. (Sec. 105, R.A. No. 11232)
Those who compose: Members (for Non-Stock); Stockholder for stock corporations
Governing Body :
Board of Trustees - for educational institutions organized as non-stock corporations
Board of Directors - for educational institutions organized as stock corporations
Shares of Stocks : Yes (for educational institutions organized as stock corporations)
No. (for educational institutions organized as non-stock corporations)
Payment of Dividend: Yes (for educational institutions organized as stock corporations)
No. (for educational institutions organized as non-stock corporations)

Close Corporation

Nature: is one whose articles of incorporation provides that:

a) all the corporation's issued stock of all classes, exclusive of treasury shares, shall
be held of record by not more than a specified number of persons, not exceeding
twenty (20);
b) all the issued stock of all classes shall be subject to one (1) or more specified
restrictions on transfer permitted by law; and
c) the corporation shall not list in any stock exchange or make any public offering of
its stocks of any class. (Sec. 95, R.A. No. 11232)
Those who compose: Stockholders
Governing Body : Board of Directors

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 Shares of Stocks : Yes
Payment of Dividend: Yes

Corporation Sole

Nature: is one established for the purpose of administering and managing, as trustee, the
affairs, property and temporalities of any religious denomination, sect or church, a
corporation sole may be formed by the chief archbishop, bishop, priest, minister,
rabbi, or other presiding elder of such religious denomination, sect or church.
(Sec.108, R.A. No. 11232)

Corporation Sole vs. Corporation Aggregate

A corporation sole is "one formed by the chief archbishop, bishop, priest, minister,
rabbi or other presiding elder of a religious denomination, sect, or church, for the
purpose of administering or managing, as trustee, the affairs, properties and
temporalities of such religious denomination, sect or church."
A corporation aggregate formed for the same purpose, on the other hand,
consists of two or more persons.|||
(Iglesia Evangelica Metodista en las Islas Filipinas vs. Lazaro, G.R. No. 184088,
July 6, 2010)

Shares of Stocks : None

Payment of Dividend: No

One Person Corporation

Nature: is a corporation with a single stockholder. (Sec. 116, R.A. No. 11232)
Those who compose: Single Stockholder
Governing Body : Board of Directors
Shares of Stocks : Yes
Payment of Dividend: Yes

Master Basic Concepts (compare and contrast)

a) Stock Corporation vs. Non-Stock Corporation

b) Closed Corporation vs. One Person Corporation
c) Corporation Sole vs. Corporation Aggregate

Board of Directors/Trustees

Composition

For Stock Corporations

a) Regular Directors

i. elected by stockholders entitled to vote based on the number of shares

of stock standing in their own names in the stock books of the
corporation

b) Independent Directors

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 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 board of corporations vested with public interest shall have

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

- Corporation vested with public interest are:

a. Corporations under the SRC namely:
1) corporations listed with an exchange or
2) with assets of at least Fifty million Pesos and having
two hundred or more holders of shares, each holding
at least one hundred (100) shares of a class of its
equity shares;
b. Banks and quasi-banks, NSSLAs, pawnshops, corporations
engaged in money service business, pre-need, trust and
insurance companies, and other financial intermediaries; and
c. Other corporations engaged in business vested with public
interest as may be determined by the SEC.

For Non-Stock Corporations

a) Regular Members of the Board of Trustees

- elected by the members
b) Independent Trustees
- elected as trustee by the members

Membership

Board of Directors

• only for stock corporation

• each of the directors must be elected from among the holders of stocks
registered in the corporation’s books
• each has a term of one (1) year
• a director shall cease to be such when he ceased to own at least one
(1) share of stock

Board of Trustees

• only for non-stock corporations

• each of the trustees shall be elected by the members of the non-stock
corporation
• each has a term not exceeding three (3) years
• a trustee shall cease to be such when he ceased to be a member of the
corporation.

Grounds for Disqualification

If within five (5) years prior to the election or appointment as such, the person was:

(a) Convicted by final judgment:

1) Of an offense punishable by imprisonment for a period exceeding six (6)
years;
2) For violating the Revised Corporation Code; and

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 3) For violating R. A. No. 8799, otherwise known as "The Securities
Regulation Code";
(b) Found administratively liable for any offense involving fraudulent acts; and
(c) By a foreign court or equivalent foreign regulatory authority for acts, violations or
misconduct similar to those enumerated in pars. (a) and (b) above.

