INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

Sec. 10. Number and qualifications of incorporators. Any number of natural persons not
less than five (5) but not more than fifteen (15), all of legal age and a majority of whom
are residents of the Philippines, may form a private corporation for any lawful purpose or
purposes. Each ofthei incorporators of a stock corporation must own or be a subscriber
to at least one (1) share of the capital stock of the corporation.

Incorporation of a private corporation, a mere privilege.

The right to be and act as a corporation does not belong to any person as a natural and civil
right, but as a special privilege conferred upon a group of persons by the sovereign power of the
State. Until there is a grant of such right, therefore, whether by special act of the legislature or
under a general law, there can be no corporation.

Since a corporation is merely a creation of law, it can be dissolved at any time by legislative
enactment, subject to certain limitations

Steps in the creation of a corporation.

There are three (3) steps in the creation and organization of a corporation, namely:
(1) Promotion;
(2) Incorporation
(3) Formal organization and commencement of business operations

Promotion of corporations
The term "promotion" is said to be not a legal but a business term, usefully summing up in a
single word, a number of business operations peculiar to the business world by which a
company is generally brought into existence

(1) The formation and organization of a corporation are brought about generally at the instance
and under the supervision of one (1) or more so-called "promoters." The activity on the part of
such persons is not, strictly speaking, formal part of the organization of a corporation, inasmuch
as they are not in any sense the agents of the corporation before it comes into existence. There
cannot be an agency unless there is a principal.

(2) Upon incorporation, the practice is for the board of directors to pass a resolution ratifying the
contracts entered into by the incorporators with the promoters. In such case, they become
agents of the corporation

(3) A corporation, however, may be formed and organized by the incorporators themselves
without getting the services of so-called promoters

Steps in incorporation.
Incorporation includes the following:
(1) Drafting and execution of the articles of incorporation by the incorporators. In this
connection, the person chosen as temporary treasurer pending incorporation must also execute:
(a) An affidavit regarding the capital subscribed and paid up

(2) Filing with the Securitics and Exchange Commission of the articles of incorporation
together with the following:
(a) Treasurer’s affidavit showing at least 25% of the entire authorized shares has been
subscribed and at least 25% of the subscription has been paid in cash and or property to the
corporation; and
(b) In case the corporation is governed by a special law, a favorable recommendation of the
appropriate government agency (i,e., Department of Education, Culture and Sports) that such
articles of incorporation is in accordance with law

(3) Payment of the filing and publication fees

(4) The issuance by the Securities and Exchange Commission of the certificate of
incorporation if all the papers filed after verification and examination, are found in order

There are rules or requirements under special laws to be complied with in organizing specific
business and to endow the corporation with the capacity to transact the business for which it
was created.

Incorporators: number and qualifications

Section 10 provides that the incorporators must not be less than five (5) but not more than 15,
all of legal age, and a majority of whom are residents of the Philippines

(1) Natural persons. - These five (5) or more persons must be natural persons.

Consequently, a corporation cannot be an incorporator of another corporation. As an exception

to this rule, Section 4 of R.A. No, 7353 provides that duly established cooperatives may
organize rural banks and/ or subscribe to shares of stock of any rural bank

Accordingly, if the corporation is a cooperative, it may become an incorporator of a rural bank. In

any case, a corporation may subscribe to the stocks of another corporation.

(2) Capacity to contract. - The incorporators must have the capacity to enter into a valid
contract, the act of forming corporation as between the Parties being contractual.

Furthermore, the articles of incorporation, under Section 15. must be acknowledged by the
incorporators before notary public, i.e. must be under oath. There is thereby the requirement
that the incorporators must be qualified to enter into contract. The purpose of requiring the
acknowledgment is to guard against the possibility of any fictitious name being subscribed to the
article and to assure that the signatures appearing therein are genuine. A married woman may
be an incorporator without the need of obtaining the consent of her husband since under the law
"either spouse may exercise any legitimate profession, occupation, business or activity without
the consent of the other subject to the right of the husband to "object only on valid, serious, and
moral grounds."

Section 10 requires that the incorporators must be "all of legal age.

(3) Residents of the Philippines. - A majority of the incorporators must be residents of the
Philippines; the rest may be persons who are neither residents nor citizens of the Philippines.
However, enemy aliens cannot become incorporators for subjects of one (1) country cannot
lawfully contract with the subjects of the country with which it is at war.

The residence requirement is mandatory. The term "residents" means domiciled residents (i.e.,
physically present in the Philippines with an intention to remain in the country) as distinguished
from temporary residents with domicile in another country.

(4) Citizens of the Philippines. - By specific constitutional and legal provisions, citizenship is a
necessary qualification for incorporators in corporations in which a certain percentage of the
capital stock is required to be owned by Filipino citizens. Foreign shareholders may be debarred
from certain activities which are exclusively reserved for Filipino citízens.

(5) Owners of or subscribers to at least one (1) share. -The Code now expressly requires
that "each of the incorporators of a stock corporation must own or be a subscriber to at least
one (1) share of the capital stock of the corporation. (Sec 10.) The presumption is that where an
incorporator has some pecuniary interest in a corporation, he will be concerned with the
management of its affairs

Requirement of minimum number of incorporators mandatory

The requirement of the law regarding the minimum number of incorporators is mandatory and
legally formed by less than the prescribed number except in the corporation cannot be case of a
corporation sole. In case of educational corporations, their incorporation "shall be governed by
special laws and by the general provisions of [the] Code."

(1) Reduction of stockholders or members to less than minimum - The number of

stockholders (or members) after the corporation is organized may become less than the
minimum number required for incorporation without affecting corporate existence unless valid
grounds exist for piercing or lifting the corporate veil.

(2) Beneficial ownership in one (1) individual. - Beneficial ownership is not necessary. A
person with legal title is qualified to become an incorporator.

(a) The requirement of a minimum number of incorporators is one of those provisions, however,
which are regularly evaded in practice. Since the law permits a scheme by which all the shares
are owned by a single individual, the latter may incorporate provided he associates with him, at
least nominally, the number of persons required by the law.
(b) The validity of the incorporation is not affected by the fact that it is formed in the interest of a
single individual, and that the other persons are under his control, without any substantial
interest, or without individual responsibility who may only be called "qualifying stockholders," or
who are popularly known as dummies or "men of straw."

(3) Subsequent accumulation of shares in one individual.- Nor is the existence of the
corporation originally formed bv the required number of incorporators affected by the
subsequens accumulation of all the shares in the hands of one (1) individual, unless, as
previously said, circumstances exist to justify the piercing of the veil of corporate entity.

Sec.11.Corporate term. A corporation shall exist for a period not exceeding fifty (50)
years from the date of incorporation unless sooner dissolved or unless said period is
extended.
The corporate term as originally stated in the articles of incorporation may be extended
for periods not exceeding fifty (50) years in any single instance by an amendment of the
articles of incorporation, in accordance with this Code: Provided, That no extension can
be made earlier than five (5) years prior to the original or subsequent expiry date(s)
unless there are justifiable reasons for an earlier extension as may be determined by the
Securities and Exchange Commission.

Term of corporate existence

The corporation shall exist for the term specified in the articles of incorporation not exceeding 50
years, unless sooner legally dissolved or unless its registration is revoked upon any of the
grounds provided by law.

The corporate life may be reduced or extended by amendment of the articles of incorporation

Extension of corporate term.

(1) Limitations - The extension of the corporate term is subject to the following limitations:

(a) The term shall not exceed 50 years in any one instance;

(b) The amendment is effected before the expiration of the corporate term of existence for after
dissolution by expiration of the corporate term there is no more corporate life to extend, Hence,
the extension cannot be done during the three (3)-year period of liquidation.

The expiration of the term for which the corporation was created does not, however, produce its
immediate dissolution for all purposes; and

(c) The extension cannot be made earlier than five (5) years prior to the expiration date unless
there are justifiable reasons therefor as may be determined by the Securities and Exchange
Commission
The Corporation Code places no limit to the number of extensions that may be made
(2) Efect of extension|expiration of term. --The mere extension of the corporate term of
existence made before the expiration of the original term constitutes a continuation of the old,
and not the creation of a new, corporation.

Upon the expiration of the period fixed in the articles of incorporation, in the absence of
compliance with the legal requisites for the extension of the period, the corporation ceases to
exist and is dissolved ipso facto.

The expiration of the term for which the corporation was created does not, however, produce its
immediate dissolution for all purposes.

(3) Automatic extension. - Section 11 allows the automatic extension of the corporate
existence by amendment of he articles of incorporation within the five (5) year-period before the
expiration date of the existing term, during which the Securities and Exchange Commission may
look, if necessary, into the financial structure of the corporation and its past operations or
actuations

Sec. 12. Minimum capital stock required of stock corporations Stock corporations
incorporated under this Code shall not be required to have any minimum authorized
capital stock exceptas otherwise specifically provided for by Special law, and subject to
the provisions of the following section.

Capital stock requirement.

The Code does not set a minimum authorized capital stock except as otherwise provided by
special law as long as the paid up capital, as required by Section 13, is not less than P5,000.
The old law also has no capital stock requirement. It merely requires that the articles of
incorporation state the amount of the corporation's capital stock. Special laws may require a
higher paid-up capital, as in the case of commercial banks, insurance companies, and
investment houses.

Filipino percentage ownership requirement regarding corporate capital.

By specific constitutional and legal provisions, Filipino ownership of a certain percentage of the
capital stock or capital is required in certain cases, such as:

(1) Corporations for exploration, development, and utilization of natural resources. - at

least 60% of the capital of which is owned by citizens of the Philippines. The word "capital" in
the above constitutional provision should be understood to mean "outstanding capital stock" in
case of stock corporations;

(2) Public service corporations. - at least 60% of the capital of which is owned by citizens of
the Philippines
(3) Educational corporations - Other than those established by religious orders and mission
boards, at least 60% of the capital of which is owned by citizens of the Philippines

(4) Banking corporations -- at least 60% of the voting stock of the corporation shall be owned
or controlled by citizens of the Philippines. (R.A. No. 8791, Sec. 11.) R.A. No. 10641 allows the
full entry of foreign banks in the Philippines subject to guidelines approved by the Monetary
Board of the Bangko Sentral ng Pilipinas (BSP);

(5) Corporations engaged in retail trade. - enterprises with less than U.S. $2.5 million paid-up
capital are reserved exclusively for Filipino citizens and corporations wholly-owned by Filipino
citizens.

(6) Rural banks. - Before, no less than 40% of the voting stocks - of which shall be owned by
Filipino citizens Or corporations at least 60% of whose capital is owned by such citizens.
Foreign investors are now allowed to own acquire or purchase up to 60% of a voting stock in a
rural bank;

(7) Corporations engaged in coastwise shipping, - at least 60% of the capital stock of which
or of any interest in said capital is totally owned by citizens of the Philippines

(8) Corporations engaged in the pawnshop business. - at least 70% of the voting capital
stock shall be owned by citizens of the Philippines and

(9) Under the Flag Law - in the purchase of articles for the Government, preference shall be
given to materials and supplies produced, made, or; manufactured in the Philippines, and to
domestic entities. The term "domestic entities" means any citizen of the Philippines or any
corporate body or commercial company at least 75% of the capital of which is owned by citizens
of the Philippines.

Sec. 13. Amount of capital stock to be subscribed and paid for purposes of
incorporation. At least twenty-five percent (25%) 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 percent (25%) of the total subscription must be paid upon subscription,
the balance to be on a date or dates fixed in the contract of payable subscription without
need of call, or in the absence of a fixed date or dates, upon call for payment by the
board of directors; Provided, however, That in no case shall the paid-up capital be less
than Five thousand pesos (P5,000.00).

Minimum subscription and paid-up capital

(1) Pre-incorporation, - Section,13 requires that at least 25% of the amount of the capital stock
has been actually subscribed and that at least 25% of such subscription paid
(a) These requirements are mandatory. Accordingly, if they are not complied with, noo
corporation Can be Jawfully incorporated even if a certificate of incorporation has been issued
by the Securities and Exchange Commission in good faith. (b) Special laws may require a
higher paid-up capital.

