Law on Business Organizations (LM 3189) PDF

Law on Business Organizations (LM 3189) SEC. 6. Classification of Shares. – The classification of shares, their UST AB Legal Management | A.Y 2024-2025 | 3LM1 | corresponding rights, privileges, or restrictions, and their stated par Lacson,...

Law on Business Organizations (LM 3189) SEC. 6. Classification of Shares. – The classification of shares, their UST AB Legal Management | A.Y 2024-2025 | 3LM1 | corresponding rights, privileges, or restrictions, and their stated par Lacson, Jannesa Clarisse value, if any, must be indicated in the articles of incorporation. Each share shall be equal in all respects to every other share, except TITLE I as otherwise provided in the articles of incorporation and in the GENERAL PROVISIONS certificate of stock. DEFINITIONS AND CLASSIFICATIONS The shares in stock corporations may be divided into classes or series SEC. 1. Title of the Code. – This Code shall be known as the of shares, or both. No share may be deprived of voting rights except “Revised Corporation Code of the Philippines”. those classified and issued as “preferred” or “redeemable” shares, unless otherwise provided in this Code: Provided, That there shall SEC. 2. Corporation Defined. – A corporation is an artificial being always be a class or series of shares with complete voting rights. created by operation of law, having the right of succession and the Holders of nonvoting shares shall nevertheless be entitled to vote powers, attributes, and properties expressly authorized by law or on the following matters: incidental to its existence. (a) Amendment of the articles of incorporation; Explanation: A corporation is an artificial being created by law, (b) Adoption and amendment of bylaws; with a right of succession (it continues to exist regardless of changes (c) Sale, lease, exchange, mortgage, pledge, or other disposition of all in ownership) and is granted specific powers and attributes by law or substantially all of the corporate property; to conduct its business activities. (d) Incurring, creating, or increasing bonded indebtedness; (e) Increase or decrease of authorized capital stock; SEC. 3. Classes of Corporations. – Corporations formed or (f) Merger or consolidation of the corporation with another organized under this Code may be stock or nonstock corporations. corporation or other corporations; Stock corporations are those which have capital stock divided into (g) Investment of corporate funds in another corporation or business shares and are authorized to distribute to the holders of such shares, in accordance with this Code; and dividends, or allotments of the surplus profits on the basis of the (h) Dissolution of the corporation. shares held. All other corporations are nonstock corporations. Except as provided in the immediately preceding paragraph, the vote Explanation: Stock corporations issue shares and distribute profits required under this Code to approve a particular corporate act shall be (dividends) to shareholders based on the shares they hold, making deemed to refer only to stocks with voting rights. them profit-oriented. Nonstock corporations, on the other hand, do not have shares, do not distribute profits, and are often nonprofit, The shares or series of shares may or may not have a par value: with members joining to support a cause rather than to make money. Provided, That banks, trust, insurance, and preneed companies, public utilities, building and loan associations, and other corporations SEC. 4. Corporations Created by Special Laws or Charters. – authorized to obtain or access funds from the public, whether Corporations created by special laws or charters shall be governed publicly listed or not, shall not be permitted to issue no-par value primarily by the provisions of the special law or charter creating them shares of stock. or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable. Preferred shares of stock issued by a corporation may be given preference in the distribution of dividends and in the distribution of Explanation: Corporations formed by special laws or charters are corporate assets in case of liquidation, or such other preferences: primarily governed by those laws or charters. If the special law does Provided, That preferred shares of stock may be issued only with a not cover certain issues, the Revised Corporation Code will apply stated par value. The board of directors, where authorized in the to fill in the gaps, but only where applicable. articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, further, That SEC. 5. Corporators and Incorporators, Stockholders and Members. – such terms and conditions shall be effective upon filing of a Corporators are those who compose a corporation, whether as certificate thereof with the Securities and Exchange Commission, stockholders or shareholders in a stock corporation or as members hereinafter referred to as the “Commission”. in a nonstock corporation. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally Shares of capital stock issued without par value shall be deemed forming and composing the corporation and who are signatories fully paid and nonassessable and the holder of such shares shall not thereof. be liable to the corporation or to its creditors in respect thereto: Provided, That no-par value shares must be issued for a consideration Explanation: Corporators are individuals or entities that make up a of at least Five pesos (P5.00) per share: Provided, further, That the corporation. In stock corporations, corporators are called entire consideration received by the corporation for its no-par value stockholders, and in nonstock corporations, they are called shares shall be treated as capital and shall not be available for members. Incorporators are the original founders who signed the distribution as dividends. articles of incorporation, forming the corporation. A corporation may further classify its shares for the purpose of ensuring compliance with constitutional or legal requirements.  TITLE II Explanation: This section explains how corporations can divide INCORPORATION AND ORGANIZATION OF PRIVATE shares into different classes (such as common, preferred, or CORPORATIONS redeemable shares) with specific rights (like voting or dividend preferences). Shares may or may not have a par value, and the SEC. 10. Number and Qualifications of Incorporators. – Any person, classification system must be outlined in the corporation’s articles of partnership, association or corporation, singly or jointly with incorporation. Nonvoting shares still have rights to vote on key others but not more than fifteen (15) in number, may organize a matters, and the corporation must comply with legal requirements corporation for any lawful purpose or purposes: Provided, That when classifying shares. natural persons who are licensed to practice a profession, and partnerships or associations organized for the purpose of practicing SEC. 7. Founders’ Shares. – Founders’ shares may be given certain a profession, shall not be allowed to organize as a corporation rights and privileges not enjoyed by the owners of other stocks. unless otherwise provided under special laws. Incorporators who Where the exclusive right to vote and be voted for in the election of are natural persons must be of legal age. directors is granted, it must be for a limited period not to exceed five (5) years from the date of incorporation: Provided, That such Each incorporator of a stock corporation must own or be a exclusive right shall not be allowed if its exercise will violate subscriber to at least one (1) share of the capital stock. Commonwealth Act No. 108, otherwise known as the “Anti-Dummy Law”; Republic Act No. 7042, otherwise known as the “Foreign A corporation with a single stockholder is considered a One Person Investments Act of 1991”; and other pertinent laws. Corporation as described in Title XIII, Chapter III of this Code. Explanation: Founders’ shares grant special rights, such as exclusive Explanation: Incorporators (those starting the corporation) can be voting rights and the ability to be elected as directors, for a limited individuals, partnerships, associations, or corporations, but there time (up to 5 years). These rights must comply with laws like the cannot be more than 15 of them. Natural persons must be of legal Anti-Dummy Law and the Foreign Investments Act, which prevent age (18+). Each incorporator in a stock corporation must own or foreign control in certain industries. subscribe to at least one share of stock. A One Person Corporation is allowed, where a single individual can be both the incorporator and SEC. 8. Redeemable Shares. – Redeemable shares may be issued by the sole stockholder. the corporation when expressly provided in the articles of incorporation. They are shares which may be purchased by the SEC. 11. Corporate Term. – A corporation shall have perpetual corporation from the holders of such shares upon the expiration of a existence unless its articles of incorporation provides otherwise. fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms Corporations with certificates of incorporation issued prior to the and conditions stated in the articles of incorporation and the effectivity of this Code, and which continue to exist, shall have certificate of stock representing the shares, subject to rules and perpetual existence, unless the corporation, upon a vote of its regulations issued by the Commission. stockholders representing a majority of its outstanding capital stock, notifies the Commission that it elects to retain its specific corporate Explanation: Redeemable shares are shares that a corporation can term pursuant to its articles of incorporation: Provided, That any buy back from shareholders after a fixed period, as stated in the change in the corporate term under this section is without prejudice to corporation’s