(Sec. 26, R.A. No. 11232)

Can directors or trustees be removed even if there is no just cause?

Yes, directors or trustees be removed with or without cause. However, removal without
cause may not be used to deprive minority stockholders or members of the right of representation to
which they may be entitled under Section 23 of the law. (Sec. 27, R.A. No. 11232)

Procedure in removing directors or trustees by stockholder or members vote

A directors or trustee may be removed from office

a) A special meeting of the stockholders or members for the purpose of removing any director
or trustee must be called by the secretary on order of the president, or upon written demand
of the stockholders representing or holding at least a majority of the outstanding capital
stock, or a majority of the members entitled to vote.
b) Notice of the time and place of such meeting, as well as of the intention to propose such
removal, must be given by publication or by written notice prescribed by law.
c) A vote of the stockholders holding or representing at least two-thirds (2/3) of the
outstanding capital stock or a vote of at least two-thirds (2/3) of the members of a nonstock
corporation entitled to vote, must be obtained approve the removal of a director or trustee

(Sec. 27, R.A. No. 11232)

Powers/Duties/Prerogatives

The board of directors or trustees shall exercise the corporate powers, conduct all business, and
control all properties of the corporation. (Sec. 22, R.A. No. 11232)

Acts of an officer that are not authorized by the board of directors/trustees do not bind the
corporation unless the corporation ratifies the acts or holds the officer out as a person with authority
to transact on its behalf.||| (University of Mindanao, Inc. vs. Bangko Sentral ng Pilipinas, G.R. Nos.
194964-65, January 11, 2016)

Business Judgment Rule

The business of a corporation is conducted by its board of directors, and so long as the board acts in
good faith, the State, through the courts, may not interfere with its management decisions.||| (Ago
Realty & Development Corp. v. Ago, G.R. Nos. 210906 & 211203, October 16, 2019)

In what instances will directors or trustees be liable jointly and severally for damages suffered by the
corporation, its stockholders or members and other persons?

Directors or trustees shall be liable jointly and severally for all damages suffered by the
corporation, its stockholders or members and other persons in cases:

1) When directors or trustees who willfully and knowingly vote for or assent to patently unlawful
acts of the corporation or
2) When directors or trustees are guilty of gross negligence or bad faith in directing the affairs
of the corporation or
3) When directors or trustees acquire any personal or pecuniary interest in conflict with their
duty as such directors or trustees.

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 (Sec. 30, R.A. No. 11232)

What is the rule when a director, trustee, or officer acquired an interest adverse to the corporation
in respect of any matter which has been reposed in them in confidence by the corporation.

The law provides that a director, trustee, or officer shall not attempt to acquire, or acquire any
interest adverse to the corporation in respect of any matter which has been reposed in them in confidence,
and upon which, equity imposes a disability upon themselves to deal in their own behalf.

If the said director, trustee, or officer have acquired an interest adverse to the corporation, such
director, trustee, or officer shall be liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation.

(Sec. 30, R.A. No. 11232)

Rule in case of disloyalty of a director

The rule is that “where a director, by virtue of such office, acquires a business opportunity which
should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, the director
must account for and refund to the latter all such profits even if that the director risked one’s own funds in
the venture. (Sec. 33, R.A. No. 11232)

Exception

Yes, the rule will not apply if the act has been ratified by a vote of the stockholders owning or
representing at least two- thirds (2/3) of the outstanding capital stock of the corporation. (Sec. 33, R.A. No.
11232)

Special Fact Doctrine

Special Fact Doctrine is a doctrine holding that a corporate officer with superior knowledge
gained by virtue of being an insider owes a limited fiduciary duty to a shareholder in transactions involving
transfer of stock.

Test on the Applicability of the Special Fact Doctrine

1) That the material fact or information was peculiarly within the knowledge of one party
and
2) That the information was not such that could have been discovered by the other party
through the exercise of ordinary intelligence.

Application:

In the sale of certain shares of the corporation, the president and corporate secretary
deliberately withheld certain information and to disclose certain documents concerning adverse
contract information known to them to the buyer. Can they be held liable for damages?