(2) Post incorporation. - The 25% subscription and 25% paid. up capital is required not only
during the incorporation period but also in case of increase of the authorized capital stock. (Sec.
38, par. 4.)
(a) This is designed to give assurance to the investing public dealing with the corporation that it
is financially and actually able to operate and undertake to do` business and meet its obligations
as they arise from the start of its operations. Accordingly, the 25% minimum paid-up capital
requirement would not apply to subsequent subscriptions to the unsubscribed shares of the
corporation since the evils or risks of insolvency against which the law intends to safeguard the
public no longer exist. (SEC Opinion, June 29, 1976.)
(b) Note hat call by the Board of Directors for the payment of the balance of subscriptions (see
Sec. 67.) is required only when there is no fixed date for payment in the contract of subscription.
(c) It is not required for purposes of incorporation that each and every subscriber shall pay 25%
of his subscription. The paid-up requirement is met as long as "25% of the total subscription" is
paid although some subscribers have paid less than 25%, or even have not paid any amount

ILLUSTRATION: Suppose it be desired that Corporation X be incorporated with a capital stock

of P100,000 divided into 1,000 shares with a par value of P100 per share

Computation of the 25% subscription requirement.

(1) Where the capital stock consists only of par value shares the minimum subscription should
be 25% of the amount of the authorized capital stock or 25% of the aggregate value of all the
shares of stock the corporation is authorized to issue In par value stock corporations, the
percentage subscription requirement shall always be based on the amount of the authorized
capital stock irrespective of the class, number, and par value of the shares.
(2) Where the capital stock consists only of no par value shares the 25% requirement shall be
computed on the basis of the entire number of authorized shares. Corporations whose shares
have no par value have no authorized capital stock. (see Scc. 15 seventh].) The issued price of
nt par shares need not be fixed in the articles of incorporation. (see Sec. 62, last par)
(3) Where the capital stock is divided into par value shares and par value shares, the
requirement as to par value shares is as indicated above and for the no par value shares, the
25% is based on the number of said no par value shares

Sec.14.Contents of Articles of Incorporation. All corporations organized under this Code

shall file withthe Securities and Exchange Commission articles of incorporation in any of
the official languages, duly signed and acknowledged by all of the incorporators
containing substantially the following matters, except as otherwise prescribed by this
Code or by special law:
(1) The name of the corporation;
(2) The specific purpose or purposes for which the corporation is being incorporated.
Where a corporation has more than one stated purpose, the articles of incorporation
shall state which is the primary purpose and which is/are the secondary purpose or
purposes: Provided, That a non-stock corporation may not include a purpose which
would change or contradict its nature as such;
(3) The place where the principal office of the corporation is to be located, which must be
within the Philippines:
(4) The term for which the corporation is to exist;
(5) The names, nationalities and residences of the incorporators;
(6) The number of directors or trustees, which shall not be less than five (5) nor more
than fifteen (15);
(7) The names, nationalities and residences of the 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;
(8) If it be a stock corporation, the amount of its authorized capital stock in lawful money
of the Philippines, the number of shares into which it is divided, and in case the shares
are par value shares, the par value of each, the names, nationalities and residences of
the original subscribers, and the amount
subscribed and paid by each on his subscription, and if some or all of the shares are
without par value, such fact must be stated;
(9) If it be a non-stock corporation, the amount of its capital, the names, nationalities and
residences of the contributors and the amount contributed by each; and
(10) Such other matters as are not inconsistent with law and which the incorporators may
deem necessary and convenient,

The Securities and Exchange Commission shall not accept the articles of incorporation
of any stock corporation unless accompanied by a sworn state- ment of the Treasurer
elected by the subscribers showing that at least twenty-five percent (25%) of the
authorized capital stock of the corporation has been subscribed, and at least twenty-five
percent (25%) of the total subscription has been fully paid to him in actual cash and/or in
property the fair valuation of which is equal to at least twenty-five percent (25%) of the
said subscription, such paid-up capital being not less than Five thousand pesos
(P5,000.00). (6a, 9a)

Sec. 15. Forms of Articles of Incorporation. - Unless otherwise prescribed by special law,
articles of incorporation of all domestic corporations shall comply substantially with the
following form:

ARTICLES OF INCORPORATION OF
(Name of Corporation)
KNOW ALL MEN BY THESE PRESENTS: The undersigned incorporators, all of legal age
and a majority of whom are residents of the Philippines, have this day voluntarily agreed
to form a (stock) (non-stock) corporation under the laws of the Republic of the
Philippines
AND WE HEREBY CERTIFY:
FIRST: That the name of said corporation shall be INC. or CORPORATION
SECOND: That the purpose or purposes for which such corporation is incorporated are:
(lf there is more than one purpose, indicate primary and secondary purposes);
THIRD: That the principal office of the corporation is located in the City/Municipality of
...................... Province of 2 ....", Philippines; . ...................
FOURTH: That the term for which the said corporation is to exist is .....................ears from
and after the date of issuance of the certificate of incorporation;
FIFTH: That the names, nationalities and resi- dences of the incorporators of the
corporation are as follows:
NAME
NATIONALITY s.....................
RESIDENCE
#F.....
""..
.....
"... ............
SsP:S.S.............
........
....
.....................
SIXTH: That the number of directors or trustees of the corporation shall be ............... and
the names, nationalities and residences of the first directors or trustees of the
corporation are as follows:
:
....
NAME
NATIONALITY RESIDENCE

SEVENTH: That the authorized capital stock of the corporation is B EUU........... PESOS in
lawful money of the Philippines divided (P...........). into shares with the par value of
.....................(............ Pesos per share (In case all the shares are without par value): That
the capital stock of the corporation is. ........ shares without par value. (In case some
shares have par value and some are without par value): That the capital stock of said
corporation consists of ...........hare of which ............hares are of the par value of (P........)
PESOS each, and of which .... ...........shares are without par value
EIGHTH: That at least twenty-five percent (25%) of the authorized capital stock above
stated has been subscribed as follows:
No. of Shares Subscribed
Name of Subscriber
Amount Subscribed
Nationality
BEEEFEE.........""
..................
s............"""""
.
.................
....."..
....""
....
NINTH: That the above-named subscribers have paid at least twenty-five percent (25%) of
the total subscription as follows: Total Paid-In
Name of Subscriber
Amount Subscribed

PRIVATE CORPORATIONS

(Modify Nos. 8 and 9 if shares are with no Dar valus. In case the corporation is
non-stock, Nos. 7, 8 and 9 of the above articles may be modlfled accordingly, and It is
sufficient if the articles state the amount of capital or money contributed or donated by
specifled persons, stating the names, nationallties and residences of the contributors or
donors and the respective amount given by oach.)
TENTH: That. ................ has been elected by the subscribers as Treasurer of the
Corporation to act as such until his successor is duly elected and quali- fied in
accordance with the by-laws, and that as such Treasurer, he has been authorized to
receive for and in the name and for the benefit of the corporation, all subscriptions (or
fees) or contributions or donations paid or given by the subscribers or members.
ELEVENTH: (Corporations which will engage in any business or activity reserved for
Filipino citizens shall provide the following): "No transfer of stock or interest which
shall reduce the ownership of Filipino citizens to less than the required percentage of
the capital stock as provided by existing laws shall be allowed or permitted to be
recorded in the proper books of the corporation and this restriction shall be indicated in
all the stock certificates issued by the corporation." In witness whereof, we have
hereunto signed these Articles of Incorporation this day of S.... 19 in the
City/Municipality of S... Province of ....... ........ Republic of the Philippines.
(Names and Signatures of the incorporators)
SIGNED IN THE PRESENCE OF:
Sec. 15

Meaning of articles of incorporation

The articles of incorporation is the document prepared by the persons establishing a corporation
and filed with the Securities and Exchange Commission containing the matters required by the
Code
A copy of the articles filed which is returned with the certificate of incorporation issued by the
Commission under its official seal becomes its corporate charter enabling the corporation to
exist and function as such.

A corporation created by special law has no articles of incorporations.

Contents and form of articles of incorporation.

(1) Section 14 enumerates the matters (mandatory provisions) that must be stated in the articles
of incorporation of domestic corporations, except as otherwise prescribed by the Code or by
special law.

(a) The incorporators may include such other matters as are not inconsistent with law and which
they may deem necessary and convenient, such as the classes of shares which the corporation
may issue, provisions on pre-emptive right, ect.

(b) Under the last paragraph, the Securities and Exchange Commission shall not accept the
articles of incorporation of any stock corporation unless accompanied by a sworn statement of
the treasurer elected by the subscribers showing compliance with the requirement as to the
minimum amount of the subscribed and paid-up capital stock

(c) The articles of incorporation may provide other matters or items (optional provisions) as long
as they are not contrary to any provision of the Code or special law

(d) While under the Corporation Code, there is no general requirement of Philippine citizenship,
there are some areas of business and industry where ownership is reserved, wholly or partially,
in favor of Filipino citizens by virtue of the Constitution and special laws. In order to safeguard
the interest of transferees of stock who may not be aware of the citizenship requirement and in
order to secure compliance with the limitation on alien ownership, Section 15(11) requires the
articles of incorporation to provide the restriction stated

Such restriction serves as notice to all persons who may be dealing with the stock of the
corporation, and is intended to deter the issue or transfer of shares in favor of aliens in violation
thereof.

(2) On the other hand, Section 15 provides the form of the articles of incorporation of all
domestic corporations, unless otherwise prescribed by special law,

(a) It must include the affidavit of the treasurer of the corporation concerning the amount of
capital stock subscribed and paid. The Securities and Exchange Commission may reject the
articles of incorporation or any amendment thereto if the same is not substantially in accordance
with the forms prescribed above or if the treasurer's affidavit is false.
(b) The articles of incorporation must be written in any of the official languages (i.e, English or
Filipino) duly signed and acknowledged by all of the incorporators

Name of the corporation

(1) Importance. - The corporation acquires juridical personality under the name stated in the
certificate of incorporation (Sec. 19.) A corporation has the power of succession by its corporate
name.It is the name of the corporation which identifies and distinguishes it from other
corporations, firms or entities. By that name i it is authorized to transact business. The name of
a corporation is, therefore, peculiarly essential to its existence

(2) Nature. - A corporate name is regarded as of the nature of a trademark even though
composed of individual names, and its simulation may be restrained. After adoption, it follows
the corporation.

A corporation's right to use its corporate and tradename is a property right, a right in rem,
meaning it may assert and protect such right against anybody, in the same manner as it may
protect its tangible property against trespass or conversion. It cannot be impaired or defeated by
subsequent appropriation by another corporation in the same field

(3) Part of name. -- It is customary to use as part of the name the word "corporation" or
"incorporated" or an abbreviation of either of them to distinguish it from a partnership and other
business organizations. But the character of a corporation is not necessarily determined by its
name.

Purpose or purposes of the corporation.

(1) Purpose or purposes must be lawful. - A corporation may be organized only for "any
lawful purpose or purposes", otherwise, no corporation may be created even though some of its
declared purposes may be lawful.

"That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral,
or contrary to government rules and regulations is one of the grounds for the rejection or
disapproval by the Securities and Exchange Commission of the articles of incorporation.

Thus, a corporation formed to carry on gambling or operate prostitution houses is incorporated

for an illegal purpose: It has been held that a corporation cannot be formed for the practice of
law, medicine, or other professions in the absence of express authority in the corporation law.
The practice of a profession is not considered a business and is open only to persons with the
necessary qualifications. In corporations, the profit motive is the principal factor. The law,
however, permits the formation of a partnership for the exercise of a profession

(2) Purpose or purposes must be stated with sufficient clarity. - The purpose or purposes
stated in the articles of incorporation need not set out with particularity the multitude of activities
in which the corporation may engage. But while the purposes may be stated in broad and
general terms, they should not be so stated indefinitely, otherwise, the articles of incorporation
may be rejected

Thus, an article of incorporation authorizing the corporation "to carry on any business not
contrary to law" or one, after stating certain distinct purposes, adding and for such other
purposes as may be agreed upon by the corporation in the future," will be rejected because the
purpose or purposes are not definitely stated.

(3) Primary purpose must be stated. - The purposes for which a corporation is organized,
where it has more than one stated purpose, shall state which is the primary which is/ are the
secondary or subsidiary purpose or purposes or main purpose and

The main purpose must be specified

Under Section 42, a corporation is prohibited from investing its funds "for any purpose other
than the primary purpose for which it was organized" unless it is approved by both its board of
directors or trustees and its stockholders or members. A non- stock corporation may not include
a purpose which would change or contradict its nature as such.

