Law on Business Organizations

(Partnerships, Corporations and Cooperatives)

CORPORATIONS Power to Incur, Create, or Increase Bonded

Indebtedness
7) Corporate Powers “Bonded indebtedness” are long term debts of the
corporation, secured by mortgage on real or
a. General powers; theory of general capacity personal property of the corporation

[See: Homework] The power to incur, create, or increase bonded

indebtedness is a form of distributing liability
Theory of General Capacity securities to the public, and constitutes an aspect of
A corporation is said to hold such powers as are not the inherent power of every corporation to borrow
prohibited or withheld from it by general law. or to incur loan obligations.

Exercise of Appraisal Right

b. Specific powers; theory of specific capacity
In Cases of Increase or Decrease of Capital Sock
The right of appraisal can be exercised in cases of
Theory of Specific Capacity
increase of capital stock because it has the
The corporation cannot exercise powers except
potential effect of diluting the proportionate interest
those expressly/impliedly given.
of a stockholder in the corporation
Under the Theory of Specific Capacity, the specific
The right of appraisal CANNOT be exercised in cases
powers of a corporation are as follows:
of decrease in capital stock since the decrease
1. Power to extend or shorten corporate term
would result in returning part of the investments of
2. Power to increase or decrease capital stock, or
the stockholders, including dissenting stockholders
incur, create, increase bonded indebtedness
[Sec. 37]
In Cases of Incurring, Creating or Increasing Bonded
3. Power to deny pre-emptive rights [Sec. 38]
Indebtedness
4. Power to sell or dispose corporate assets [Sec. 39]
The appraisal right CANNOT be exercised by
5. Power to acquire own shares [Sec. 40]
dissenting stockholders when the corporation validly
6. Power to invest corporate funds in another
incurs, creates, or increases bonded indebtedness.
corporation or business, or for any other purpose
[Sec. 41]
7. Power to declare dividends [Sec. 42] e. Power to deny pre-emptive rights
8. Power to enter into management contract [Sec.
43] Pre-emptive right
9. Power to amend AOI [Sec. 15] The preferential right of shareholders to subscribe to
all issues or disposition of shares of any class in
c. Power to extend or shorten corporate term proportion to their present shareholdings. [Sec 38]

The purpose of preemptive right is to enable the

A private corporation may extend or shorten its term
shareholder to retain his proportionate control in
as stated in the articles of incorporation. [Sec. 36]
the corporation and to retain his equity in the
surplus
Perpetual existence under the RCC applies to
existing corporations. AOIs shall be deemed
GR: All shareholders of a stock corporation have the
amended to reflect its perpetual term, unless the
preemptive right to subscribe to all issues or
corporation elects to retain its limited term [Herbosa,
disposition of shares of any class, in proportion to
2019].
their respective shareholdings.
XPN: If such right is denied by the AOI or an
When Exercised
amendment thereto
Period to extend the corporate term has been
reduced by the RCC to three years before
“All issues” of shares extends to BOTH issuances of:
expiration.
• New shares resulting in an increase in capital
stock, and
When the term expires, it is not ipso facto dissolved
• Previously unsubscribed shares which formed
but may apply for a revival of its corporate
part of the existing capital stock. [Herbosa,
existence. [Divina, 2020]
2019; SEC Opinion No. 5-03]
d. Power to increase or decrease capital stock For close corporations, the pre-emptive rights extend
or incur, create, increase bonded to all stock to be issued, including reissuance of
indebtedness treasury shares, whether for money, property or
personal services, or in payment of corporate debts,
A corporation may increase or decrease its capital unless the AOI provides otherwise. [Sec. 101]
stock or incur, create or increase any bonded
indebtedness. [Sec. 37] Note: Pre-emptive right can only be exercised to the
same class of shares issued or disposed with that
Power to Increase or Decrease Capital Stock owned by the stockholder (Share-a-like basis).
An increase or decrease of the capital stock
amends the underlying contractual relationships f. Power to sell or dispose corporate assets
between and among members of the corporation

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Law on Business Organizations
(Partnerships, Corporations and Cooperatives)