articles of incorporation. These shares can be the appraisal right of dissenting stockholders in accordance with redeemed regardless of the company’s available retained earnings, the provisions of this Code. and the specific terms are outlined in the articles of incorporation and certificate of stock, subject to SEC regulations. Redeemable A corporate term for a specific period may be extended or shares are issued with an automatic buyback condition at a specific shortened by amending the articles of incorporation: Provided, time and price, as agreed upon when the shares were first issued. That no extension may be made earlier than three (3) years prior to the original or subsequent expiry date(s) unless there are justifiable SEC. 9. Treasury shares. – Treasury shares are shares of stock reasons for an earlier extension as may be determined by the which have been issued and fully paid for, but subsequently Commission: Provided, further, That such extension of the corporate reacquired by the issuing corporation through purchase, term shall take effect only on the day following the original or redemption, donation, or some other lawful means. Such shares subsequent expiry date(s). may again be disposed of for a reasonable price fixed by the board of directors. A corporation whose term has expired may apply for a revival of its corporate existence, together with all the rights and privileges under Explanation: Treasury shares are stocks that a company has bought its certificate of incorporation and subject to all of its duties, debts back after they were sold to investors. These shares are no longer in and liabilities existing prior to its revival. Upon approval by the circulation but can be resold by the company later at a price Commission, the corporation shall be deemed revived and a determined by the board of directors. Treasury shares are shares that certificate of revival of corporate existence shall be issued, giving it a company has bought back voluntarily and keeps in its treasury, perpetual existence, unless its application for revival provides with the option to sell them again later at the company's discretion. otherwise. No application for revival of certificate of incorporation of banks, and a statement that some or all of the shares are without par value, if banking and quasibanking institutions, preneed, insurance and applicable; trust companies, non-stock savings and loan associations (i) If it be a nonstock corporation, the amount of its capital, the (NSSLAs), pawnshops, corporations engaged in money service names, nationalities, and residence addresses of the contributors, business, and other financial intermediaries shall be approved by the and amount contributed by each; and Commission unless accompanied by a favorable recommendation of (j) Such other matters consistent with law and which the the appropriate government agency. incorporators may deem necessary and convenient. Explanation: Corporations generally have perpetual existence, An arbitration agreement may be provided in the articles of but can choose a specific term if stated in their articles of incorporation pursuant to Section 181 of this Code. incorporation. Corporations formed before this Code still have perpetual existence unless they vote to shorten their term. A The articles of incorporation and applications for amendments corporation can extend or shorten its term by changing its articles of thereto may be filed with the Commission in the form of an incorporation, but extensions cannot happen earlier than 3 years electronic document, in accordance with the Commission’s rules and before the original term ends unless approved by the Commission. If regulations on electronic filing. a corporation's term expires, it can apply for revival to continue its existence, but certain types of corporations need a government Explanation: The Articles of Incorporation are a critical document recommendation for revival. when forming a corporation, detailing the corporation's name, purpose, office location, term, incorporators, number of directors, SEC. 12. Minimum Capital Stock Not Required of Stock capital stock, and other necessary information. These articles must Corporations. – Stock corporations shall not be required to have a comply with legal requirements and can include an arbitration clause. minimum capital stock, except as otherwise specifically provided Additionally, the document can be filed electronically with the SEC. by special law. SEC. 14. Form of Articles of Incorporation. – Unless otherwise Explanation: Stock corporations generally do not need a minimum prescribed by special law, the articles of incorporation of all domestic capital stock unless a specific law says otherwise. corporations shall comply substantially with the following form: SEC. 13. Contents of the Articles of Incorporation. – All corporations shall file with the Commission 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 Commission, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: (a) The name of the corporation; (b) The specific purpose or purposes for which the corporation is being formed. Where a corporation has more than one stated purpose, the articles of incorporation shall indicate the primary purpose and the secondary purpose or purposes: Provided, That a nonstock corporation may not include a purpose which would change or contradict its nature as such; (c) The place where the principal office of the corporation is to be located, which must be within the Philippines; (d) The term for which the corporation is to exist, if the corporation has not elected perpetual existence; (e) The names, nationalities, and residence addresses of the incorporators; (f) The number of directors, which shall not be more than fifteen (15) or the number of trustees which may be more than fifteen (15); (g) The names, nationalities, and residence addresses of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code; (h) If it be a stock corporation, the amount of its authorized capital stock, number of shares into which it is divided, the par value of each, names, nationalities, and residence addresses of the original subscribers, amount subscribed and paid by each on the subscription,  incorporation. Amendments to the articles shall be indicated by underscoring the change or changes made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees, with a statement that the amendments have been duly approved by the required vote of the stockholders or members, shall be submitted to the Commission. The amendments shall take effect upon their approval by the Commission or from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation. Explanation: To amend the Articles of Incorporation, a corporation needs approval from both the board of directors and at least two-thirds of its stockholders or members. The amendments must be submitted to the SEC, with the changes clearly marked. The amendments take effect once approved by the SEC or after 6 months if the SEC doesn't act. Dissenting stockholders can exercise their appraisal rights to have their shares valued and purchased by the corporation. SEC. 16. Grounds When Articles of Incorporation or Amendment May be Disapproved. – The Commission may disapprove the articles of incorporation or any amendment thereto if the same is not compliant with the requirements of this Code: Provided, That the Commission shall give the incorporators, directors, trustees, or officers a reasonable time from receipt of the disapproval within which to modify the objectionable portions of the articles or amendment. The following are grounds for such disapproval: (a) The articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein; (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; and (d) The required percentage of Filipino ownership of the capital stock under existing laws or the Constitution has not been complied with. No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, preneed, insurance and trust companies, NSSLAS, pawnshops, and other financial intermediaries shall be approved by the Commission unless accompanied by a favorable recommendation of the appropriate SEC. 15. Amendment of Articles of Incorporation. – Unless government agency to the effect that such articles or amendment is in otherwise prescribed by this Code or by special law, and for accordance with law. legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of Explanation: The SEC can disapprove a corporation's articles or directors or trustees and the vote or written assent of the amendments if they don't comply with the prescribed form, contain stockholders representing at least two-thirds (2/3) of the outstanding illegal or immoral purposes, present false capital stock information, capital stock, without prejudice to the appraisal right of dissenting or fail to meet ownership requirements. For specific financial stockholders in accordance with the provisions of this Code. The institutions, the SEC requires a recommendation from the relevant articles of incorporation of a nonstock corporation may be government agency to ensure legal compliance. amended by the vote or written assent of majority of the trustees and at least two-thirds (2/3) of the members. The original and amended articles together shall contain all SEC. 17. Corporate Name. – No corporate name shall be allowed by provisions required by law to be set out in the articles of the Commission if it is not distinguishable from that already reserved or registered for the use of another corporation, or if such Explanation: A corporation's existence starts when the SEC name is already protected by law, or when its use is contrary to approves its name and issues a certificate of incorporation. The existing law, rules and regulations. process involves submitting a name for verification, filing necessary documents (articles of incorporation and bylaws), and