(4) Purposes must be capable of being lawfully combined although Section 10 allows the
formation of corporations "for any lawful purpose or purposes," the purposes, where there are
more than one, must be capable of being lawfully combined

Thus, banks which are governed by the General Banking Law of 2000 (R.A. No. 8979.) are
prohibited from directly engaging in non-banking activities such as insurance as the insurer.
Similarly, insurance companies which are governed by the Insurance Code (PD, No. 1460.) are
not allowed to engage in banking operations,

Reasons for statement of purpose or purposes.

The law requires the statement of the purpose or purposes for which a corporation is formed in
order that.

(1) A person who intends to invest his money in the business corporation will know where and in
what kind of business or activity his money will be invested;

(2) The directors and the officers of the corporation will know within what scope of business they
are authorized to act; and lastly;

(3) A third person who has dealings with the corporation may know by perusal of the articles
whether the transaction or dealing he has with the corporation is within the authority of the
corporation or not.
In other words, the main reason for stating the purpose of the corporation is to determine
whether the acts performed by the corporation are authorized or beyond its powers. In the latter
case, they will be known as ultra vires acts. (C.G. Alvendia op. cit., p. 80.)

Principal office of the corporation

(1) City or municipality within the Philippines.- The articles of incorporation must state the
"place where the principal office of the corporation is to be established or located, which place
must be within the Philippines." The place to be designated is the city or town (not mercly the
province) where the principal office is to be located It is now required by the Securities and
Exchange Commission that all corporations and partnerships applying for registration with it
should state in their Articles of Incorporation or Articles of Partnership the:

(a) specific address of their principal office, which shall include if feasible, street number, street
name, barangay, city, or municipality; and

(b) specific residence address of each incorporator, stockholder, director, trustee, or partner.
(SEC Circ. No. 3, Series of 2006.) The indication of a general address such as a city,
municipality. or Metro Manila is no longer allowed

(2) Place where corporate books are ordinarily kept and its officers meet. -The "place of
the principal office" does not necessarily mean the place where the business of the corporation
is transacted but the place where its books and records are ordinarily kept and its officers
usually meet for the purpose of managing the affairs and transacting the business of the
corporation.

(3) Change of address. - If the change involves a change of city or municipality, amended
articles of incorporation stating the new address must be filed with the Securities and Exchange
Commission. (Sec. 16.) If the new address is located within the same city or municipality, no
corporate document is required to be filed with the Securities and Exchange Commission except
a notice regarding the change of address.

Incorporating directors or trustees.

The incorporating directors or trustees are those chosen by the incorporators (Sec. 5.) and
named in the articles of incorporation

(1) Matters to be specified in articles of incorporation. - The articles of incorporation must

specify the names, nationalities, and residences of the incorporators and must show that at
least a majority of the incorporators are residents of the Philippines.
The statement of the nationalities of the incorporators will enable the Securities and Exchange
Commission to determine prima facie compliance with constitutional or legal requirements
regarding ownership by Filipino citizens of certain percentage of the capital stock of certain
corporations.
(2) Numnber. - The number of the incorporating directors or trustees is determined by the
incorporators, but such number must not be less than the minimum (5) nor more than the
maximum (15) provided by law

(3) Term of office. - The incorporating directors or trustees shall hold office until their
successors are duly elected and qualified. They are intended to be replaced by the regularly
clected directors or trustees who shall holdoffice for one (1) year
when the corporation is organized by the adoption of by-laws (see Sec, 46.) at the first meeting
of stockholders or members,

(4) Subscribers to stock, - Under Section 23 (par. 2.), “every director must have at least one
(1) share of capital stock of the corporation of which he is director." This requirement applies to
the directors elected after incorporation as well as to incorporatingdirectors who must "be a
subscriber to at least one (1) share of the capital stock of the corporation."

It follows that in a stock corporation, there must be at least five (5) stockholders.

Capital stock/capital and subscribers/ contributors.

(1) Stock corporation. - The articles of incorporation of a stock corporation under Section 14(8)
must state the following:

(a) The amount of its authorized capital stock in pesos;

(b) The number of shares into which it is divided;
(c) The par value in pesos of each share;
(d) The names, nationalities, and residences of the original subscribers;
(e) The amount of capital stock subscribed and Paid by each on his subscription; and
(f) If some or all of the shares are without par value such fact.

(2) Non-stock corporation - If the corporation be a non-stock corporation, the articles of

incorporation must state:

(a) The amount of its capital or money contributed or donated by specified persons;
(b) The names, nationalities, and residences of the donors or contributors; and
(c) The respective amount contributed by each.

Where shares with par value,

Where the shares issued by a corporation have only one par value the authorized capital stock
would be the number of shares multiplied by the par value.
If a corporation is authorized to issue different classes of shares with different par values, the
authorized capital stock would be the total of the products of the number of shares in each class
multiplied by the par value of such class of shares.
Thus, where the number of shares authorized to be issued is 1,000,000 of the par value of
P1.00 per share, the authorized capital stock is P1,000,000.
lf, for example, 600,000 of the shares are classified into Class "A" with a par value of P1.00 and
400,000 of the shares, into Class "B" with a par value of P1.50, the authorized capital stock is
P1,200,000, the total of the products of 600,000 multiplied by P1.00, or P600,000, and of
400,000 multiplied by P1.50, or P600,000.

Where shares without par value.

In case the capital stock consists of shares without par value, the articles of incorporation need
only state such fact, together with the number of shares into which said capital stock is divided.

If the shares have par value, the amount of the authorized capital stock in pesos is specified in
the articles, but if they have no par value, no amount of capital stock is specified in the articles
which need only state the number of shares into which said capital stock is divided

The reason is that the price of no par value shares may vary from time to time and, therefore,
the total amount of the capital stock cannot be known until all the shares are issued

Where shares with par value and without par value.

In case some of the shares of the capital stock have par value and some are without par value,
the articles of incorporation must state such fact, the number of shares into which the capital
stock is divided, the number of shares with par value and thct par valuc, and the number of
shares without par value

Where business of corporation reserved for Filipino citizens.

Corporations which will engage in any business or activily reserved for Filipino citizens shall
provide in their articles o incorporation the restriction against the "transfer of stock Or interest
which will rcduce the ownership of Filipino citizens to less than the required percentage of the
capital stock as provided by existing laws x x x.'

If the required percentage of ownership has not been complied with, the articles of incorporation
will not be accepted by the Sccurities and Exchange Commission.

Sec. 16. Amendment of Articles of Incorporation.

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 disseriting stockholders in accordance with the
provisions of this Code, or the vote or written assent of two-thirds (2/3) of the members if
it be a non-stock corporation
The original and amended articles together shall contain all provisions required by law to
be set out in the articles of incorporation. Such articles, as amended, 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 stating the fact
that said amendment or amendments have been duly approved by the required vote of
the stockholders or members, shall be submitted to the Securities and or from the date of
filing with the said Commission if not acted upon within six (6) months from the date of
The amendments shall take effect upon their not attributable to the corporation.

INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

Power of stockholders or members to amend articles of incorporation

The authority of stockholders or members to amend the articles of incorporation which forms
part of the corporate charter is conferred by Sections 16, 37, and 38. Section 37 refers to the
extension or shortening of the corporate term; Section 38, to increase or decrease of the capital
stock, and Section 16, to matters other than the foregoing.

The amendment must also be approved by a majority vote of the board of directors or trustees

Necessity of stockholders' or members' meeting for amendment.

It must be noted that under the first paragraph of Section 16, the amendment may also be
effected by the "written assent" of the stockholders representing at least 2/3 of the outstanding
capital stock of the corporation or 2/3 of its members, meaning that such action need not be
taken at a meeting and upon a vote.

(1) If the amendment consists in extending or shortening the corporate term, a meeting of the
stockholders or members is necessary.

(2) In a close corporation, if the amendment of the articles of incorporation refers to any of the
matters mentioned in Section 103, the same shall not be valid or effective unless approved by
the required vote of the stockholders at a meeting duly called for the purpose. A mere written
assent would not also be sufficient.

Limitations on power of corporation to amend.

Section 16 imposes limitations on the power of a corporation to amend its articles of
incorporation. They are as follows:

(1) The amendment of any provision or matters stated in the articles of incorporation is not
allowed when it will be contrary to any provision or requirement prescribed by the Code or IS
special law;
(2) It must be "for legitimate purposes";

(3) It must be approved by the required vote of the board and the stockholders or members;

(4) The original articles and amended articles together shall contain all provisions required by
law to be set out in the articles of incorporation; and

(5) Such articles, as amended, shall be indicated by under. scoring 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 stating that the _ amendment or amendments have been duly approved
by the required vote of the stockholders or members shall be submitted to the Securities and
Exchange Commission;

(6) The amendments shall take effect only upon their approval by the Securities and Exchange
Commission. They are deemed approved by the Commission from the date of filing if not acted
upon within six (6) months from said date for a cause not attributable to the corporation,
assuming that the amendments are not illegal; and

(7) If the corporation is governed by a special law Such as banks, banking and quasi-banking
institutions, insurance companies, etc., the amendments must be accompanied by a favorable
recommendation of the appropriate government agency to the effect that such amendments are
in accordance with law,

(8) In the case of foreign corporations authorized to transact business in the Philippines, they
are merely required to file, within 60 days after the amendment to the articles of incorporation
(or by-laws) becomes effective, with the Securities and Exchange Commission and in proper
cases, with the appropriate government agency, duly authenticated copy of the articles of
incorporation (or by-laws) for record purposes. The filing thereof however, shall not of itself
enlarge or alter the purpose or purposes for which such corporation is authorized under its
license to transact business in the Philippines

Sec. 17. Grounds when articles of incorporation or amendment may be rejected or

disapproved. - The Securities and Exchange Commission may reject the articles of
incorporation or disapprove any amend- ment thereto if the same is not in compliance
with the requirements of this Code: Provided, That the Commission shall give the
incorporators reasonable time within which to correct or modify the objectionable
portions of the articles or amendment. The following are grounds for such rejection or
disapproval:

(1) That the articles of incorporation or any amendment thereto is not substantially in
accordance with the form prescribed herein;

(2) That the purpose or purposes of the corporation are patently unconstitutional, illegal,
immoral, or contrary to government rules and regulations
(3) That the Treasurer's Affidavit concerning the amount of capital stock subscribed
and/or paid is false;

(4) That the percentage of ownership of the capital stock to be owned by citizens of the
Philippines has not been complied with as required by existing laws or the Constitution

No articles of incorporation or amendment to articles of incorporation of banks, banking

and quasi- banking institutions, building and loan associations, trust companies and
other financial intermediaries, insurance companies, public utilities, educational
institutions, and other corporations governed bv special laws shall be accepted or
approved by the Commission unless accompanied by a favorable recommendation of the
appropriate government agency to the effect that such articles or amendment is in
accordance with law.

Grounds for rejection of articles of incorporation or amendment thereto.

Section 17 enumerates the grounds for the rejection of the articles of incorporation or
disapproval of any amendment thereto. The grounds are not exclusive.

(1) The Securities and Exchange Commission is required to give the incorporators reasonable
time within which to correct or modify the objectionable portions of the articles of incorporation
or amendment when the same is rejected or disapproved for non-compliance with the
requirements of the Code.

(2) In case of corporations governed by special laws such as banks, insurance companies, and
educational institutions, the articles of incorporation or amendment shall not be accepted or
approved by the Securities and Exchange Commission unless accompanied by a fayorable
recommendation of the appropriate government agency (e.g., Monetary Board of the Central
Bank, with respect to banking institutions) that such articles or amendment is in accordance with
law.

(3) The Securities and Exchange Commission shall not also accept the articles of incorporation
of any stock corporation unless accompanied by a sworn statement of the treasurer elected by
the subscribers showing the amount of the capital stock subscribed and Paid.

Suspension or revocation of the certificate of registration of corporations.

Under Pres. Decree No. 902-A, the Securities and Exchange Commission may suspend, or
revoke, after proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships, or associations upon any of the grounds provided by law, including
the following:
(1) Fraud in procuring its certificate of incorporation (such as making it appear that it has cash
paid-up capital when actu- ally it has none, the money being in fact merely borrowed and
returned to the lender after incorporation);

(2) Serious misrepresentation as to what the corporation can do or is doing to the great
prejudice of, or damage to, the general public;

(3) Refusal to comply with or defiance of a lawful order of the Commission restraining the
commission of acts which would amount to a grave violation of its franchise;
(4) Continuous inoperation for a period of at least five (5) years;

(5) Failure to file by-laws within the required period; and

(6) Failure to file required reports in appropriate forms as determined by the Commission within
thc prescribed period.