Sale of all or substantially all of corporate assets the expensive requisite of a majority voting
A corporation may sell all or substantially all of the its stock. [Villanueva]
properties and assets, including its goodwill. [Sec. 39]
XPNs:
To determine whether a sale or other disposition shall • Redeemable shares may be acquired even
be deemed to cover all or substantially all the without surplus profit for as long as it will not
corporate property and assets: result to the insolvency of the Corporation;
1. Make a computation based on the • In cases that the corporation conveys its
corporation’s net asset value, as shown in its stocks in payment of a Debt;
latest financial statements. • In a Close corporation, a stockholder may
2. Assess whether the corporation would be demand the payment of the fair value of
rendered incapable of continuing the business shares regardless of existence of retained
or accomplishing the purpose for which it was earnings for as long as it will not result to the
incorporated. [Sec. 39] insolvency of the corporation.

De facto Merger – Continuity-of-business enterprise Legitimate Corporate Purposes [Sec. 40]

requirement Legitimate corporate purposes include, but is not
There is a de facto merger when a corporation limited to the following:
(transferring corporation) exchange all or A) To eliminate fractional shares arising out of stock
substantially all of its assets for the shares of another dividends
(transferee corporation). The transferring B) To collect or compromise an indebtedness to the
corporation may later on be dissolved, where the corporation, arising out of unpaid subscription, in
shares of the transferee corporation will be a delinquency sale, and to purchase delinquent
distributed by way of liquidating dividends to the shares sold during said sale; and
shareholders of the transferring corporation. C) To pay dissenting or withdrawing stockholders.

The continuity-of-business enterprise requirement is h. Power to invest corporate funds in another

what differentiates a de facto merger from a corporation or business
voluntary dissolution of a corporation
GR: The corporation is not allowed to engage in a
g. Power to acquire own shares business different from those enumerated in its AOI.
XPN: The purpose will be amended to include the
The power of a corporation to acquire its own shares desired business activity among its secondary
A stock corporation shall have the power to purpose.
purchase or acquire its own shares for a legitimate
corporate purpose or purposes. Rules in case a corporation wants to invest in an
undertaking
Unrestricted Retained Earnings • Investment of a corporation in a business which
This is defined as the amount which is: is in line with its primary purpose requires only the
1) The accumulated profits and gains realized out approval of the board.
of the normal and continuous operations of the • Investment of assets for any of its secondary
company AFTER deducting therefrom purposes requires the prior approval of its
i. Distributions to stockholders and shareholders/members
ii. Transfers to capital stock or other • If the investment is outside the purpose/s for
accounts, and which the corporation was organized, Articles of
2) NOT appropriated by its Board of Directors for Incorporation must be amended first, otherwise
corporate expansion projects or programs: it will be an Ultra Vires act.
3) NOT covered by a restriction for dividend
declaration under a loan agreement; and i. Power to declare dividends
4) NOT required to be retained under special
circumstances obtaining in the corporation such
Requirements
as when there is a need for a special reserve for
(1) Must be distributed out of URE
probable contingencies. [SEC Memorandum
(2) Payable in cash, in property, or in stock to all
Circular No. 11-08, (December 5, 2008)]
shareholders on the basis of outstanding stock
held by them
GR: The corporation may only acquire its own stocks
(3) Resolution by the Board
in the presence of URE
Source of dividends
Rationale: Existence of URE is required before a
Dividends may only be declared out of actual and
corporation acquires its own shares because:
bona fide unrestricted retained earnings.
• The repurchase of shares is a method of
distribution or withdrawal of assets, and is
Prohibition imposed by law on UREs of a stock
subject to abuse, as creditors have a right to
corporation
assume that so long as there are debts and
Stock corporations are prohibited from retaining
liabilities, the Board will not use corporate
surplus profits in excess of 100% of their paid-in
assets to purchase its own stock; and
capital stock, except:
• Treasury shares may be availed of to
(1) When justified by definite corporate expansion
perpetrate control of the enterprise without
projects or programs approved by the BOD;

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Law on Business Organizations
(Partnerships, Corporations and Cooperatives)