receiving A name is not distinguishable even if it contains one or more of the approval from the SEC. Once approved, the corporation gains legal following: personality and can operate as a business entity. (a) The word “corporation”, “company”, “incorporated”, “limited”, “limited liability”, or an abbreviation of one of SEC. 19. De facto Corporations. – The due incorporation of any such words; and corporation claiming in good faith to be a corporation under this (b) Punctuations, articles, conjunctions, contractions, Code, and its right to exercise corporate powers, shall not be prepositions, abbreviations, different tenses, spacing, or inquired into collaterally in any private suit to which such number of the same word or phrase. corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. The Commission, upon determination that the corporate name is: (1) not distinguishable from a name already reserved or registered for Explanation: A de facto corporation is an entity that claims to be a the use of another corporation; (2) already protected by law; or (3) corporation in good faith, even if it has some issues with its contrary to law, rules and regulations, may summarily order the incorporation. Its corporate status cannot be challenged in private corporation to immediately cease and desist from using such name lawsuits, but the Solicitor General can challenge it through a quo and require the corporation to register a new one. The Commission warranto proceeding. This protects businesses acting in good faith shall also cause the removal of all visible signages, marks, from having their corporate status questioned in ordinary legal advertisements, labels, prints and other effects bearing such corporate matters. name. Upon the approval of the new corporate name, the Commission shall issue a certificate of incorporation under the SEC. 20. Corporation by Estoppel. – All persons who assume to act amended name. as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities, and damages If the corporation fails to comply with the Commission’s order, the incurred or arising as a result thereof: Provided, however, That when Commission may hold the corporation and its responsible directors or any such ostensible corporation is sued on any transaction entered officers in contempt and/or hold them administratively, civilly by it as a corporation or on any tort committed by it as such, it shall and/or criminally liable under this Code and other applicable laws not be allowed to use its lack of corporate personality as a defense. and/or revoke the registration of the corporation. Anyone who assumes an obligation to an ostensible corporation as such cannot resist performance thereof on the ground that there Explanation: Corporations cannot use a name that is too similar to was, in fact, no corporation. an existing one, is legally protected, or violates laws. The SEC can require a corporation to change its name and take legal action if the Explanation: Under corporation by estoppel, if individuals act as a company does not comply. corporation without actually being incorporated, they are treated as general partners and are personally liable for any debts or legal SEC. 18. Registration, Incorporation and Commencement of issues that arise. An ostensible corporation is a business that Corporate Existence. – A person or group of persons desiring to appears to be a corporation but is not legally incorporated. They incorporate shall submit the intended corporate name to the cannot use the excuse of not being a real corporation as a defense in Commission for verification. If the Commission finds that the name lawsuits or to avoid their obligations. is distinguishable from a name already reserved or registered for the use of another corporation, not protected by law and is not contrary to SEC. 21. Effects of Non-Use of Corporate Charter and Continuous law, rules and regulations, the name shall be reserved in favor of the Inoperation. – If a corporation does not formally organize and incorporators. The incorporators shall then submit their articles of commence its business within five (5) years from the date of its incorporation and bylaws to the Commission. incorporation, its certificate of incorporation shall be deemed revoked as of the day following the end of the five (5)-year period. If the Commission finds that the submitted documents and However, if a corporation has commenced its business but information are fully compliant with the requirements of this Code, subsequently becomes inoperative for a period of at least five (5) other relevant laws, rules and regulations, the Commission shall issue consecutive years, the Commission may, after due notice and the certificate of incorporation. hearing, place the corporation under delinquent status. A private corporation organized under this Code commences its A delinquent corporation shall have a period of two (2) years to corporate existence and juridical personality from the date the resume operations and comply with all requirements that the Commission issues the certificate of incorporation under its official Commission shall prescribe. Upon compliance by the corporation, seal, and thereupon the incorporators, stockholders/members, and the Commission shall issue an order lifting the delinquent status. their successors shall constitute a body corporate under the name Failure to comply with the requirements and resume operations stated in the articles of incorporation for the period of time mentioned within the period given by the Commission shall cause the therein, unless said period is extended or the corporation is sooner revocation of the corporation’s certificate of incorporation. dissolved in accordance with law. The Commission shall give reasonable notice to, and coordinate with the appropriate regulatory agency prior to the suspension or revocation of the certificate of incorporation of companies under their special regulatory jurisdiction. Explanation: If a corporation does not start business within 5 years of being incorporated, its certificate is revoked. If the corporation stops operating for 5 consecutive years, it becomes delinquent and has 2 years to restart its business. If it fails to comply, its certificate of incorporation will be revoked. The Commission will coordinate with relevant agencies before revoking the status of corporations under special regulation. Law on Business Organizations (LM 3189) Explanation: The board of directors or board of trustees manages UST AB Legal Management | A.Y 2024-2025 | 3LM1 | and oversees a corporation’s operations, business, and properties. For Lacson, Jannesa Clarisse stock corporations, directors are elected by stockholders and must own at least one share of stock. Their term lasts for one year but TITLE III continues until a replacement is elected and qualified. If a director BOARD OF DIRECTORS/TRUSTEES AND OFFICERS sells all their shares, they lose their position. In non-stock corporations, trustees are chosen from the members and can serve SEC. 22. The Board of Directors or Trustees of a Corporation; for up to three years, but they must remain members to keep their Qualification and Term. – Unless otherwise provided in this Code, position. the board of directors or trustees shall exercise the corporate Some corporations are considered to have public interest because powers, conduct all business, and control all properties of the their activities affect many people. These include banks, companies corporation. with securities registered with the government, or those with significant public ownership or assets of at least ₱50 million. These Directors shall be elected for a term of one (1) year from among the corporations must have independent directors—directors who do holders of stocks registered in the corporation’s books, while not have ties to the company’s management or business relationships trustees shall be elected for a term not exceeding three (3) years that could influence their decisions. Independent directors must make from among the members of the corporation. Each director and fair and impartial decisions to protect the interests of minority trustee shall hold office until the successor is elected and qualified. shareholders and the public. A director who ceases to own at least one (1) share of stock or a Independent directors should make up at least 20% of the board in trustee who ceases to be a member of the corporation shall cease to these corporations. They are elected during the usual elections of be such. directors and must meet specific qualifications set by the SEC. These rules ensure their independence and align with international best The board of the following corporations vested with public interest practices for corporate governance. shall have independent directors constituting at least twenty percent (20%) of such board: SEC. 23. Election of Directors or Trustees. – Except when the a) Corporations covered by Section 17.2 of Republic Act No. 8799, exclusive right is reserved for holders of founders’ shares under otherwise known as “The Securities Regulation Code”, namely those Section 7 of this Code, each stockholder or member shall have the whose securities are registered with the Commission, corporations right to nominate any director or trustee who possesses all of the listed with an exchange or with assets of at least Fifty million pesos qualifications and none of the disqualifications set forth in this Code. (P50,000,000.00) and having two hundred (200) or more holders of shares, each holding at least one hundred (100) shares of a class of its At all elections of directors or trustees, there must be present, either equity shares; in person or through a representative authorized to act by written b) Banks and quasi-banks, NSSLAs, pawnshops, corporations proxy, the owners of majority of the outstanding capital stock, or engaged in money