GROUP 2

LAW ON PARTNERSHIP AND

CORPORATION

SECTION 7 - SECTION 12
Section 7: The agreement to
Incorporate
 A. Pre-Incorporation & Promoter's Contract

1. Who is Promoter?

Section 3.10, Securities Regulation Code (R.A. 8799) "Promoter" is a

person who, acting alone or with others, takes initiative in founding
and organizing the business or enterprise of the issuer and receives
consideration therefore.
 2. Pre-Incorporation Subscription Agreements (Section 59 & 60)

SEC. 59. Subscription Contract. – Any contract for the acquisition of unissued stock in an
existing corporation or a corporation still to be formed shall be deemed a subscription within
the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or
some other contract.

SEC. 60. Pre-incorporation Subscription. – A subscription of shares in a corporation still

to be formed shall be irrevocable for a period of at least six (6) months from the date of
subscription, unless all of the other subscribers consent to the revocation, or the corporation
fails to incorporate within the same period or within a longer period stipulated in the contract
of subscription. No pre-incorporation subscription may be revoked after the articles of
incorporation is submitted to the Commission.
 3. Liability Rules for Promoter's Contracts

• Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko, 65 Phil. 223 (1937)
• Rizal Light & Ice Co. v. Public Service Commission, 25 SCRA 285 (1968)
 B. De Facto Corporations

SEC. 19. De facto Corporations. – The due incorporation of any corporation claiming in
good faith to be a corporation under this Code, and its right to exercise corporate powers,
shall not be inquired into collaterally in any private suit to which such corporation may
be a party. Such inquiry may be made by the Solicitor General in a quo warranto
proceeding.

• Arnold Hall v. Piccio (1950)

 C. Corporation by Estoppel Doctrine

SEC. 20. Corporation by Estoppel. – All persons who assume to act as a corporation knowing
it to be without authority to do so shall be liable as general partners for all debts, liabilities
and damages incurred or arising as a result thereof: Provided, however, That when any such
ostensible corporation is sued on any transaction entered by it as a corporation or on any
tort committed by it as such, it shall not be allowed to use its lack of corporate personality
as a defense. Anyone who assumes an obligation to an ostensible corporation as such cannot
resist performance thereof on the ground that there was in fact no corporation
.
 1. Jurisprudential Background

• Asia Banking Corp. v. Standard Products (1924)

• Albert v. University Publishing Co. (1965)
 2. Nature of Doctrine

The Doctrine of Corporation by Estoppel effectively holds

individuals or entities accountable as corporations, even if
they are not officially incorporated, prohibiting them from
avoiding responsibility once they have profited from their
corporate actions. It guarantees equity and safeguards
other parties that may have based their actions on the
corporation's conduct.
 3. Two Levels of Doctrine

- With Fraud - Individuals are personally liable for the actions and
obligations of the corporation.
• People v. Garcia (1997)
- Without Fraud - The individuals acting as corporation are not personally
liable for the debts, but the doctrine still ensures that the entity will be
treated as a corporation for legal purposes.
• Int'l Express Travel & Tour Services v. Court of Appeals (2000)
4. Circumstances When Defective Attempt to Form Corporation
Results in Partnership - When entity tries to form a corporation but
failes to meet legal requirements for incorporation, and as a result,
it is treated as partnership under the law.
D. Trust Fund Doctrine
This doctrine protects creditors by ensuring that corporate assets cannot be distributed to
shareholders until liabilities are paid.

1. Common Law Foundation

Art. 2236. The debtor is liable with all his property, present and future, for the fulfillment of
his obligations, subject to the exemptions provided by law. (1911a)
•Phil. Trust Co. v. Rivera (1923)
•Garcia v. Lim Chu Sing (1934)
•APT v. Court of Appeals (1998)
•NTC v. Court of Appeals (1999)
2. Power to Purchase Own Shares
- SEC. 8. Redeemable Shares.
- SEC. 40. Power to Acquire Own Shares.
- SEC. 42. Power to Declare Dividends.
- SEC. 139. Corporate Liquidation.
3. Rescission of Subscription Agreement
- provides a way to cancel an agreement to purchase
shares if there are legal grounds, such as fraud.
•Ong Yong v. Tiu (2003)
Section 8: Articles of
Incorporation
 A. Nature of the Charter
SEC. 18. Registration, Incorporation and Commencement of
Corporate Existence. – A person or group of persons desiring to
incorporate shall submit the intended corporate name to the
Commission for verification. If the Commission finds that the name
is distinguishable from a name already reserved or registered for
the use of another corporation, not protected by law and is not
contrary to law, rules and regulations, the name shall be reserved in
favor of the incorporators. The incorporators shall then submit their
articles of incorporation and bylaws to the Commission.
 B. Incorporation Procedure and Documentary Requirements

B1. SEC Guidelines on Authentication of Articles of

Incorporation.

