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Corporation Law

Sec. 2. Corporation, defined. A corporation is an


artificial being created by operation of law, having the
right of succession and the powers, attributes and
properties expressly authorized by law or incident to
its existence.

Corporation as a Person, Resident, or Citizen


1.
-

Attributes of a Corporation:
1.
2.
3.
4.

2.
-

Artificial being;
Created by operation of law;
Enjoys the right to succession;
Has the powers, attributes and properties expressly
authorized by law or incident to its existence.

Doctrine of Corporate Entity


-

3.
-

A corporation is a legal or juridical person with a


personality separate and distinct from its individual
stockholders or members and from any other legal
entity to which it may be connected or related.
The law treats it as though it were a person by
process of fiction thus facilitating the conduct of
corporate business.

2.
-

3.
-

4.
-

5.
-

6.

As a person
Persons are divided into natural and artificial
persons. The term person prima facie includes both
and, therefore as a general rule, includes
corporations but in a figurative sense only.
As a resident or nonresident
It is deemed a resident or a nonresident of a
particular state or country within the meaning of a
statute, if it is within the purpose and intent of the
statute such as those defining the jurisdiction of the
courts, or relating to venue, taxation, etc.
As a citizen
Citizenship is the status of a citizen with its rights
and privileges and corresponding duties and
obligations.
In corporation, it is in the sense of indicating the
country under whose laws the corporations were
organized.

Doctrine of Piercing the Veil of Corporate Entity


1.
-

Corporation as an Artificial Personality: Consequences


1.

A corporation remains unchanged and unaffected in


its identity by changes in its individual membership.

Liability for acts or contracts.


General Rule: obligations incurred by a corporation,
acting through its authorized agents, are its sole
liabilities.
o
A corporation may not, generally, be made
to answer for acts or liabilities of its
stockholders and vice versa.
o
A suit against certain stockholders of a
corporation cannot be a suit against the
unpleaded
corporation
itself
without
violating the principle that a corporation has
a legal personality distinct and separate
from its stockholders.
Liability
when
exceptional
circumstances
warrants.
Thus, it may validly attach when the director/trustee
or officer acted maliciously or in bad faith, or with
gross negligence (Sec. 31, 65)
There is no law that prohibits a corporate officer from
binding himself personally to answer for a corporate
debt. (Toh v. Solid bank Corp)
Right to bring actions.
A corporation may incur obligations and bring civil
and criminal actions in its own name in the same
manner as a natural person,
Right to acquire and possess property.
It may possess property of all kinds.
Property acquired by the corporation is in law the
property of the corporation itself as a distinct legal
entity and not that of the stockholders or members
as such and vice-versa.
Acquisition by court of jurisdiction
The personality of the president of a corporation is
distinct from that of corporation itself.
In the absence of summons on the corporation, a
judgment against it is void for lack of jurisdiction and
lack of due process.
Changes in individual membership.

2.
-

3.

When legal fiction to be disregarded


Where the fiction of corporate entity is being used as
a cloak or cover for fraud or illegality or to defeat
public convenience, justify wrong, protect fraud, or
defend crimes.
Effect as to liability
The corporation will be treated merely as an
association of individuals or collection of persons
undertaking business as a group and the liability will
attach personally or directly to the officers and
stockholders.
Where there are 2 corporations, they will be merged
into one, the one being merely regarded as the
instrumentality, agency, conduit, or adjunct of the
other.
Application of doctrine in 3 areas:
1. Defeat of public convenience when the
corporate fiction is used as a vehicle for the
evasion of existing obligation;
2. Fraud cases when the corporate entity is used
to justify wrong, protect fraud, or defend a
crime;
3. Alter ego cases

where a corporation is merely a farce since


it is a mere alter ego or business conduit of
a person

where the corporation is so organized and


controlled and its affairs are so conducted
as to make it merely an instrumentality,
agency, conduit, or adjunct or another
corporation.

Instances Where Doctrine Applied


1.

2.

Where the transaction was entered into by the


President who was also the treasurer and general
manager of a close family corporation where the
incorporators and directors belong to one single
family.
Where a corporation functions for the benefit of a
single person who has complete control over the

3.

4.

5.

6.

funds and the said person is the sole owner thereof.


In such a case, the corporate entity is but an alter
ego or business conduit of the owner.
Where the corporation is a mere instrumentality of
the individual stockholders, the latter must
individually answer for corporate obligations.
Where a subsidiary company is created by a parent
company merely as an agency of the latter,
especially if the stockholders or officers of the two
corporations are substantially the same or their
system of operations unified or where parent
company assumes complete control of the operation
of its subsidiarys business.
In workmens compensation cases, where there is
admission that 2 corporations are sister companies,
operating under one single management, and
housed in the same building.
Where a corporation is dissolved and its assets are
transferred to another corporation to avoid financial
liability of the first corporation to its employees, both
firms being owned and controlled by the same
persons with the result that the second corporation
should be considered a continuation and successor of
the first entity.

Powers, Attributes, and Properties of a Corporation


-

2.
-

3.
-

Partnership
Corporation
Manner of Creation
Created by mere agreement Created by law or operation
of the parties
of law
Number of Incorporators
Organized by only 2 persons
Organized
at
least
5
incorporators
(except
corporation sole)
Commencement of Juridical Personality
Commences
from
the Commences from the date of
moment of the execution of issuance of the certificate of
the contract of partnership
incorporation by the SEC
Powers
Exercise
any
power Exercise only those expressly
authorized by the partners
granted by law or implied
from
those
granted
or
incident to its existence
Management
If not agreed upon, every The power to do business is
partner is an agent of the vested in the board of
partnership
directors or trustees.
Effect of Mismanagement
A partner can sue a co- The suit against a member of
partner who mismanages
the
board
of
directors/trustees
who
mismanages must be in the
name of the corporation
Right of Succession
No right of succession
Has right of succession
Extent of Liability to Third Persons
The
partners
are
liable The stockholders are liable
personally and subsidiarily only to the extent of their
for partnership debts to 3 rd investment as represented by
persons
the shares subscribed by
them
Transferability of Interest
A partner cannot transfer his A stockholder has the right to
interest in the partnership to transfer his shares without
make
the
transferee
a the prior consent of the other
partner without the consent stockholders
of all the other existing
partners
Terms of Existence
Established for any period May not be formed for a term
stipulated by the partners
in excess of 50 years
extendible to not more than
50 years

Instrumentality or control test


Control - Complete dominion, not only of finances but
of policy and business in respect to the transaction
attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or
existence of its won.
Fraud test
Such control must have been used by the defendant
to commit farud or wrong, violation of a statutory or
other positive legal duty, or dishonesty and unjust
act in contravention of plaintiffs legal rights.
Harm/Causal Connection Test
The control and breach of duty must proximately
cause the injury or unjust loss complained of.

Acquisition by Court of Jurisdiction over Corporation/s


Involved
-

A corporation not impleaded in a court cannot be the


subject to the courts process of piercing the
corporate veil.
Implications:
1. The court must first acquire jurisdiction over the
corporation/s involved before it can apply the
doctrine.
2. The doctrine must be raised during a full-blown
trial over a cause of action duly commenced
involving parties duly brought under the
authority of the court.

Right of Succession of a Corporation


-

A corporation may exercise only such powers as are


granted by the law of its creation. All powers which
may be implied from those expressly provided by law
and those which are incidental or essential to the
corporations existence may also be exercised.

Distinctions between a Partnership and a Corporation

3 Elements Piercing the Corporate Veil:


1.
-

The life of the corporation is limited to the period


of time stated in the articles of incorporation not
exceeding 50 years from the date of
incorporation unless sooner dissolved or said
period extended.
Corporations created by special laws have the
right of succession for the term provided in the
laws creating them.

A corporation has a capacity of continuous existence


irrespective of the death, withdrawal, insolvency, or
incapacity of the individual stockholders or members
and regardless of the transfer of their interest or
shares of stock.

Foreign Corporation can be a limited partner in a Philippine


Limited partnership

Firm Name
A limited partnership is May adopt any firm name
required by the law to add provided it is not identical or
the word Ltd. To its name
similar to any registered firm
name or contrary to existing
law
Dissolution
May be dissolved at any time Can only be dissolved with
by the will of any or all of the the consent of the State
partners
Laws which Govern
Governed by Civil Code
Governed by the Corporation
Code

Reason:
1. No express law prohibiting foreign corp.
2. A corporate investor should also be allowed to make
passive investments in limited partnership just like an investor
in a corp.
3. Sec. 42 of Corp. Code does not require that the investing
corporation be involved in the management
4. Jurisprudence and common commercial practice in US
indicated that corporations are not barred from acting as
limited partner

Similarities between a Partnership and a Corporation:


1.
2.
3.
4.
5.
6.

Have a juridical personality separate and distinct


from that of the individuals composing it.
Can act only through agents.
An organization composed of aggregate of
individuals.
Distributes its profits to those who contribute capital
to the business.
Can be organized only where there is a law
authorizing its organization.
A partnership is taxable as a corporation, subject to
income tax.

Advantages of a business corporation


1.
2.
3.
4.
5.
6.
7.
8.
9.

Corporation as a partner

Disadvantage

General rule: a corporation cannot enter into partnership


with other corporation or with individuals

1.
2.
3.
4.

Reason:
1
2
3

Has Legal capacity to act and contract in its own name


Continuity of existence because of its non-dependence on
the lives who compose it
Credit id strengthen by continuity of existence
Management is centralized
Creation, organization, management and dissolution are
centralized
Makes feasible gigantic financial undertaking
Shareholders have limited liability
They are not general agents of the business
Shares of stock can be transferred w/o the consent of
other stockholders

Corp. Can act only through its duly authorized officers


and agents and not bound by acts of anyone else
Public policy since it would be bound of the acts of
persons not duly appointed and authorized
Corporate assets would be subjected to risk and liabilities
not contemplated by stockholders

5.
6.
7.
8.

Complicated in formation and management


High cost in formation and operation
Credit is weakened by limited liability
Lack of personal element in view of transferability of
shares
Greater degree of governmental control and supervision
Management and control are separated from ownership
Stockholders voting rights have become theoretical by
use of proxies and widespread ownership
Little voice in the conduct of business

Exception:
1

Enter into joint venture


Provided: the nature of the venture is in line with business
authorized by their charters

Sec. 3. Classes of corporation.- Corporation formed or


organize under this code may be stock or non-stock
corporations. Corporations which have capital stock
divided into shares and are authorized to distribute to
the holders of such shares dividends or allotments of
the surplus profits on the basis of the shares held are
stock corporations. All other corporations are nonstock corporations.

Need not be registered with SEC provided does not result


to new corp. or part.
Joint venture with foreign corporation licensed to do
business here in the Philippines for undertaking certain
phases of the construction
Where partnership agreement provides that 2 partners
will manage the partnership so that the management of
the corporate interest is not surrendered

Classification of corporation under this Code


Stock Corporation
Ordinary
business
corporation created and
operated for the purpose
of making a profit which
may be distributed in the
form of dividends to
stockholders on the basis

Certain cases where SEC allowed


1
All corporate partners must be managing partners and
solidarily liable
2
Statue or charters expressly allow
3
Where one of the partners is a foreign corporation
licensed to transact business
Corporation as limited partner

Non-stock Corporation
Do not issue stock and
distribute dividends to
their
members
and
created for public good
and welfare

of their invested capital


Has capital stock
Sources from investors

No capital stock
Sources
contribution
donation
Other Classifications of corporations
1.

2.

c. Affiliated corporation - is one related to another by


owning or being owned by common management or by a
long-term lease of its properties or other control device.

from
and

8.

Number of person
a. Corporation aggregate - is a corporation consisting
of more than one member or corporator
b. Corporation sole or a special form of corporation
- is usually associated with the clergy. Consist of one
member or corporator only and his successors, such as
bishop.

b. Private corporation - is one formed for some private


purpose, benefit, or end
i.
Government-owned
or
controlled
corporations - are those created or organized by the
government or of which the government is the majority
stockholders

Whether religious purpose or not


a. Ecclesiastical corporation - is one organized for
religious purposes. Either corporation sole or religious
societies.

ii.
Quasi-public
corporation
or
private
corporations - are those which have accepted from the
state the grant of franchise or contract involving the
performance of public duties.

b. Lay Corporation - is one organized for the purpose


other than for religion. Either eleemosynary or civil.
3.

9.

Whether charitable purpose or not


a. Eleemosynary corporation - is one established or
devoted for charitable purpose or those supported by
charity

i. Corporation by prescription - is one which


exercised corporate powers for an indefinite period
without interference on the part of the sovereign power
and which by fiction of law is given the status of a
corporation

Whose laws they have been created


a. Domestic corporation - is one incorporated under
the laws of the Philippines

ii. Corporation by estoppel - is one which in reality


is not a corporation, either de jure r de facto, because it is
so defectively formed, but is considered a corporation in
relation to those only who, by reason of their acts or
admissions, are precluded from asserting that it is not a
corporation

b. Foreign corporation - is one formed, organized or


existing under any laws other than those of the
Philippines
5.

Their legal right to corporate existence


a. De jure corporation - is a corporation existing in fact
and in law

Distinctions between Public and Private Corporation


Public
Subject to governmental
visitation and control

b. De facto corporation - is a corporation existing in


fact but not in law
6.

Whether true sense or limited


a. True corporation - is one exist by statutory authority
b. Quasi-corporation - is one exist without formal
legislative grant

b. Civil corporation - is one established for business or


profit
4.