service business, pre-need, trust and insurance if there be no capital stock, a majority of the members entitled to companies, and other financial intermediaries; and vote. When so authorized in the bylaws or by a majority of the board c) Other corporations engaged in business vested with public interest of directors, the stockholders or members may also vote through similar to the above, as may be determined by the Commission, after remote communication or in absentia: Provided, That the right to taking into account relevant factors which are germane to the vote through such modes may be exercised in corporations vested objective and purpose of requiring the election of an independent with public interest, notwithstanding the absence of a provision in the director, such as the extent of minority ownership, type of financial bylaws of such corporations. products or securities issued or offered to investors, public interest involved in the nature of business operations, and other analogous A stockholder or member who participates through remote factors. communication or in absentia, shall be deemed present for purposes of quorum. An independent director is a person who, apart from shareholdings and fees received from the corporation, is independent of The election must be by ballot if requested by any voting stockholder management and free from any business or other relationship or member. which could, or could reasonably be perceived to materially interfere with the exercise of independent judgment in carrying out the In stock corporations, stockholders entitled to vote shall have the responsibilities as a director. right to vote the number of shares of stock standing in their own names in the stock books of the corporation at the time fixed in the Independent directors must be elected by the shareholders present bylaws or where the bylaws are silent, at the time of the election. The or entitled to vote in absentia during the election of directors. said stockholder may: (a) vote such number of shares for as many Independent directors shall be subject to rules and regulations persons as there are directors to be elected; (b) cumulate said shares governing their qualifications, disqualifications, voting requirements, and give one (1) candidate as many votes as the number of directors duration of term and term limit, maximum number of board to be elected multiplied by the number of the shares owned; or (c) memberships and other requirements that the Commission will distribute them on the same principle among as many candidates as prescribe to strengthen their independence and align with may be seen fit: Provided, That the total number of votes cast shall international best practices. not exceed the number of shares owned by the stockholders as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock The officers shall manage the corporation and perform such duties as shall be voted. Unless otherwise provided in the articles of may be provided in the bylaws and/or as resolved by the board of incorporation or in the bylaws, members of nonstock corporations directors. may cast as many votes as there are trustees to be elected but may not cast more than one (1) vote for one (1) candidate. Nominees for Explanation: After the directors of a corporation are elected, they directors or trustees receiving the highest number of votes shall be must organize themselves and choose certain key officers to manage declared elected. the corporation. These officers include: 1. President: Must be one of the directors of the corporation. If no election is held, or the owners of majority of the outstanding 2. Treasurer: Must be a resident of the Philippines. capital stock or majority of the members entitled to vote are not 3. Secretary: Must be both a Filipino citizen and a resident of present in person, by proxy, or through remote communication or not the Philippines. voting in absentia at the meeting, such meeting may be adjourned and 4. Other Officers: The corporation may have additional the corporation shall proceed in accordance with Section 25 of this officers as specified in its bylaws. Code. If the corporation has public interest (e.g., large companies, banks), the board is also required to appoint a compliance officer who The directors or trustees elected shall perform their duties as ensures the company follows laws and regulations. prescribed by law, rules of good corporate governance, and bylaws of A person can hold more than one position in the corporation (e.g., the corporation. someone can be both treasurer and vice president). However, a person cannot serve as both president and secretary or president Explanation: In a corporation, stockholders or members have the and treasurer at the same time, unless the law specifically allows it. right to nominate and vote for directors (for stock corporations) or These officers are responsible for managing the corporation and trustees (for non-stock corporations). These individuals must meet all performing tasks assigned by the corporation’s bylaws or by qualifications and must not have any disqualifications stated in the decisions of the board of directors. Essentially, they handle the law. day-to-day operations and ensure the corporation runs smoothly. For elections to be valid, there must be enough participation. Specifically, a majority of the stockholders (or members, in SEC. 25. Report of Election of Directors, Trustees and Officers, non-stock corporations) must be present, either physically, through a Non-holding of Election and Cessation from Office. – Within thirty representative with a proxy, or by participating remotely (like online (30) days after the election of the directors, trustees and officers of or voting in absentia). Remote participation is allowed if authorized the corporation, the secretary, or any other officer of the corporation, by the corporation's bylaws or decided by the board. In public shall submit to the Commission, the names, nationalities, interest corporations (like banks or large companies), this is shareholdings, and residence addresses of the directors, trustees, and allowed even without specific bylaw provisions. officers elected. During elections, voting must be done by ballot if a voting member requests it. Stockholders in stock corporations can use their shares to The non-holding of elections and the reasons therefor shall be vote in three ways: reported to the Commission within thirty (30) days from the date 1. Straight voting – Use all shares to vote for each director. of the scheduled election. The report shall specify a new date for the 2. Cumulative voting – Combine all votes and give them to election, which shall not be later than sixty (60) days from the one candidate. scheduled date. 3. Split voting – Divide votes among multiple candidates. However, no stockholder with delinquent shares (unpaid If no new date has been designated, or if the rescheduled election is shares) can vote. For non-stock corporations, members can likewise not held, the Commission may, upon the application of a cast one vote per trustee position but cannot give multiple stockholder, member, director or trustee, and after verification of the votes to one candidate. unjustified non-holding of the election, summarily order that an If no election happens because there aren't enough participants or election be held. The Commission shall have the power to issue such votes, the meeting can be postponed, and the corporation must orders as may be appropriate, including orders directing the issuance follow specific procedures outlined in the law. of a notice stating the time and place of the election, designated Once elected, directors or trustees take on the responsibility of presiding officer, and the record date or dates for the determination of managing the corporation's operations according to legal standards, stockholders or members entitled to vote. good governance practices, and the corporation's bylaws. Notwithstanding any provision of the articles of incorporation or SEC. 24. Corporate Officers. – Immediately after their election, the bylaws to the contrary, the shares of stock or membership directors of a corporation must formally organize and elect: (a) a represented at such meeting and entitled to vote shall constitute a president, who must be a director; (b) a treasurer, who must be a quorum for purposes of conducting an election under this section. resident; (c) a secretary, who must be a citizen and resident of the Philippines; and (d) such other officers as may be provided in the Should a director, trustee or officer die, resign or in any manner cease bylaws. If the corporation is vested with public interest, the board to hold office, the secretary, or the director, trustee or officer of the shall also elect a compliance officer. The same person may hold two corporation, shall, within seven (7) days from knowledge thereof, (2) or more positions concurrently, except that no one shall act as report in writing such fact to the Commission. president and secretary or as president and treasurer at the same time, unless otherwise allowed in this Code. Explanation: Election Reporting: After the corporation elects its Were found guilty by a foreign court or agency for similar directors, trustees, and officers, the corporation’s secretary (or crimes or fraud. another officer) must report the following details to the SEC within The Securities and Exchange Commission (SEC) or other 30 days: regulators can add more rules to prevent unqualified people from Names of those elected being elected, especially if they were involved in bad practices. Their nationalities Their shareholdings (ownership of shares) SEC. 27. Removal of Directors or Trustees. – Any director or Their residence addresses trustee of a corporation may be removed from office by a vote of If an election is not conducted, the corporation must inform