16, s. 2020 (the Circular) dated 29 April 2020, incorporators of

new domestic corporations may now authenticate Articles of
Incorporation (AOI) by attaching thereto a Certificate of
Authentication (Certificate) as an alternative to notarization or
authentication thereof.
 B. Incorporation Procedure and Documentary Requirements

B2. Who May Be, and Number of, Incorporators.

MC No. 16-19 was enacted for the clear and proper implementation
of Section 10 of the Revised Corporation Code, which allows any
person, partnership, association, or corporation, singly or jointly
with others, but not more than fifteen (15) in number, to organize a
corporation for any lawful purpose or purposes.
 B. Incorporation Procedure and Documentary Requirements

B3. Corporate Name

SEC. 17. Corporate Name. – No corporate name shall be allowed by the Commission if it is not
distinguishable from that already reserved or registered for the use of another corporation, or if such
name is already protected by law, or when its use is contrary to existing law, rules and regulations.

SEC. 18. Registration, Incorporation and Commencement of Corporate Existence. – A person or group
of persons desiring to incorporate shall submit the intended corporate name to the Commission for
verification. If the Commission finds that the name is distinguishable from a name already reserved
or registered for the use of another corporation, not protected by law and is not contrary to law, rules
and regulations, the name shall be reserved in favor of the incorporators. The incorporators shall then
submit their articles of incorporation and bylaws to the Commission.
 B. Incorporation Procedure and Documentary Requirements

B3.1. Guidelines on the use of Corporate Names, Particularly 3 Primary

Grounds for Denial of Allowance:
a. Similarity to an existing name
b. Violation of Laws and Regulations
c. Misleading the Public

B3.2. Effect of Change of Corporate Name

B3.3. Use of Corporate Names of Dissolved Corporations

 B. Incorporation Procedure and Documentary Requirements

B4. Purpose Clauses (Sections 14(b) & 41)

SEC. 14 (B): That the purpose or purposes for which such corporation is incorporated are: (If there is
more than one purpose, indicate primary and secondary purposes);
SEC. 41. Power to Invest Corporate Funds in Another Corporation or Business or for Any Other
Purpose. – Subject to the provisions of this Code, a private corporation may invest its funds in any
other corporation, business, or for any purpose other than the primary purpose for which it was
organized, when approved by a majority of the board of directors or trustees and ratified by the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least
two thirds (2/3) of the members in the case of nonstock corporations, at a meeting duly called for
the purpose.
 B. Incorporation Procedure and Documentary Requirements

B5. Corporate Term

SEC. 11. Corporate Term. – A corporation shall have perpetual
existence unless its articles of incorporation provides otherwise.
a. Perpetual Term as the Default Rule/ Selection & Retention of a
Definite Term
b. Extension of a Definite Corporate Term
c. Revival of Expired Corporations
 B. Incorporation Procedure and Documentary Requirements

B6. Principal Place of Business

SEC. 50. Place and Time of Meetings of Stockholders or Members. –

Stockholders’ or members’ meetings, whether regular or special, shall be
held in the principal office of the corporation as set forth in the articles
of incorporation, or, if not practicable, in the city or municipality where
the principal office of the corporation is located: Provided, That any city
or municipality in Metro Manila, Metro Cebu, Metro Davao, and other
Metropolitan areas shall, for purposes of this section, be considered a
city or municipality.
 B. Incorporation Procedure and Documentary Requirements

B7. No Minimum Capitalization

SEC. 12. Minimum Capital Stock Not Required of Stock Corporations. –

Stock corporations shall not be required to have a minimum capital
stock, except as otherwise specifically provided by special law.
 B. Incorporation Procedure and Documentary Requirements