Sec.18.Corporate name. - No corporate name may be allowed by the Securities and

Exchange Commission if the proposed name is identical or deceptively o confusingly
similar to that of any existing corporation or to any other name already protected by law
or is patently deceptive, confusing or contrary to existing laws. When a change in the
corporate name is approved, the Commission shall issue an amended certificate of
incorporation under the amended name.

Change of corporate name

(1) Requirements - A corporation can change the name originally selected by it after complying
with the formalities prescribed by law, to wit: amendment of the articles of incorporation and
filing of the amendment with the Securities and Exchange Commission.

Hence, the mere approval by the stockholders of the amendment of the articles of incorporation
changing the corporate name does not automatically change the name of the corporation as of
that date.

When a change of name is approved, it is required that Commission must issue an amended
certificate of incorporation the under the amended name.

(2) Effect. - An authorized change in the name of the corporation has no more effect upon its
identity as a corporation than a change of name of a natural person upon his identity. It does not
affect the rights of the corporation or lessen or add to its obligations. After a corporation has
effected a change in its name it should sue and be sued in its new name

Limitation upon use of corporate name.

The incorporators may choose and use any name they may see fit, provided it is one not
identical with or similar to a name which was previously adopted and which is being used by
another corporation or unincorporated association or a natural person as trade name, or is
contrary to existing law.

If any corporation could adopt at pleasure the name of another corporation, the practice would
cause confusion and unfair and fraudulent competitions. It would also create difficulties in the
administration and supervision by the government of corporations.

Sec.19.Commencementof corporate existence. A private corporation formed or organized

under this Code commences to have corporate existence and juridical personality and is
deemed Incorporated from the date the Securitles and Exchange Commission issues a
certificate of incorporation under its official seal; and thereupon the incorporators,
stockholders members and their successors shall constitute a body politic and corporate
under the name stated in the articles of incorporation for the period of time mentioned
therein, unless said period is extended or the corporation is sooner dissolved in
accordance with law.

Acquisition of juridical personality

(1) Issuance of certificate of incorporation. - A corporation commences to have juridical

personality and legal existence only from the moment the Securities and Exchange Commission
issues to the incorporators a certificate of incorporation under its official seal.

(a) Such certificate is a final determination of the corporation's right to do business or to enter
into contracts in its name.

(b) Once issued, the certificate becomes he charter or corporate franchise from which the
authority of the corporation to operate as such flows.

(c) The issuance of the certificate calls the corporation into being but it is not ready to do
business until it is organized. The corporation must formally organize and commence the
transaction of its business or the construction of its works within two (2) years from the date of
its incorporation, otherwise, its corporate powers shall' cease and it shall be deemed dissolved.

(2) Filing of articles of incorporation. - In the case of religious corporations, the Code does
not require the Securities and Exchange Commission to issue a certificate of incorporation. In
fact, Section 112 clearly states that from and after the filing with the Commission of the articles
of incorporation the chief archbishop etc. shall become a corporation sole

(3) Registration of cooperative.- A cooperative acquires juridical personality upon registration

with the Cooperatives Development Authority. It need not be registered again with the Securities
and Exchange Commission.
The methods or causes of dissolution of. corporations discussed under Title XIV.
Sec.20 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.

De jure corporation defined.

A de jure corporation is one created in strict or substantil conformity with the mandatory
statutory requirements for incorporation and whose right to
exist as a corporation cannot be successfully questioned by any party even in a direct
proceeding for that purpose by the State

De facto corporation defined.

A de facto corporation is one which actually exists for all practical purposes as a corporation
but which has no legal right to corporate existence as against the State. (Ibid.) It is a corporation
from the fact of its acting as such, though not in law or of right a corporation.

It is one which had not complied with all the requirements necessary to be a de jure corporation
but has complied sufficiently to be accorded corporate status as against third parties although
not against the State

Requisites of a de facto corporation.

It is essential to the existence of a de facto corporation that there be:

(1) A valid law under which a corporation with powers assumed might be incorporated;
(2) A bona fide attempt to organize a corporation under such law; and
(3) Actual user or exercise in good faith of corporate powers conferred upon it by law.

Stockholders of a de ficto corporation enjoy exemption from personal liability for corporate
obligations as do stockholders of a de mure corporation.

Existence of law.
In order that there can be a de facto corporation there must be a law authorizing it to be a
corporation de jure for there cannot be a corporation de facto when there cannot be one de jure.

(1) Accordingly, there cannot be a corporation de facto under an unconstitutional statute for
such statute is void and a void law is no law.

(2) Similarly, a corporation cannot be recognized as having a de facto existence when its
purpose is prohibited by law or contrary to public policy.
(3) Neither can there be a corporation for the practice of a learned profession in the absence of
a law expressly permitting the organization of such corporations.

Bona fide attempt to incorporate

When there has been no attempt in good faith to create a corporation de Jure, there can be no
de facto corporation. Any other rule might well open the door to fraud upon the public. Mere
intent is not sufficient. In addition, there must be a bona fide attempt to comply with the
requirements of the law.

(1) Creation of corporation precluded.- The following are examples of defects which will
preclude the creation ot even a de facto corporation:

(a) Absence of articles of incorporation,

(b) Failure to file articles of incorporation withthe Securities and Exchange Commission
(c) Lack of certificate of incorporation from the Securities and Exchange Commission.

In all the above cases, the omissions would be fatal to de facto corporate existence, for even its
stockholders may not probably claim good faith in being a corporation

(2) Creation of de facto corporation results, - The following are examples of defects which do
not preclude the creation of a de facto corporation:

(a) The name of the corporation closely resembles that of a pre-existing corporation that it will
tend to deceive the public;
(b) The incorporators or a certain number of them are not residents of the Philippines;
(c) The acknowledgment of the articles of incorporation or certificate of incorporation is
insufficient or defective in form, or it was acknowledged before a person without authority.

The above may be considered as inadvertent or minor defects or errors which can be excused
to prevent injustice.

User or exercise of corporate powers in good faith.

To create a corporation de facto, it is not sufficient to show the existence of a law under which a
corporation might be formed and an honest attempt to comply with the requirements thercof. It
is also necessary to show an actual user or exercise of corporate powers.

(1) User contemplated. - The acts relied upon as showing user must be corporate acts (e.g.,
adoption of by-laws, issuance of shares of stocks) as distinguished from acts which might as
well be performed by an incorporated association or individual. In other words, the act or
business must be transacted as a corporation and under the corporate forms, Hence, the mere
act of engaging in business is not enough unless the business is such that it can only be carried
on by a corporation.
(2) Duty to correct defect if discovered. - it is essential that the corporation must act in good
faith in claiming to be a corporation and exercising corporate powers.

Therefore, if after incorporation, the incorporators discovered it is that they have not complied
substantially with the law and still continued transacting business as a corporation, without
doing anything to correct the defect, the privilege of de facto existence can no longer be invoked

Questioning validity of corporate existence.

The well-settled rule is that assuming that a de faicto corporation actually exists, its existence as
a corporation cannot be collaterally attacked or questioned either by the state or by private
individuals. The State must bring a direct proceeding (i.e. quo warranto) against the corporation
to oust it from the exercise of corporate powers usurped by it and to have it dissolved

Direct attack of corporate existence defined.

Direct attack is one whereby the State, in a proceeding brought for that purpose, attacks the
existence of an association claiming to be a corporation. A direct attack can only be instituted by
the government through the Solicitor General by quo warranto proceedings.

Collateral attack of corporate existence defined.

A Collateral attack is one whereby corporate existence is questioned in some incidental
proceeding not provided by law for the express purpose of attacking the corporate existence

Reason for the rule against collateral attack.

The general rule against collateral attack upon corporate existence is based upon the ground of
public policy.

(1) Individual right is not invaded; it is the State's right and authority which are invaded and
usurped. Tf the State, which alone grants the authority to incorporate, remains silent, an
individual would not be allowed and permitted to raise the inquiry.

(2) It would produce endless confusion and hardship and probably destroy the corporation if the
legality of its existence could be questioned in every suit to which it is a party, for then no
judgment could be rendered which would finally settle the question.

(3) Likewise, the rule is in the interest of the public and is essential to the validity of business
transactions with corporations.

Sec.21.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 as a
defense its lack of corporate personality

One who assumes an obligation to an ostensible corporation as such, cannot resist

performance thereof on the ground that there was in fact no corporation

Estoppel to deny corporate existence

(1) The stockholders or members of a pretended or ostensible corporation who participated in

holding it Out as Corporation are generally estopped or precluded to deny its existence against
creditors for the purpose of escaping liability for corporate debts or for unpaid part of a
subscription to stock.

(2) So, also are the third persons, who deal with such a corpo- ration recognizing it as such and
the pretended corporation itself, estopped from denying its corporate existence and raising the
defensc of its lack of corporate personality for the purpose of defeating a liability growing out of
a contract between them and such entity

The Chinese Chamber of Commerce VS. Pua Te Ching 14 Phil. 222 [1909].), or any tort
committed by it as such. But one induced by fraud to deal with an apparent corporation will not
be estopped to deny the corporate existence

(3) All persons not stockholders or members who assume to act as a corporation knowing it to
be without authority to do so shall be solidarily liable as general partners with all their properly
for all debts, liabilities and damages incurred or arising as a result thereof.

Corporation by estoppel without de facto existence

A corporation by estoppel has no real existence, in law. It is neither de Jure nor a de facto
corporation, but is a "mere fiction existing for the particular case" where the element of estoppel
is Present. (8 Fletcher 219.) It exists only between the persons who misrepresented their status
and the parties who relied on the misrepresentation.

The existence of a corporation by estoppel may be attacked or questioned by any third party
except where the attacking party is estopped to treat the entity other than as a corporation.

ILLUSTRATION:

Where a group of persons represented that their organization called X & Co. is a corporation,
when it is not, to Y who recognized it as such, and on this representation, entered into a
contract with Y and without assuming to act as a corporation entered into another contract with
Z, in an action against them on such contracts, they are estopped from denying the corporate
existence of X & Co. as against Y but not as against Z. Neither is Y allowed to question or
challenge the validity of the organization or formation of X & Co. in an action of the latter against
the former.

If not all the associates participated or consented to the representation, as to them, the doctrine.
of estoppel will not apply,

If the group of persons (would-be corporation) does not qualify as a corporation, whether de
jure, de facto, or by estoppel, there is no corporation and the stockholders are individually liable

Sec. 22. Effects of non-use of corporate charter and continuous inoperation of a

corporation. - I a corporationdoes not formally organize and commence the transaction
of its business or the construction of its works within two (2) years from the date of its
incorporation, its corporate powers cease and the corporation shall be deemed
dissolved. However, if a corporation has commenced the transaction of its business but
subsequently becomes continuously inoperative for a perlod of at least five (5) years the
same shall be a ground for the suspension or revocation of its corporate franchise or
certiflcate of incorporation.

This provision shall not apply if the failure to or- ganize and commence the transaction of
its business or the construction of its works, or to continuously operate is due to causes
beyond the control of the corporation as may be determined by the Securities and
Exchange Commission.

Statutory requirements before and after incorporation.

The corporation law contains various requirements and conditions which must be complied with
in order that persons desiring to be so may become a body corporate. The courts have
established between mandatory and directory conditions

The rule is that as to provisions of the statute which are mandatory, non-compliance will prevent
the creation of a de jure corporation but as to those provisions which are merely directory, a
departure will not have this consequence. Strict compliance ever with the mandatory provisions
which are conditions precedent to corporate existence is not required. The law requires only
substantial compliance. Of course, what constitutes substantial compliance is a question to be
determined in each case.

Mandatory conditions may be either conditions precedent or conditions subsequent.

Mandatory and directory provisions explained.

Mandatory provisions prescribe formalities for incorporation which are designed to protect the
public. When a provision is construed as directory it is regarded as relatively inconsequential so
that failure to comply with directory provision will not be a fatal to valid incorporation.
Conditions precedent explained.

Conditions precedent are those conditions non-compliance with which will prevent the legal
existence of a corporation
Examples are:

(1) Filing of the articles of incorporation with the Securities and Exchange Commission as
required by Section 14;
(2) The issuance of the certificate of incorporation by the Securities and Exchange Commission
under Section 19;
(3) The minimum number of five (5) incorporators required by Section 10; and
(4) The legal requirements under Section 13 that 25% of the authorized capital stock must be
subscribed and 25% thereof paid,

Conditions subsequent explained.