the SEC the stockholders holding or representing at least two-thirds (2/3) of within 30 days of the missed election date. This report must: the outstanding capital stock, or in a nonstock corporation, by a State why the election wasn’t held. vote of at least two-thirds (2/3) of the members entitled to vote: Provide a new election date, which must be within 60 days Provided, That such removal shall take place either at a regular of the original date. meeting of the corporation or at a special meeting called for the If the corporation does not set a new date or fails to hold the purpose, and in either case, after previous notice to stockholders or rescheduled election, the SEC can step in. Upon a request by any members of the corporation of the intention to propose such removal stockholder, member, director, or trustee, and after verifying the at the meeting. A special meeting of the stockholders or members for issue, the SEC can: the purpose of removing any director or trustee must be called by Order the election to take place. the secretary on order of the president, or upon written demand of Issue notices specifying the election's time, place, presiding the stockholders representing or holding at least a majority of the officer, and criteria for determining who can vote. outstanding capital stock, or a majority of the members entitled to Even if the corporation's rules require a specific quorum, the shares vote. If there is no secretary, or if the secretary, despite demand, fails or members represented during the SEC-ordered election will form or refuses to call the special meeting or to give notice thereof, the the quorum. stockholder or member of the corporation signing the demand may If a director, trustee, or officer of the corporation dies, resigns, or call for the meeting by directly addressing the stockholders or otherwise leaves their position, the corporation’s secretary or other members. Notice of the time and place of such meeting, as well as of officer must report this to the SEC within 7 days of knowing about the intention to propose such removal, must be given by publication it. or by written notice prescribed in this Code. Removal may be with or without cause: Provided, That removal without cause may not be SEC. 26. Disqualification of Directors, Trustees or Officers. – A used to deprive minority stockholders or members of the right of person shall be disqualified from being a director, trustee or officer representation to which they may be entitled under Section 23 of this of any corporation if, within five (5) years prior to the election or Code. appointment as such, the person was: The Commission shall, motu proprio or upon verified complaint, and (a) Convicted by final judgment: after due notice and hearing, order the removal of a director or trustee (1) Of an offense punishable by imprisonment for a period elected despite the disqualification, or whose disqualification arose or exceeding six (6) years; is discovered subsequent to an election. The removal of a disqualified (2) For violating this Code; and director shall be without prejudice to other sanctions that the (3) For violating Republic Act No. 8799, otherwise known as Commission may impose on the board of directors or trustees who, “The Securities Regulation Code”; with knowledge of the disqualification, failed to remove such director (b) Found administratively liable for any offense involving or trustee. fraudulent acts; and (c) By a foreign court or equivalent foreign regulatory authority for Explanation: To remove a director or trustee, a vote must be held, acts, violations or misconduct similar to those enumerated in and the vote must come from at least two-thirds (2/3) of the paragraphs (a) and (b) above. stockholders (if it’s a stock corporation) or members (if it’s a nonstock corporation) who have the right to vote. The foregoing is without prejudice to qualifications or other The removal vote can happen at a regular meeting or at a special disqualifications, which the Commission, the primary regulatory meeting called for this specific purpose. agency, or the Philippine Competition Commission may impose in its Stockholders or members must be informed in advance that the promotion of good corporate governance or as a sanction in its removal will be discussed at the meeting. administrative proceedings. If the meeting is special (just for removal), it must be called by the secretary or by the president. If the secretary refuses to call the Explanation: A person cannot be elected or appointed if, in the past meeting, stockholders or members can do it themselves. 5 years, they: Stockholders or members must be given notice of the meeting (time, Were convicted of: place, and the reason for the meeting) either through publication or ○ A crime with a prison sentence of more than 6 written notice. years. A director or trustee can be removed with cause (for a specific ○ Breaking the Corporation Code or Securities reason, such as poor performance) or without cause (no specific Regulation Code (laws about corporations and reason). However, removal without cause cannot be used to protecting investors). unfairly take away the rights of minority stockholders or members. Were found guilty of fraud by a government agency. If a director or trustee was found to be disqualified (unfit to hold the by unanimous board vote, with their role limited to addressing the position), the SEC (Securities and Exchange Commission) can order emergency. The SEC must be notified within 3 days. their removal. This can happen if the disqualification was discovered For vacancies due to an increase in board seats, elections must be after the election. held during a meeting called for this purpose. Replacement directors If the board knew about the disqualification but did nothing to or trustees serve only the remainder of the predecessor's term. remove the person, the SEC may impose additional penalties on the board. SEC. 29. Compensation of Directors or Trustees. – In the absence of any provision in the bylaws fixing their compensation, the directors SEC. 28. Vacancies in the Office of Director or Trustee; Emergency or trustees shall not receive any compensation in their capacity as Board. – Any vacancy occurring in the board of directors or such, except for reasonable per diems: Provided however, That the trustees other than by removal or by expiration of term may be filled stockholders representing at least a majority of the outstanding by the vote of at least a majority of the remaining directors or capital stock or majority of the members may grant directors or trustees, if still constituting a quorum; otherwise, said vacancies trustees with compensation and approve the amount thereof at a must be filled by the stockholders or members in a regular or regular or special meeting. special meeting called for that purpose. In no case shall the total yearly compensation of directors exceed ten When the vacancy is due to term expiration, the election shall be (10%) percent of the net income before income tax of the held no later than the day of such expiration at a meeting called corporation during the preceding year. for that purpose. When the vacancy arises as a result of removal by the stockholders or members, the election may be held on the same Directors or trustees shall not participate in the determination of day of the meeting authorizing the removal and this fact must be so their own per diems or compensation. stated in the agenda and notice of said meeting. In all other cases, the election must be held no later than forty-five (45) days from the Corporations vested with public interest shall submit to their time the vacancy arose. A director or trustee elected to fill a vacancy shareholders and the Commission, an annual report of the total shall be referred to as replacement director or trustee and shall serve compensation of each of their directors or trustees. only for the unexpired term of the predecessor in office. Explanation: By default, directors or trustees do not receive However, when the vacancy prevents the remaining directors from compensation unless the bylaws specify it or the stockholders or constituting a quorum and emergency action is required to members, representing a majority, approve it in a meeting. However, prevent grave, substantial, and irreparable loss or damage to the reasonable per diems (allowances for attending meetings) are corporation, the vacancy may be temporarily filled from among the allowed. officers of the corporation by unanimous vote of the remaining The total annual compensation of directors cannot exceed 10% of directors or trustees. The action by the designated director or trustee the corporation’s net income before taxes from the previous year. shall be limited to the emergency action necessary, and the term Directors or trustees are also prohibited from deciding their own shall cease within a reasonable time from the termination of the compensation. emergency or upon election of the replacement director or trustee, For corporations with public interest, an annual report detailing the whichever comes earlier. The corporation must notify the compensation of each director or trustee must be submitted to the Commission within three (3) days from the creation of the shareholders and the SEC. emergency board, stating therein the reason for its creation. SEC. 30. Liability of Directors, Trustees or Officers. – Directors or Any directorship or trusteeship to be filled by reason of an increase in trustees who willfully and knowingly vote for or assent to patently the number of directors or trustees shall be filled only by an election unlawful acts of the corporation or who are guilty of gross at a regular or at a special meeting of stockholders or members duly negligence or bad faith in directing the affairs of the corporation or called for the purpose, or in the