(2) When the corporation is prohibited under any k. Ultra vires acts
loan agreement with any financial institution or
creditor from declaring dividends without its Ultra Vires Acts
consent, and such consent has not yet been Those acts which a corporation is not empowered to
secured; do or perform because they are outside or beyond
(3) When it can be clearly shown that such retention the express and implied powers conferred by its
is necessary under special circumstances Articles of Incorporation or by the Revised
obtaining in the corporation Corporation Code, or not necessary or incidental to
the exercise of the powers so conferred. [Sec. 44]
Note: In case a corporation unjustifiably retains
surplus profits in excess of one hundred (100%) Types of Ultra Vires Acts
percent of the paid-in accumulated capital, it will a. Acts done beyond the powers of the corporation
be liable for Improperly Accumulated Earnings Tax as provided in the law or its articles of incorporation;
(IAET) equal to 10% of the improperly accumulated b. Ultra Vires acts of officers and not of the
taxable income. [Sec. 29 (A), NIRC] corporation
c. Acts or contracts, which are per se illegal as
Moreover, it will also be liable to pay a penalty being contrary to law. [Villanueva]
imposed by the SEC. [SEC Memo. Circ. No. 6, s. 2005]
l. Doctrine of Individuality of Subscription
Forms of Dividends
(1) Cash – Any cash dividend due on delinquent
Concept
stock shall first be applied to the unpaid balance
The Doctrine of Individuality of Subscription states
on the subscription plus cost and expenses
that a subscription is one entire and indivisible whole
(2) Stock - Stock dividends shall be withheld from the
contract. It cannot be divided into portions.
delinquent stockholder until his unpaid
subscription is fully paid; Stock dividends cannot
Effect
be issued to a person who is not a stockholder in
Where stocks were subscribed and part of the
payment of services rendered.
subscription contract price was not paid, the whole
(3) Property - Stockholders are entitled to dividends
subscription shall be considered delinquent, and not
pro-rata based on the total number of shares
only the shares which correspond to the amount not
and not on the amount paid on shares.
paid.
Cash Dividends vs. Stock Dividends
Cash Stock m. Doctrine of Equality of Shares
Voting Board of Board of
requirements Directors Directors + 2/3 Concept
for issuance of stockholders The doctrine of equality of shares states that all
Effect on Shall be Shall be stocks issued by the corporation are presumed equal
delinquent applied to the withheld from with the same privileges and liabilities, provided that
stock unpaid the delinquent the Articles of Incorporation is silent on such
balance on stockholder differences. [Sec. 6]
the until his unpaid
subscription subscription is n. Trust fund doctrine
plus cost and paid
expenses Concept
Can this be No (Sec. 34) No, since this The Trust Fund Doctrine states that the capital stock,
issued by requires properties and other assets of a corporation are
Executive stockholders’ regarded as equity in trust for the payment of
Committee? approval [Sec. corporate creditors
34]
8) Stockholders and Members
j. Power to enter into management contract
a. Fundamental rights of a stockholder
Management Contract
Any contract whereby a corporation undertakes to [See: Homework]
manage or operate all or substantially all of the
business of another corporation, whether such Nature of the Rights of Members
contracts are called service contracts, operating The eleemosynary nature (i.e. charitable) of every
agreements or otherwise. non-stock corporation defines the characteristic of
membership therein as being essentially personal in
Period of every management contract character and therefore essentially non-transferable
GR: No management contract shall be entered into in nature
for a period longer than 5 years for any one term.
XPN: Service contracts or operating agreements b. Participation in management
which relate to exploration, development,
exploitation or utilization of natural resources may be i. Proxy
entered into for such periods as may be provided in
the pertinent laws and regulations. Stockholders and members may vote in person
or by proxy in all meetings
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Law on Business Organizations
(Partnerships, Corporations and Cooperatives)

3) Remote communication or in absentia [Sec.

Requisites 57]
1) It must be in writing;
2) Signed by the stockholder or member of c. Proprietary rights
record;
3) Filed with the corporation before the i. Appraisal right
scheduled meeting with the Corporate
Secretary. [Sec. 57] Appraisal Right
The right to withdraw from the corporation and
Period of effectivity demand payment of the fair value of the shares
GR: No proxy shall be valid and effective for a after dissenting from certain corporate acts
period longer than five (5) years at any one time. involving fundamental changes in corporate
XPN: Unless otherwise provided in the proxy, it structure. [Sec. 80]
shall be valid only for the meeting for which it is
intended. Who is Entitled to Exercise
A prejudiced stockholder who dissented in the
ii. Voting trust meeting where the proposal was approved.