Conditions subsequent are conditions to be complied with after acquiring corporate existence in
order that a corporation may legally continue as such

(1) Under Section 22, the two required acts of organization and commencement of its business
operations are conditions subsequent failure to comply with which will result in the automatic
cessation of corporate powers and the dissolution of the corporation.

(2) Non-compliance, however, with a condition subsequent which is mandatory may not affect
corporate existence aIthough it may be a ground for proceedings by the State to forfeit its
charter. An example is the keeping of books and records required by Section 74.

Formal organization and commencement of business.

(1) Acts constituting formal organization. - Formal organization requires the adoption of
by-laws and the election of the board of directors (or trustees) and of the officers by the board
pursuant to the by-laws and the taking of such other steps as are necessary to enable the
corporation to transact the legitimate business or accomplish the purpose for which it was
created.

(2) Substantial compliance sufficient.- Strict compliance with this condition subsequent is not
required. Thus, in a case, a corporation was deemed to have formally organized, it appearing
that from the day of its formation, the corporation had a governing board which directed its
affairs, as well as d treasurer and a clerk, and that through these instrumentalities, it actually
functioned and engaged in the business for which it was organized, and, therefore, it could not
be held to have forfeited its charter simply because it had not specifically shown that it also had
a president and a secretary.
(3) Acts constituting commencement of business. - A corporation shall be considered to
have commenced the transaction of its business when it has performed preparatory acts geared
toward the fulfillment of the purposes for which it was established such as but not limited to the
following: entering into contracts or negotiation for lease or sale of properties to be used as
business or factory site; making plans for and the construction of the factory: and taking steps to
expedite the construction of the corporation's working equipment.

(4) Effect of subsequent continuous inoperation. - Where the corporation has commenced
the transaction of its business but subsequently becomes continuously inoperative or a period of
at least five (5) years, such continuous inoperation shall be a ground for the s suspension or
revocation of its corporate franchise or certificate of incorporation but notice and hearing in such
case are required as provided in Pres Decree No. 902-A (supra.) If the non-use of
corporate,charter or continuous inoperation of a corporation is due to causes beyond its control
as found by the Securities and Exchange Commission the effects mentioned shall not take
place.

Title III
BOARD OF DIRECTORS/ TRUSTEES/OFFICERS

Sec. 23. The board of directors or trustees. Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations controlled and held by the
board of directors or trustees to be elected from among the holders of stocks, or where
there is no stock, from among the members of the corporation who shall hold office for
one (1) year and until their successors are elected and qualified.

Every director must own at least one (1) share of the capital stock of the corporation of
which he is a director, which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at least one (1) share of the
capital stock of the corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members thereof. A majority of the
directors or trustees of all corporations organized under this Code must be residents of
the Philippines.

Corporate powers exercised by board of directors or trustees.

(1) Governing body ofthe corporation. - All corporations, being impersonal, existing only in
contemplation of law, can only act and contract through the aid and by means of individuals.
Such individuals may be these holding corporate offices or agents properly appointed by such
officers.

It is well-established in corporation law that the corporation can act only through its board of
directors or trustees, Section 23 provides that "unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shal be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees.'" The board of directors or trustees, therefore, is the governing body of the corporation
chosen by the stockholders or members.

(2) Binding effect of stockholders' action. - The stockholders (or members) elect a board of
directors (or trustees) to oversee the management and operation of the corporation. They are
not the agents of the corporation; they cannot bind it by their acts. With the exception only of
some powers reserved by law to stockholders; the directors have sole authority to determine
policy and conduct the ordinary business of the corporation within the scope of its charter in all
those matters which do not require the consent or approval of the stockholders.

Once elected, the directors are not directly controlled by the stockholders who only have indirect
control of the corporation through their votes

(a) The law is settled that contracts between a corporation and third persons must be made by
or under the authority of its board of directors and not by its stockholders. Hence, the action of
the stockholders in such matter is only advisory and not in any wise binding on the corporation.

(b) For the same reason that a corporation can act only through the board of directors, a
resolution adopted at a meeting of stockholders refusing to recognize a corporate contract
effected with the approval of the board of directors or repudiating it, is without effect.

(3) Extent of judicial review. - As long as the directors ( or trustees) act honestly and the
contract does not violate the rights of the minority opposed to it, the courts will not interfere. The
well-known rule is that courts cannot undertake to control the discretion of the board of directors
about administrative matters as to which they have the legitimate power of action

Reason for the rule.

The theory of every corporate organization is that the stockholders may have all the profits but
shall turn over to the directors the exclusive authority to manage and control the transaction of
its business and the use of its assets, the power of the stockholders being limited to a few
specified matters concerning its internal affairs.

This oncentration of power in the board of directors is deemed necessary to efficiency

especially in a large organization It is clearly impractical and unwise to entrust the administration
of corporate affairs to a host of widely scattered stockholders who are generally unfamiliar with
the business of the corporation and unable to comprehend corporate management.

Limitations on powers of board of directors or trustees.

Broad as it is, the managerial authority of the board of directors or trustees, however, is subject
to at least three (3) limitations.
They are as follows:
(1) It must observe the limitations or restrictions imposed by the Constitution, statutes, and rules
and regulations having the force of law on the corporation including its articles of incorporation
and by-laws;

(2) It cannot perform constituent acts, that is, acts involving fundamental o major changes in the
corporation (such as amendment of the articles of incorporation under Sec. 16.);and

(3) It cannot exercise powers not possessed by the corporation

Directors or trustees hold a fiduciary relation (i.e, occupy position involving trust and confidence)
to the corporation and the stockholders or members they represent, They are required to
discharge their duties in good faith and with diligence, care, and skill. They are liable if they
breach their fiduciary duty.

Powers exercised by board of directors or trustees as a board.

The board of directors or trustees must act together as a body in a lawful meeting, not
individually or separately, in order to bind the corporaticn by their acts. In other words, to
exercise their powers, they must meet as directors or trustees and act "at a meeting at which
there is quorum.''

There are recognized exceptions to the rule that a corporation cannot act except by authority of
the board of directors or trustee in a meeting duly convened.

Reasons for the rule.

The general rule that the directors or trustees can bind the corporation only by action taken at a
board meeting seems to rest upon two (2) reasons:
​
(1) A meeting is necessary in order that any action may be adopted only after full discussion;
and

(2) As agents of the corporation managing its affairs, directors (or trustees) have no power other
than as a board.

Unlike its officers, directors are not the agents of the bind the corporation. corporation per se,
and thus have no power acting individually to bind the corporation

Exceptions to the rule

The requirement that the board must act as body and personally (see Sec. 25.) to bind the
corporation is not without any exception,. Thus:

(1) A contract entered into by the directors without a meeting of the board is binding upon the
corporation where the directors happened to be lhe sole stockholders

(2) The corporation is similarly bound by a contract entered into by any corporate officer, such
as the general manager, to bind it by contract
(3) The corporation is also bound by a particular transaction ratified in subsequent board
meeting. The ratification may be express or implied and if implied it may take diverse forms such
as by silence or acquiescence, by acts showing approval or adoption of the contract or by
acceptance and retention of benefits flowing therefrom and such ratification relates back to the
time of the contract and is equivalent to original authority.

(4) The by-laws of a corporation may create an executive committee with authority to act on
such specific matters within the competence of the board, as may be delegated to it in the by-
laws of the corporation or on a majority vote of the board, except on certain matters specified in
Section 35.

(5) A corporation is expressly allowed, subject to certain limitations provided in Section 44, to
enter into a management contract under which it delegates the management of its affairs to
another corporation for a certain period of time,

(6) In a close corporation, any action by the directors without a meeting or at a meeting
improperly hcld, shal, unless the by- laws otherwise provide, be deemed valid or ratified in the
cases mentioned in Section 101.

Delegation of power of directors or trustees.

The power to bind the corporation by

(1) General rule,- contracts rests in its board of directors or trustees, but the power . may be
delegated, either expressly or impliedly, to other officers or agents of the corporation,

(2) Exceptions, - The rule recognizing the power of the board to delegate authority is not
without limitations,

(a) Discretionary powers which, by provisions of law or the by-laws or by the vote of the
stockholders are vested exclusively in the board of directors or are especially delegated to
them, cannot be delegated to subordinate officers and agents. But purely ministerial duties
connected therewith may be delegated

(b) It cannot delegate entire supervision and control of the corporation to others for this is not
only unnecessary but it is inconsistent with Section 23, which requires that "the corporate
powers x x x shall be exercised, all business conducted and all property of such corporation
controlled and held by its board of directors or trustees.

(c) Neither can the board delegate special powers especially conferred upon it by a resolution of
the stockholders or members of the corporation. Unquestionably, it may delegate purely
ministerial duties.

(d) It is quite clear that the power of the board to delegate authority is subject to restrictions as
may be provided in the by- laws.
Term of office of directors or trustees

(1) One year. - It is now expressly provided that the board of directors or trustees to be elected
"shall hold office for one year and until their successors are elected and qualified. Upon failure
of a quorum at any meeting of the stockholders or members called for an election, the
directorate naturally holds over and continues to function until another directorate is chosen and
qualified.

(2) Hold-over. - Upon failure of a quorum at any meeting of the stockholders or members called
for an election, the directorate naturally holds over and continues to function until another
directorate is chosen and qualified (see Sec 24. last sentence.) The failure to elect does not
terminate the terms of incumbent officers nor dissolve the corporation

(a) To "hold over" when applied to an that the office has a fixed term which has expired, and the
office implies incumbent is holding the succeeding term

(b) Hold-over is a situation that arises when no successor is elected due to valid and justifiable
reason (e.g. pending election protest on the outcome of the annual election), in which case the
incumbent holds over and continues to function until another officer is chosen and qualified.
(SEC Opinion, June 24, 1998.) The corporation should, as soon as possible, call a special
meeting for such purpose with proper notice given to all stockholders or members

Number of directors or trustees

(1) Under the Code, the number must be "not be less than five (5) nor more than fifteen (15)"
(Sec. 14[6].) except as otherwise provided by the Code or special law,

(2) In ordinary non-stock corporations, the board of trustees, unless otherwise provided in the
articles of incorporation or the by-laws, "may be more than fifteen (15) in number," with the term
of office of 1/3 of their number expiring every year.

(3) In a close corporation, the articles of incorporation may provide that the business of the
corporation shall be managed by its stockholders rather than by a board of directors in which
case no meeting of stockholders need be held to elect directors.

(4) Trustees of non-stock educational corporations "shall not be less than five (5) nor more than
fifteen (15)," provided that the number "shall be in multiples of five (5)," with the term of office of
1/5 of their number expiring every year.

(5) In a corporation sole, there is no board of directors or trustees as it consists of one (1)
member or corporator only.
(6) The board of trustees of religious societies shall also "be not less than five (5) nor more than
fiftcen (15)." (see Sec. 116[6].) The limitation as to the number of directors or trustecs seeks to
give ample representation to stockholders or members of a corporation to its board while at the
same avoiding that it will be too unwieldy.

Qualifications of directors or trustees.

(1) Stock corporations, - The qualifications of directors of stock corporations are as follows:

(a) Every director must own at least one (1) share of the capital stock;
(b) The share of stock held by the director must be registered in his name on the books of the
corporation;
(c) Every director must continuously own at least a share of stock during his term, otherwise, he
shall automatically cease to be a director; and
(d) A majority of the directors must be residents of the Philippines.

(2) Non-stock corporations. - Trustees of non-stock corporations must be members in good

standing thereof and like in stock corporations, a majority of them must be "residents of the
Philippines.

A person who has the disqualification mentioned in Section 27 is not qualified to hold the
position of director or trustee

Natural persons contemplated by law.

Only natural persons can be elected s directors or trustees and they must be elected from
arriong the stockholders or members.

However, a corporation which owns shares of stock or is a corporate member in another

corporation can designaie by a board resolution its officer or represent tive to Sit in the latter's
board and thus qualifying him to be elcu ed as director or trustee

A contrary rule would create a situation where there would be no board as where all the
stockholders or members are corporations or juridical persons, The appointment must be
recorded in the corporate books.

Citizenship requirement.

(1) There is no citizenship requirement demanded of the members of the board of directors
under the Code.