Whether public or private purpose


a. Public corporation - is one formed or organized for
the government or portion of the state

Whether they are open to public or not


a. Close corporation - is one which is limited to selected
persons or members of a family
b. Open corporation - is one which is open to any
person who may wish to become a stockholder or
member thereto

7.

Their relation to another corporation


a. Parent or Holding Corporation - is one which is so
related to another corporation that it has the power,
either directly or indirectly, to control or to elect the
majority of the directors of such other corporation

Created
without
the
consent of the locality to
be effected

b. Subsidiary corporation - is one related to another


corporation that the majority of its directors can be
elected, either directly or indirectly, by such other
corporation which thereby become its parent corporation.
Another corporation owns atleast 50% or majority of the
shares

Private
Charter
of
private
corporation is a contract
between the state and
the corporation which,
under
constitution
prohibiting
laws
impairing the obligation
of contract, renders not
subject
to
visitation
control and change by
the state except exercise
of the police power
Consent
of
the
incorporators
is
necessary to the creation
of
the
private
corporation

Dual status of public corporation


Governmental or public
Municipal government

Proprietary or private
Corporate
legal
individual

Not liable for damages


occasioned
by
the
negligent or wrongful
action of its officers,
agents or employee

Components of a Corporation

Liable for damages

1. Corporators those who compose the corporation,


whether stockholders or members
2. Incorporators those corporators mentioned in the
articles of incorporation as originally forming and composing
the corporation and who are signatories thereof and
acknowledge the same before a notary public

Sec. 4. Corporations created by special laws or


charters.- Corporations created by special laws or
charters shall be governed primarily by the provisions
of the special law or charter creating them or
application to them, supplemented by the provisions of
this Code, insofar as they are applicable.

3. Stockholders owners of shares of stock in a stock


corporation.
4. Members corporators of a corporation which has no
capital stocks

Incorporation of private corporation by special act.


The enactment of special act creating a private corporations is
subject to the constitutional limitations that such corporation
shall be owned or controlled by the government.

Note:

Reason:

All incorporators are corporators but not all corporators


are incorporators
Shareholders maybe natural or juridical persons but only
Natural persons are incorporators

1. to prevent the granting of special privileges


Other classes
2. to prevent bribery and corruption of the legislature
5. Promoters persons who bring about or causes to bring
about the formation and organization of a corporation by
bringing together the incorporators or the person interested in
the enterprise, procuring subscription or capital for the
corporation and setting in motion the machinery which leads
to the incorporation of the corporators itself

Governing Law
A corporation created by special law or charter is primarily
governed by such law and suppletorily, by the provisions of
the Code insofar as they are applicable.
GOCCs may be created

6. Subscribers persons who have agreed to take and pay


for original, unissued shares of a corporation formed or to be
formed

1. by original charter or special law which will be governed


under Civil Service Law
2. by provisions of Corporation Code

Note: all incorporators are subscribers but a subscribers but a


subscriber need not be an incorporators

Corporations organized under Corporation Law is under


Labor Code

7. Underwriters a person who

Jurisdiction of SEC

a. has agreed to buy at stated terms an entire issue


of securities or a substantial part thereof

No jurisdiction over corporations with original charter


or created by special law
However, SEC can rule on the status of the
corporation whether GOCCs or Private Corp.

b. has guaranteed the sale of an issue by agreement


to buy from the issuing party any unsold portion at a stated
price
c. has agreed to use his best effort to market all or
part of an issue

Government, as a member of a corporation, never exercise its


sovereignty but acts only as a mere corporator

d. has offered for sale stock he has purchased from a


controlling stockholder
Sec. 5. Corporators and Incorporators, stockholders
and members.- Corporators are those compose a
corporation, whether as stockholder or as members.
Incorporators are those stockholders or members
mentioned in the articles of incorporation as originally
forming and composing the corporation and who are
signatories therof.

8. Board of directors governing body in a stock


corporation
9. Trustees governing body in a non-stock corporation
10. Corporate Officers the officers who are identified as
such in the Corporation Code, the Articles of Incorporation, or
the by-laws of the corporation

Corporators in a stock corporation are called


stockholders or shareholders. Corporators in a nonstock corporation are called members.

Agreement or contract with a corporation

1. Bet. Corporators and corporation agreement is


essential. There can be no such thing as corporation
aggregate without members and a person cannot become
member except by agreement

Where the articles of incorporation provide for


non-voting shares in the cases allowed by this Code,
the holders of such shares shall nevertheless be
entitled to vote on the following matters:

2. Bet members and corporation ordinarily no contract


between them. The contract is between each individual
member and the whole body of members represented by the
corporation

1. Amendment of the articles of incorporation;


2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate
property;

Sec. 6. Classification of Shares. The shares of stock of


stock corporation may be divided into classes or series
of shares, or both, any of which classes or series of
shares may have such rights, privileges or restrictions
as may be stated in the articles of incorporation:
provided, that no share may be deprived of voting
rights except those classified and issued as
preferred or redeemable shares, unless otherwise
provided in this Code: provided, further, that there
shall always be a class or series of shares which have
complete voting rights. Any or all of the shares or
series of shares may have a par value or have no par
value as may be provided for in the articles of
incorporation: provided, however, that banks, trust
companies, insurance companies, public utilities, and
building and loan associations shall not be permitted
to issue no-par value shares of stock.

4.
Incurring,
indebtedness;

creating

or

increasing

bonded

5. Increase or decrease of capital stock;


6. Merger or consolidation of the corporation with
another corporation or other corporations;
7. Investment of corporate funds in another
corporation or business in accordance with this Code;
and
8. Dissolution of the corporation.
Except as provided in the immediately
preceding paragraph, the vote necessary to approve a
particular corporate act as provided in this Code shall
be deemed to refer only to stock with voting rights.

Preferred shares of stock issued by any


corporation
may
be
given
preference
in
the
distribution of the assets to the corporation in case of
liquidation and in the distribution of dividends, or such
other preference as may be stated in the articles of
incorporation which are not violative of the provision
of this Code; provided, that preferred shares of stock
may be issued only with a stated par value. The board
of directors, where authorized in the articles of
incorporation, may fix the terms and conditions of
preferred shares of stocks or any series thereof:
provided, that such terms and conditions shall be
effective upon the filling of a certificate thereof with
the Securities and Exchange Commission .

Power to classify

Shares of capital stock issued without par


value shall be deemed fully paid and non-assessable
and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto:
provided, that shares without par value may not be
issued for a consideration less than the value of five
pesos (P5.00) per share: provided, further, that the
entire consideration received by the corporation for its
no-par value shares shall be treated as capital and
shall not be available for distribution as dividends.

A corporation may, furthermore, classify its


shares for the purpose of insuring compliance with
constitutional or legal requirements.

The shares of stock corporation may be divided into


classes or series of shares, or both, any of which
classes or series of shares may have rights,
privileges or restrictions as may be stated in the
articles of Incorporation
A corporation has unrestricted freedom to issue such
classes or series of shares
Unless
1. Restricted by the law
2. The provision of its articles of incorporation
Primary classification of shares
1. Common
2. Preferred
Each of which may be divided into other classes
Shares may differ with respect to:
1. Voting rights
2. Dividend rights
3. Right to corporate assets
There must be at least one class of stock with voting
rights
A corporation may issue only one class or kind of
share

When Classification of shares may be made


1. First determined by the incorporator as stated in the
Articles of Incorporation

Except as otherwise provided in the articles of


incorporation and stated in the certificate of stock,
each share shall be equal in all respect to every other
share.

2. After the corporation comes into existence, they may be


altered by the Board of Directors and the stockholders by
amending the articles of incorporation

f. Legal capital the amount equal to the aggregate par


value and/or issued value of the outstanding capital stock.
Note:

Note: If the amendment changes or restricts the rights of any


class or authorize preference, any stockholder shall have the
right to DISSENT and DEMAND payment of fair value of his
shares

A corporation may, furthermore, classify its shares


for the purpose of insuring compliance with
constitutional or legal requirement.

Ex: Authorized Capital Stock: 1,000,000 in 10,000 shares for


par value of 100 per share. 250,000 were subscribed.

Ex: Class A and Class B. Class A for Filipino and Class B for
Filipino and Foreigner
-

when par value shares are issued above par, the premium
or excess is not to be considered as part of the legal
capital.
if no par value shares, the entire consideration received
forms part of legal capital and shall not be available for
distribution

Under Sec 13, 25% of the subscription is required to be paid,


thus 62,500 was paid.

Corporation classify shares for reason of expediency


primarily for monitoring purpose

Ans:
Doctrine of equality of shares means that in the
absence of any provision in the articles of incorporation and in
the certificate of stock to the contrary, all stocks, regardless of
their class nomenclature, enjoy the same rights and privilege
and subject to the same liabilities.

Authorized capital stock= 1,000,000, Subscribed, outstanding


or issued capital stock= 250,000, paid-up capital stock=
62,500, Unissued capital stock=750,000 and legal capital=
250,000

The Board of Directors has no authority to classify


shares of stock where the articles of incorporations
are silent on the matter
The consent of the stockholders are necessary to
change the terms and preference of classes of shares
of stocks provided therein
If one of shares has the right to vote, all other classes
are presumed to have the same voting power
The terms and conditions of preferred shares of
stock may be fixed by the board of directors only
when authorized in the articles of incorporation

Capital indicate the entire property or assets of the


corporation. Includes the amount invested by the stockholders
plus the undistributed earnings less losses and expenses
-

Strict sense, refers to that portion of the net assets


paid by the stockholders as considered for the shares
issued to them, which is utilized for the prosecution
of the business of the corporation
In case of stock dividends, it is the amount that the
corporation transfers from its surplus profit account
to its capital account

Capital stock the amount fixed in the articles of


incorporation, to be subscribed and paid in or agreed to be
paid in or agreed to be paid in by the stockholders of a
corporation, in money, property, services, or other means at
the organization of the corporation or afterwards and upon
which it is to conduct its business.

Capital
Actual corporate property,
concrete thing
Fluctuates or varies from day
to day
Belongs to the corporation
Real or personal

a. Authorized capital stock the amount of capital stock as


specified in the articles of incorporation. Synonymous with
capital stock where the shares of the corporation have par
value

Capital stock and legal capital

Capital stock
An amount, abstract
An amount fixed in
articles of incorporation
Belongs to stockholders
Always personal

the

Capital stock
Legal capital
Merely an amount and remains unchanged except as
outstanding shares are increased or reduced in number or
amount
Limits the maximum or Sets the minimum amount of
number of shares that may the corporate assets which
be issued without formal for
the
protection
of
amendment of the articles of corporate creditors, may not
incorporation
be lawfully distributed to
stockholders

- if shares of stock has no par value, the corporation has no


authorized capital stock but it has capital stock
b. Subscribed capital stock amount of the capital stock
subscribed, whether fully paid or not. Connotes original
subscription
c. Outstanding capital stock the total shares of stock
issued to subscribers or stockholders, whether or not fully or
partially paid, except treasury shares

Stock or shares of stock one of the units into which the


capital stock is divided, represents the interest or right which
the owner has

d. Paid-up capital stock that portion of the subscribed or


outstanding capital stock that is actually paid
e. Unissued capital stock that portion of the capital stock
that is not issued or subscribed

a. In the management of the corporation through


right to vote

b. In proportion of the corporate earnings through


dividends

2. Voting or non-voting
3. Common or preferred, and preferred shares maybe voting,
convertible, or redeemable

c. upon dissolution and winding up assets of the


corporation remaining after the payment of corporate debts
and liabilities.
Share of stock
Distributive sense, stocks in
the hands of the stockholders

Preferred maybe
a. Cumulative or non-cumulative

Capital stock
Collective sense, signify the
whole body of shares of stock
in the corporation

b. Participating or non-participating
4. Promote share
5. Share in escrow

Nature of share of stock

6. Convertible share

Represents a distinct undivided share or interest


Purely inchoate, or mere expectancy of a right in
the management of the corporation
Constitutes property distinct from the capital or
tangible property
Incorporeal in nature, the shares are personal
property
In nature of choses in action
Do not constitute an indebtedness
Typifies a proportionate or aliquot part of the
corporations property

7. Founders share
8. Redeemable share
9. Treasury Share
Par value share - one with a specific money value fixed in
the articles of incorporation and appearing in the certificate of
stock

Certificate of stock a written acknowledgement by the


corporation of the interest, right, and participation of a person
in the management, profits, and assets of a corporation

It is the formal written evidence of the holders


ownership of one or more shares and is a convenient
instrument for the transfer of title

Shares of stock
Incorporeal
or
intangible
property
Right or interest of a person
Issued
even
if
the
subscription is not fully paid
except in no par share
Situs is deemed to be the
state where the corporation
has its domicile

No par value share one without any stated value


appearing on the face of the certificate of stock, other words,
it is a stock which does not state how much money it
represents

Certificate of stock
Tangible property
Written evidence of the right
or interest
May not be issued unless the
subscription is fully paid

Situs is at the place where it


is located or at the domicile
of the owner even though the
corporation
is
domiciled
elsewhere

Note: possession of a certificate of stock is not essential to


ownership of stock because the right to stock may exist
independently of the certificate

No par value but it has always an issued value


Does not purport to represent any stated
proportionate interest in the capital stock
measured by the value, but only an aliquot part
of the whole
A corporation may issue no par value only or
together with par value shares
No par value stockholders have the same rights
as holders of par value stock

Voting Share share with right to vote

Situs of shares of stock


For purpose of execution,
attachment, and garnishment
For purpose of registration of
chattel mortgage on shares
of stock
For purpose of property
taxation
Classes of Shares in general

Purpose: to fix the minimum subscription or


issue price of the shares
Shares issued less than par value are called
watered stock
The par value of a stock remains the same
regardless or market value or book value of the
stock EXCEPT when there is a stock split

Domicile or residence of the


corporation
Principal office or place of
business

Domicile or residence of the


owner

Customary to give right to vote to common stock


and withhold it from preferred
Only preferred and redeemable may be
deprived of voting rights
Whenever a vote is necessary to approve a
particular corporate act, such vote refers only to
stocks with voting rights except in certain cases
when even non-voting shares may also vote

Non-voting share share without right to vote

1. Par value or no par value

If a stock is issued originally with voting rights, it


may not be deprived of the right to vote without
the consent of the holder

No share may be deprive of voting rights except


those classified and issued as preferred or
redeemable unless otherwise provided in the
Code.
The issuance of common stock with feature that
voting rights thereof shall be exercised by
trustee , violates the rule that common shares
cannot be deprive of voting rights

of interest as dividend from net earnings or


surplus only
o
In effect, a preferred stock
Promotion share shares which are issued to promoters, or
those in some way interested in the company, for
incorporating the company, or services rendered in launching
or promoting the welfare of the company such as advancing
fees, advertising, attorneys fees, surveying, etc.