An arrangement created by one or more Mere silence or abstention does not suffice. The
stockholders for the purpose of conferring upon stockholder must have voted against the
a trustee or trustees the right to vote and other corporate action.
rights pertaining to the shares for a period not
exceeding 5 years at any time [Sec. 58]. ii. Right to inspect

Note: Under a voting trust agreement, a Basis of Right

stockholder of a stock corporation parts with the As the beneficial owners of the business, the
naked or legal title, including the power to vote, stockholders have the right to know the financial
of the shares and only retains the beneficial condition and management of corporate affairs
ownership of the stock.
Requirements for the exercise of the right of
Requisites inspection
1) It is in writing and notarized; 1) Any director, trustee, stockholder or member
2) It specifies the terms and conditions thereof; of the corporation in person or by a
and representative.
3) A certified copy of such agreement is filed 2) Must be done at reasonable hours on
with the corporation and with the SEC. [Sec. business days.
58] 3) A demand in writing may be made by the
director, trustee or stockholder at their
Period of Effectivity expense, for such records or excerpts from
GR: Voting trust agreements shall not exceed five the records.
(5) years at any one time. Exception 4) The inspecting or reproducing party shall
XPN: Voting trust agreements may be for a remain bound by confidentiality rules
period exceeding five (5) years if it is specifically 5) Must be for a legitimate purpose
required as a condition in a loan agreement
Test to Determine Whether the Purpose of
iii. Cases when stockholders' action is required Inspection is Legitimate
A legitimate purpose is one which is genuine to
GR: Each share of stock is entitled to vote. the interests of the stockholders as such and not
XPN: Unless otherwise provided in the articles of contrary to the interests of the corporation
incorporation or declared delinquent under Sec. • A valid defense to refuse is the requester is a
66. [Sec. 6] competitor, director, officer, controlling
stockholder or otherwise represents the
Note: Nevertheless, ALL stockholders, regardless interests of a competitor.
of classification as voting or non-voting, are
entitled to vote in the following matters: ABISIMID iii. Preemptive right

iv. Manner of voting Concept

An option or privilege of an existing stockholder
A stockholder may vote either: to subscribe to a proportionate part of shares
1) Directly (in person); or subsequently issued by the corporation before
2) Indirectly, through a representative: the same can be disposed of in favor of others
a. Proxy
b. By a trustee under a voting trust Purpose/Basis
agreement; or Preservation of the existing proportional rights of
c. By executors, administrators, the stockholders.
receivers, or other legal
representatives duly appointed by iv. Right to vote
the court
GR: No share may be deprived of voting rights

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Law on Business Organizations
(Partnerships, Corporations and Cooperatives)

XPN: Shares classified and issued as “preferred”

or “redeemable” may be deprived of voting 1) Liability to the Corporation for Unpaid
rights: Provided, that there shall always be a class Subscription [Sec. 66]
or series of shares with complete voting rights. 2) Liability to the Corporation for Interest on Unpaid
Subscription if so Required by the By-Laws
v. Right to dividends 3) Liability for Watered Stocks
4) Liability for Dividends Unlawfully Paid
A dividend is that portion of the profits of the
corporation set aside, declared and ordered by f. Meetings
the directors to be paid ratably to the
stockholders on demand or at a fixed time Regular Special
Annually on a date Any time
Discretion of Board to Declare Dividends fixed by the by- deemed
GR: The board of directors of a stock corporation laws. necessary or as
may declare dividends out of the unrestricted provided in the
retained earnings to all stockholders on the basis When If not fixed, on any by-laws
of outstanding stock held by them. [Sec. 42] date AFTER April 15
XPN: Stock corporations are prohibited from of every year as
retaining surplus profits in excess of 100% of their determined by the
paid-in capital stock. BOD/BOT
XPN to XPN: Stock corporations may retain GR: Sent at least 21 GR: At least 1
surplus profits in excess of 100% of their paid-in days prior to the week written
capital stock: meeting notice
(1) When justified by definite corporate Written XPN: A different XPN: A different
expansion projects or programs approved by Notice period is required period is
the board of directors; or by the by-laws, law provided in the
(2) When the corporation is prohibited under or regulation. by-laws, law or
any loan agreement with financial institutions regulation
or creditors, whether local or foreign, from Stock Corporations
declaring dividends without their consent, GR: Principal office
and such consent has not yet been secured; XPN: If not practicable, in the city or
or municipality where the principal office
(3) When it can be clearly shown that such of the corporation is located
retention is necessary under special Where
circumstances obtaining in the corporation, Non-stock Corporations
such as when there is need for special Any place even outside the place
reserve for probable contingencies. [Sec. 42] where the principal office of the
corporation is located, as long as
d. Remedial rights within Philippine territory
GR: Majority SH
Precondition/Requisite Quorum XPN: RCCP or the by-laws provide
The SH has tried to exhaust intra-corporate remedies otherwise.
or administrative remedies
9) Board of Directors and Trustees
i. Individual suit