(2) In corporations not organized under the Code, citizenship requirements are established.
Thus, in case of domestic banks the General Banking Law of 2000 allows non-Filipino citizens
to become members of the board of directors to the extent of the foreign participation in the
equity of said bank, and in the case of rural banks, to the extent of their proportionate share in
the equity of the rural bank. For registered investment companies and private development
banks, all the members of the board of directors must be citizens of the Philippines

(3) Under the Constitution, aliens may not be elected as directors or officers of corporations
engaged in business or industries which are totally or partially nationalized business or
industries.

Stock ownership requirement.

The general rule is that the person who holds the legal title to the stock as shown by the books
of the corporation is qualified although some other person may be the beneficial owner of the
stock recorded in his name.

The legal title is what counts. Hence, person to whom shares have been transferred on the
books a director of the corporation as pledgee is not qualified to be because he holds the
shares merely as security and not as owner.

Upon like principle, a director is not disqualified when he merely pledged his shares or enter into
an executory contract to sell the same.

Reason for the requirement.

The reason for requiring a director to own stock in the corporation is simple enough. It is
commonly felt that a man with a financial interest at stake will devote more attention to the
business.

Today, however, management is chosen for its professional competence rather than its financial
contribution. In any event, if the financial contribution of management is very small, it is hardly
an incentive to the individual director to be more careful or a deterrent to carelessness. On the
other hand, to require from a director that he invest substantially all of his fortune to the
company of which he is a director would mean losing many valuable men.

Additional qualifications in the by-laws.

The qualifications of directors or trustees of the corporation i.e, qualifications in addition to those
specified in Section 23, may be prescribed by the by-laws but their qualifications may not be
modified if such modification would be in conflict with the requirements prescribed by the
corporation law.

For instance, the by-laws may not provide that a director need not be owner of stock such
provision in the by-laws would be invalid. But the by-laws may provide that a dircctor must own
two (2) or more shares of stock. This is not inconsistent with the law because "at least one
share" means one (1) or more shares.

Effect of lack of qualification.

Votes cast for a person who is not eligible as a director cannot elect him. In any event one not
eligible as director because not owning any stock is not a de facto director where he never
accepted the office, nor performed any act as director, nor ever held himself out as director in
any way.
It does not follow, however, that ineligibility of a person who has been elected as an officer will
invalidate his acts as such

Persons dealing with a corpoation are not required to ascertain whether the directors or other
officers of the corporation have the qualifications prescribed by the by-laws. Acts of a director or
other officers are, therefore, valid so far as third persons are concerned, although he may not
possess the qualifications prescribed, if he has been elected or appointed by the corporation
and permitted to act for it.

Sec. 24. Election of directors or trustees. - At all elections of directors or trustees, there
must be present, either in person or by representative authorized to act by written proxy,
the owners of the majority of the outstanding capital stock, or if there be no capital stock,
a majority of the members entitled to vote. The election must be by ballot if requested by
any voting stockholder or member in stock corporations, every stockholder entitled to
vote shall have the right to vote in person or by proxy the number of shares of stock
standing, at the time fixed in the by-laws, in his own name on the stock books of the
corporation, or where the by-laws are silent, at the time of the election; and said
stockholder may vote such number of shares for as many persons as there are directors
to be elected cr he may cumulate said shares and give one candidate as many votes as
the number of directors to be elected multiplied by the number of his shares shall equal,
or he may distribute them on the same principle among as many cancidates as he shall
see fit: Provided, That the total number of votes cast by him shall not excoed the number
of shares owned by him as shown in the books of the corporation multiplied by the whole
number of dlrectors to be elected: Provided, however, That no delinguent stock shall be
voted. Unless otherwise provided in the articles of incorporation or in the by-laws,
members of corporation which have no capital stock may cast as many votes as there
are trustees to be elected but may not cast more than one vote for one candidate.
Candidates receiving the highest number of votes shall be declared elected Any meeting
of the stockholders or members called for an election may adjourn from day to day or
from time to time but not sine die or indefinitely if, for any reason, no election is heid, or
if there are not present or represented by proxy, at the meeting, the owners of a majority
of the outstanding capital stock, or if there be no capital stock, a majority of the members
entitled to vote.

Election of directors or trustees.

The following limitations or conditions are imposed in the election of directors or trustees:

(1) At any meeting of stockholders or members called for the election of directors or trustees,
there must be present in person or by representative authorized to act by written proxy, the
owners of the majority of the outstanding capital stock, or if there be no capital stock, a majority
of the members entitled to vote;
(2) The election must be by ballot if requested by any voting stockholder or member. Hence,
voting by viva voces or roll call (raising of hands) is valid except when there is a request that the
election be by ballot;

(3) A stockholder cannot be deprived in the articles of incorporation or in the by-laws of his
statutory right to use any of the methods of voting in the election of directors;

(4) No delinquent stock shall be voted;

(5) lf a quorum is present, the candidates receiving the highest number of votes shall be
declared elected

The law requires only plurality, not majority of the votes cast at the election;

(6) In case of failure to hold an election for any reason, the meeting may be adjourned from day
to day or from time to tire but it cannot be adjourned sine die or indefinitely; and

(7) The requisite notice must be given.

For one to be elected as director/ trustee or officer, it is not required that he must be physically
present at the meeting at the time of his nomination and election, unless it is otherwise provided
by the by-laws. But a dlirector or trustee cannot attend or vote by proxy at board meetings.

Time of annual election.

Since Section 23 fixes the tenure of directors or trustees at one (1) year, their election must be
held substantially once in each year.

The Code does not provide when the first election of directors or trustees shall be held. It,
however, authorizes the corporation to provide in its by-laws "the time for holding the annual
election of directors or trustees."

The failure to hold the annual meeting is not disastrous because the directors or trustees can
hold-over.

Methods of voting.
Every stockholder entitled to vote: shall have the right to vote in person or by proxy the numbers
of shares of stock standing at the time fixed in the by-faws, in his own name on the stock books
of the corporation or where the by-laws are silent, at the time of the election, and said
stockholder may vote his shares in any of the ways mentioned below.

(1) Straight voting. - By this voting method, every stockholder may vote such number of shares
for as many persons as there are directors" to be elected.
ILLUSTRATION:
A owns 100 shares of stock in a corporation. If there are five (5) directors to be chosen, A is
entitled to 500 votes obtained multiplying 100 by 5. He may give to the fivc (5) candidates he
wants to be elccted 100 votes each.

Under this method, the votes are distributed equally among the five (5) candidates without
preference.

(2) Cumulative voting for one candidate. - By this method, a stockholder is allowed to
concentrate his votes and "give one candidate as many votes as the number of directors to be
elected multiplied by the number of his shares shall equal."

(a) The privilege of cumulative voting is permitted for the purpose of giving minority stockholders
representation in the board of directors. Needless to say, straight voting does not benefit
minority stockholders for they would not be able to elect any director over the objection of the
stockholder or stockholders who own at least 51% of the capital stock.

(b) A director elected because of the vote of minority stockholders who united in cumulative
oting cannot be removed without cause

Voting in a non-stock corporation.

Members of non-stock corporations may cast as many votes as there are trustees to be elected
but may not cast more than one vote for one candidate. This is the manner of voting in there
non-stock corporations unless otherwise provided in the articles of incorporation or in the
by-laws.

ILLUSTRATION:
If A is a member of a non-stock corporation and therc are five (5) directors to be elected, he is
entitled only to five (5) votes. He may giye one (1) vote to each of the five (5) candidates he
wants to be elected.

If he has only one (1) candidate he can cast only one (1) vote for said candidate unless
cumulative voting is authorized in the articles of incorporation or in the by-laws. Thus, where
cumulative voting exists, and there are nine (9) trustees to be elected, a member is entitled to
cast nine (9) votes for one (1) candidate or by distributing the same among as many candidates
as he shall see fit

Sec.25. Corporation officers, quorum. - Immediately after their election, the directors of a
corporation must formally organize by the election of a president, who shall be a director,
a treasurer who may or may not be a director, a secretary who shall be a resident and
citizen of the Philippines, and such other officers as may be provided for in the by-laws.
Any two (2) or more positions may be held concurrently by the same person, except that
no one shall act as president and secretary or as president and treasurer at the same
time.

The directors or trustees and officers to be elected shall perform the duties enjoined on
them by law and by the by-laws of the corporation. Unless the articles of incorporation or
the by-laws provide for a greater majority, a majority of the number of directors or
trustees as fixed in the articles of incorporation shall constitute a quorum for the
transaction of corporate business, and every decision of at least a majority of the
directors or trustees present at a meeting at which there is a quorum shall be valid as a
corporate act, except for the election of officers which shall require the vote of a majority
of all the members of the board. Directors or trustees cannot attend or vote by proxy at
board meetings

Corporate officers and agents.

(1) Election. - The directors or trustees of the corporation are elected to their office by the
stockholders or members at the stockholders or members' meeting.

(a) The election of the administrative officers, such as the president, treasurer, secretary, and
such other officers as may be provided for in the by-laws is, in turn, entrusted to the board of
directors or trustees. Thus, pursuant to the by-laws, the directors may elect a vice-president, a
general manager and such other officers as the needs and nature of the business may demand.

(b) The board of directors or trustees, as we have seen, formulates the broad policy of the
corporation and directs the conduct of its business operations. But the task of actual
management and carrying on the details of business operations are delegated to the officers
who are responsible to the board.

(c) In the case of a close corporation, the articles of incorporation may provide, however, that all
officers or employees or that specified officers or employees shall be elcted by the stockholders,
instead of by the board of directors. In a non-stock corporation, the officers may be directly
elected by the members unless otherwise provided for in the articles of incorporation or the
by-laws.

(2) Compensation and terms of office. - It is within the power of the board to fix the salaries of
corporate officers whom it appoints for the power to grant compensation. The terms of office of
these officers may be fixed in the by-laws; otherwise, they may be removed at any time by the
board.

Positions concurrently held by same person.

The directors or trustees and officers elected shall perform the dutics enjoined on them by law
and by the by-laws of the corporation.
(1) Any two or more positions may be held concurrently by the same person except as provided
in Section 25. The positions of president and secretary or treasurer are considered by law as
incompatible with each other due to the very nature appe3rtaining to each office

(2) There is no prohibition in the law against a stockholder being a director or officer of two (2) or
more corporations.

(3) The Corporation Code does not prohibit a corporate officer from occupying the samc position
in another corporation organized for the same purpose. However, such a situation may be
prchibited by special law, the articles of corporation, or the by-laws of the corporation.

Extent of authority of corporate officers.

The officers chosen by the board of directors /trustees are responsible for the day-to-day
running of the corporation. Unlike directors (or trustees), they are agents of the corporation and
thus, can bind it by their acts as long as they are within their actual, apparent, or inherent
authority conferred by statute, the articles of incorporation, the by-laws of the corporation, or by
resolution of the board of directors. The officers are often members of the board of directors.

(1) President. - The president of a corporation must be a director of the corporation, but he
cannot act as president and secretary or as president and treasurer at the same time. The
president is the only officer required by law to be a member of the board of directors or trustees.

The powers of the president of the corporation are such only as are conferred upon him by the
board of directors or trustees or vested in him by the by-laws lf there is nothing in the by- laws
conferring any particular authority upon him, he has from his office alone no more power over
the corporate property and business than has any other director.

However, according to the v.iew taken by many authorities, regard must be had to the fact that
presidents of corporations are often given general supervision and control of the business as
chief executive officers from which is to be inferred that contracts or acts done by the president
in the ordinary course of business are presumed to be duly authorized uniess the contrary
appears

By law, the president shall preside at all meetings of the directors or trustees as well as of the
stockholders or members unless the by-laws provide otherwise.

(2) Vice-President. - The inherent power of the vice-president as his title indicates would seem
merely to be to act in the absence of, or in case of vacancy in the office of the president.

He has no authority by virtuc of his office alone to enter into contracts in behalf of the
corporation. However, it is frequently the case that the vice-president of a corporation is given
certain executive duties by the board of directors or by-laws of the corporation. Where the
by-laws provide that it shall be the duty of the vice-president to take the place of the president
during the absence of the latter, the vice-president should likewise be a director.

(3) Secretary. -The secretary must be a resident and a ciazen of the Philippines. He is not
allowed to act as president and secretary at the samne time. He need not be a director unless
required by the by-laws

It is generally the duty of the secretary of a corporation to make and keep its records and to
make proper entries of the votes, resolutions and proceedings of the shareholders and directors
in the management of the corporation and all other matters required to be entered on the
records. The secretary is a ministerial officer who cannot bind the corporation unless he is
authorized especially to do so.

