How to draft by-laws

In addition to articles of incorporation, a corporation must have by-laws.  The by-laws contain provisions for the corporation’s internal government and for the government of its stockholders as well as those having the direction, management and control of the corporation.  (see Corporation Code of the Philippines Annotated, p. 441 [2006].)

Under the Corporation Code, the corporation must adopt the by-laws within one month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission (SEC). (Corporation Code, sec. 46).  In practice, the incorporators of a corporation usually submit the articles of incorporation and the by-laws for approval by the SEC at the same time.

For the adoption of by-laws after incorporation, the approval of stockholders representing at least majority of the outstanding capital stock must be obtained.  The approval of the majority of the directors must also be obtained.  (see Corporation Code, sec. 46).

What provisions should be included in the by-laws?  Section 47 of the Corporation Code lists some of the matters that may be included in the by-laws:

1.     The time, place and manner of calling and conducting regular or special meetings of the directors or trustees;

2.     The time and manner of calling and conducting regular or special meetings of the stockholders or members;

3.     The required quorum in meetings of stockholders or members and the manner of voting therein;

4.     The form for proxies of stockholders and members and the manner of voting them;

5.     The qualifications, duties and compensation of directors or trustees, officers and employees;

6.     The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof;

7.     The manner of election or appointment and the term of office of all officers other than directors or trustees;

8.     The penalties for violation of the by-laws;

9.     In the case of stock corporations, the manner of issuing stock certificates; and

10.   Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs.


Here are some notes to each of the foregoing:

1.      The time, place and manner of calling and conducting regular or special meetings of the directors or trustees.  Unless otherwise provided in the by-laws:

(a)     regular meetings of the board of directors or trustees of every corporation must be held monthly;

(b)     special meetings of the board of directors or trustees may be held at any time upon the call of the president;

(c)     meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines;

(d)     notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least one (1) day prior to the scheduled meeting; and

(e)     the president shall preside at all meetings of the directors or trustee as well as of the stockholders or members.  (see Corporation Code, secs. 53, 54).

2.     The time and manner of calling and conducting regular or special meetings of the stockholders or members.   Unless otherwise provided in the by-laws:

(a)    regular meetings of stockholders or members must be held annually on any date in April of every year as determined by the board of directors;

(b)    written notice of regular meetings must be sent to all stockholders or members of record at least two (2) weeks prior to the meeting;

(c)    at least one (1) week written notice must be sent to all stockholders or members prior to a special meeting.

Stockholder’s or member’s meetings, whether regular or special, must be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation.  In this regard, Metro Manila is considered a city or municipality.

Notice of meetings must be in writing, and the time and place thereof stated therein.

3.      The required quorum in meetings of stockholders or members and the manner of voting therein.  Unless otherwise provided for in the Corporation Code or in the by-laws, the quorum for stockholders’ meetings consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations. (Corporation Code, sec. 52).  In certain instances, the Corporation Code requires the approval of stockholders representing at least 2/3 of the outstanding capital stock (or 2/3 of the members in case of non-stock corporations).  Quorum for such meetings would be higher.

4.      The form for proxies of stockholders and members and the manner of voting them.  Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies must be in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it is valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time. (Corporation Code, sec. 58).

Directors cannot designate proxies for board meetings.

5.       The qualifications, duties and compensation of directors or trustees, officers and employees.  The by-laws may fix the qualifications of directors and officers.  However, the by-laws cannot dispense with the minimum legal requirements that a director must be a registered owner of at least one share of stock and that at least a majority of the directors must be residents of the Philippines.  (see Corporation Code of the Philippines Annotated, p. 455 [2005]).  Similarly, the by-laws cannot do away with the requirement that the President must be a director or that the Corporate Secretary must be resident and citizen of the Philippines.  (Corporation Code, sec. 25).

The by-laws may validly provide for the disqualification for the position of directors (e.g., a person engaged in the business which competes or is antagonistic to the business of the corporation (see Gokongwei vs. SEC, 89 SCRA 336 [1979]).

In the absence of any provision in the by-laws fixing their compensation, the directors do not receive any compensation, as such directors, except for reasonable per diems.  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 (10%) percent of the net income before income tax of the corporation during the preceding year. (Corporation Code, sec. 30).

The by-laws do not usually fix the compensation of officers and employees.  It is within the power of the board of directors to fix the compensation of corporate officers appointed by it.  (See Corporation Code Annotated, p. 252 [2005]).

The by-laws do not normally define the duties of directors (which duties are governed by law);  however, the by-laws normally define the powers of the board of directors.

6.     The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof.  Directors or trustees are normally elected during the annual stockholders’ meetings.  The notice requirements are normally the same as any other stockholders’ meeting.

7.     The manner of election or appointment and the term of office of all officers other than directors or trustees. In general, corporate officers (such as President, Treasurer and Corporate Secretary) are appointed by majority vote of the members of the board of directors.

8.     The penalties for violation of the by-laws.  In the absence of any provision in the by-laws authorizing the imposition of penalties, a violation of the by-laws would merely constitute in appropriate cases an actionable wrong for which the ultimate remedy resides in the courts.  (see Corporation Code Annotated, p. 456 [2005]).

9.     In the case of stock corporations, the manner of issuing stock certificates.  The capital stock of stock corporations are divided into shares for which certificates are signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation. (Corporation Code, sec. 63)  Stock certificates  cannot be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid.

10.   Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs.  These may include:

(a)   authorization given to the board of directors to fix the issue price of no par value shares (Corporation Code, sec. 62);

(b)   rate of interest for unpaid subscriptions or for failure to pay on due date (Corporation Code, secs. 66, 67);

(c)   entries that will be made in the stock and transfer book (Corporation Code, sec. 74);

(d)   restrictions on the transfer of shares;

(e)   appointment of external auditors;

(f)   fiscal year of the corporation;  and

(g)  dividend policies.

The SEC has sample by-laws.  One such sample is found here.  It is prudent to have the by-laws reviewed by your lawyer prior to submission to the SEC.

(Note: This is part of a series of “How To” articles. These articles intend to give the reader a general overview of the legal aspects of doing certain things and they will not contain all details regarding the proposed action. There may be changes to applicable laws and regulations after the article is posted. You should consult your lawyer if you wish to take a particular action. See Disclaimer page for additional disclaimers.)


Advertisements