Common share of stock a share which entitles the holder


thereof to a pro rata division of the profits, if there are any,
and in its assets upon dissolution, without any preference or
advantage over other stockholders or class of stockholders
but equally with all other stockholders EXCEPT preferred
stockholders

Shares in escrow shares subject to agreement by virtue of


which the share is deposited by the grantor or his agent with
a third person to be kept by the depository until the
performance of a certain condition or the happening of a
certain event contained in the agreement

So-called since it is the basic class of stock


issued by private corporation or because its
holders stand in equal footing without extra
ordinary rights or privileges
Have complete voting rights, which cannot be
deprive except provided by law
Common stockholders are residual owners of the
corporation
o
Only gets the assets left over in case of
liquidation after all other securities are
paid
The common stock, normally, has preference in
the matter of management
The simplest corporate structure has only one
kind of stock-common.
When only a single class of stock is issued, then
all shares are alike and all issues are common
stock

Convertible share share which is convertible or


changeable by the stockholder from one class to another class
at certain price and within certain period

Preferred share of stock one with a stated par value


which entitles the holder thereof to certain preference over
the holders of common stock

It may only be issued with a stated par value.


More than 1 class of preferred may be issued
They are issued to induce persons to subscribe
for shares of corporation. Preference in:
o
Dividends
o
Distribution of assets
o
Such other as maybe stated in articles

The stockholder may demand conversion at his


pleasure except restricted by the articles of
incorporation
If the entire authorized stock has been issued
and fully subscribed, it cannot issue additional
stock
If necessary to create additional common stock
into which preferred stock can be converted, it is
done by reclassifying the preferred shares into
common

Convertibility of share
1. Preferred share to common preferred shares cannot be
converted into common shares in the absence of an express
provision in the articles of incorporation as to their
convertibility

Note: each share shall be in all respect equal to every other


share except as otherwise provided in articles of incorporation
and stated in the certificate

Escrow deposit makes the depository a trustee


under express trust
The legal title remain in the grantor until the
condition is fulfilled, thus subject to suspensive
condition
Before fulfillment, grantee or holder is not yet
the owner, hence not entitled to the rights
belonging to the stockholder

Reason: The terms of the preferred share contract cannot be


changed without the consent of the stockholders
2. No par value share to par value share allowed by
SEC provided there would be no change in the stockholders
percentage interest in the total assets of the corporation

Thus, unless otherwise provided, preferred stocks are


presumed to be voting although they are rarely given
voting privileges
Guaranteed stock is synonymous to preferred
stock
o
Which the payment of dividend is
guaranteed, and sometimes entitled to
arrears in dividends
o
While ordinary preferred stock is not
entitled
Interest bearing stock which the corporation
agrees absolutely to pay interest before
dividends are paid to common stockholders is
legal only when construed as requiring payment

If the conversion would result in the increase in


the number of shares, the same should be
allocated to the existing stockholders in
proportion to the number of shares held by them
without changing the total peso amount of the
total outstanding shares

Nature of par value/book value/ market value

1. Par value represents the amount of money or property


contributed by the shareholders to the capital stock of the
corporation

5. Entire consideration received by the corporation for its no


par value shares shall be treated as capital and shall not be
available for distribution as dividends

Assets cannot always equal to the par value of


outstanding shares since it is constantly in the
state of fluctuation

Note: no par value shares has no par value but it has issued
value

Advantage and disadvantage of Par Value Shares


2. Book value determined by dividing the total
stockholders equity or the net value of the total corporate
assets by the number of shares issued or outstanding.

Advantage
1. Easily sold
2. Greater protection to
creditors
3. Unlikelihood of sale of
subsequently issued shares
at a lower price
4.
Unlikelihood
of
the
distribution of dividends that
are only ostensible profits

since unpaid subscription are considered part of the asset


of a corporation which the board of directors may at any time
declare due and payable, they should be included in the
computation of book value
3. Market value the price at which a willing seller would
sell and a willing buyer would buy, assuming that both have
reasonable knowledge of the facts and neither being under
abnormal pressure

Disadvantage
1. Subscribers are liable to
corporate creditors foe their
unpaid subscription
2. Stated face value of the
shares is not an accurate
criterion of its true value

Advantage and disadvantage of No par value shares

--> may be more or less than the par value and book value

Advantage
1. Issued as fully paid and
non-assessable
2. Price is flexible

affected by the law of supply and demand


Ex: authorized capital stock 1,000,000 divided into shares
10,000 with par value 100 per share. Capital stock is fully
subscribed and paid.

3. Low-priced stocks enjoy


wider distribution
4. Tell no untruth concerning
the value of the stockholders
contribution
5. Stock dividends are easily
issued, simplify accounting

Book value is determined by dividing 1,000,000 by 10,000


which is shares issued or outstanding.
If corporation makes a profit of 100,000, the increased book
value of each share would be 110.

Disadvantage
1. Legalize large issue
stock for property
2. Conceal the money
property represented by
shares
3.
Promote
issuance
watered stock
4.
Lesser
protection
creditors

of
or
the
of
to

If loss 100,000, its book value would be 90.


The market value may be 100,110 or 90.

Corporate stock is at par when it is worth its face


value
It is above par or at premium when it is worth
more

Kinds of Preferred shares


1. Preferred shares as to assets - shares which gives the
holder thereof preference in the distribution of the assets of
the corporation in case of liquidation

Limitations or restrictions imposed by law regarding


issuance of NO PAR value shares:

2. Preferred shares as to dividends - shares which is


entitled to receive dividends on said share to the extent
agreed upon before any dividends at all are paid to the
holders of common stock

1. Banks, trust companies, insurance companies, and building


and loan associations shall not be permitted to issue no par
value shares of stock
2. Preferred shares of stock of any corporation may be issued
only with a stated par value

- no guaranty that it will receive any dividends.


- the corporation is not bound to pay dividends
unless the board of directors declare them

3. Shares without par shall be deemed fully paid and nonassessable and the holder of such share shall not be liable to
the corporation or to its creditors in respect thereto. Means
not liable beyond the issue price

-> Corporation may issue different classes of preferred shares


-Unless a classification is provided in the articles of
incorporation, the rule is that preferred shares of stock enjoys
the same preference or privileges

4. Shares without par may not be issued for consideration less


than the value of 5 pesos per share

-> Preferred stockholders are not creditors but has lien upon
corporate property

10

-> stock cannot be issued with fixed interest instead of


dividend

- the balance is given entirely to the common stocks


Note: in the absence of an agreement, dividends should be
deemed non-cumulative and non-participating in accordance
with the presumption in Sec. 6 that shares are equal in all
respect unless otherwise stated in articles of incorporations
and in the certificate of stock

- it will make contract of subscription one of loan


-> the stock issued with dividends payable by the corporation
may be in nature of interest as where the parties intended
the purchase with agreed cumulative dividends of a fixed
percentage per annum

5. Cumulative-participating preferred share the holder


is entitled not only to dividends in arrears but also to
participation with the holders of common stock in the
remaining profits

-> it is immaterial how or where the holder obtained his stock


since the preference belongs to the stock and not to the
stockholder

Sec. 7. Founders share Founders share classified as


such in the articles of incorporation may be given
certain rights and privileges not enjoyed by the owners
of other stocks, provided that where the exclusive
right to vote and be voted for in the election of
directors is granted, it must be for a limited period not
to exceed 5 years subject to the approval of the
Securities and Exchange Commission. The five-year
period shall commence from the date of the aforesaid
approval by the Securities and Exchange Commission.

4 Limitations regarding preferred shares:


1.

2.
3.
4.

Preferred shares deprived of voting rights in the


articles of incorporation shall still be entitled to vote
on matters enumerated in Sec 6.
The preference of preferred shares must not be
violative of the provision of this code
Preferred shares may be issued only with a stated
par value
BOD may fix the terms and conditions of preferred
shares of stock only when authorized by articles of
incorporation
The authority enables the board to tailor its securities
to meet changes in the market conditions which
cannot be foreseen at the time of incorporation
It would not need the concurrence of 2/3 of the
outstanding capital if authorized by the articles of
incorporation
Blanket authority not contemplated, hence as a
matter of public policy, SEC does not allow a
provision giving the BOD a blanket authority unless
the guidelines and standards are followed

Founders share shares issued to the organizers and


promoters of a corporation in consideration of some supposed
right or property
-

Kinds of Preferred Shares


1. Cumulative Preferred shares is a share which entitles
the holder thereof not only to the payment of current
dividends but also to dividend in arrears

- if the stipulated dividend is not paid in a given year,


it shall be added to the dividend which shall be due the
following year and the accumulated dividends must be paid to
the holder of said preferred share before any dividend may be
paid to the holders of common stock

Usually share in profits only after certain percentage


has been paid upon the common stock but are often
given special privileges over other stock at to voting
and as to division of profits in excess of minimum
dividend on the common stock
Special rights and privilege
o
Preference in payment of dividend
o
Distribution of assets in case of dissolution
o
Right to convert shares
o
Right to cumulative dividends
o
Etc.
The exclusive right to vote or be voted in the election
of BOD is granted and such may be exercise for a
limited period not exceeding 5 years subject to
approval of the SEC
o
To protect the interest of other stockholders

General Rule: no share may be deprive of voting rights


except those classified and issued as preferred or redeemable
shares

2. Non-cumulative Preferred share is a share which


entitles the holder thereof to the payment of current
dividends only in preference to common stockholders

Except: section 7
Refers only to the exclusive right to vote and be
voted for in the election of directors.

-if dividends are not declared in a given year, the


right to the dividends for that particular year is extinguished

Preferred shares are not affected by the provisions in Sec 7.

3. Participating Preferred share is a share which gives


the holder not only the right to receive the stipulated
dividends at the preferred rate but also to participate with the
holders of common shares in the remaining profits pro rate
after the common shares have been paid the amount of the
stipulated dividends at the same preferred rate

Sec. 8. Redeemable shares.- Redeemable shares may


be issued by the corporation when expressly so
provided in the articles of incorporation. They may be
purchased or taken up by the corporation upon the
expiration of a fixed period, regardless of the
existence of unrestricted retained earnings in the
books of corporation, and upon such other terms and
conditions stated in the articles of incorporation, which
terms and conditions must also be stated in the
certificate of stock representing said shares.

4. Non-participating preferred shares is a share which


entitles the holder thereof to receive the stipulated preferred
dividends and no more.

11

Redeemable shares

and strict compliance thereof is essential. Thus, the


corporation cannot redeem its preferred shares
before the redemption period or at a discount price in
contravention of the AOI to improve its financial
position. The remedy is to amend the articles by
changing the redemption features of the preferred
shares.

Redeemable or callable shares- are shares by their terms are


redeemable at a fixed date or at the option of either the
issuing corporation or the stockholder or both at a certain
redemption price.
(1) Redemption - it is the repurchase, the reacquisition
of stock by a corporation which issued the stock in
exchange for cash or property, whether or not the
acquired stock is cancelled, retired or held in the
treasury.

(6) Redemption optional with corporation- except


as otherwise provided therein, the redemption rests
entirely with the corporation, and the stockholder is
without right to either compel or refuse the
redemption of his stock. The redeemable shares
provided in Sec.8 are of the optional, not the
obligatory type.

The redemption of stock dividends previously issued


is sometimes used by a corporation as a veil for the
constructive distributions of cash dividends.

(7) Maintenance of a sinking fund- for the protection


of a stockholders, all corporations which have issued
redeemable shares with mandatory redemption
features are required by the SEC to set up and
maintain a sinking fund where cash is gradually set
aside in order to accumulate the amount necessary
to meet the redemption price of redeemable shares
at specified dates in the future.
The fund shall be put in a trustee bank and shall not
be invested in risky or speculative ventures.

(2) When redeemable shares maybe issued- they


maybe issued only when expressly so provided in the
articles of incorporation.
Common shares are never redeemed.
(3) Redemption regardless of existence of unrestricted
retained earnings- upon the expiration of the period
fixed, they may be taken up or purchased by the
corporation, regardless of the existence of
unrestricted retained earnings (see sec. 43) in the
books of the corporation

(8) Purpose of redemption- it is a safeguard to enable


a corporation to retire an obligation or a claim on the
earnings, usually at a premium when it becomes
advisable for purposes of financing.
Unless expressly provided in the AOI and stated in
the certificate of stock, preferred shares shall be
deemed irredeemable.