(4) Treasurer - The treasurer of the corporation is the proper officer entrusted with the authority
to receive and keep the money of the corporation and to disburse them as he may be
authorized

The view is taken that he has no inherent power to bind the corporation by contracts or to
borrow money in behalf of the corporation. The treasurer may not hold at the same time the
position of president.

A comptroller is different from a treasurer. The former is said to be an officer appointed to

control accounts and to check expenditures. By virtue of his office, the authority of a comptroller
is restricted to doing those things which are usual and necessary in the performance of his
duties.

(5) General Manager. - At the present time, the general business of corporations is frequently
entrusted to the management of a general manager or managing officer who has power to bind
the corporation by acts within the scope of his apparent authority.

Accordingly, the general manager or managing officer has very broad powers, especially as far
as third persons are concerned
He has been deemed by numerous authorities as "the person who really has the most control
over the affairs of a corporation and who has knowledge of all its business and property and
who can act in emergencies on his own responsibility, and who may be considered the principal
officer.' This power has been broadly described as being co-extensive with the powers of the
corporation itself unless specifically restricted. He has implied authority to make any contract or
do any other act which is necessary or appropriate to the conduct of the ordinary business of
the corporation. This authority, however, is generally qualified as not extending to matters over
which the stockholders alonc have control.

Requisites for board meeting

Under Section 25, validity of a corporate act is predicated on the presence of the following
requisites:
(1) Meeting of the directors or trustees duly assembled as a board, i.e., as a body in a lawful
meeting;

(2) Presence of a quorum;

(3) Decision of the majority of the quorum or, in other cases, a majority of the entire board; and

(4) Meeting at the place, time, and in the manner provided in the by-laws

Quorum.

Quorum is such number of the membership of a collective body as is competent to transact its
business or do any other corporate act.

(1) Number required for presence of quorum.- Section 25 provides that "'unless the articles
of incorporation or the by Section 25 laws provide for a greater majority, a majority of the
number of directors or trustees as fixed in the articles shall constitute a quorum for the
transaction of corporate business.” The majority would be at least one-half plus one of the
number of directors

(2) Number required for approval of corporate acts. As a general rule, a majority vote of the
directors or trustees present at a mecting at which there is a quorum, as distinguished from a
majority of the full board, is sufficient to authorize action where the Code requires approval of
certain corporate acts such as the declaration of dividends or entering into a management
contract, without stating that it shall be by majority vote of the board but if the word "majority,'' is
used, the number of votes required to approve such acts shall be at least one-half plus one of
the entire membership.

(3) Number provided greater than majority. - Unlike the old law which sets the quorum at "a
majority of the directors” without giving the corporation the power to provide otherwise, the Code
gives the corporation the power to require a number greater than the majority of the board
members to constitute the quorum necessary to transact business.

So, given a corporation with nine (9) directors, the presence and a vote of three (3) will be
enough to pass a board resolution. of five (5) members will be sufficient to hold a board meeting
However, the same corporation can provide in its articles of incorporation or by-laws, that the
required quorum shall be seven (7) members. In this case, a vote of at least four (4) members
IS necessary for the approval of any board resolution But "the vote of majority of all the
members of the board" or at least five (5) members, shall be required for the election of officers.

Less than the number to constitute the required quorum cannot meet and bind the corporation
by any act or resolution All that the directors or trustees present can do is to adjourn
ILLUSTRATION:
The by-laws of X Corporation provide for 11 directors. Only nine (9) directors were elected with
two (2) seats remaining vacant., During a special mecting of the board where only five (5)
directors were present (no guorum), the board passed a resolution.

Under the law, the required guorum of the board is a majority of the entire board as it would be
constituted if all the vacancies were filled, ie., six (6) directors, Consequently, the resolution is
irregular. Suppose the abscnt director subsequently signed the minutes of the meeting. Will the
signature cure the defect of the first meeting? No.

But if the board subsequently met with six (6) directors present and all of them voted
unanimously to approve and ratify said resolution, such action would have the effect of curing
the defect and giving effect to the resolution

Proxy and constructive presence in meeting of directors or trustees

(1) Directors or trustees Cannot validly act by proxy. (as to meaning of "proxy" see comments
under Sec. 58.) They must attend the mceting of the board of directors or trustees and actin
person and as a body.

Each director or trustee is required to exercise his personal judgment and he cannot delegate
his duties or assign his powers to another.

(2) The SEC has ruled that constructive or electronic presence (including telephone) is not a
substitute for actual presence required under Section 25, which does not mention the same.

Furthermore, participation or voting by electronic presence is quile hard to prove by admissible

evidence because electronic voices and messages can easily be dissimulated.

Teleconferencing and videoconferencing for directors meetings are now allowed by SEC which
prescribed guidelines for the conduct thereof.

Sec. 26. Report of election of directors, trustees and officers. - Within thirty (30) days
after the election of the directors, trustees and officers of the corporation, , the secretary,
or any other officer of the corporation, shall submit to the Securities and Exchange
Commission, the names, nationalities and residences of the directors, trustees and
officers elected. Should a director, trustee or officer die, resign or in any manner cease to
hold office, his heirs in case of his death, the secretary, or any other officer of the
corporation or the director, trustee or officer himself, shall immediately report such fact
to the Securities and Exchange Commission.

Report of elections and vacancies.

Section 26 requires the following:
(1) the secretary or any other officer of the corporation to submit to the Securities and Exchange
Commission the names, nationalities, and residences of the directors/ trustees and officers
elected, which must be done within 30 days after the meeting in which they were elected; and

(2) the heirs of the director/ trustee or officer in case of the latter' s death, the secretary, or any
other officer of the corporation, or the director trustee or officer himself, to immediately report to
the Commission any death resignation, or cessation in any manner of holding office of a
director/ trustee or officer: The filling of vacancies in the office of director or trustee is governed
by Section 29

Sec. 27. Disqualification of directors, trustees or officers. - No person convicted by final

judgment of an offense punishable by imprisonment for a period exceeding six (6) years,
or a violation of this Code, committed within five (5) years prior to the date of his election
or appointment, shall qualify as a director, trustee or officer of any corporation.

Disqualification of directors/trustees or officers.

The above provision disqualifies any one convicted by final judgment of an offense punishable
by imprisonment for a period exceeding six (6) years or a violation of the Code as a director/
trustee or officer of any corporation.

The offense need not involve moral turpitude. The rule applies regardless of the nature or
classification of the offense as long as it is punishable by imprisonment for a period exceeding
six (6) years. If the disqualification is based on a violation of the Code, the duration of the
imprisonment is immaterial but the commission (not conviction) of the violation must have taken
place within five (5) years prior to the date of the election or appointment

Sec. 28. Removal of directors or trustees - Any director or trustee of a corporation may
be removed from office by a vote of the stockholders holding or representing two-thirds
(2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by
a vote of two-thirds (2/3) of the members entitled to vote: Provided, That such removal
shall take place either at a regular meeting of the corporation or at a special meeting
called for the purpose and in either case, after previous notice to stockholders or
members of the corporation of the intention to propose such removal at the meeting A
special meeting of the stockholders or members of a corporation for the purpose of
removal of directors or trustees, or any of them, must be called by the secretary on order
of the president or on the written demand of the stockholders representing or holding at
least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on
the written demand of a majority of the members entitled to vote. Should the secretary
fail or refuse to call the special meeting upon such demand or fail or refuse to give the
notice, or if there is no secretary, the call for the meeting may be addressed directly to
the stockholders or members by any stockholder or member of the corporation signing
the demand Notice of the time and place of such meeting, as well as of the intention to
propose such removal, must be given by publication or by written notice as prescribed in
this Code. Removal may be with or without cause: Provided, That removal without cause
may not be used to deprive minority stockholders or members of the right of
representation to which they may be entitled under Section 24 of this Code.

Removal of directors or trustees.

Stockholders cannot tell directors how they. are to manage the corporation but they do maintain
indirect control since they can remove directors any time if they wish

(1) Generally; limitation. - The law does not specify cases for removal of a director or trustee
nor even require that removal should be for sufficient cause or reason. A director or trustee may
be removed by the prescribed vote of the stockholders or members without cause subject to the
limitation that a director Or trustee cannot be rernoved without cause if the effect of such
removal is to deprive minority stockholders or members who united in cumulative voting to elect
such director, of right-of representation to which they may be entitled under Section 24.

(2) Filling of vacancy created, - In case of removal on the vote of stockholders or members, as
the case may be, the vacancy so created may be filled by election at the same meeting, without
further notice, or at any regular or at any special meeting called for the purpose after giving the
prescribed notice. Thus, the stockholders or members who have removed a director or trustee
are also given the power to choose his replacement at the same meeting.

Power of the board to remove a member.

The board of directors (or trustees) has no power to remove one of its members as director (or
trustee).

The reason is that as officers deriving their title from the stockholders (or members), they can be
removed only by the power that appointed them. Since the law expressly confers the authority
to stockholders or members, the board cannot indirectly usurp or disregard the same.

Power of court to remove directors or trustees

The Corporation Code does not confer expressly upon the courts the power to remove a
director or trustee of a corporation

There are abundant authorities, however, which hold that if the court has acquifed jurisdiction to
appoint a receiver because of the mismanagement of the directors, these may thereafter be
removed and others appointed in their place by the court in the exercise of its equity jurisdiction.
But where the properties and assets of the corporation are amply protected by the appointment
of a receiver, such removal is unnecessary and unwarranted in view of the provisions of Section
28 prescribing the manner of removal of directors or trustees,

Requisites for removal of directors or trustees

Section 28 specifies the following requisites for the removal of directors or trustees:
(1) The removal must "take place either at regular meeting of the corporation or at a special
meeting called for the Purpose”;

(2) There must be "previous notice to the stockholders or members of the corporation of the
intention to propose such removal at the meeting"; and

(3) The removal must be "by a vote of the stockholders holding or representing two-thirds (2/3)
of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of
two-thirds (2/3) of the members entitled to vote.'

Resignation of directors or trustees

The fact that the law requires directors removed to continue in office until their successors are
elected or trustees unless and qualified does not prevent a director or trustee from resigning at
any time

However, by reason of the fiduciary nature of the position they occupy, director cannot resign, as
Part of fraudulent scheme to prejudice the corporation or its stockholders and make profit to his
own advantage or, at an unreasonable time if the immediate consequence would be to leave the
interest of the corporation without proper care and protection. If a director quits under
circumstances which occasioned a loss of profits to the corporation, it is but right that he should
repair and make good such loss.

The Code requires the resignation of a director or trustee to be immediately reported to the
Securities and Exchange Commission.

Abandonment of office.
Where a director (or trustee) in a corporation accepts a position in which his duties are
incompatible with those as such director (or trustee), it is presumed that he has abandoned his
office as director (or trustee) of the corporation.

Similarly, where a director abscnted himself from all meetings for nearly a year and announced
his refusal to act as an officer and stockholder, there is an abandonment of his position as
director

Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the
board of directors or trustees other than by removal by the stockholders or members or
by expiration of term, may be filled by the vote of at least a majority of the remaining
directors or trustees, if still constituting a quorum; otherwise, said vacancies must be
filled by the stockholders in a regular or special meeting called for that purpose. A
director or trustee so elected to fill a vacancy shall be elected only for the unexpired term
of his predecessor in office Any directorship or trusteeship to be filled by reason of an
increase in the number of directors or trustees shall be filled only by an election at a
regular or at a special meeting of stockholders or members duly called for the purpose,
or in the same meeting authorizing the increase of directors or trustees if so stated in the
notice of the meeting.

Filling of vacancies in the office of director or trustee.

The person elected to fill a vacancy holds office only for the unexpired term of his predecessor.
A vacancy in the office of director or trustee may be filled as follows:

(1) By the stockholders or members,- In any of the following cases:

(a) If the vacancy results from the removal by the stockholders or members or the expiration of
term;
(b) If the vacancy occurs other than by removal or by expiration of term, such as death,
resignation, abandonment, or disqualification, if the remaining directors or trustees do not
constitute a quorum for the purpose of filling the vacancy:
(c) If the vacancy may be filled by the remaining directors or trustees but the board refers the
matter to the stockholders or members; or
(d) If the vacancy is created by reason of an increase in the number of directors or trustees

(2) By the members of the board. - If still constituting a quorum, at least a majority of them are
empowered to fill any vacancy occurring in the board other than by removal by the stockholders
or members or by expiration of term.

