By-Laws of Corporations in the Philippines

The by-laws of a corporation in the Philippines serve as an internal document that governs the corporation’s daily management, operational procedures, and internal governance. Section 45 of the Revised Corporation Code of the Philippines (RCC) (Republic Act No. 11232) mandates corporations to adopt by-laws, while also providing details on what those by-laws must contain and the process by which they are enacted, amended, and enforced.

1. Adoption of By-Laws

Under the RCC, every corporation registered in the Philippines must adopt its by-laws within one month (30 days) from the issuance of its certificate of incorporation (Sec. 45, RCC). Non-compliance with this requirement may subject the corporation to sanctions from the Securities and Exchange Commission (SEC), including possible suspension or revocation of corporate registration.

Process of Adoption:

Drafting: The by-laws are typically drafted by the incorporators or initial directors in consultation with legal counsel.
Approval by Majority: A majority vote of the board of directors (or trustees, in the case of non-stock corporations) is required to initially adopt the by-laws.
Ratification by Stockholders: Following the board's approval, stockholders holding at least a majority of the outstanding capital stock, or members of non-stock corporations, must ratify the by-laws for them to be effective.

Contents of By-Laws:

Section 46 of the RCC enumerates the minimum items that corporate by-laws must contain, including:

Corporate Officers: Designations, functions, qualifications, terms, and compensation.
Meetings: Rules on the calling, time, place, notice, and quorum requirements for both stockholder and board meetings.
Board Powers and Functions: Specific powers, authority, and duties of the board of directors.
Stock Certificates and Transfers: Regulations on issuance, form, and manner of stock transfers.
Fiscal Matters: Fiscal year, financial records, audit, and any applicable policies.
Amendment Procedure: The process by which the by-laws may be amended, including any special quorum or voting requirements.

2. Key Clauses in Corporate By-Laws

A corporation’s by-laws may contain various other provisions, tailored to the specific nature and needs of the organization, beyond the minimum requirements stated by the RCC:

Director and Officer Liability and Indemnity: Clauses that outline the extent of liability, indemnification, and insurance coverage of directors and officers.
Conflict of Interest: Policies to prevent conflicts of interest, often requiring directors and officers to disclose any interest in transactions with the corporation.
Board Committees: Creation and powers of committees (e.g., audit, risk, and compensation committees), including the appointment and roles of committee members.
Internal Controls and Risk Management: Guidelines for internal audits, financial controls, and risk mitigation to ensure corporate integrity and compliance.
Dissolution and Liquidation: Procedures to be followed if the corporation decides to dissolve and liquidate its assets.

3. Amendments to the By-Laws

The RCC grants corporations the flexibility to amend their by-laws to adapt to changing needs. The procedure for amendments is as follows:

Initiation by the Board: The board of directors initiates amendments through a majority vote.
Approval by Stockholders: The proposed amendments are then ratified by at least a majority of the outstanding capital stock or by the members in non-stock corporations.
Filing with the SEC: All amendments to the by-laws must be submitted to the SEC, which may review the amendments to ensure compliance with relevant laws and regulations.

SEC Approval:

The SEC has the authority to require modifications to the proposed amendments if they conflict with existing laws or corporate governance principles.

4. Enforcement and Compliance

Corporations must enforce their by-laws consistently to maintain good governance, transparency, and accountability. Failure to adhere to by-laws can result in corporate mismanagement and potential legal issues. Stockholders, directors, and officers may bring complaints to the SEC if a corporation or its board violates its by-laws.

Corporate Governance Compliance: The SEC may conduct periodic audits to ensure corporations comply with both the RCC and their internal by-laws. Corporations may also need to periodically disclose updates to their by-laws or governance practices, particularly for publicly listed entities.

5. Legal Implications of By-Laws

The by-laws have the force of law within the corporation, binding all directors, officers, stockholders, and members. Courts treat them as binding contracts between the corporation and its stakeholders. Violations of the by-laws can lead to:

Personal liability for directors and officers under certain circumstances.
Nullification of board or stockholder resolutions if these were adopted in violation of the by-laws.
Injunctive relief by a court to prevent violations of the by-laws.

6. Judicial Interpretations and Doctrine

Philippine courts have consistently upheld the sanctity of corporate by-laws in rulings. Key principles that emerge from jurisprudence include:

Doctrine of Strict Compliance: Courts enforce by-laws strictly according to their terms and favor interpretations that uphold their integrity.
Stockholders’ Right to Petition: Stockholders can petition courts to compel compliance with by-laws, especially when governance issues or malfeasance arise.
Derivative Suits: In cases of by-law violations that harm the corporation, stockholders may file derivative suits to address damages caused by corporate officials.

Summary

In the Philippine corporate framework, by-laws are an essential element in maintaining the orderly governance and operation of a corporation. They function as binding internal rules, establish the parameters of authority within the corporation, and provide stakeholders with assurance of fair, transparent, and legally compliant management.