Published — June 1, 2022
The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.
Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
After reading “What is the Binding Effect of Bylaws of a Corporation?”, read also “What are bylaws?”
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Bylaws are the relatively permanent and continuing rules of action adopted by the corporation for its own government and that of the individuals composing it and having the direction, management and control of its affairs, in whole or in part, in the management and control of its affairs and activities.
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The purpose of a by-law is to regulate the conduct and define the duties of the members towards the corporation and among themselves.
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The provisions of the Bylaws are binding not only upon the corporation but also on its stockholders, members and those having direction, management and control of its affairs.
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Since the Bylaws operate merely as internal rules among stockholders, directors and officers, they cannot affect or prejudice third person who dealt with the corporation.
What are Bylaws?
The case of China Banking Corporation v. Court of Appeals (G.R. No. 117604 March 26, 1997) provides for a definition of Bylaws in the following manner:
By-laws signifies the rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it. In other words, by-laws are the relatively permanent and continuing rules of action adopted by the corporation for its own government and that of the individuals composing it and having the direction, management and control of its affairs, in whole or in part, in the management and control of its affairs and activities.”
What is the purpose of Bylaws?
The same case of China Banking Corporation v. Court of Appeals states that the purpose of Bylaws is to regulate the conduct and define the duties of the members towards the corporation and among themselves. To wit:
“The purpose of a by-law is to regulate the conduct and define the duties of the members towards the corporation and among themselves. They are self-imposed and, although adopted pursuant to statutory authority, have no status as public law. (China Banking Corporation v. Court of Appeals, G.R. No. 117604 March 26, 1997.)
Who are bound by the Bylaws of a corporation?
The provisions of the Bylaws are binding, not only upon the corporation, but also on its stockholders, members and those having direction, management and control of its affairs. (Sundiang and Aquino, Reviewer on Commercial Law, p.201, 2017.)
Are third persons bound by Bylaws of a corporation?
However, the provisions of the Bylaws are not binding unless there is actual knowledge of such provisions. Notice to third persons, in this case, cannot be presumed. Third persons are not even bound to investigate the contents of the Bylaws because they are not bound to know that Bylaws are merely provisions for the management of a corporation.
In the same case of the China Banking Corporation v. Court of Appeals, the Supreme Court ruled that third persons are generally not bound by the bylaws of a corporation, as such:
“Therefore, it is the generally accepted rule that third persons are not bound by by-laws, except when they have knowledge of the provisions either actually or constructively. In the case of Fleisher v. Botica Nolasco, 47 Phil. 584, the Supreme Court held that the by-law restricting the transfer of shares cannot have any effect on the transferee of the shares in question as he “had no knowledge of such by-law when the shares were assigned to him. He obtained them in good faith and for a valuable consideration. He was not a privy to the contract created by the by-law between the shareholder . . . and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his right as a purchaser.” (Emphasis supplied.)
Moreover, in the case of PMI Colleges v. National Labor Relations Commission (G.R. No. 121466, August 15, 1997), the Supreme Court held that:
“Since the Bylaws operate merely as internal rules among stockholders, directors and officers, they cannot affect or prejudice third person who dealt with the corporation.”
In the same case of PMI Colleges v. National Labor Relations Commission, it was held that the provisions in the Bylaws enumerating the contract signatories of the corporation are not binding on third persons who signed a contract with the corporation as represented by the Chairman. The contract is binding even if the Chairman is not one of those enumerated as a signatory.
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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