The board has no power to filll any directorship or trusteeship by reason of an increase in the
number of directors or trustees

ILLUSTRATION:
If four (4) of nine (9) directors died, the remaining five (5) directors still constitute a quorum, and
a majority of the five (5) or three (3) may fill the four (4) vacancies.? But if five (5) of the directors
died, the vacancies will have to be filled by the stockholders in a regular or special meeting duly
called for the purpose,

Sec.30. Compensation of directors. - In the absence of any provision in the by-laws fixing
their compensation, the directors shall not receive any compensation, as such directors,
except for reasonable per diems: Provided, however, That any such compensation other
than per diems may be granted to directors by the vote of the stockholders representing
at least a majority of the outstanding capital stock at a regular or special stockholders
meeting. In no case shall the total yearly compensation of directors, as Such directors,
exceed ten percent (10%) of the net income before income tax of the corporation during
the preceding year.

Compensation of directors.
Under the law, a private corporation is authorized to provide in its by Jaws for the compensation
of directors or trustees.

In the absence of any provision in the by-laws fixing their oompensation, the directors, as such,
shall not receive any a vote of the stockholders compensation, unless authorized by
representing at least majority of the outstanding capital stock

Directors without authority to grant themselves compensation.

The directors have no authority to grant compensation to themselves

As a general rule, when directors perform nothing more than the usual and ordinary duties of
their office, they are not entitled to salary or other compensation. The reason is that directors
render services gratuitously and that the return upon their shares adequately furnishes the
motives for services without compensation. This is true even when the services rendered may
be considered as extraordinary or beyond the normal scope of the director's duties. If a director
deserves compensation for such services, the same may be granted by the vote of the
stockholders. But a director is entitled to be reimbursed for legitimate expenses incurred in
behalf of the corporation.

Limit to compensation.
Where compensation is granted either int the by-laws or byt the vote of stockholders, the total
yearly compensation of directors shall not exceed 10% of the net income before income tax of
the corporation during the preceding year. This is true even when the services rendered may be
considered as extraordinary o beyond the normal scope of the director's duties. If a director
deserves compensation for such services, the same may be granted by the vote of the
stockholders. But a director is entitled to be reimbursed for legitimate expenses incurred in
benan corporation.

This limitation seeks to curb the practice particularly of closed corporations to grant excessive
bonuses to directors to reduce taxable income.

Per diems of directors.

Whether or not authorized by the by-laws or by the stockholders, directors are entitled to receive
reasonable per diems. In view of the real distinction between per diemns and compensation, the
per diemns granted to directors should not be and included in their total yearly compensation for
purposes of the 10% limitation.

Section 30 does not specify, however, who is to set the amount of the per diems and what
amounts shall be considered "reasonable" under the circumstances. If normal corporate practice
were to be followed, the matter shall be decided by the directors themselves. Thus, they may
easily circumvent the 10% limitation.
Compensation of corporate officers.

(1) Corporate officers who are not directors. - The reason for the general rule that directors
of a corporation are not entitled to compensation does not apply to corporate officers who are
not directors. Such officers, not being directors and having no control over the funds and
property of the corporation, even though they may be stockholders, do not occupy the relation of
trustees to the corporation.

Accordingly, if they are elected or appointed to perform valuable services for the corporation
under circumstances indicating an intention and expectation of payment, there arises an implied
promise on the part of the corporation to pay a reasonable compensation for services rendered,
even in the absence of an express contract
This principle applies as well to employees hired by the corporation,

(2) Corporate officers who are directors. - It is believed that directors who are also corporate
officers are entitled, in addition to reasonable per diem as directors, to compensation as such
corporate officers, and the amount thereof may be fixed by mere board resolution in the
absence of provision to the contrary in the by-laws and subject to the provision of Section 32. It
must appear that the intention is to give them salaries as such officers

Compensation may take the form of salary and fringe benefits, such as housing, membership in
clubs, company cars, stock options, etc. Needless to say, the compensation must not be
excessive.

Sec. 31. Liability of directors, trustees or officers - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages resulting therefrom suffered
by the corporation, its stockholders or members and other persons When a director,
trustee or officer attempts to acquire or acquires, in violation of his duty, any interest
adverse to the corporation in respect of any matter which has been reposed in him in
confidence as to which equity imposes a disability upon him to deal in his own behalf, he
shall be liable as a trustee for the corporation and must account for the profits which
otherwise, would have accrued to the corporation.

Nature of directors/trustees' position

The directors of a corporation are its agents. They occupy a fiduciary relation to the corporation.
By numerous authorities they have been called "trustees", with certain powers and subject to
certain duties in the management of its property, and each stockholder a cestui que trust
according to his interest and shares.
(1) In the performance of their official duties, they are under obligations of trust and confidence
to the corporation and its stockholders and must act in good faith and for the interest of the
corporation or its stockholders with due care and diligence and within the scope of their
authority.

(2) They are personally liable for any wrongful disposition of corporate assets and for any loss
or injury to the corporation arising from their gross negligence or unauthorized acts or violation
of their duties.

(3) Directors are not liable, however, for business losscs incurred because of honest bad
judgment not amounting to bad faith or gross negligence.

Liability of directors/trustees for damages.

Section 31 enumerates the occasions when a director or trustee may be held liable for
damages, as follows:

(1) He willfully and knowingly votes or assents to patently unlawful acts of the corporation;

(2) He is guilty of gross negligence (not mere "want of ordinary prudence" as held in Steinberg
vs. Velosco, supra.) or bad faith in directing the affairs of the corporation; and

(3) He acquires any personal or pecuniary interest in conllict with his duty as such director or
trustee.

In the above instances, the erring board members shall be held jointly and severally (or
solidarily) liable for all the damages resulting therefrom suffered by the corporation, its
stockholders or members, or other persons such as corporate creditors.

Liability of directors/trustees or officers for secret profits.

Furthermore, in the case mentioned in the second paragraph, the director/trustee or officer guilty
of violation of duty shall be held accountable for the profits which otherwise would have accrued
to the corporation.

Similarly, a director guilty of disloyal act against the corporation, is required by Section 34 to
account to the corporation for the profits obtained by him from a business opportunity which
should belong to the corporation

Sec.32. Dealings of directors, trustees or officers with the corporation. - A contract of the
corporation with one or more of its directors or trustees or officers is voidable, at the
option of such corporation, unless " all the following conditions are present:

1. That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was ‣ not necessary for the approval of the
contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in the case of an officer, the contract has been previously authorized by the board
of directors.

Where any of the first two conditions set forth in the preceding paragraph is absent, in
the case of a contract with a director or trustee, such contract may be ratified by the vote
of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock
or of two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That
full disclosure of the adverse interest of the directors or trustees involved is made at
such meeting: Provided, however; That the contract is fair and reasonable under the
circumstances.

Self-dealing directors/trusees or officers

(1) Generally, contract void, - Section 32 renders voidable at the option of the corporation d
contract of such corporation with one or more of its directors/trustees or officers. It does not
require that the corporation suffers injury or damage as d result of the contract.

(2) Exceptions - . In. any of the following cases, the contract shall be valid

(a) All the conditions enumerated.in Section 32 are present;

(b) Not all the conditions set forth are present but the corporation (through the board) elects not
to question the validity of the contract without prejudice to the liability of the directors or trustees
for damages under Section 31; or
(c) In the case of a contract with a director or trustee, only the third condition is present, i.e., the
contract is fair and reasonable under the circumstances, if the contract is ratified by the required
vote of the stockholders or members in a meeting called for the purpose, provided that full
disclosure of the adverse interest of the directors or trustees involved is made at such meeting.

Section 32 fails to specify whether the votes of the self-dealing director or trustee shall be
counted in the meeting for the ratification of the contract.

Sec.33. Contracts between corporations with interlocking directors. - Except in cases of

fraud, and provided the contract is fair and reasonable under the circumstances, a
contract between two or more corporations having interlocking directors shall not be
invalidated on that ground alone: Provided, That if the interest of the interlocking director
in one corporation or corporations is merely nominal, he shall be subject to the
provisions of the preceding section insofar as the latter corporation or corporations are
concerned,

StockholdIngs exceeding twenty percent (20%) of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors.
Contracts between corporatlons with InterlockIng directors.
Section 33 recognizes as valid a contract between two (2) or more corporations which have
interlocking directors (i.e, one some, or all of the directors in one corporation is / are also
director / directors in another corporation) as long as there is no fraud and the contract is fair
and reasonable under the circumstances However, if the interest of the interlocking director in
one corporation is substantial, i.e., his stockholdings exceed 20% of . the outstanding capital
stock and in the other merely nominal, the rules of Section 32 on self-dealing directors shall
apply insofar as the latter corporation is concerned.

Sec. 34. Disloyalty of a director. - Where a director, by virtue of his office, acquires for
himself a business opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation, he must account to tho latter for all
such profits by refunding the same unless his act has been ratified by a vote of the
stockholders owning or representing at loast two-thirds (2/3) of the outstanding capital
stock. This provision shall be applicable, notwithstanding the fact that the director risked
his own funds in the venture.

The "corporate opportunity" doctrine,

Under this doctrine, a director who, by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation thereby obtaining profits to the prejudice of
such corporation, is guilty of disloyalty and should, therefore, account to the latter for all such
profits by refunding the same, notwithstanding that he risked his funds in the venture

Under Section 34,-the guilty director will only be exempted from liability to the corporation if his
disloyal act is ratified by the vote of the stockholders owning or representing at least 2 / 3 of the
outstanding capital stock. Note that there is no similar provision in Section 31.

Section 34 is silent on whether the disloyal director shall be allowed to vote his shares in the
ratification of his act.

Sec. 35. Executive committee. - The by-laws of a corporation may create an executive
committee, composed of not less than three members of the board to be appointed by
the board. Said committee may act, by majority vote of all its members, on such specific
matters within the competence of the board, as may be delegated to it in the by-laws or
on a majority vote of the board, except with respect to: (1) approval of any action for
which shareholders' approval is also required; (2) the filing of vacancies in the board; 3)
the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment
or repeal of any resolution of the board which by its express terms is not so amendable
or repealable; and (5) a distribution of cash dividends to the shareholders.
Executive committee.
(1) Need for an executive committee. - Section 25 recognizes an already existing corporate
practice in the Philippines whereby to an executive committee the board of directors delegates
composed of some members of the board corporate powers to expedite action on important
matters without the need for a board meeting especially when such meeting cannot readily be
held. Thus, the committee directly manages the operations oft the corporation between
meetings of the board thereby reducing the workload of the latter.

(2) Express provision in the by-laws,. - Under Section 35, the executive committee must be
provided for in the by-laws and composed of not less than three (3) members of the board The
committee may act on specific matters within the com petence of the board, as may be
delegated to it by the board or in the by-laws, except those matters enumerated with respect to
which only the board duly called and assembled as such can act upon.

(3) Committee contemplated, - The "executive committee referred to in Section 35 should be

distinguished from olher committees which are within the competence of the board to create at
any time and whose actions require confirmation by the board itself.

(4) Restrictions on power. - The restrictions on the power of the executive committee as
provided in Section 35 may b e enlarged by the board to cover other matters. Note that under
No (4), the executive committee may amend or repeal any resolution of the board unless "by its
express terms [it] is not so amendable or repealable.

It is as powerful as the board as it actually performs certain duties of the board, and, in effect, it
is acting for the board itself. And so, because of the nature of the functions of the executive
committee, the authority to appoint such body should be expressly provided in the by-laws, and
a provision in the by law's which states that authorizing the board to create such , committees
as the board may deem necessary, is not a sufficient reason for its creation and appointment.'

(5) Quorum and voting. - The general rule for quorum requirements is the same as that for
board of directors. A majority of the committee members (regardless of the classification of
membership into directors/ members or non-directors, members) constitute a quorum. To bind
the corporation, it is essential that the executive committee acts "by a majority vote of all its
members.'" From this, it can be inferred that the committee cannot delegate its authority even to
one of its number.

(6) Membership. - All members of an executive committee must be directors of the corporation.
However, if all the acts of the committee will be merely recommendatory in nature and shall not
be carried out without the formal approval of the board of dirctors acting through a majority of
the quorum, alternate representation may be allowed in the committee such that some members
thereof may not be directors of the corporation.