B8. No more Subscription and Paid-up Requirements

SEC. 13 (Former Corporation Code): Amount of capital stock to be subscribed and paid
for purposes of incorporation. At least twenty-five (25%) percent of the authorized
capital stock as stated in the articles of incorporation must be subscribed at the time of
incorporation, and at least twenty-five (25%) percent of the total subscription must be
paid upon subscription, the balance to be payable on a date or dates fixed in the contract
of subscription without need of call, or in the absence of a fixed date or dates, upon call
by the board of directors: Provided, however, That in no case shall the paid-up capital be
less than five thousand (P5,000.00) pesos. (n)
 B. Incorporation Procedure and Documentary Requirements

B8. No more Subscription and Paid-up Requirements

SEC. 37. Power to Increase or Decrease Capital Stock; Incur, Create or Increase Bonded
Indebtedness. – No corporation shall increase or decrease its capital stock or incur, create
or increase any bonded indebtedness unless approved by a majority vote of the board of
directors and by two-thirds (2/3) of the outstanding capital stock at a stockholders’
meeting duly called for the purpose. Written notice of the time and place of the
stockholders’ meeting and the purpose for said meeting must be sent to the stockholders
at their places of residence as shown in the books of the corporation and served on the
stockholders personally, or through electronic means recognized in the corporation’s
bylaws and/or the Commission’s rules as a valid mode for service of notices.
 C. GROUNDS FOR DISAPPROVAL
SEC. 16. 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.
 D. AMENDMENTS

Sec 15. – Unless otherwise prescribed by this Code or by special law, and for legitimate
purposes, any provision or matter stated in the articles of incorporation may be amended
by a majority vote of the board of directors or trustees and the vote or written assent of
the stockholders representing at least two-thirds (2/3) of the outstanding capital stock,
without prejudice to the appraisal right of dissenting stockholders in accordance with the
provisions of this Code.

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.
Section 9: Corporate By-Laws
 CORPORATE BY-LAWS

Sec 46 CONTENTS OF BY-LAWS - A private corporation may provide

the following in its bylaws:
(a) The time, place and manner of calling and conducting regular or
special meetings of the directors or trustees;
(b) The time and manner of calling and conducting regular or special
meetings and mode of notifying the stockholders or members
thereof;
(c) The required quorum in meetings of stockholders or members
and the manner of voting therein;
(d) The modes by which a stockholder, member, director, or trustee
may attend meetings and cast their votes;
 CORPORATE BY-LAWS

(e) The form for proxies of stockholders and members and the
manner of voting them;
(f) The directors’ or trustees’ qualifications, duties and
responsibilities, the guidelines for setting the compensation of
directors or trustees and officers, and the maximum number of
other board representations that an independent director or trustee
may have which shall, in no case, be more than the number
prescribed by the Commission;
(g) The time for holding the annual election of directors or trustees
and the mode or manner of giving notice thereof;
(h) The manner of election or appointment and the term of office of
all officers other than directors or trustees;
 CORPORATE BY-LAWS

(i) The penalties for violation of the bylaws;

(j) In the case of stock corporations, the manner of issuing stock
certificates; and
(k) Such other matters as may be necessary for the proper or
convenient transaction of its corporate affairs for the promotion of
good governance and anti-graft and corruption measures.
 1.Adoption Procedure (Sec. 45) - Corporate By-Laws
Section 45 of the Corporation Code of the Philippines (Batas
Pambansa Blg. 68) outlines the procedure for adopting corporate
by-laws. This section has undergone changes, notably the removal
of the requirement to adopt by-laws within one month of
incorporation.
 C. Common Law Limitations on Contents
By-Laws Cannot Be Contrary to Law and Articles of Incorporation
A by-law provision granting to a stockholder a permanent representation in the Board of
Directors is contrary to the Corporation Code requiring all members of the Board to be
elected by the stockholders or members. Even when the members of the association may
have formally adopted the provision, their action would be of no avail because no provision
of the by-laws can be adopted if it is contrary to law. Grace Christian High School v. Court of
Appeals, 281 SCRA 133 (1997).

By-Laws Cannot Be Unreasonable or Be Contrary to Nature of By-laws. Government of

the Philippine Islands v. El Hogar Filipino, 50 Phil. 399 (1927).
Authority granted to a corporation to regulate the transfer of its stock does not empower
corporation to restrict the right of a stockholder to transfer his shares, but merely
authorizes the adoption of regulations as to the formalities and procedure to be followed in
effecting transfer. Thomson v. Court of Appeals, 298 SCRA 280 (1998).