A suit brought by the shareholder in his own a. Repository of corporate powers

name against the corporation when a wrong is
directly inflicted against him. Unless otherwise provided in this Code, the board of
directors or trustees shall exercise the corporate
ii. Representative suit powers, conduct all business, and control all
properties of the corporation
A suit brought by the stockholder in behalf of
himself and all other stockholders similarly Governing Body of the Corporation
situated when a suit brought by the shareholder GR: The corporation can act only through its BOD in
in his own name against the corporation when a the case of stock corporations, or BOT in the case of
wrong is directly inflicted against him or a wrong non-stock corporations
is committed against a group of stockholders. XPNs:
(1) It can be delegated to the Executive Committee
iii. Derivative suit (2) In case of a contracted manager which may be
an individual, a partnership, or another
A suit brought by a SH for and on behalf of the corporation
corporation for its protection from the wrongful
acts committed by the BOD/BOT of the b. Tenure, qualifications, and disqualifications of
corporation, when the SH finds that he has no directors
redress because the BOD/BOT, are the ones
vested by law to decide whether or not to sue i. Tenure

e. Obligations of a stockholder BOD – 1 year

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Law on Business Organizations
(Partnerships, Corporations and Cooperatives)

BOT - not exceeding 3 years XPN: Unless the act has been ratified by a vote of the
stockholders owning or representing at least two-
ii. Qualifications thirds (2/3) of the outstanding capital stock.
• Doctrine of Corporate Opportunity
a. Director: Must own at least (1) share of stock • Self-Dealing Director
Trustee: Must be a member
b. Must be a natural person, of legal age, i. Business judgment rule
possess full legal capacity
c. Must not be convicted by final judgment of GR: Questions of policy or management are left
an offense punishable by imprisonment for a solely to the honest decision of officers and
period exceeding 6 years directors of a corporation and the courts are
d. Other qualifications as may be prescribed in without authority to substitute their judgment for
the by-laws of the corporation. the judgment of the board of directors.

Note: The RCCP removed the requirement that The board is the business manager of the
majority of the BOD/BOT must be residents of corporation and so long as it acts in good faith,
the Philippines. its orders are not reviewable by the courts or the
SEC.
iii. Disqualifications
• The resolution, contracts and transactions of
A person shall be disqualified from being a the board cannot be reversed or set aside by
director, trustee, or officer of any corporation if, the Courts even on the behest of
within five (5) years prior to the election or stockholders or members, under the principle
appointment as such, the person was: that the business of the corporation has been
a. Convicted by final judgment: left to the hands of the board.
i. Of an offense punishable by imprisonment • Directors and duly authorized officers cannot
for a period exceeding six (6) years; be held personally liable for acts or contracts
ii. For violating this Code; and done with the exercise of their business
iii. For violating Republic Act No. 8799, judgment
otherwise known as “The Securities
Regulation Code” ii. Solidary liabilities for damages
b. Found administratively liable for any offense
involving fraud acts e. Personal liabilities
c. By a foreign court or equivalent foreign
regulatory authority for acts, violations or When sufficient proof exists on record that the
misconduct similar to those enumerated officers acted fraudulently, beyond his authority or
when the officer agrees to be personally liable on
c. Compensation behalf of the corporation

GR: Directors or trustees are only entitled to f. Inside information

reasonable per diems. They are not entitled to
compensation as directors or trustees. [Sec. 29] It is inside information if it is not generally available to
XPN: (1) Provided in the AOI or (2) SH Vote Majority others and is acquired because of the close
relationship of the director or officer to the
d. Disloyalty corporation.