same meeting authorizing the acquire any personal or pecuniary interest in conflict with their duty increase of directors or trustees if so stated in the notice of the as such directors or trustees shall be liable jointly and severally for meeting. all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. In all elections to fill vacancies under this section, the procedure set forth in Sections 23 and 25 of this Code shall apply. A director, trustee, or officer shall not attempt to acquire, or acquire any interest adverse to the corporation in respect of any matter Explanation: If a vacancy occurs (other than removal or term which has been reposed in them in confidence, and upon which, expiration), the remaining directors may fill it by majority vote if equity imposes a disability upon themselves to deal in their own there is a quorum. Without a quorum, the vacancy must be filled by behalf; otherwise the said director, trustee, or officer shall be liable as the stockholders or members at a meeting within 45 days. For term a trustee for the corporation and must account for the profits which expirations, elections must occur on or before the last day of the otherwise would have accrued to the corporation. term, and for removals, elections can happen on the same day if stated in the meeting notice. Explanation: Directors, trustees, or officers are personally liable if If a vacancy leaves no quorum and urgent action is needed, a they knowingly approve illegal acts, act with gross negligence, or temporary director may be appointed from the corporation's officers demonstrate bad faith in managing the corporation, causing harm to the company, its stockholders, or others. They are held jointly and individually responsible for damages. Additionally, they cannot act in two (2) or more corporations having interlocking directors shall ways that conflict with the corporation’s interests, such as using not be invalidated on that ground alone: Provided, That if the confidential information for personal gain. If they do, they must interest of the interlocking director in one (1) corporation is return any profits earned to the corporation as they hold those gains substantial and the interest in the other corporation or corporations is in trust. Directors and officers must always act in the best interest of merely nominal, the contract shall be subject to the provisions of the corporation, upholding their fiduciary duty. the preceding section insofar as the latter corporation or corporations are concerned. SEC. 31. Dealings of Directors, Trustees or Officers with the Corporation. – A contract of the corporation with (1) one or more of Stockholdings exceeding twenty percent (20%) of the outstanding its directors, trustees, officers or their spouses and relatives within the capital stock shall be considered substantial for purposes of fourth civil degree of consanguinity or affinity is voidable, at the interlocking directors. option of such corporation, unless all the following conditions are present: Explanation: A contract between these corporations is not automatically invalid just because they share directors, as long as the (a) The presence of such director or trustee in the board meeting in contract is fair and reasonable. which the contract was approved was not necessary to constitute a If one corporation has a substantial interest (more than 20% of the quorum for such meeting; stock) in another corporation, the contract may need to follow (b) The vote of such director or trustee was not necessary for the additional rules, especially if the interest in the other corporation is approval of the contract; nominal (small). In this case, the provisions from SEC. 31 (about (c) The contract is fair and reasonable under the circumstances; director's dealings with the corporation) would apply to ensure (d) In case of corporations vested with public interest, material fairness. contracts are approved by at least two-thirds (2/3) of the entire Stockholdings exceeding 20% of the outstanding shares are membership of the board, with at least a majority of the independent considered substantial for determining interlocking directors. directors voting to approve the material contract; and (e) In case of an officer, the contract has been previously authorized SEC. 33. Disloyalty of a Director. – Where a director, by virtue of by the board of directors. such office, acquires a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such Where any of the first three (3) conditions set forth in the preceding corporation, the director must account for and refund to the latter paragraph is absent, in the case of a contract with a director or all such profits, unless the act has been ratified by a vote of the trustee, such contract may be ratified by the vote of the stockholders owning or representing at least two thirds (2/3) of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, outstanding capital stock or of at least two-thirds (2/3) of the notwithstanding the fact that the director risked one’s own funds in members in a meeting called for the purpose: Provided, That full the venture. disclosure of the adverse interest of the directors or trustees involved is made at such meeting and the contract is fair and reasonable under Explanation: A director must not use their position to take the circumstances. opportunities that should be available to the corporation. If the director profits from an opportunity that belongs to the corporation, Explanation: This section regulates contracts between a corporation they are required to return the profits to the corporation. The director and its directors, trustees, officers, or their close family members. doesn't have to return the profits if the shareholders approve the Such contracts can be voidable (cancellable) by the corporation action by a vote of at least two-thirds of the shares. This rule applies unless the following conditions are met: even if the director invested their own money in the venture. 1. Quorum: The director or trustee involved is not needed to make the meeting valid (i.e., not required for a quorum). SEC. 34. Executive, Management, and Other Special Committees. – 2. Vote: The director or trustee's vote is not essential for the If the bylaws so provide, the board may create an executive contract to be approved. committee composed of at least three (3) directors. Said committee 3. Fairness: The contract must be fair and reasonable. may act, by majority vote of all its members, on such specific 4. Public Interest Corporations: If the corporation serves matters within the competence of the board, as may be delegated to it public interest, the contract must be approved by two-thirds in the bylaws or by majority vote of the board, except with respect to of the board, with a majority of independent directors the: (a) approval of any action for which shareholders’ approval is voting in favor. also required; (b) filling of vacancies in the board; (c) amendment or 5. Officer Contracts: For officers, the contract must be repeal of bylaws or the adoption of new bylaws; (d) amendment or authorized by the board of directors beforehand. repeal of any resolution of the board which by its express terms is not If the first three conditions are not met, the contract can still be amendable or repealable; and (e) distribution of cash dividends to the validated if two-thirds of the stockholders or members approve it, shareholders. with full disclosure of the conflict of interest and confirmation that the contract is fair. The board of directors may create special committees of temporary or permanent nature and determine the members’ term, composition, SEC. 32. Contracts Between Corporations with Interlocking compensation, powers, and responsibilities. Directors. – Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between Explanation: If the bylaws allow, the board can form an executive capital stock or of its members. Written notice of the proposed committee of at least three directors. This committee can make action and the time and place of the meeting shall be sent to decisions on specific matters that the board assigns to it, as long as stockholders or members at their respective place of residence as those matters are within the board’s power. The committee must shown in the books of the corporation, and must either be deposited decide by a majority vote of its members. to the addressee in the post office with postage prepaid, served Limitations on the Executive Committee's Powers: personally, or when allowed in the bylaws or done with the consent The committee cannot approve actions that need of the stockholder, sent electronically in accordance with the rules shareholder approval. and regulations of the Commission on the use of electronic data It cannot fill board vacancies. messages. In case of extension of corporate term, a dissenting It cannot amend or repeal bylaws or adopt new ones. stockholder may exercise the right of appraisal under the conditions It cannot amend or repeal board resolutions that are provided in this Code. explicitly not changeable. The committee cannot approve dividend distribution to Explanation: Allows a private corporation to change its term shareholders. (duration) by a majority vote of the board and approval from at least The board can also create special committees, either temporary or two-thirds (2/3) of the stockholders or members. Stockholders must permanent. These committees' duties, members, compensation, and be notified of the proposed change through mail, personal delivery, or powers are determined by the board. electronic means (if allowed). If the term is extended, dissenting stockholders may exercise their right of appraisal, meaning they can TITLE IV demand the company buy back their shares at a fair price. POWERS OF CORPORATIONS SEC. 37. Power to Increase or Decrease Capital Stock; Incur, Create