By-laws Cannot Discriminate Among Its Shareholders / Members in Same Class

D. Generally NOT Binding on the Dealing Public

Binding Effects of By-laws (China Banking Corp. v. Court of Appeals, 270 SCRA
503 [1997]).

“Neither can we concede that such contract would be invalid just because the
signatory thereon was not the Chairman of the Board which allegedly violated
the corporation’s by-laws. Since by-laws operate merely as internal rules among
the stockholders, they cannot affect or prejudice third persons who deal with the
corporation, unless they have knowledge of the same.” PMI Colleges v. NLRC, 277
SCRA 462 (1997).
 E. Amendments & Revisions (Sec. 47)
Amendment to Bylaws. – A majority of the board of directors or trustees, and the
owners of at least a majority of the outstanding capital stock, or at least a
majority of the members of a nonstock corporation, at a regular or special
meeting duly called for the purpose, may amend or repeal the bylaws or adopt
new bylaws. The owners of two-thirds (2/3) of the outstanding capital stock or
two-thirds (2/3) of the members in a nonstock corporation may delegate to the
board of directors or trustees the power to amend or repeal the bylaws or adopt
new bylaws: Provided, That any power delegated to the board of directors or
trustees to amend or repeal the bylaws or adopt new bylaws shall be considered
as revoked whenever stockholders owning or representing a majority of the
outstanding capital stock or majority of the members shall so vote at a regular or
special meeting.
Section 10: Corporate powers
and Capacity
 A. Corporate Powers and Juridical Capacity to Act

Express Powers
SEC. 35. Corporate Powers and Capacity. – Every corporation incorporated
under this Code has the power and capacity:
(a) To sue and be sued in its corporate name;
(b) To have perpetual existence unless the certificate of incorporation
provides otherwise;
(c) To adopt and use a corporate seal;
(d) To amend its articles of incorporation in accordance with the provisions
of this Code;
(e) To adopt bylaws, not contrary to law, morals or public policy, and to
amend or repeal the same in accordance with this Code;
(f) In case of stock corporations, to issue or sell stocks to subscribers and to
sell treasury stocks in accordance with the provisions of this Code; and to
admit members to the corporation if it be a nonstock corporation;
(g) To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage, and otherwise deal with such real and personal property,
including securities and bonds of other corporations, as the transaction of
the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution;
(h) To enter into a partnership, joint venture, merger, consolidation, or any
other commercial agreement with natural and juridical persons;
(i) To make reasonable donations, including those for the public welfare or
for hospital, charitable, cultural, scientific, civic, or similar purposes:
Provided, That no foreign corporation shall give donations in aid of any
political party or candidate or for purposes of partisan political activity;
(j) To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers, and employees; and
(k) To exercise such other powers as may be essential or necessary to carry
out its purpose or purposes as stated in the articles of incorporation
 A. Corporate Powers and Juridical Capacity to Act

Implied Powers
CASE SUMMARIZATION: Luneta Motor Co. v. A.D.
Santos Inc., 5 SCRA 809 (1962)

Luneta Motor Company wanted to buy the rights to run a taxicab service,
but the court said no. The company’s official purpose, as written in its legal
documents, didn’t include running land transportation like taxis. Since it
wasn’t allowed to operate taxis, it also couldn’t buy the license needed to run
a taxi service. The court upheld this decision and dismissed Luneta Motor
Company’s appeal.
 A. Corporate Powers and Juridical Capacity to Act

Implied Powers
CASE ANALYSIS: Luneta Motor Co. v. A.D. Santos Inc.,
5 SCRA 809 (1962)
The implied powers of a corporation refer to actions that a corporation can
take, even if they aren't explicitly stated in its Articles of Incorporation, as
long as they are necessary to achieve its stated purposes. In this case, Luneta
Motor Company argued that its implied powers allowed it to buy and use the
certificate of public convenience to operate a taxicab service.
However, the court rejected this argument, stating that operating a taxicab
service was not related to the company’s stated purpose (which was focused
on dealing with automobiles, accessories, and water transportation). Since
operating taxis was outside the scope of its primary purpose, the court ruled
that the implied powers did not apply.
 A. Corporate Powers and Juridical Capacity to Act