Three-Fold Duty The fiduciary position of insiders, directors, and

Duty of Obedience, duty of Diligence, and duty of officers prohibits them from using confidential
Loyalty. information relating to the business of the
corporation to benefit themselves or any competitor
Duty of Obedience corporation in which they may have a mere
The Directors or Trustees and Officers should direct substantial interest.
the affairs of the corporations only in accordance
with the purposes for which it was organized. 10) Capital Affairs

Duty of Diligence
a. Certificate of Stock
The directors should not willfully and knowingly vote
for or assent to patently unlawful acts of the
An instrument formally issued by the corporation with
corporation or act in bad faith or with gross
the intention that the same constitute the best
negligence in directing the affairs of the corporation.
evidence of the rights and status of a shareholder
[Sec. 30]

Duty of Loyalty b. Corporate Books and Records

GR: Where a director, by virtue of such office,
acquires a business opportunity which should belong i. Records to be kept at principal office
to the corporation, thereby obtaining profits to the
prejudice of such corporation, the director must • Articles of incorporation and by-laws and all
account for and refund to the latter all such profits. their amendments;

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Law on Business Organizations
(Partnerships, Corporations and Cooperatives)

• Current ownership structure and voting rights Merger a corporation absorbs the other and remains
of corporation in existence while the others are dissolved
• Names and addresses of all members of
BOD/trustees and the executive officers Consolidation a new corporation is created, and
• Record of all business transactions consolidating corporations are extinguished
• Record of resolutions of BOD/Trustees and of
stockholders/members MERGER CONSOLIDATION
• Copies of latest reportorial requirements One or more Union of 2 or more
submitted to the Commission; and corporations are corporations to form a
• Minutes of all meetings of absorbed by another new corporation
stockholders/members or of BOD/trustees. which survives and
continues the
11) Dissolution and liquidation combined business

a. Modes of dissolution b. Distinguish: constituent and consolidated

corporation
Dissolution of a corporation is the extinguishment of
its franchise and the termination of its corporate Constituent Corporations – The parties to a merger
existence or business purpose. or consolidation

However, for the purpose only of winding up its affairs Consolidated Corporation - The new single
and liquidating its assets, its corporate existence corporation created through consolidation.
continues for a period of 3 years from such dissolution
Surviving Corporation – One of the constituent
VOLUNTARY INVOLUNTARY corporations which remain in existence after the
Vote of the Board and Expiration of the merger
SH/Members where no shortened corporate
creditors are affected term c. Plan of merger or consolidation
By the judgment of the By Legislative
SEC after hearing of Enactment d. Articles of merger or consolidation
petition for voluntary
dissolution, where e. Procedure, effectivity, limitations, and effects
creditors are affected
Amending the AOI to Failure to organize and i) Approval of Plan of Merger or Consolidation by
shorten its term commence business BOD and Stockholders of Constituent
within 5 years from Corporations
incorporation
In case of a Cessation of business Any dissenting stockholder in stock corporations
corporation sole, by for 5 years may exercise his appraisal right in accordance
submitting with the Code
to the SEC a verified
declaration of the ii) Articles of Merger or Articles of
dissolution for approval Consolidation shall be executed by each
By merger or By order of the SEC on of the constituent corporations.
consolidation grounds under existing
laws [Sec 138] iii) Submission of of the Articles of Merger or
By order of the Courts Articles of Consolidation to the SEC for
following a quo approval.
warranto proceeding,
a proceeding involving iv) Conduct hearing or issue certificate.
a financially distressed [Sec. 78] a. If necessary, the SEC shall set
corporation, or for a hearing, notifying all corporations
grounds under existing concerned at least 2 weeks before. b.
laws. SEC shall issue a certificate approving the
articles and plan of merger or of
b. Methods of liquidation consolidation.

Liquidation is the process by which all the assets of v) Upon issuance of the certificate of
the corporation are converted into liquid assets merger or consolidation, such merger or
(cash) in order to facilitate the payment of consolidation shall become effective
obligations to creditors, and the remaining balance
if any is to be distributed to the stockholders. Note: Merger or consolidation does not become
effective by mere agreement of the constituent
12) Merger and Consolidation corporations. The approval of the SEC is required
[PNB v. Andrada Electric and Engr. Co., Inc. (2002)]
a. Definition and Concept

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