(a) The Rule in Sec. 41 is different. The power of the


corporation to acquire its own shares for the
purposes stated therein is subject to the
condition that there be unrestricted retained
earnings in its books to cover the shares
purchased or acquired. In the case of
redeemable shares, the shareholder is conferred
the right of a creditor to attract corporate
financing.

(9) Effect of redemption- a redemption by the


corporation of its stock is, in a sense, a repurchase of
it cancellation. The retirement of a class of stock
destroys all rights adhering to the shares of that
class.
(a) In the case of redeemable shares reacquired by
the corporation, the same shall be considered
retired and no longer issuable, unless otherwise
provided in its AOI. The rule is different with
respect to treasury shares.
(b) Upon redemption, redeemable shares lose their
status as part of the outstanding or unissued
authorized capital stock. They are considered
treasury shares after redemption if by provision
of the AOI they can be reissued.
(c) Where the reissuance of the redeemed shares is
prohibited, either expressly or impliedly by
silence, the number of authorized shares of the
capital stock of the corporation is reduced
accordingly, and the AOI must be amended to
reflect such reduction.

(b) The issuance of the shares may be likened to the


issuance of bonds or debt papers. Since the
terms and conditions of the purchase are stated
in the AOI, as well as in the corresponding
certificates of stock, corporate creditors and
other shareholders are supposed to be aware of
the same.
(c) Strict compliance with statutory or contractual
provisions of redemption is essential.
(4) Where corporation insolvent- redemption may
not be made where the corporation is insolvent or if
such redemption would cause insolvency or inability
of the corporation to meet its debts as they mature.
Such a limitation is based on the principle that
corporate assets are a trust fund for creditors.

(10) Voting rights- redeemable shares may be deprived


of voting rights in the AOI, unless otherwise provided
in the code.

(5) Terms and conditions- all the terms and conditions


affecting such shares must be stated not only in the
articles of incorporation but also in the certificate of
stock representing said shares.

Section 9. Treasury shares. - Treasury shares are


shares of stock which have been issued and fully paid
for, but subsequently reacquired by the issuing
corporation by purchase, redemption, donation or
through some other lawful means. Such shares may

Provisions in the articles relating to the redemption of


preferred stock are, in effect, a contract between the
issuing corporation and the preferred stockholders

12

again be disposed of for a reasonable price fixed by


the board of directors. (n)

In both kinds of acquisition of the corporation,


therefore, the shares would have value but
inasmuch as they have been acquired by the
corporation, they would cease to represent any
right. Treasury shares are recorded at cost.

Treasury shares
Treasury shares- are shares which have been lawfully issued
by the corporation and fully ppaid for and later reacquired by
it either by purchase, redemption, donation, forfeiture or other
lawful means.

(3) Dividend restriction on retained earnings- as a


general rule, a corporation can reacquire its own
shares provided it has an adequate amount of
unrestricted retained earnings to support the cost of
the said shares. Thus, the capital stock is preserved.

(1) Status- Sec. 41 expressly empowers a stock


corporation to purchase or acquire its own shares for
legitimate corporate purposes. Under Sec. 68, the
corporation, in the absence of a qualified bidder, may
bid at the public sale of delinquent shares and title to
the shares purchased shall be vested in the
corporation as treasury shares.

Accordingly, the amount of such earnings equivalent


to the cost of the treasury shares being held, cannot
be declared and distributed as dividends.
(4) Declaration as property dividend- treasury
shares being unrealized income, are not considered
as part of earned or surplus profits, and, therefore,
not distributable as dividends, either in cash or stock.
But if there are retained earnings arising from the
business of the corporation, treasury shares, being
the property of the corporation, may properly be
distributed as property dividend.

The purchase by the corporation operates, in effect,


as a forfeiture of the shares.
(a) Treasury shares are not retired shares. They do
not revert to the unissued shares of the
corporation but are regarded as pproperty
acquired by the corporation which may be
reissued or resold by the corporation at a price
to be fixed by the board of directors.
(b) Retirement of treasury shares can be effected by
decreasing the capital stock of the corporation in
accordance with Sec.38 for the purpose of
eliminating the treasury shares.
(c) Treasury shares are issued shares but being in a
treasury, they do not have the status of
outstanding shares, in the sense that they do not
constitute a liability of the corporation. There
are, therefore, not a part of outstanding capital
stock.
(d) A corporation may eliminate the treasury shares
by reducing its authorized capital stock. Since
they do not lose their status as issued shares,
they cannot be treated as new issues when
disposed of or reissued.
(e) A treasury share or stock, which may be
common or preferred, may be used for a variety
of corporate purposes. It may be held
indefinitely, resold or retired.
(f) Treasury shares must be distinguished from
authorized but unissued shares in that the
acquisition of the former does not reduce the
number of unissued shares or the amount of the
stated capital.

(5) Voting rights- treasury shares have no voting rights


as long as they remain in the treasury.
(6) Right to dividends- neither are treasury shares
entitled to dividends or assets because dividends
cannot be declared by a corporation to itself.
(7) Resale they may be sold by the corporation at any
price the board of directors sees fit to accept, even at
less than par or issued value, the corporation having
already received the full value upon their initial
issuance, provided such price is reasonable under
the circumstances:
(a) Stockholders may rightfully complain if the price
is lower than reasonable.
(b) In case of sale or reissue, the treasury shares
again becomes outstanding stock and regain
whatever dividends and voting rights they
originally held.
(c) Treasury shares differ from retired or cancelled
shares in that while the latter has disappeared
altogether, the former may be sold. Sec. 36(6)
expressly authorizes stock corporations to sell
treasury shares subject to Sec.9. Their status on
resale differs from that of newly created shares
which cannot be issued for less than the legal
minimum consideration. (see. Sec. 36)
(d) The sale of treasury shares should be treated as
a sale of ordinary property of the corporation;
hence, the gain there from is subject to tax. The
purpose of the sale is to recover the amount
paid by the corporation for said shares.

(2) Where acquisition from stockholders- shares


may be acquired by the corporation from
stockholders by purchase, redemption, or donation,
or through some other lawful means.
(a) If the corporation acquires the shares by
purchase from stockholders, the transaction is,
in effect, a return to them of the value of their
investments in the company, and a reversion of
the shares to the corporation.
(b) On the other hand, if the shares are donated to
the corporation by the stockholders, their act
would simply amount to the surrender of their
stock without getting back their investments
which are, instead, voluntarily given to the
corporation.

Title 2
Incorporation and organization of private
corporations
Section 10. Number and qualifications of
incorporators. - Any number of natural persons

13

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 of the incorporators of s stock
corporation must own or be a subscriber to at
least one (1) share of the capital stock of the
corporation. (6a)

Concept of
association

Possession
of juridical
personality

A legal entity
deriving its
existence from
franchise

Governing
law

Private
corporations are
governed by
Corporation
code
Art. 46 CC.
juridical persons
may acquire and
possess property
of all kinds as
well as incur
obligations and
bring civil or
criminal actions
in conformity
with the laws
and regulations
of their
organization.

Incorporation of a private corporation a mere


privilege.
Generally, incorporation is generated by agreements
of a group of persons, and may, therefore, be likened
to other contracts which individuals may enter into.
But such agreements alone are not sufficient for a
corporation to exist. It is necessary that legislative
authority be obtained to put a stamp of state
intervention in the creation of corporations, such
power being one of the attributes of sovereignty.

Capacity to
act in its
name

Until there is a grant of such right, whether by


special act of the legislature or under the general
law, there can be no corporation. Under Sec. 10, the
formation of a corporation is a matter of right and
cannot be restrained.
Since a corporation is merely a creation of law, it can
be dissolved at any time by legislative enactment
subject to certain limitations.

Advantages of the corporate form


1.

2.

3.

4.

Through the process of incorporation, any


number of persons may unite in a single
enterprise without using their own names,
without difficulty or inconvenience, and with the
valuable right to contract, to sue and be sued, to
hold or convey property in the corporate name,
and to act as a legal unit.
An individual stockholder may invest in the
corporate enterprise as much or as little as he
sees fit, without risking more, and, in the
absence of statutes to the contrary, this is the
limit of his liability, since stockholders are not
personally liable for the debts of the corporation.
They transfer their shares without the consent of
the other stockholders.
The rights and obligations of a corporation are
not affected by the death or change of the
individual members, but the corporate business
continues uninterrupted and unaffected so long
as the corporate entity continues. Its credit is
strengthened by such continuity of existence.
The
modern
corporation
makes
great
undertakings feasible since it enables many
individuals to cooperate in order to furnish the
large amounts of capital necessary to finance
the gigantic enterprises of modern times. The
resulting large-scale enterprise may be more
efficient, thus lowering the costs of production.

Powers,
rights, and
privileges

Policy of
juridical
noninterference

Validity and
enforcemen
t of acts

Corporations and associations

14

corporations
defined by Sec.
2 of the Code

associations
A collection of
persons who have
joined together
for a certain
object
A creature of
contract without a
legal entity
separate from the
individuals
composing it.
Governed by the
provisions of NCC
or some other
laws.
Cant sue or be
sued, it cant
enter into
contracts in the
name of the
association, and
neither can it
acquire properties
under its common
name.
Its not competent
to act as agent or
create agents or
confer upon
another authority
to act on its
behalf, and those
who act or purport
to act as its
representatives or
agents do so at
their own risk.
A society or
association not
engaged in
business and not
desirous of
acquiring juridical
personality need
not be registered
with SEC.

An unregistered
organization,
however, cant
exercise the
powers, rights
and privileges
incident to
incorporation
and expressly
granted to
registered
corporations
under Sec.36 of
the corporation
Code
The GR is that courts will not interfere
with the internal affairs of an
unincorporated association so as to
settle disputes between the members
on questions of policy, discipline, or
internal government.
The fact, that group of persons adopt
a name operate without first being
organized as a legal entity, does not
make their acts necessarily void.
Their acts may be valid, although

(2) Incorporation (Sec.10);


(3) Formal organization and commencement of business
operations. (see Sec.22)

unenforceable under the name they


have adopted.

Promotion of corporations

Concept of franchise

Promotion- a number of business operations peculiar to


the commercial world by which a company is generally
brought into existence.

Franchise- includes any special privilege or right affected


with public interest, conferred by the State on corporations or
persons and which does not belong to the citizens of the
country, generally as a matter of common right.

The formation and organization of a corporation are


brought about generally at the instance and under the
supervision of one or more so-called promoters.

As a privilege, a franchise is not exercised by private


individuals at their mere will and pleasure only but under such
conditions, regulations, and restrictions as the government
may deem necessary to impose in the public interest, security
and safety.

A corporation, however, may be formed and organized by


the incorporators themselves without getting the services
of so-called promoters.

Primary franchise and secondary franchise

Promoters of Corporation

(1) Primary or corporate franchise- the right or privilege


granted to individuals by the State to be and act as a
corporation after its incorporation.

The primary franchise (also known as general


franchise) is granted to and vests in the individuals who
compose the corporation and not in the corporation itself.
(2) Secondary franchise- franchise to exercise powers and
privileges granted to such corporation to the business for
which it was created, including those conferred for
purposes of public benefit such as the power of eminent
domain and other powers and privileges enjoyed by
public utilities.
The secondary franchise is conferred upon the
corporation after its incorporation and not upon the
individuals who compose the corporation.

one who, alone or with others, takers it upon himself


to organize a corporation: to procure the necessary
legislation, where that is necessary; to procure the
necessary subscribers to the AOI, where the
corporation is organized under general laws; to see
that the necessary document is presented to the
proper office to be recorded and the certificate of
incorporation issued; and generally, to float the
company.

Stages in corporate promotion


(1) Discovery- this stage may represent a new product or
service, or the promoter may simply organize another
company in an existing line of business;
(2) Investigation- this second phase involves an analysis of
needsfinancial, management, plant, material and labor
and a decision whether the estimated earnings justify
the effort; and
(3) Assembly- this last stage consists of bringing together
the property, money, and personnel into an organization.
At this stage, the promoter must have some assurance of
control lest third parties deprive him of the fruits of his
efforts. Control may cover such items, for example, as
patents, leases, options on property, and contracts for
services.

Transferability of franchise
franchise is generic, covering all the rights granted by
the State. It may mean either the corporate or primary
franchise which is the right granted to a group of
individuals to exist and act as a corporation, or the
secondary or special franchise which is the right granted
to a corporation to exercise certain powers and privileges.
(1) Primary franchise- in its nature is inalienable. It is
part of the corporation and cannot be sold or
assigned; otherwise, a corporation would be created
without the consent of the legislature. It may be
conveyed provided there is express legislative
authority to do so.
(2) Secondary franchise- which is vested in the
corporation itself, may ordinarily be conveyed or
mortgaged under a general power granted to a
corporation to dispose of its property, except such
franchises as are charged with a public use. Thus, if
the corporation is a public utility, its franchise can
only be sold subject to the prior approval and
authorization of the Public Service Commission. A
secondary franchise is subject to levy and sale on
execution, together with all the property necessary
for the enjoyment thereof.