Incidental Powers
CASE SUMMARIZATION: Atrium Management Corp.
v. Court of Appeals, 353 SCRA 23 (2001)
This case is about Atrium Management Corporation suing Hi-Cement
Corporation over four dishonored checks worth P2 million. Atrium had
discounted the checks, which were issued by Hi-Cement to E.T. Henry and
Co. The checks were dishonored because Hi-Cement stopped payment.
Atrium sued for the value of the checks.
The trial court ruled in favor of Atrium, ordering Hi-Cement and others to
pay. However, the Court of Appeals disagreed, saying Hi-Cement was not
liable because the checks were issued without proper authority and for no
valid reason. Lourdes M. de Leon, Hi-Cement’s treasurer, appealed, claiming
she wasn’t personally liable, while Hi-Cement also appealed.
 A. Corporate Powers and Juridical Capacity to Act

Incidental Powers
CASE SUMMARIZATION: Atrium Management Corp.
v. Court of Appeals, 353 SCRA 23 (2001)
The Supreme Court agreed with the Court of Appeals, saying the checks
were part of a valid corporate act. However, Lourdes was found personally
liable due to her negligence in confirming false details about the checks. The
Court also ruled that Atrium couldn’t claim to be a holder in due course but
could still recover due to lack of consideration.
The Court denied both appeals and upheld the lower court’s decision,
dismissing claims against Hi-Cement and awarding attorney’s fees.
 A. Corporate Powers and Juridical Capacity to Act

Incidental Powers
CASE ANALYSIS: Atrium Management Corp. v. Court
of Appeals, 353 SCRA 23 (2001)
In this case, the incidental power of a corporation refers to the authority a
company has to perform acts necessary to carry out its main purpose, even if
those acts are not explicitly mentioned in its charter. Hi-Cement issued the
checks as part of securing a loan for its operations, which is within its
corporate powers.
However, the Court ruled that the act of issuing the checks was valid but
questioned whether the checks were issued for proper consideration. So, the
incidental power was applied to justify the checks being part of corporate
activities, but the way they were handled raised legal issues.
 B. Express Powers That Require Ratification of Shareholders

SEC 36. Power to Extend or Shorten Corporate Term

A private corporation can extend or shorten its term if approved by the

board of directors and then ratified by stockholders or members holding at
least two-thirds of the company’s shares. Stockholders must be notified in
writing about the proposed change, with details on the meeting time and
place. This notice can be sent by mail, in person, or electronically if allowed.
If the corporation's term is extended, dissenting stockholders can exercise
their right to appraisal.
 B. Express Powers That Require Ratification of Shareholders

SEC. 37. Power to Increase or Decrease Capital Stock; Incur, Create or

Increase Bonded Indebtedness
A corporation cannot increase or decrease its capital stock or take on more
debt without approval from the board of directors and two-thirds of the
stockholders in a meeting. Stockholders must be notified in writing about
the meeting details. A certificate must be signed by the directors and include
details about the changes, such as how much capital stock was increased or
decreased, the subscribers, and the debt created. The Commission must
approve any changes, and the corporation must file a certificate with them.
For capital stock increases, at least 25% must be paid or subscribed before
filing. Nonstock corporations can also increase debt with similar approval
from their board and members.
 B. Express Powers That Require Ratification of Shareholders

SEC. 39. Sale or Other Disposition of Assets.

A corporation can sell, lease, or dispose of its assets with approval from its
board of directors. However, if it's selling most of its assets, including
goodwill, it needs approval from two-thirds of the stockholders or members.
For nonstock corporations, a majority of trustees can approve such actions.
The sale must be based on the company's net assets, and if it affects the
ability to continue business, it counts as selling most of the assets.
Stockholders must be notified, and if they disagree, they can request an
appraisal. After approval, the board can still cancel the sale. This does not
apply to routine business transactions or when assets are needed for
ongoing operations.
 B. Express Powers That Require Ratification of Shareholders

SEC. 41. Power to Invest Corporate Funds in Another Corporation or

Business or for Any Other Purpose
A private corporation can invest its funds in another business or for a
purpose outside its primary goal, but it needs approval from the board of
directors and at least two-thirds of the stockholders or members. The
stockholders or members must be notified about the meeting where the
decision will be made. If they disagree, they can request an appraisal.
However, if the investment is necessary to fulfill the corporation's main
purpose, stockholder approval is not required.
 B. Express Powers That Require Ratification of Shareholders

