g. Bylaws

By-laws

Relatively permanent and continuing rules of action adopted by the corporation for its own government and of the individuals composing it and those having direction, management and control of its affairs, in whole or in part, in the management and control of its affairs and activities.

Regulations, ordinances, rules or laws adopted by an association or corporation or the like for its internal governance, including rules for routine matters such as calling meetings and the like (San Miguel Corporation v. Mandaue Packing Products Plants-San Miguel Packaging Products -San Miguel Corpor, G.R. No. 152356, 16 August 2005)¹.

By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restrictions, they are always subject to the charter of the corporation (Rural Bank of Salinas, Inc. v. Court of Appeals*, G.R. No. 96674, 26 June 1992)².

Requisites of Valid By-Laws:

• It must be consistent with the Revised Corporation Code, other pertinent laws and regulations.
• It must be consistent with the Articles of Incorporation.
• It must be reasonable and not arbitrary or oppressive.
• It must not disturb vested rights, impair contract or property rights of stockholders or members or create obligations unknown to law.

Binding Effects

The by-laws of the corporation are its own private laws that have the same effect as the laws of the corporation. They are deemed written into the charter. Thus, they become part of the fundamental laws of the corporation which are binding upon the corporation and its officers, but do not bind third persons merely because they are litigants (Peña v. CA, G.R. No. 91478³; Forest Hills Golf and Country Club, Inc. v. Gardpro, Inc., G.R. No. 164686, 22 October 2014⁴).

Procedure on Adoption of By-Laws (Sec. 45)

• After Incorporation:
• Approval by the majority of outstanding shares/members
• By-laws must be signed by stockholders/members voting for them
• Kept in the principal office of the corporation
• Subject to inspection by stockholders or members
• Certified copy signed by majority of directors, countersigned by the corporate secretary, filed w/ SEC and attached to original Articles of Incorporation
• Prior to Incorporation:
• such by-laws shall be approved and signed by all the incorporators and
• submitted to the SEC, together with the articles of incorporation.

Note: A certification of the appropriate government agency to the effect that such bylaws or amendments are in accordance with law is required before the SEC shall accept for filing the bylaws or any amendment thereto of the following:

• Bank,
• Banking institution,
• Building and loan association,
• Trust company,
• Insurance company,
• Educational institution, or
• Other special corporations governed by special laws

Unjustified Failure or Refusal to Comply with Corporate-Record Inspection or Reproduction Requirements Is Punishable by a Fine; the SEC’s Contempt Powers Are Preserved (Sec. 161⁵; Sec. 157)

Common Law Limitations on By-Laws

• By-laws cannot be contrary to law and articles of incorporation

A by-law provision granting to a stockholder a permanent representation in the Board of Directors is contrary to the Corporation Code⁶ requiring all members of the Board to be elected by the stockholders or members. Even when the members of the association may have formally adopted the provision, their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law (Grace Christian High School v. Court of Appeals, G.R. No. 108905, 23 October 1997)⁷.

Under Section 47 of the Revised Corporation Code, amending a corporation’s by-laws requires the prescribed board and stockholder or member votes, unless amendment authority has been validly delegated to the board. An amendment cannot impair existing contractual rights or undermine the security of tenure of a regular employee. Otherwise, it would enable an employer to remove any employee from employment by the simple expediency of amending its by-laws and providing the position shall cease to exist upon occurrence of a specified event (Salafranca v. Philamlife, G.R. No. 121791, 23 December 1998)⁸

By-laws that prohibit directors who have interests in competitor corporations are reasonable in order to protect the interests of the company (Gokongwei v. Securities and Exchange Commission, G.R. No. L-45911, 11 April 1979)⁹

• By-laws cannot be unreasonable or be contrary to the nature of by-laws (Government of the Philippine Islands v. Filipino, G.R. No. 26649, 31 March 1926)¹⁰.

Authority granted to a corporation to regulate the transfer of its stock does not empower corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer (Thomson v. Court of Appeals and the American Chamber of Commerce of the Philippines, Inc., G.R. No. 116631, 22 November 1999)¹¹.

By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restrictions; they are always subject to the charter of the corporation (Rural Bank of Salinas, Inc. v. Court of Appeals*¹²; quoting from Thompson on Corporation Sec. 4137, cited in Fleischer v. Botica Nolasco Co., Inc., G.R. No. 23241, 14 March 1925¹³).

• By-law provisions cannot discriminate among its stockholders or members

Contents of by-laws (Sec. 46)

A private corporation may provide the following in its bylaws:

• The time, place and manner of calling and conducting regular or special meetings of the directors or trustees;
• The time and manner of calling and conducting regular or special meetings and mode of notifying the stockholders or members thereof;
• The required quorum in meetings of stockholders or members and the manner of voting therein;
• The modes by which a stockholder, member, director, or trustee may attend meetings and cast their votes;
• The form for proxies of stockholders and members and the manner of voting them;
• The directors’ or trustees’ qualifications, duties and responsibilities, the guidelines for setting the compensation of directors or trustees and officers, and the maximum number of other board representations that an independent director or trustee may have which shall, in no case, be more than the number prescribed by the SEC;
• The time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof;
• The manner of election or appointment and the term of office of all officers other than directors or trustees;
• The penalties for violation of the bylaws;
• In the case of stock corporations, the manner of issuing stock certificates; and
• Such other matters as may be necessary for the proper or convenient transaction of its corporate affairs for the promotion of good governance and anti-graft and corruption measures.

Note: An arbitration agreement may be provided in the bylaws pursuant to Section 181 of this Code¹⁴.

Binding effect of by-laws:

• As to the corporation and its components – Binding not only upon the corporation but also on its stockholder, members and those having direction, management and control of its affairs. They have the force of contract between the members/stockholders.
• As to third persons – Not binding unless there is actual knowledge. Third persons are not even bound to investigate the content because they are not bound to know the bylaws which are merely provisions for the government of a corporation and notice to them will not be presumed (China Banking Corp. v. CA, G.R. No. 118332)¹⁵.

Amendment or Revision (Sec. 47)

• With stockholders or members approval
• Majority vote of the members of the Board; and
• Majority of the outstanding capital stock or majority of the members in case of non- stock corporation, in a meeting duly called for the purpose
• The board may be delegated to have the power to amend or repeal any by- laws or adopt new by- laws, by a vote of:
• 2/3 of the shareholders representing the outstanding capital stock; or
• 2/3 of the members in a non- stock corporation.

Such power of the Board may be revoked by majority vote of the outstanding capital stock or majority of the members in a non- stock corporation

Note: The power to adopt the first original bylaws cannot be delegated to the board of directors or trustees; only the power to amend or repeal any by- laws or adopt new by- laws that will supplant the old by- laws can be validly delegated.

Filing and Effectivity

Whenever the bylaws are amended or new bylaws are adopted, the corporation shall file with the SEC

• amended or new bylaws and,
• if applicable, the stockholders’ or members’ resolution authorizing the delegation of the power to amend and/or adopt new bylaws, duly certified under oath by the corporate secretary and a majority of the directors or trustees.

The amended or new by-laws shall only be effective upon the issuance by the SEC of a certification that the same is in accordance with this Code and other relevant laws.

Corporate Officers –R.A. No. 11232, Section 24¹⁶

De Facto Corporation –R.A. No. 11232, Section 19¹⁷

Corporation by Estoppel –R.A. No. 11232, Section 20¹⁸

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.

When such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use its lack of corporate personality as a defense.

Anyone who assumes an obligation to an ostensible corporation as such cannot resist performance thereof on the ground that there was in fact no corporation.