SEC. 35. Corporate Powers and Capacity. – Every corporation or Increase Bonded Indebtedness. – No corporation shall increase incorporated under this Code has the power and capacity: or decrease its capital stock or incur, create or increase any bonded (a) To sue and be sued in its corporate name; indebtedness unless approved by a majority vote of the board of (b) To have perpetual existence unless the certificate of directors and by two-thirds (2/3) of the outstanding capital stock at incorporation provides otherwise; a stockholders’ meeting duly called for the purpose. Written notice (c) To adopt and use a corporate seal; of the time and place of the stockholders’ meeting and the purpose (d) To amend its articles of incorporation in accordance with the for said meeting must be sent to the stockholders at their places of provisions of this Code; residence as shown in the books of the corporation and served on the (e) To adopt bylaws, not contrary to law, morals or public policy, and stockholders personally, or through electronic means recognized in to amend or repeal the same in accordance with this Code; the corporation’s bylaws and/or the Commission’s rules as a valid (f) In case of stock corporations, to issue or sell stocks to mode for service of notices. subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if A certificate must be signed by a majority of the directors of the it be a nonstock corporation; corporation and countersigned by the chairperson and secretary of the (g) To purchase, receive, take or grant, hold, convey, sell, lease, stockholders’ meeting, setting forth: pledge, mortgage, and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the (a) That the requirements of this section have been complied with; transaction of the lawful business of the corporation may reasonably (b) The amount of the increase or decrease of the capital stock; and necessarily require, subject to the limitations prescribed by law (c) In case of an increase of the capital stock, the amount of capital and the Constitution; stock or number of shares of no-par stock thereof actually subscribed, (h) To enter into a partnership, joint venture, merger, consolidation, the names, nationalities and addresses of the persons subscribing, the or any other commercial agreement with natural and juridical amount of capital stock or number of no-par stock subscribed by persons; each, and the amount paid by each on the subscription in cash or (i) To make reasonable donations, including those for the public property, or the amount of capital stock or number of shares of no-par welfare or for hospital, charitable, cultural, scientific, civic, or similar stock allotted to each stockholder if such increase is for the purpose purposes: Provided, That no foreign corporation shall give of making effective stock dividend therefor authorized; donations in aid of any political party or candidate or for purposes (d) Any bonded indebtedness to be incurred, created or increased; of partisan political activity; (e) The amount of stock represented at the meeting; and (j) To establish pension, retirement, and other plans for the benefit (f) The vote authorizing the increase or decrease of the capital stock, of its directors, trustees, officers, and employees; and or the incurring, creating or increasing of any bonded indebtedness. (k) To exercise such other powers as may be essential or necessary Any increase or decrease in the capital stock or the incurring, creating to carry out its purpose or purposes as stated in the articles of or increasing of any bonded indebtedness shall require prior approval incorporation. of the Commission, and where appropriate, of the Philippine Competition Commission. The application with the Commission shall SEC. 36. Power to Extend or Shorten Corporate Term. – A private be made within six (6) months from the date of approval of the board corporation may extend or shorten its term as stated in the articles of directors and stockholders, which period may be extended for of incorporation when approved by a majority vote of the board of justifiable reasons. directors or trustees, and ratified at a meeting by the stockholders or Copies of the certificate shall be kept on file in the office of the members representing at least two-thirds (2/3) of the outstanding corporation and filed with the Commission and attached to the original articles of incorporation. After approval by the Commission stock offerings, or when shares are issued in exchange for property and the issuance by the Commission of its certificate of filing, the needed by the corporation or to pay off an existing debt, provided capital stock shall be deemed increased or decreased and the these actions are approved by two-thirds of the stockholders. incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the SEC. 39. Sale or Other Disposition of Assets. – Subject to the Commission shall not accept for filing any certificate of increase of provisions of Republic Act No. 10667, otherwise known as capital stock unless accompanied by a sworn statement of the “Philippine Competition Act”, and other related laws, a treasurer of the corporation lawfully holding office at the time of the corporation may, by a majority vote of its board of directors or filing of the certificate, showing that at least twenty-five percent trustees, sell, lease, exchange, mortgage, pledge, or otherwise (25%) of the increase in capital stock has been subscribed and that at dispose of its property and assets, upon such terms and conditions least twenty-five percent (25%) of the amount subscribed has been and for such consideration, which may be money, stocks, bonds, or paid in actual cash to the corporation or that property, the valuation of other instruments for the payment of money or other property or which is equal to twenty-five percent (25%) of the subscription, has consideration, as its board of directors or trustees may deem been transferred to the corporation: Provided, further, That no expedient. decrease in capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. A sale of all or substantially all of the corporation’s properties and Nonstock corporations may incur, create or increase bonded assets, including its goodwill, must be authorized by the vote of the indebtedness when approved by a majority of the board of trustees stockholders representing at least two-thirds (2/3) of the outstanding and of at least two-thirds (2/3) of the members in a meeting duly capital stock, or at least two-thirds (2/3) of the members, in a called for the purpose. stockholders’ or members’ meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the In nonstock corporations where there are no members with voting Commission, which shall have the authority to determine the rights, the vote of at least a majority of the trustees in office will be sufficiency of the terms thereof. sufficient authorization for the corporation to enter into any transaction authorized by this section. Explanation: This requires that a corporation must get approval from both its board of directors and two-thirds of its stockholders before it The determination of whether or not the sale involves all or can increase or decrease its capital stock or take on more debt substantially all of the corporation’s properties and assets must be through bonds. Stockholders must be properly notified about the computed based on its net asset value, as shown in its latest meeting and its purpose. financial statements. A sale or other disposition shall be deemed to After the vote, a certificate must be filed, confirming the details of cover substantially all the corporate property and assets if thereby the the changes, such as the amount of stock issued or new debt, and corporation would be rendered incapable of continuing the business must be signed by the board members. or accomplishing the purpose for which it was incorporated. The corporation must also get approval from the SEC before these changes can take effect, and the SEC will not approve the increase in Written notice of the proposed action and of the time and place for capital unless at least 25% of the new capital is paid in cash or the meeting shall be addressed to stockholders or members at their property. places of residence as shown in the books of the corporation and Nonstock corporations can also increase their debt if approved by deposited to the addressee in the post office with postage prepaid, their board and two-thirds of their members. Any bonds issued must served personally, or when allowed by the bylaws or done with the also be registered with the SEC. This ensures that financial decisions consent of the stockholder, sent electronically: Provided, That any are made transparently and protect both stockholders and creditors. dissenting stockholder may exercise the right of appraisal under the conditions provided in this Code. SEC. 38. Power to Deny Preemptive Right. – All stockholders of a stock corporation shall enjoy preemptive right to subscribe to all After such authorization or approval by the stockholders or members, issues or disposition of shares of any class, in proportion to their the board of directors or trustees may, nevertheless, in its discretion, respective shareholdings, unless such right is denied by the articles of abandon such sale, lease, exchange, mortgage, pledge, or other incorporation or an amendment thereto: Provided, That such disposition of property and assets, subject to the rights of third parties preemptive right shall not extend to shares issued in compliance under any contract relating thereto, without further action or approval with laws requiring stock offerings or minimum stock ownership by by the stockholders or members. the public; or to shares issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital Nothing in this section is intended to restrict the power of any