Nature of relations of promoters


(1) To corporation- a promoter has a unique relation to a
corporation representing its interest when it does not
legally exist or has just been created.
(a) The promoters of a corporation are not in any sense
the agents of the corporation before it comes into
existence, for there cannot be an agency unless
there is a principal. But they may, of course, become
the agents of the corporation after it has been
formed provided there is assent, express or implied,
on the part of the corporation.
(b) It is well settled that promoters occupy a fiduciary or
quasi-trust relation toward the corporation when it
comes to existence and towards the subscribers prior
to its organization, as long as they are acting as
promoters.
(c) This fiduciary relation imposes upon the promoter to
act in good faith in all dealings in behalf of the

Steps in the creation of a corporation


(1) Promotion;

15

corporation to protect the corporation from dishonest


promoters.
(2) To subscribers or corporators- they may be agents of
the subscribers or corporators.
(a) Since agency is a contract, it is essential that there is
an agreement to this effect.
(b) Even when there is no agency, the relation between
the promoters and the persons who have become, or
who are expected to become, subscribers for its
capital stock, or corporators, or purchasers of stock
from the corporation, is one of trust and confidence,
so as to impose upon the former the duty to act in
perfect good faith and in the interest of all the
subscribers and corporators.
(c) Subscribers for stock in a proposed corporation do
not, without agreement to such effect, become
partners with the promoters of it.
(d) Stockholders of a corporation cannot be held
personally liable for the compensation claimed by
promoters for services performed by them in the
organization of the corporation in the absence of any
showing that said stockholders contracted such
services.
(3) Inter se- a partnership can be created, as between the
parties themselves, only by mutual agreement, and,
therefore, promoters do not become partners as between
themselves, in the absence of such agreement, by merely
joining in an attempt to create a corporation, by uniting in
subscriptions for stock, or by otherwise promoting the
creation of the corporation. But such a relation may, of
course, be created by agreement of the parties, in which
case it is governed by the general principles of the law of
partnership.

A promoters contract does not, by the incorporation of a


contemplated company, ipso facto become the contract
of the corporation.
(2) After incorporation and organization- under the general
rule permitting a corporation to assume liability on a
promoters contract, the contract must, of course, be one
such as the corporation can itself make. A corporation as
a legal entity cannot assume the obligations of an ultra
vires contract made by its promoters anymore than it can
legally initiate such contract.
Contracts entered into by promoters should at most be
deemed suspended, and enforceable only after the
incorporation and organization of the corporation.
Liability of
corporation

promoters

for

failure

to

organize

(1) To subscribers. If money is paid to promoters or


provisional directors by a subscribers for shares in a
projected corporation preliminary to organization, and the
promoters or provisional directors fail to organize the
corporation according to the prospectus or other
agreement or abandon the enterprise before it has been
carried into execution, it is a case of money paid on a
consideration which has failed.
The subscriber may recover it back from the promoters or
directors in an action at law although the money has
been applied in payment of preliminary expenses or
otherwise.
(2) To each other. While it has been held that as between
themselves the rights of the stockholders in a defectively
incorporated association should be governed by the laws
of the State relating thereto and not by the rules
governing partners it is ordinarily held that persons
attempt, but fail, to form a corporation and who carry on
business under the corporate name, occupy the position
of partners inter se.

Liability of corporation for promotion fees


(1) General Rule- in the absence of character or statutory
provisions, a corporation is not liable to its promoters in
respect for any payment in services rendered or expenses
incurred before its incorporation in promoting it, unless
after its incorporation it expressly agrees to make such
payment or from the other facts the court can infer a new
contract to reimburse.
(2) Authorization by stockholders- after due organization
of the corporation, it may, with the consent of all its
stockholders and where there is no question as to the
rights of subsequent stockholders, authorize the payment
of compensation to promoters and the issuance to them
of stock unless prohibited by statute.
(3) Amount- the amount of promotion fees that the SEC
allows depends principally upon the effort exerted, the
difficulties encountered, and the expenses incurred in
promoting and organizing the corporation. There is no
hard and fast rule in this regard.

Underwriting Agreements
There are four (4) general types of underwriting
contract.
(1) the syndicate may make a firm commitment under which
the members severally but not jointly agree to purchase
the whole issue outright at a particular price for resale at
a price differential to the public, or to dealers who sell at
another differential to the public.
(2)
the underwriters may make an all-or-nothing
commitment under which they agree to accept liability for
the purchase of an issue at a given price only if the entire
issue is not sold usually within a 30-day period.
(3) the syndicate may make a standby commitment or rights
offering under which it will purchase and distribute at
predetermined prices to the public any amount of the
issue not taken by stockholders in exercising their preemptive rights.
(4) this merely means that the syndicate will use its best
efforts to distribute the issue to the public.

Liability of corporation on promoters contracts.


(1) Before corporation and organization- Since a corporation
cannot before its organization, have agents contract for
itself, or be contracted with, it is not liable upon any
contract which a promoter attempts to make for it prior to
its organization unless the contract is expressly or
impliedly adopted or ratified by it after organization is
completed or liability is imposed by statute.

Incorporation distinguished from creation


Incorporation

16

creation

Scope

Narrower
Refers to the
performance of
conditions, acts,
deeds, and writings
by incorporators,
and the official acts,
certifications or
records, which give
the corporation its
existence.

(2) Filing with the Securities and Exchange Commission of


the articles of incorporation together with the following:
(a) Treasurers affidavit in the form prescribed in Section
15 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 (Ibid); and
(b) In case the corporation is governed by a special (e.g.
educational institution), 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
the law.
(3) Payments of the filing and publication fees; and
(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.

Not that narrow


Understood in its
broadest sense,
includes all of the acts
and doing from the
enactment of the
general incorporation
law by the legislature
through the promotion,
underwriting,
preparation and
execution and filing of
the incorporation
papers obtaining the
certificate or charter, to
the organization and
first meeting and
election which set the
corporation in motion
full-pledged.

There are rules or requirements under special laws to be


complied with in organizing business to endow the corporation
with the capacity to transact the business for which it was
created.

Incorporation distinguished from corporation


Incorporation
Only the act by which that
institution is created

Substantial compliance with requirements

Corporation
Legal or juridical institution

Where the formation or organization of corporations is not


governed by special laws (e.g. those engaged in real estate
development), the Securities and Exchange Commission may
accept and approve the articles of incorporation or
amendments therein upon mere showing of a substantial
compliance with the corporation Code (SEC Opinion, Oct. 21,
1988.) and that it meets the guidelines established by the
Commission.

Incorporator distinguished from corporator


Incorporator
Signatory of the AOI
Does not cease to be an
incorporator upon sale of his
shares

Gr- 5 to 15 natural persons


Xpn- in case of cooperative,
incorporator of rural bank;
corporation sole
Originally forms part of the
corporation
Gr- Filipino citizenship is not
a requirement
Xpn- when engaged in a
business which is partly or
wholly nationalized where
majority must be residents

Corporator
May or not be signatory of
the AOI
Cease to be a corporator by
sale of his shares in case of
stock corporation. In case of
non-stock corporation, when
the corporator ceases to be a
member
No limit

Where there is substantial compliance with the legal


requirements, the registration of the proposed corporation
becomes a matter of right.
Incorporators: number and qualifications
(1) Incorporators must not be less than 5 but not more
than 15;
(2) All of legal age
(3) A majority of whom are residents of the Philippines
(4) Each must own or be a subscriber to at least one
share of the capital stock of the corporation.
(5) If the number of incorporators is more than than 15,
the excess will not be considered as incorporators.

Not necessarily
Depending on the nature of
business of the corporation. If
it is nationalized, the
citizenship becomes material.

Unless otherwise provided in AOI, a corporation


cannot impose other qualifications. The same rule
shall apply to stockholders.
(1)

Steps in incorporation

These 5 or more persons must be natural persons.


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

(1) Drafting and execution of the articles of incorporation by


the incorporators and other documents required for
registration of the corporation. In this connection, the
person chosen as temporary treasurer pending
incorporation must also execute:

As an example of an exception to the rule, Sec. 4 of R.A.


7353 (Rural Banks Act of 1992) provides that duly
established cooperatives and corporations primarily
organized to hold equities in rural banks may organize
rural banks and/or subscribe to shares of stock of any
rural bank. If the corporation is a cooperative, it may
become an incorporator of a rural banking corporation.

(a) An affidavit certifying compliance with subscription


and paid-up requirements as to capital stock.

A corporation may become a stockholder in another


corporation by subscribing to or purchasing the latters

Incorporation includes the following:

17

stock for the power of one corporation to own stock in


another corporation is entirely different from its power to
create or itself become one of the incorporators of
another corporation.

circumstances exist to justify the piercing of the veil of


corporate entity.
Section 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. (6)

(2) The incorporators must have the capacity to enter into a


valid contract, the act of forming a corporation as
between the parties being contractual. The AOI, under
Sec.15 must be acknowledged by the incorporators
before a notary public.
(3) 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.
Hence, a corporation composed entirely of aliens may be
incorporated as long as the majority of the incorporators
are residents of the Phil. EXCEPT in the case of
nationalized corporations.

Term of corporate existence

The residence requirement is likewise mandatory. Sec.10,


does not require that the majority of the members must
also be residents. A situation, wherein majority of the
members of a corporation are nonresidents is allowable.
But a majority of the directors or trustees of all
corporations must be residents of the Phil.
(4) By specific constitutional and legal provisions, citizenship
is a necessary qualification for incorporators in a
corporations in which a certain percentage of the capital
stock is required to be owned by Filipino citizens.
(5) The code now expressly requires that each of the
incorporators of a stock corporation must own or be a
subscriber to at least 1 share of the capital stock of the
corporation.
Requirement
regarding
incorporators mandatory

minimum

number

The corporation shall exist for the term specified in the AOI
not exceeding 50 yrs., 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 AOI by complying with the
procedural requirements laid down in Sec.37.
Extension of corporate term
(1) Limitations. The extension of 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 existence, for after
dissolution by expiration of the corporate term
there is no more corporate life to extend.
(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.
(2) Effect 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, not the creation of a new,
corporation.
(3) Automatic extension of the term. Section 11 allows
the automatic extension of the corporate existence by
amendment of the 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.

of

The requirement of the law regarding the minimum number of


incorporators is mandatory and a de jure corporation cannot
be legally formed by less than the prescribed number except
in the case of a corporation sole.
(1) Reduction of stockholders or members to less than
minimum- the number of stockholders/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 individual- beneficial
ownership is not necessary, and a person who holds the
legal title to stock is qualified to become an incorporator.
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 under his control, without any
substantial
interest,
or
without
the
individual
responsibility who may only be called qualifying
stockholders, or who are popularly known as dummies or
men of straw.

The code places no limits to the number of extensions


that may be made.
Period of corporate existence a matter of public
interest.

(3) Subsequent accumulation of shares in one


individual- nor is the existence of the corporation
originally formed by the required number of incorporators
affected by the subsequent accumulation of all the shares
in the hands of one individual unless, as previously said,

(1) Period not subject to agreement. The state has an


obvious interest in the term of life of corporations, since
the conferment of juridical capacity upon them during
such period is a privilege that is derived from statute. It is

18

obvious that no agreement between the stockholders or


members can result in giving rise to a new and distinct
personality,
possessing
independent
rights
and
obligation, unless the law itself shall decree such result.
(2) Purpose of limitation. The State is naturally
interested that this privilege be enjoyed only under the
conditions and not beyond the period that it sees fit to
grant; and, particularly, that it be not abused in fraud and
to the detriment of other parties; for this reason, it has
been ruled that the limitation (of corporate existence) to
a definite period is an exercise of control in the interest of
the public.

(8) 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 Phil.
(9) Financing Companies- at least 60% of the capital
stock shall be owned by citizens of the Phil.
(10) Corporations engaged in the pawnshop
business- at least 70% of the voting capital stock
shall be owned by citizens of the Phil.
(11) Corporations engaged in the recruitment and
placement of workers, locally or overseas- at
least 75% of the authorized and voting capital stock
is owned and controlled by Filipino citizens.
(12) Corporations engaged in the operation of a
private detective, watchman or security guard
agencies- must be 100% Filipino owned.
(13) 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 Phil., and to domestic entities.
Domestic entities- any citizen of the Phil. or any
corporate body or commercial company at least 75%
of the capital of which is owned by citizens of the
Phil.

Section 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
except as 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 P5,000.00.

Section 13. Amount of capital stock to be subscribed


and paid for the 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 (25%) per cent of the total subscription
must be paid upon subscription, the balance to be
payable on a date or dates fixed in the contract of
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
(P5,000.00) pesos. (n)

Special laws may, however, require a higher paid-up


capital, as in the case of commercial banks, insurance
companies, and investment houses.
Filipino percentage ownership
By specific constitutional and legal provisions, Filipino
ownership of a certain percentage of the capital stock or
capital 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 the citizens
of the Philippines.
(2) Public service corporations. at least 60% of the
capital of which is owned by the 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 the
citizens of the Philippines. The control and
administration of educational institutions shall be
vested in Filipino citizens;
(4) Corporations engaged in mass media and
advertising industry, -- the first must be wholly
(i.e., 100%) owned and managed by Filipino citizens.
(5) Banking corporations. at least 60% of the voting
stock of a domestic corporation shall be owned or
controlled by Filipino citizens;
(6) Corporations
engaged
in
retail
sale.

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;
(7) Rural Banks- no less than 40% of the voting stocks
of which shall be owned by citizens of the Phil. Or
corporations at least 60% of whose capital is owned
by such citizens.