Answer:

Yes, the “special facts” doctrine holds that “absent a fiduciary relationship between
parties, there is nonetheless a duty to disclose when one party’s superior knowledge of essential
facts renders a transaction without disclosure inherently unfair”

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Master Basic Concepts

1) Requirement and term of members of the Board

2) Grounds for Disqualification of Membership in the Board
3) Removal of Members of the Board
4) Powers/Duties/Prerogatives of the Board
5) Business Judgment Rule
6) Disloyalty of a Director
7) Self-Dealing Director
8) Special Fact Doctrine

Articles of Incorporation and By-Laws

Articles of Incorporation

Nature: The articles of incorporation has been described as one that defines the charter of the
corporation and the contractual relationships between the State and the corporation, the
stockholders and the State, and between the corporation and its stockholders.| (Lanuza vs.
Court of Appeals, G.R. No. 131394, March 28, 2005)

Adoption:

• The articles of incorporation shall be adopted and filed by the incorporators.

• All corporations shall file with the SEC articles of incorporation in any of the official
languages, duly signed and acknowledged or authenticated, in such form and manner
as may be allowed by the SEC. (Sec. 13, R.A. No. 11232)
• Should be filed with the SEC prior to incorporation

Approval by SEC:

• When the AOI and other pre-incorporation documents are in order, the SEC shall
issue the certificate of incorporation.

Grounds for Disapproval:

(a) The articles of incorporation or any amendment thereto is not substantially in accordance
with the form prescribed by law;
(b) The purpose or purposes of the corporation are patently unconstitutional, illegal, immoral
or contrary to government rules and regulations;
(c) The certification concerning the amount of capital stock subscribed and/or paid is false;
(d) The required percentage of Filipino ownership of the capital stock under existing laws or
the Constitution has not been complied with.

(Sec. 16 R.A. No. 11232)

Amendment to the AOI

Requirements:

For Stock Corporation:

1) approval by a majority vote of the board of directors and

2) the vote or written assent of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock

• without prejudice to the appraisal right of dissenting stockholders

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 For Non-Stock Corporation:

1) approval by the vote or written assent of majority of the trustees and

2) the vote or written assent of the at least two-thirds (2/3) of the members.

Effectivity of Amendment:

1) upon their approval by the SEC or

2) from the date of filing with the SEC if not acted upon within six (6) months from the
date of filing for a cause not attributable to the corporation.

(Sec. 15, R.A. No. 11232)

By-Laws

Nature:

A corporation's by-laws is a legal document setting forth key rules and regulations governing
the corporation's day-to-day operations. It is designed for the internal governance of the
corporation.

Adoption:

1) If adopted pre-incorporation

• Such by-laws shall be approved and signed by all incorporators and submitted to
the SEC, together with the articles of incorporation.

2) If adopted post-incorporation

a) the affirmative vote of the stockholders representing at least a majority of the

outstanding capital stock, or of at least a majority of the members in case on
nonstock corporations
b) copy thereof, duly certified by a majority of the directors or trustees and
countersigned by the secretary of the corporation, shall be filed with the SEC.

(Sec 45, R.A. No. 11232)

Effectivity:

• shall be effective only upon the issuance by the SEC of a certification that the by-
laws are in accordance with law. (Sec 45, R.A. No. 11232)

Amendment of the By-Laws

Requirements:

1) Approval by a majority of the board of directors or trustees, and

2) Ratification by the owners of at least a majority of the outstanding capital stock, or
at least a majority of the members of a nonstock corporation.

• The owner of two-thirds (2/3) of the outstanding capital stock or two-third

(2/3) of the members in a nonstock corporation mat delegate to the board of

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 directors or trustees the power to amend or repeal the bylaws or adopt new
bylaws.

• Any power delegated to the board of directors or trustee to amend or repeal

the bylaws or adopt new bylaws shall be considered as revoke whenever
stockholders owning or representing a majority of the outstanding capital
stock or majority of the members shall so vote at a regular or special meeting.

(Sec. 47, R.A. No. 11232)

Effectivity of Amendment:

• The amended or new bylaws shall only be effective upon the issuance by the SEC
of certification that the same is in accordance with the Revised Corporation Code
and other relevant laws. (Sec. 47, R.A. No. 11232)

Master Basic Concepts (compare and contrast)

1) AOI vs. By-Laws – (compare and contrast)

• when it can be adopted and necessity before incorporation
• Effectivity of Amendment of AOI

2) Grounds for Disapproval of AOI

3) Requirements for approval for the amendment of AOI
4) Requirements for approval of amendment to the By-laws

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