stock, in exchange for property needed for corporate purposes or in corporation, without the authorization by the stockholders or payment of a previously contracted debt. members, to sell, lease, exchange, mortgage, pledge, or otherwise dispose of any of its property and assets if the same is necessary in Explanation: Stockholders have a preemptive right, meaning they the usual and regular course of business of the corporation or if the can buy new shares in proportion to their current holdings when a proceeds of the sale or other disposition of such property and assets corporation issues more shares. However, this right can be removed if shall be appropriated for the conduct of its remaining business. stated in the corporation's articles of incorporation or if changed by an amendment. The preemptive right does not apply to shares issued Explanation: The board of directors (or trustees) has the authority to under certain conditions, such as when required by law for public sell, lease, exchange, mortgage, pledge, or dispose of the corporation’s assets. This can be done on terms deemed appropriate back, the company can buy them to pay them the value of by the board, which may include money, stocks, bonds, or other their shares. property. This gives the company the ability to manage its shares in specific If the corporation intends to sell all or substantially all of its assets, situations, but only if it has enough money saved up to do so. including goodwill, this requires the approval of at least two-thirds (2/3) of the stockholders or members in a meeting specifically SEC. 41. Power to Invest Corporate Funds in Another Corporation or called for that purpose. This ensures significant transactions are fully Business or for Any Other Purpose. – Subject to the provisions of this supported by the majority of stockholders or members. Code, a private corporation may invest its funds in any other For nonstock corporations (those without members who have voting corporation, business, or for any purpose other than the primary rights), the decision to dispose of assets can be made with the purpose for which it was organized, when approved by a majority approval of a majority of the trustees. of the board of directors or trustees and ratified by the stockholders To determine whether the sale involves "all or substantially all" of the representing at least two-thirds (2/3) of the outstanding capital corporation's assets, it is based on the net asset value shown in the stock, or by at least two thirds (2/3) of the members in the case of latest financial statements. A sale is considered "substantially all" if it nonstock corporations, at a meeting duly called for the purpose. would leave the corporation unable to continue its business or fulfill Notice of the proposed investment and the time and place of the its purpose. meeting shall be addressed to each stockholder or member at the Stockholders or members must receive written notice of the proposed place of residence as shown in the books of the corporation and transaction, including details about the time, place, and purpose of deposited to the addressee in the post office with postage prepaid, the meeting. Notices can be sent by mail, personal delivery, or served personally, or sent electronically in accordance with the electronically, depending on the corporation’s bylaws. rules and regulations of the Commission on the use of electronic data Dissenting stockholders (those who do not agree with the transaction) message, when allowed by the bylaws or done with the consent of the can exercise the right of appraisal, meaning they can demand the stockholders: Provided, That any dissenting stockholder shall have corporation buy back their shares at a fair value. appraisal right as provided in this Code: Provided, however, That After the approval of the stockholders or members, the board may where the investment by the corporation is reasonably necessary to still choose to abandon the sale or transaction without requiring accomplish its primary purpose as stated in the articles of further approval, provided no third-party contracts are affected. incorporation, the approval of the stockholders or members shall not The section clarifies that the board can dispose of property without be necessary. stockholder approval if it is part of the regular business operations or if the proceeds are used to fund the corporation’s ongoing Explanation: A private corporation is allowed to invest its funds in business. another corporation, business, or for any other purpose beyond its primary business goal, but only under certain conditions. SEC. 40. Power to Acquire Own Shares. – Provided that the 1. Approval Requirement: The investment must be approved corporation has unrestricted retained earnings in its books to cover by a majority of the board of directors or trustees. the shares to be purchased or acquired, a stock corporation shall Additionally, it must be ratified by stockholders holding at have the power to purchase or acquire its own shares for a least two-thirds (2/3) of the outstanding capital stock, or by legitimate corporate purpose or purposes, including the following at least two-thirds (2/3) of the members in the case of cases: nonstock corporations. 2. Notice of Meeting: Stockholders or members must be (a) To eliminate fractional shares arising out of stock dividends; notified about the proposed investment, and the notice must (b) To collect or compromise an indebtedness to the corporation, be sent to their addresses through mail, personal service, or arising out of unpaid subscription, in a delinquency sale, and to electronic means (if allowed by the bylaws or with purchase delinquent shares sold during said sale; and consent). (c) To pay dissenting or withdrawing stockholders entitled to 3. Dissenting Stockholders: If a stockholder disagrees with payment for their shares under the provisions of this Code. the investment, they have the right to sell their shares back to the corporation (appraisal right). Explanation: A stock corporation is allowed to buy back its own 4. Exception: If the investment is necessary to carry out the shares, but only if it has enough unrestricted profits (money in the corporation's primary purpose (as stated in the articles of company’s books that is not set aside for other purposes). The incorporation), the approval of stockholders or members is corporation can buy back shares for three main reasons: not required. 1. To remove small or leftover shares: If the company issues stock dividends and some stockholders end up with SEC. 42. Power to Declare Dividends. – The board of directors of a fractional (partial) shares, it can buy them back to get rid of stock corporation may declare dividends out of the unrestricted those fractions. retained earnings which shall be payable in cash, property, or in 2. To collect unpaid debts: If a stockholder hasn’t fully paid stock to all stockholders on the basis of outstanding stock held by for their shares, the company can buy back those shares them: Provided, That any cash dividends due on delinquent stock during a special sale to recover the money. shall first be applied to the unpaid balance on the subscription plus 3. To pay stockholders who disagree with company costs and expenses, while stock dividends shall be withheld from the decisions: If stockholders don’t agree with certain delinquent stockholders until their unpaid subscription is fully paid: company decisions and have the right to sell their shares Provided, further, That no stock dividend shall be issued without the approval of stockholders representing at least two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly Explanation: A management contract must be approved by the called for the purpose. board of directors and stockholders holding at least the majority of the capital stock (or members, in the case of nonstock corporations) Stock corporations are prohibited from retaining surplus profits in of both the managing and the managed corporations. excess of one hundred percent (100%) of their paid-in capital stock, If certain conditions are met, such as stockholders or directors except: (a) when justified by definite corporate expansion projects or controlling a significant portion of the companies, then the programs approved by the board of directors; or (b) when the stockholders of the managed corporation must approve the corporation is prohibited under any loan agreement with financial contract with a two-thirds (2/3) majority. institutions or creditors, whether local or foreign, from declaring This applies to contracts where a corporation manages or operates all dividends without their consent, and such consent has not yet been or most of another company’s business, often referred to as service secured; or (c) when it can be clearly shown that such retention is contracts or operating agreements. necessary under special circumstances obtaining in the corporation, A management contract cannot exceed a term of five (5) years. such as when there is need for special reserve for probable contingencies. SEC. 44. Ultra Vires Acts of Corporations. – No corporation shall possess or exercise corporate powers other than those conferred by Explanation: A stock corporation can pay dividends to its this Code or by its articles of incorporation and except as necessary shareholders. Dividends are a way for the company to share its profits or incidental to the exercise of the powers conferred. with stockholders. The board of directors decides if dividends will be paid, and they can be in cash, property, or additional shares of Explanation: Corporations can only exercise powers granted to them stock. However, before paying dividends on delinquent stock by the Corporation Code or their articles of incorporation, and (unpaid stock), the company must use the cash to pay off the unpaid only those powers t