SEC. 43. Power to Enter into Management Contract

A corporation can enter into a management contract with another

corporation only if it is approved by both the board of directors and the
majority of stockholders (or members, for nonstock corporations) of both
the managing and the managed corporations. If there is significant overlap in
ownership or control—such as one-third or more of the voting stock being
controlled by the same shareholders, or a majority of the board members of
one corporation also serving on the other board—the contract must then be
approved by at least two-thirds of the stockholders or members of the
managed corporation. Additionally, such contracts cannot last longer than
five years.
 C. Other Corporation Powers (SEC. 35)

Sell Land and Other Properties

Corporations are allowed to manage various types of property, including real

estate (land, buildings) and personal property (equipment, intellectual
property). This includes the ability to buy, sell, lease, or even mortgage
property as needed to support the corporation’s operations. For example, a
corporation can sell an office building to raise funds or lease property to
expand its business.
 C. Other Corporation Powers (SEC. 35)

Borrow Funds

Corporations can take loans or issue bonds to raise money for business
activities, such as expanding their operations, funding projects, or managing
cash flow. This means they can enter into agreements with banks, other
businesses, or even investors to secure funds. The borrowed money allows
the corporation to finance its growth or pay for immediate expenses, with
the agreement that it will pay back the borrowed amount under certain
terms.
 C. Other Corporation Powers (SEC. 35)

Power to Sue and Be Sued

Corporations have legal rights like individuals, which means they can be
involved in lawsuits. If a corporation faces harm or if it needs to protect its
rights, it can file a lawsuit. Similarly, if someone is wronged by the
corporation, they can sue the corporation in court. This power gives the
corporation a legal identity and ensures it can function within the legal
system.
 C. Other Corporation Powers (SEC. 35)

Hire Employees and Appoint Agents

A corporation has the authority to employ staff for various roles needed to
run the business, such as managers, workers, and executives. In addition, the
corporation can appoint agents—individuals or organizations authorized to
act on its behalf. For example, a corporation might appoint an agent to
handle legal matters or make decisions in a specific area (like managing an
overseas branch). This flexibility allows the corporation to delegate tasks and
bring in expertise.
 C. Other Corporation Powers (SEC. 35)

Provide Gratuity Pay for Employees

Corporations can offer extra benefits or financial rewards to employees,

such as retirement pay, pension plans, or other forms of gratuity. This
ensures that employees are compensated for their long-term service and
dedication to the company. For instance, a corporation may provide
severance pay or a retirement fund for employees when they leave the
company or after a certain number of years worked.
 C. Other Corporation Powers (SEC. 35)

To Make Reasonable Donations

Corporations are permitted to make donations to charitable causes or public

welfare programs, such as funding hospitals, education, cultural events, and
scientific research. However, they are restricted from making political
donations, meaning they cannot give money to political parties, candidates,
or engage in political campaigning. This ensures that corporate resources are
used for social good rather than political influence. A corporation may
donate to disaster relief efforts or sponsor a local community initiative, for
example.
 1. Ultra Vires of the First Type: Classic Ultra Vires Acts
Classic Ultra Vires Acts (Sections 2 and 44)
Section 2 of the Corporation Code provides that corporations
can only engage in the activities specified in their Articles of
Incorporation. If they do anything beyond that, it is considered
ultra vires.
Section 44 prohibits acts that go beyond the express powers and
objects mentioned in the corporation's Articles of
Incorporation.
 Section 11: Sustaining the
Corporation as a Going Concern
 A. Doctrine of Centralized Management (Section 22)

1. Concept of Governing Board

The doctrine of centralized management assigns the

management and control of corporate affairs exclusively to the
board of directors. In Hormilla v. Saludat (2003), the Supreme
Court emphasized that the board must exercise its authority
collectively, in good faith, and in the best interests of the
corporation.
 A. Doctrine of Centralized Management (Section 22)

2. Theories on Source of Board Power

State-Vested Powers: The corporation’s existence and powers
originate from the state. For example, in Ramirez v. Orientalist
Co. (1918), it was held that a corporation is a creation of the state
and derives its legal authority from its incorporation.
Shareholder-Delegated Powers: Shareholders delegate their
powers to the board of directors to act on their behalf. This
principle was affirmed in Angeles v. Santos (1937) and Tan v.
Sycip (2006). These cases underscore the board’s fiduciary duty
to act in the best interest of the shareholders.
 A. Doctrine of Centralized Management (Section 22)