Minimum subscription and paid-up capital


(1) Pre-incorporation- Sec. 13 requires that atleast 25% of
the amount of the authorized capital stocks has been
actually subscribed and that at least 25% of such
subscription.
(a) The commission has the power to require that the
authorized capital stock to be not less than a certain
amount such that the 25% paid-up capitalwill be
more than 5K. this requirements are mandatory.
Accordingly, if they are not complied with, no stock
corporation can be lawfully incorporated even if a
certificate of incorporation has been by SEC.
(b) The policy of the Commission is to require full
payment of subscription by foreigners as it will be
difficult to compel them to pay their unpaid
subscriptions when they are outside the country
unless they can give sufficient security to guarantee
full payment.
(c) The number of shares subscribed, the amount
subscribed, and the amount paid by each stockholder
must be stated in the AOI.
(d) Special law may require a higher paid-up capital.
(2) Post incorporation- the minimum 25% subscription and
25% paid-up capital is required not only during the

19

incorporation period but also in case of increase of the


authorized capital stock.
(a) The requirement 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 obligation as
they arise from the start of its operations.
(b) The call by the board of directors for the payment of
the balance of subscriptions 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.
(d) It would seem that the minimum25% paid up
requirement applies only to par value shares because
a subscriber to no par value shares must pay in full
his subscription. (sec.6 par.2).

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;

Computation of the 25% subscription requirement

6. The number of directors or trustees, which shall not


be less than five (5) nor more than fifteen (15);

(1) Where the capital stock is consist 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.
(2) Where the capital stock consists only of no par
value shares, 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.
(3) Where the capital stock is divided into par
value shares and no par value shares, the
requirement as to par value shares is as indicated
above and for no par value shares, the 25% is based
on the number of said no par value shares.

7. The names, nationalities and residences of 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 share 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;

Subscription of corporations

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

(1) Domestic Corporations- they may subscribe initially to


the capital stock of another proposed corporation but
their subscriptions cannot be taken into consideration in
the computation of the 25% subscription and 25% paid
up capital requirement of the law.
(2) Foreign corporations- such corporations, whether
resident and nonresident, may subscribe to the stocks of
domestic corporations as long as they are authorized by
their charters to hold shares in other corporations. Their
subscriptions shall not also be counted in the
computation of the minimum subscription and payment
requirements.

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 statement
of the Treasurer elected by the subscribers showing
that at least twenty-five (25%) percent of the
authorized capital stock of the corporation has been
subscribed, and at least twenty-five (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 (25%) percent of the said
subscription, such paid-up capital being not less than
five thousand (P5,000.00) pesos.

It is the policy of the SEC to require corporations to pay


their subscriptions in full. This is based upon the fact that
while a corporation has an unlimited capacity to contract
obligations, it has only a limited capacity to pay.
Section 14. Contents of the articles of incorporation. All corporations organized under this code shall file
with the Securities and Exchange Commission articles
of incorporation in any of the official languages duly
signed and acknowledged by all of the incorporators,

Section 15. Forms of Articles of Incorporation. - Unless


otherwise prescribed by special law, articles of

20

incorporation of all domestic corporations shall comply


substantially with the following form:

___________________ ___________________ ___________________


SEVENTH: That the authorized capital stock of the
corporation is ______________________ (P___________) PESOS
in lawful money of the Philippines, divided into
__________
shares
with
the
par
value
of
____________________ (P_____________) Pesos per share.

ARTICLES OF INCORPORATION OF
__________________________
(Name of Corporation)

(In case all the share are without par value):

KNOW ALL MEN BY THESE PRESENTS:

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 _____________ shares of which ______________
shares are of the par value of _________________
(P____________) PESOS each, and of which _________________
shares are without par value.

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) (nonstock) 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";

EIGHTH: That at least twenty five (25%) per cent of the


authorized capital stock above stated has been
subscribed as follows:

SECOND: That the purpose or purposes for which such


corporation is incorporated are: (If there is more than
one
purpose,
indicate
primary
and
secondary
purposes);

Name of Subscriber Nationality No of Shares Amount


Subscribed Subscribed

THIRD: That the principal office of the corporation is


located
in
the
City/Municipality
of
________________________, Province of _______________________,
Philippines;

_________________ __________ ____________ ____________


_________________ __________ ____________ ____________
_________________ __________ ____________ ____________

FOURTH: That the term for which said corporation is to


exist is _____________ years from and after the date of
issuance of the certificate of incorporation;

_________________ __________ ____________ ____________


_________________ __________ ____________ ____________

FIFTH: That the names, nationalities and residences of


the incorporators of the corporation are as follows:
NAME NATIONALITY RESIDENCE

NINTH: That the above-named subscribers have paid at


least
twenty-five (25%)
percent of
the total
subscription as follows:

___________________ ___________________ ___________________

Name of Subscriber Amount Subscribed Total Paid-In

___________________ ___________________ ___________________

_________________ ___________________ _______________

___________________ ___________________ ___________________

_________________ ___________________ _______________

___________________ ___________________ ___________________

_________________ ___________________ _______________

___________________ ___________________ ___________________

_________________ ___________________ _______________

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:

_________________ ___________________ _______________


(Modify Nos. 8 and 9 if shares are with no par value. In
case the corporation is non-stock, Nos. 7, 8 and 9 of
the above articles may be modified accordingly, and it
is sufficient if the articles state the amount of capital
or money contributed or donated by specified persons,
stating the names, nationalities and residences of the
contributors or donors and the respective amount
given by each.)

NAME NATIONALITY RESIDENCE


___________________ ___________________ ___________________
___________________ ___________________ ___________________
___________________ ___________________ ___________________

TENTH: That _____________________ has been elected by


the subscribers as Treasurer of the Corporation to act
as such until his successor is duly elected and qualified
in accordance with the by-laws, and that as such

___________________ ___________________ ___________________

21

Treasurer, he has been authorized to receive for and in


the name and for the benefit of the corporation, all
subscription (or fees) or contributions or donations
paid or given by the subscribers or members.

with
Res.
Cert.
No.
___________
issued
_______________________ on ____________, 19 ______

ELEVENTH: (Corporations which will engage in any


business or activity reserved for Filipino citizens shall
provide the following):

My commission expires on

"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 stock certificates issued by the
corporation."

Doc. No. _________;

at

NOTARY PUBLIC

_________, 19 _____

Page No. _________;


Book No. ________;
Series of 19____ (7a)

IN WITNESS WHEREOF, we have hereunto signed these


Articles of Incorporation, this __________ day of
________________, 19 ______ in the City/Municipality of
____________________, Province of ________________________,
Republic of the Philippines.

Articles of incorporation
(1) AOI- is the document prepared by the persons
establishing a corporation and filed with the SEC
containing the matters required by the code.
(2) One that defines the charter of the corporation and the
contractual relationships between the State and the
corporation, the stockholders and the State, and between
the corporation and the stockholders.

_______________________ _______________________
_______________________ _______________________
________________________________

Contents and form of AOI

(Names and signatures of the incorporators)

(1) Sec 14 enumerates the matters (mandatory provisions)


that must be stated in the AOI 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 preemptive right etc.
(b) The contents of the AOI may be held valid as an
agreement between the parties thereto, even though
the validity of such may be subject to question.
(c) SEC shall not accept the AOI 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.
(d) The AOI may provide other matters or items as long
as they are not contrary to any provision of the Code
or special law.
(e) Under the Corporation Code, there is no general
requirement of the Phil. 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, Sec.
15 (11) requires the AOI 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.

SIGNED IN THE PRESENCE OF:


_______________________ _______________________
(Notarial Acknowledgment)
TREASURER'S AFFIDAVIT
REPUBLIC OF THE PHILIPPINES )
CITY/MUNICIPALITY OF ) S.S.
PROVINCE OF )
I, ____________________, being duly sworn, depose and say:
That I have been elected by the subscribers of the
corporation as Treasurer thereof, to act as such until
my successor has been duly elected and qualified in
accordance with the by-laws of the corporation, and
that as such Treasurer, I hereby certify under oath that
at least 25% of the authorized capital stock of the
corporation has been subscribed and at least 25% of
the total subscription has been paid, and received by
me, in cash or property, in the amount of not less than
P5,000.00, in accordance with the Corporation Code.
____________________
(Signature of Treasurer)
SUBSCRIBED AND SWORN to before me, a Notary
Public,
for
and
in
the
City/Municipality
of
___________________ Province of _____________________, this
_______ day of ___________, 19 _____; by __________________

22

(2) Sec. 15 provides the form of the AOI 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 matter required to be
stated by Sec. 14(8) is the actual amount
subscribed and paid by each subscriber on his
subscription.

its purpose is a lawful and authorized one, conditions


cannot be imposed on granting the certificate.
(3) Lawfulness of object or purpose- simply because
the duty of the commission happen to be ministerial,
it does not necessarily follow that it has no authority
to pass upon the lawfulness of the object or purpose
of the as expressed in the AOI.
Name of the corporation

The SEC may reject the AOI or any amendment


thereto if the same is not substantially in accordance
with the forms prescribed above, or the treasurers
affidavit is false.
(b) The AOI must be written in any of the official
languages. It is, therefore, a public instrument.

(1) Importance- the corporation acquires juridical


personality under the name stated in the certificate of
incorporation. A corporation has the power of
succession by its corporate name. By its name, a
corporation is authorized to transact business.
The name of a corporation is peculiarly essential to its
existence and to its identity.
(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 a adoption, it
follows the corporation.

Filing of the AOI


(1) Actual filing or registration with SEC required. the
mere recording of the AOI without the intention or
the fact of allowing the same to remain in the office
of the SEC is not a sufficient filing to complete the
organization of the corporation or vest it with
corporate powers.
(2) Rule where corporation created by special law- a
corporation created by special law or charter does
not have to file with the SEC its AOI and by-laws
since the grantee of such a special charter draws its
life not from compliance with a general law, but from
a direct act of congress.
(3) Rule with a respect to a joint venture- The
Commission has ruled that 2 or more corporations
may enter into a joint venture through a contract if
the nature of the venture is in line with the business
authorized by their charters. The contract need not
be registered with it, provided that the joint venture
will not result in the formation of a new partnership
or corporation.
However, if the parties to the agreement want the
joint venture to be treated as a separate entity or
have a separate personality because they intend to
secure for the joint venture project a TIN of its own
from the BIR, registration with the SEC is necessary
in order to have a legal personality to obtain a
separate TIN.

A corporations right to use its corporate and trade name


is a property right, a right in rem which it may assert and
protect against the whole world 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 a part of name
the word corporation or incorporated or an abbreviation
of either of them to distinguish it from partnership and
other business organizations. But the character of a
corporation is not necessarily controlled by its name.
Purpose or purposes of the corporation
Purpose clause- clause in the articles of incorporation which
states the specific or purposes for which the corporation is
being incorporated.
(1) The statement of the purpose or purposes operates as an
authorization to the management to enter into contracts
and transactions which may be considered as included
within or incidental to the attainment of said purposes.
(2) Where the purpose clause of AOI embodies a variety of
different purposes, the corporation maybe allowed to
have separate modus operandi for each of the stated
corporate purposes.
(3) There is no legal need to repeat in AOI the powers
granted by the law upon the corporation.
(4) A non- stock corporation may not include a purpose which
would change or contradict the nature as such. Sec. 88
enumerates the allowable purposes for which a non-stock
corporation may be organized.

Power of SEC to reject articles of incorporation


(1) Compliance with statute- if AOI substantially
comply with the statute, the Commission has no
discretion, but may be compelled by mandamus to file
them.
The duty of the SEC to file and record incorporation
papers exist only when they are in the form in
compliance with the statute. Furthermore, it should
refuse to file for record incorporation papers not
complying with the statute.

Purposes must be lawful


(1) Effect in case unlawful- a corporation the primary
object of which is without statutory authority can have no
lawful existence, even though some of its declared
purposes are lawful. that the purpose or purposes of the
corporation are patently unconstitutional, illegal, or
immoral or contrary to government rules and regulations
is one of the grounds for the rejection or disapproval by
the SEC of the AOI. (sec.27 (2)

(2) Truthfulness of matters stated- generally, the


officer concerned has no discretionary power to look
beyond the face of the incorporation papers and to
determine from matters outside of such papers
whether or not to file papers. He cannot consider
extraneous matters. Ordinarily, if the association has
complied with all the pre-requisite requirements, and

23

(a) A corporation was held incorporated for an illegal


purpose, where the object of the incorporators is to
organize a pueblo or barrio in a municipality into a
separate corporation
(b) Helping promote and enhance the incorporation of
the Phil. As an American State.

(1) May be stated in broad terms- the purpose or purposes


stated in the AOI need not set out with particularity the
multitude of activities in which the corporation may
engage. The effect of broad purposes or object is to
confer wide discretionary upon the directors and
management of the corporation as to the kinds of
business in which it may engage.

But the purpose to conduct a study, survey, research


and subsequently publish or disseminate the results
thereof as a corporation is not objectionable.

It is, therefore important that the corporations purpose


be specified in the AOI with sufficient clarity to define
with certainty the scope of its business.

(2) Where powers merely unauthorized by law- in


authorizing the formation of corporations for any lawful
purpose, the word unlawful as applied in this
connection, is not used by the Code exclusively in the
sense of Malum in se or malum prohibitum. It is also used
to designate powers which corporations are not
authorized to exercise, or contracts which they are not
authorized to make, or acts which they are not authorized
to doin other words, such acts, powers, and contracts
as are ultra vires.