3. Board Must Act as a Body to Bind the Corporation

The principle that the board must act as a collective entity, not
through individual directors acting independently, was stressed
in Islamic Directorate of the Philippines v. Court of Appeals
(1997). Any decision made by an unauthorized individual
director is considered invalid unless ratified by the board.
 B. Business Judgment Rule (BJR)
1. First Branch: Transactions Entered Into
The BJR protects directors from liability for honest mistakes of
judgment. In Montelibano v. Bacolod-Murcia Milling Co. (1962),
the court explained that courts will not interfere with the
board’s decisions unless there is fraud, bad faith, or gross
negligence.
2. Second Branch: Personal Liability of Directors
Directors are shielded from personal liability for acts performed
within their authority unless there is evidence of malice, fraud,
or gross negligence. This was articulated in Benguet Electric
Cooperative, Inc. v. NLRC (1992).
 C. Countervailing Doctrines to Protect Corporate Contracts

1. Doctrine of Ratification or Estoppel (Article 1910, Civil Code)

Corporations can ratify unauthorized acts, making them valid.
Additionally, they can be estopped from denying an agent’s
authority if third parties relied on the agent’s actions in good
faith. In Lopez Realty v. Spouses Tanjangco (2014), the court
highlighted the need to protect third parties dealing with
corporations.
2. Doctrine of Laches or Stale Demands
The principle of laches prevents corporations from asserting
claims after an unreasonable delay, as affirmed in Rovels
Enterprises, Inc. v. Ocampo (2002). This doctrine safeguards
against the abuse of legal remedies and ensures stability in
corporate dealing.
 C. Countervailing Doctrines to Protect Corporate Contracts

3. Doctrine of Apparent Authority (Article 1883, Civil Code)

The doctrine protects third parties who reasonably believe that a
corporate agent has authority. For instance, in Francisco v. GSIS
(1963) and Georg v. Holy Trinity College (2016), the courts upheld
transactions entered into by agents with apparent authority to act
on behalf of the corporation.
Section 12: Directors and
Trustees
A. Qualifications and Disqualifications of Directors /
Trustees (Secs. 22 & 26)

Section 12 of the Corporation Code addresses the qualifications and

disqualifications of Directors and Trustees of a corporation, as well
as the powers of the SEC (Securities and Exchange Commission) to
remove disqualified members of the board.
 B. Election of Directors and Trustees

Election Process: Directors are nominated based on eligibility criteria, and

elections are held during meetings, often by majority vote.

Term Lengths: Directors usually serve 2-5 year terms with the possibility of re-
election. Some organizations use staggered elections for continuity

Election Procedures: Bylaws detail the nomination, voting, and quorum

requirements. Filling Vacancies: Special elections may fill vacant positions to
maintain a full board.

Transparency: The process should be clear and fair, with new members
undergoing orientation.
 C. Independent Directors

Independent directors have no close ties to the organization or its

management, ensuring impartial decision-making. Many laws
require independent directors to ensure transparency and
accountability. Their duties include monitoring performance,
ensuring financial integrity, and compliance with legal standards.
 D. Term of Office, Hold Principle and Renewal

Term of Office: Directors serve set terms, typically 2-5 years, to

bring fresh ideas.

Hold-Over Principle: If no replacement is chosen, directors may

continue temporarily until a new one is found.

Renewal: Directors may be re-elected or re-appointed at the end of

their term if still eligible and beneficial to the board.
 E. Board Vacancies (Sec. 28 and 25)

Vacancy Occurring by Removal

Vacancy Occurring by Expiration of Term
All Vacancies Other Than by Removal or Expiration of Term:
Increase in the Number of the Board:
Emergency Board
 F. Board Meetings (Sec. 48,52, 53 and 91)

Quorum (Sec. 51)

Chairman Presides Over Meetings (Sec. 52):
Modern Means of Participation (Sec. 52)
Abstention
SEC Guidelines (Memo Circular No. 06-2020)
Recusal in Related Party Transactions (Sec. 52)
Minutes of Meetings:
Resolution Versus Minutes
 G. Compensation of Directors (Sec. 29)

This section explains how directors are paid for their work in the
company.
Approval of Stockholders
Limitasyon in Compensation
Transparency at Fiduciary Duty
Thank you!