(2) May not be indefinitely stated- while the purposes may


not be stated in broad and general terms, they should not
be so stated indefinitely; otherwise, the AOI may be
rejected.
It is not also sufficient to state that the purpose is to carry
on any business which may be deemed profitable. Such
all-embracing proviso cannot be stretched to include
purposes not incidental, implied or necessary for the
furtherance of the purposes stated in the AOI.

Thus, a corporation cannot be formed for the practice of


law, medicine, or other learned profession in the absence
of express authority in the corporation law.

Primary purpose must be stated


The purpose of which the corporation is organized, where it
has more than one stated purpose, shall state which is the
primary or main purpose and which is/are the secondary or
subsidiary purpose or purposes. The main purpose must be
specified. The law allows the corporation to have secondary
purposes because the primary purpose may turn out to be
profitable, and in such case, all it has to do is invest its fund in
any such purposes instead of organizing a new corporation.
Evidently, a corporation may have only one primary purpose.

The law, however, permits the formation of a partnership


for the exercise of a profession for in such case, it is the
individual partner and not the partnership firm who
exercises the profession and is responsible for his acts as
such.
(3) Determination of question of lawfulness- general
rule, the question as to whether the purposes for which a
given corporation has been formed are lawful as to be
determined by the description of those purposes as
stated in the AOI.
(a) A corporation is not illegal unless it is shown that the
end it has in view is illegal, or the means by which it
proposes to attain that end are illegal;
(b) If, as expressed on the face of the instrument of
incorporation, the purpose for which the corporation
is formed is not necessarily unlawful, it will be
presumed that it was for a purpose for which a
corporation might lawfully be formed; and this
presumption holds in case of a foreign corporation.
(c) Where the object of a corporation as expressed in the
AOI is not illegal, the fact that such corporation
afterwards entered upon illegal projects does not
make it an illegal corporation and such illegal acts
cannot be urged as a defense, in an action to recover
unpaid subscription to the capital stock.
(4) Inquiry into purposes other than those stated- the
best proof of the purpose of the corporation is its AOI
and by laws. The AOI must state the primary and
secondary purposes of the corporation, while the bylaws outline the administrative organization of the
corporation which in turn, is supposed to ensure or
facilitate the accomplishment of said purposes. If the
corporate purpose as stated in the AOI is lawful, then
the SEC has no authority to inquire whether the
corporation has purposes other than those stated,
and mandamus will lie to compel it to issue the
certificate of incorporation.

Under Sec.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.
Purpose must be capable of being lawfully combined
Although Sec. 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.
Subject to the limitation mentioned, the secondary purposes
may not be allied to each other or to the primary purpose
provided they are contrary to law. But a non-stock
corporation, including educational and religious corporations,
may not include a purpose which would change or contradict
its nature as such although it may be organized for any
combination of purposes mentioned in Sec.88.
Reasons for statement of purpose or purposes
(1) 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 persons who has dealings with the corporation
may know by perusal of the articles whether the

Purposes must be stated with sufficient clarity

24

transaction or dealing he has with the corporation is


within the authority of the corporation or not.

the new address is located within the same city or


municipality, no corporate document is required to be
filed with the SEC except a notice regarding the change of
address.

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. Thus, the purpose clause
of the AOI indicate the extent as well as the limitations of the
powers which a corporation may exercise.

Incorporating directors or trustees


The incorporating directors or trustees are those chosen by
the incorporators and named in the AOI. Trustees refers to
members of the board of a non-stock corporation.

Effect where primary/secondary purpose unauthorized

(1) Matters to be specified in AOI- must specify the name,


nationality, and residence of the incorporators and must
show that at least a majority of the incorporators are
residents of the Phil.

(1) If the primary purpose stated in the AOI is unauthorized,


the corporation has no legal existence even though other
secondary lawful purposes are included.
(2) If, on the other hand, a principal lawful purpose is
specified, but the articles of certificate assumes for the
corporation the existence of powers which it is not
permitted to exercise, then this additional and
unauthorized assumption may be treated as a surplusage
and the corporation regarded as entitled to exercise the
lawful powers only.

The statement of the nationalities of the incorporators will


enable the SEC 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. It is also necessary that the AOI specify
the names, nationalities, and residences of the persons who
will be the first directors or trustees of the corporation.
(2) Number- the number of the incorporating directors or
trustees is determined by the incorporators but such
number shall not be less than 5 or more than 15 in
number as may be fixed in their AOI or by-laws.

Effect where corporation engages in its secondary


instead of its primary purpose
Where the corporation actually engages in one of its
secondary purposes instead of its primary purpose, the same
may be classified in accordance with said secondary purpose.
Thus, a corporation organized for the primary purpose of
engaging in mining and whose secondary purpose is
agriculture is a mining corporation.

There is an irreconcilable conflict between the 2 provisions.


Being the subsequent provision, Sec.29 must prevail on the
theory that it is the latest expression of the legislative will.
(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 elected directors or trustees who shall hold
office for 1 year, when the corporation is organized by the
adoption of by-laws at the first meeting of stockholders or
members.
(4) Subscribers to stock- Sec. 23 (2), every director must
own at least 1 share of the capital stock of the
corporation of which he is director. This requirement
applies to the directors elected after incorporation, as
well as to incorporating directors who must be a
subscriber to at least 1 share of the capital stock of the
corporation. It follows that in a stock corporation, there
must be at least 5 stockholders.

Place where principal office of corporation located


(1) City or municipality within the Phil. the AOI must
state the place where the principal office of the
corporation is to be established or located, which place
must be within Phil. The purpose of the requirement is to
fix the residence of a corporation in a definite place,
instead of allowing it to be ambulatory for effective
regulation and supervision of the corporation.
(2) Place where its books and records are ordinarily
kept and meetings held- 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.

Capital stock/capital and subscribers/contributors


(1) Stock corporations- the AOI of a stock corporation
under Sec.14(8) must state the following:
(a) The amount of its authorized capital stock in pesos;
(b) The number of shares in 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 corporations- if the corporation is a nonstock corporation, the AOI must state:
(a) The amount of its capital or money contributed or
donated by specified persons;

The principal office may be located at one place and the


place of business at another.
(3) Residence at the place where the principal office is
located- a corporation is in a metaphysical sense a
resident of the place where its principal office is located
as stated in its AOI filed with the SEC. The place where
the principal office of the corporation is located
determines its residence and the venue in an action by or
against it.
(4) Change of address- in case of change of address
involving a change of city or municipality, an amended
AOI stating the new address must be filed with the SEC. if

25

(b) The names, nationalities, residences of the donors or


contributors; and
(c) The respective amount contributed by each.

Section 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
dissenting
stockholders
in
accordance with the provisions of this Code, or the
vote or written assent of at least two-thirds (2/3) of
the members if it be a non-stock corporation.

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 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.

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 Exchange
Commission.

Where shares without par value


In case where the capital stock consist of shares without par
value, the AOI 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 not only state the number of shares
into which said capital stock is divided.

The amendments shall take effect upon their approval


by the Securities and Exchange Commission or from
the date of filing with the said Commission if not acted
upon within six (6) months from the date of filing for a
cause not attributable to the corporation.

Where shares with par value and without par value


the AOI must state such fact, the number of shares into which
the capital stock is divided, the number of shares with par
value and their par value, and the number of shares without
par value.
Where business of corporation reserved for Filipino
citizens

Meaning of corporate charter


Charter- an instrument or authority from the sovereign
power bestowing the right or privilege to be and act as
corporation.

Corporations which will engage in any business or activity


reserved for Filipino citizens shall provide in their AOI the
restriction against the transfer of stock or interest which will
reduce the ownership of Filipino citizens to less than the
required percentage of the capital stock as provided by
existing laws.

With regard to corporations, the term is correctly used in its


limited sense only with reference to special incorporation by
act of legislature. In the case of a corporation organized under
a general law, however, the corporations charter is not
limited to its AOI.

If the required percentage of ownership has not been


complied with, the AOI will not be accepted by the SEC. in
determining the nationality of corporations with foreign
equity, the Commission has adopted the control test rule.

Distinguished from franchise


Corporate or primary
franchise
Is the right and privilege
itself of being a corporation

Acknowledgement, signature, and verification


In order to become a corporation de jure, the provisions
requiring the incorporation papers to be acknowledged as well
as signed must be complied with. Each of the signatories must
acknowledge his signature to the articles and there is no
corporation de jure unless acknowledged by the minimum
number required by law. However, unless otherwise provided
by the statute, the acknowledgement of the signatures of the
incorporators is not a part of the AOI.

Corporate charter
Applies to the instrument
bestowing such right and
privilege.

Components of corporate charter


A charter represents the complete grant of authority; hence,
the complete charter of a corporation does not rest only upon
one instrument.

The purpose of the law in requiring acknowledgement under


oath is to secure the Statute and all concerned against the
possibility of any fictitious names being subscribed to the
articles, and to furnish proof of the geniuses of the signatures.

(1) As to corporation formed under the general


incorporation law, the charter consists of:
(a) The law under which it is organized (B.P. Blg. 68)
(b) Articles of incorporation
(c) By-laws; and

26

(d) All applicable provisions of the Constitution and the


general laws of the State in force at the time the
corporation is incorporated which are as much a part
of its charter ass though expressly written therein.
(2) As to corporations created by special laws, the
charter consists of:
(a) The special law which create the corporation;
(b) Executive Orders of the President; rules and
regulations applicable to such corporations; and
(c) All laws applicable thereto, including the Corporation
Code provisions of which apply suppletorily.

existing charter under a right reserved to the State


when the charter was granted; for though the State
may reserve the right to amend the charter of a
private corporation, it cannot compel the members to
accept the charter as amended, any more than it
could compel them to accept the original charter. If
they do not choose to adopt the amendment, they
may give up their charter altogether.
The acceptance of an amendment, like the
acceptance of an original charter, may be implied
from the conduct of the corporation or its members
and it will be constructively presumed if the powers
conferred by the amendatory act are exercised.
(2) A contract between the corporation and the
stockholdersIt is generally held that a corporate charter constitutes a
contract between the corporation and its stockholders.
Stockholders are presumed to have entered into such
contract with knowledge of the provisions thereof, are
bound thereby, and their rights as stockholders are
defined and limited by the charter.

Nature of Corporate Charter


A corporate charter is described as a contract of a 3-fold
nature, that is, a contract between the State and the
corporation, a contract between the corporation and its
stockholders (or members), and a contract between the
stockholders inter se.
(1) A contract between the State and the Corporationit is commonly said that the corporations are created by
the act of the sovereign. But it is not to be understood
from this that the Legislature can bring a private
corporation into existence of its own accord, and without
the consent of the members who compose it. The charter
of a private corporation has been regarded as a contract
between the corporation and the State.

The AOI or the corporate charter being considered a


contract, the corporation is bound to observe all the
provisions thereof.
(3) A contract between stockholders inter seThe charter of the corporation constitutes a contract also
between the stockholders which is entitled to protection
as against attempted action by the corporation, though
authorized by law and the majority of the stockholders,
insofar as the interests of dissenting stockholders are
concerned. Thus, there is a contractual obligation on the
corporation with respect to its stockholders and on the
stockholders with respect to each other than no
fundamental, radical, or material changes on the
purposes of the corporation shall be made, at least in the
absence of express or implied consent of the
stockholders.

The consideration for the grant of powers and privileges by


the State is found in the liabilities and duties which the
incorporators assume by accepting the terms specified in the
charter.
(a) Acceptance of the original charter1) If persons apply to the legislature for a charter,
this is sufficient evidence of consent on their
part and when the charter is granted, no
acceptance of it by them, other than will be
implied from their previous application, need be
shown. Indeed, they may be considered as
having made an offer, and the State as having
accepted it.
2) If, however, without such application, the
legislature offers a charter, either to particular
persons by a special act, or to persons or a class
of persons generally by a general law, an
acceptance must be shown. Until acceptance,
the offer of a charter, either by a general or a
special law, can have no effect whatever.

Reserved power of state to amend corporate charter


(1) Constitutional and statutory authorityThe certificate of incorporation is a contract primarily
between the State and the corporation. Hence, it can be
amended only by or under constitutional or statutory
authority.
(a) The constitutional authority of Congress to change or
amend the charter of a private corporation for the
operation of a public utility is expressly reserved by
Sec11, art XII of the Consti.
(b) The statutory authority of the Congress to alter or
amend the corporate charter is impliedly reserved by
Sec. 145 of the Code subject to the limitation therein
provided with respect to vested rights that have
accrued at the time of the enactment of the
amendatory law and the prohibition of the
Constitution against laws impairing the obligation of
contracts.
(c) Under the reserved power to repeal the corporate
charter, the legislature may terminate corporate
existence.
(2) Exercise of powerThe reservation of the power is an incident of the contract
between the state and the incorporators. The dissolution
of corporation without a cause is void as impairing the

An act of the Legislature authorizing persons to


become a corporate body by complying with
certain terms and conditions is, until accepted
by the persons authorized, nothing but an offer
on the part of the State, which may be
withdrawn by it at any time; and it is withdrawn,
so as to be no longer open for acceptance, by a
repeal of the act by the Legislature, or by the
adoption of a constitutional provisions rendering
such an act void.
(b) Acceptance of amendment to existing charterthe rule that a charter must be accepted before it
can have any effect applies to acts amending

27

obligation of a contract between the incorporators and


the State.
NOTE: with respect to the franchise of public utility, the
only limitation is that the power can be exercised only
when the common good requires.

(5) Articles, as amended, must be indicated by the


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 that the amendment or amendments have been
duly approved by the required vote of the stockholders or
members must be submitted to the SEC. filling fees must
be paid;
(6) The amendments shall take effect only upon their
approval by the SEC.
(7) If the corporation is governed by special laws, 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 a foreign corporations authorized to
transact business in the Phil, they are merely required to
file, within 60 days after the amendment to the AOI
becomes effective, with the SEC and in proper cases, with
the appropriate government agency, a duly authenticated
copy of the AOI for record purposes. The filing thereof,
however, shall not of itself enlarge or alter the purposes
for which such corporation is authorized under its license
to transact business in the Phil.
(9) Such portion of the AOI which states an established or
accomplished fact at the time of incorporation cannot be
changed or amended.

Power of stockholders or members to amend articles of


incorporation
(1) Power expressly granted- the authority of stockholders or
members to amend the AOI which forms part of the
corporate charter is conferred by Secs. 16. 37 and 38.
Sec. 37 refers to the extension or shortening of the
corporate term; Sec. 38, to increase or decrease of the
capital stock; and Sec 16, to amendments in general.
The power to amend is also expressly granted by Sec 36
(4).
The amendment must also be approved by a majority of
the board of directors or trustees.
(2) Matters not subject to amendmentCertain provisions or matters stated in the AOI cannot be
amended.
(a) The portion of the AOI stating the names of the
incorporators and the first set of directors/trustees,
place and the date of the execution of the articles
and the original subscriptions of the incorporators.
(b) The names, etc. of the subscribers, the treasurer of
the corporation elected by the subscribers and the
witnesses cannot be amended except to correct
mistakes.

Section 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 amendment
thereto if the same is not in compliance with the
requirements of this Code: Provided, That the
Commission shall give the incorporators a 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:

Necessity of stockholders or members meeting for


amendment
(1) The amendment nay 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. Even holders of non-voting
shares or non-voting members, as the case may be, are
entitled to vote on the amendment.
(2) If the amendment consists in extending or shortening the
corporate term or increasing or decreasing the capital
stock, a meeting of the stockholders or members is
necessary.
(3) In a close corporation, if the amendment of the AOI refers
to any of the matters mentioned in Sec. 103, the same
shall not be valid or effective unless approved by the
required vote of the stockholders at a meeting duly
cancelled for the purpose.

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;

Limitations of power of corporation to amend

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.

(1) When it will be contrary to any provision or requirement


prescribed by the Code or by special law, or change any
provision in the AOI stating an accomplished act;
(2) Must be for legitimate purpose;
(3) Must be approved by the required vote of the board of
directors or trustees and the stockholders or members;
(4) The original and the amended articles together must
contain all provisions required by law to be set out in the
AOI;

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

28

institutions, and other corporations governed by


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. (n)

(b) It may sell its assets pursuant to Sec 122 but it may
only purchase property if such purchase will be
consistent with liquidation;
(c) It may sue for purposes of recovering its property.
The capacity of a corporation to institute an
ejectment suit is not affected by the subsequent
suspension and revocation of certificate of
registration.
(3) Lifting of order of revocation- the lifting restores the
corporation to its original status as if there was no
revocation order issued against it, with the capacity to
exercise all the powers of a duly registered corporation
under the Corporation Code.

Grounds for rejection of AOI or amendment thereto


Sec. 17 enumerate the grounds. The grounds are not
exclusive.
(1) The SEC is required to give the incorporators reasonable
time within which to correct or modify the objectionable
portions of the AOI or amendment when the same is
rejected or disapproved for non-compliance with the
requirements of the Code.
(2) Any decision of the Commission rejecting the AOI or
disapproving any amendment thereto is appealable by
petition for review in accordance with the pertinent
provisions of the rules of court.
(3) In case of corporations governed by special laws, the AOI
or amendment shall not be accepted or approved by the
SEC unless accompanied by a favorable recommendation
of the appropriate government agency.
(4) Before a foreign corporation can lawfully transact
business in the Phil it must first secure a license in
accordance with the code and a certificate of authority
from the appropriate government authority.
(5) The SEC shall not also accept the AOI of any stock
corporations unless accompanied by a sworn statement
of the treasurer elected by the subscribers showing the
amount of the capital stock subscribed and paid.
(6) The action of the commission in approving or rejecting
the AOI or any amendment thereto is not a ministerial
function but involves the exercise of discretionary power.

Section 18. Corporate name. - No corporate name may


be allowed by the Securities and Exchange Commission
if the proposed name is identical or deceptively or
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.
(n)
Limitations upon use of corporate name
(1) Similarity with another trade nameThe incorporators may choose and use any name they
may see fit, provided it is one not identical with or
prejudicially similar to a name which was previously
adopted and which is being used by another existing
corporation or unincorporated association or a natural
person as trade name or is contrary to existing law.
(a) It acquires its name by choice and need not select a
name identical with or similar to one already
appropriated by a senior corporation while an
individuals name is a thrust upon him.
(b) If any corporation could adopt at pleasure the name
of another corporation, the practice would cause
confusion and unfair and fraudulent competitions,
open the door to frauds upon the public, promote the
evasion of legal obligations and duties, and result in
difficulties of administration and supervision over
corporations.

Suspension or revocation of certificate of registration


of corporations
(1) Grounds- under PD 902-A, SEC 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 ff.:
(a) Fraud in procuring its certificate of incorporation;
(b) Serious misinterpretation as to what the corporation
can do or is doing to the great prejudice of, or
damage to, the general public;
(c) Refusal to comply with or defiance of a lawful order
of the Commission restraining he commission of acts
which would amount to a grave violation of its
franchise;
(d) Continuous inoperation for a period of at least 5
years;
(e) Failure to file by laws within the required period; and
(f) Failure to file required reports in appropriate forms as
determined by the Commission within the prescribed
period.
(2) Effectivity- a SEC order of revocation is immediately
effective. Once the revocation order is issued, the subject
corporations existence is terminated at that very instant
and is deemed terminated until the particular revocation
order is lifted.
(a) It may not continue to operate its business and issue
shares;

(2) Test of infringementThe right to exclusive use of a corporate name with


freedom from infringement is determined by priority of
adoption. The test is whether the similarity is such as to
misled a person using ordinary care and discrimination
and the court must look to the record as well as the
names themselves.
It is settled that proof of actual confusion need not be
shown. It suffices that confusion is probably or likely to
occur.
(3) Part of nameThe corporate name shall contain the word corporation
or incorporated, or the abbreviations corp. or inc.,
respectively. The corporate name of a foundation shall
use the word foundation.
(4) Prohibited use of certain wordsIn addition to the limitation provided by Sec.18, special
laws prohibit the use of certain words as part of the
corporate name such as those which imply that a

29

corporation is engaged in an activity in which it is not


allowed by law to engage in.
(5) Use of generic, geographical, and descriptive
terms and namesCertain words, terms, or names are regarded by law as
incapable of exclusive appropriation. Of this class are
generic terms and geographical names and terms which
are merely descriptive of the goods, services, places
where made, the character of the business, or the name
of the maker.
(6) Use of trade name of other corporationThe SEC guidelines, and procedures on the use of
corporate and Partnership names, specifically requires
that:
(a) A corporate name shall not be identical, misleading
or confusingly similar to one already registered by
another corporation with the commission;
(b) The name applied for applied for is similar to the
name of a registered firm, the applicant shall at least
contain one or more distinctive words to proposed
name to remove the similarity or differentiate it from
the registered name.
(7) Use of a persons full name or surnameIt may be used in a corporate name if he/she is a
stockholder of the corporation and has consented to such
use. If the person is already deceased, the consent shall
be given by his/her estate. The meaning of initials used in
a name shall be stated by the registration the AOI or in a
separate document signed by an incorporator or director.

May be prevented by the corporation having a prior


right, by a suit for injunction against the new
corporation to prevent the use of the name.
(b) Interference with its businessGeneral rule is that the right of one corporation to
enjoin the use of the name of a similar name by
another depends upon whether such use has
interfered with the formers business whatever it
may be and without regard to whether it is
commercial, trading or otherwise.
(2) De-registration- to restrain the wrongful assumption of
a name by a corporation is not to annul the corporation
by depriving it of a name. if restrained from using a name
chosen, it may choose another name. Sec.18 empowers
the SEC to de-register a corporate name deceptively
similar to that already used by an existing corporation not
only for the protection of the complaining corporation but
more so for the protection of the public.
Change of corporate name
(1) Compliance with formalities- a corporation can
change the name originally selected by it after complying
with the formalities prescribed by law, to wit: amendment
of AOI and filing of the amendment with the SEC.
(2) Effectivity- it is required that the Commission must issue
an amended certificate of incorporation under the
amended name.
The change of name is deemed effective as of the date of
the Commissions approval of the amended articles or
from the date of filing with it if not acted upon within 6
months from the date of filing for a cause not attributable
to the corporation.
(3) Effect- has no more effect upon its identity as a
corporation than a change of name of natural person
upon his identity.

(8) Doctrine of secondary meaningOriginated in the trademark law. Its application is


extended to corporate names since the right to use a
corporate name to the exclusions of others is based upon
the same principle which underlies the right to use a
particular trademark or trade name.
(9) Use of business names different from corporate
nameNo law prohibits a company from using a different name
from its corporate name in doing business. A company
may have more than one business name or trade name
provided these are indicated in the AOI, and in the
absence of fraud or deceit and having complied with said
circular, is allowed to use its business names.
(10)
Where business of junior corporation different
or non- competingThe protection to which the prior user of a corporate
name is entitled is not limited to guarding its goods or
business from actual market competition with identical or
similar products of the parties but extends to all cases in
which the use by the junior appropriator of the name is
likely to lead to a confusion of source, as where
prospective purchasers would be misled into thinking
field, or is any way connected with the activities if the
infringer; or when it forestalls the normal potential
expansion of its business.

Use of changed or abandoned corporate names


(1) Former name of same corporation- the mere fact
that the former name is indicated in the certificate of
filing of amended AOI would militate against anyone
using said name and said previous name cannot be
appropriated or used by any other person for a certain
period.
(2) Name(s) of merged or consolidated corporations
in case the change of the corporate name is due to
merger or consolidation, the corporate name of the
merged ;or consolidated corporations may not be used by
another corporation, without the consent of the surviving
corporation although there is a dissolution of the
absorbed corporation in view if Sec.80 (4).
(3) Name
of
dissolved
corporation
or
whose
registration has been revoked- it shall not be used by
another corporation within 3 yrs from the approval of the
dissolution or 6 yrs from the date of revocation unless its
use has been allowed at the time of the dissolution or
revocation by the stockholders or members who
represent a majority of the outstanding capital stock or
membership of the corporation.
(4) Name of dissolved corporation acquired by new
corporation- a new corporation which has acquired the
property and name of a dissolved corporation is in the
same position as the original corporation would have

Remedy of corporation whose name has been adopted


by another
(1) Injunction- the name may be protected by injunction
upon a principle similar to that upon which persons are
protected in the use of trademarks and trade names.
(a) Fraud upon the aggrieved corporation-

30

been had it continued to exist and may enjoin the use of


such name by another.
(5) Name of corporation dissolved through expiration
of term- but when the corporate name is abandoned due
to the dissolution of the corporation through expiration of
its corporate life, such corporate name may be used by
another corporation.

Securities and Exchange Commission to issue a


certificate of incorporation.
(3) Registration of cooperative. A cooperative
acquires juridical personality upon registration with
the Cooperative Development Authority. It need not
to be registered again with the Securities and
Exchange Commission.

Effect of misnomer of a corporation

Section
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.
(n)

(1) Contracts. The general rule is that the mere


misnomer of a corporation in a bond, note, or other
deed or contract does not render the same invalid or
inoperative.
Nor will a grant or conveyance to or by a corporation
be avoided because of a misnomer.
(2) Suit by, or against, corporation. The
corporation may sue or be sued thereon in its true
name with proper allegation and proof that it is the
corporation intended; and its identity may be
established by parol evidence.

De jure corporation/de facto corporation defined.


(1) A de jure corporation is one created in strict or
substantial conformity with the mandatory statutory
requirements for incorporation and the right of which
to exist as a corporation cannot be successfully
attacked or questioned by any party even in a direct
proceeding for that purpose by the State.
(2) A de facto corporation is one which actually exist for
all practical purposes as against the State. It is a
corporation from the fact of its acting as such,
though not in law or right a corporation

Generally speaking, a corporation if sued by the


wrong name is bound if duly served.
Section 19. Commencement of 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 Securities 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. (n)

It is one which has 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.
(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.

Acquisition of juridical personality


Stockholders of a de facto corporation enjoy exemption from
personal liability for corporate obligations as do stockholders
of de jure corporations.

(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 corporations right and competence to
transact business or enter into contracts in
its name.
(b) It is the certificate of incorporation that not
only gives juridical personality to a
corporation but places it under the
jurisdiction of the Commission.
(c) The issuance of the certificate calls the
corporation into being but it is not really
ready to do business until it is organized.
(2) Filing of articles of incorporation. In the case of
religious corporations, the Code does not require the

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, even though there may have been an assumption of
corporate powers.
Bona fide attempt to incorporate.
(1) Absence of 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. Mere intent is not sufficient.
(2) Defects precluding creation of corporation.
the following are examples of defects which will
preclude the creation of even a de facto corporation:

31

(a) Absence of articles of incorporation;


(b) Failure to file articles of incorporation with
the Securities and Exchange Commission ;
and
(c) Lack of certificate of incorporation from the
Securities and Exchange Commission.
(3) Defects resulting in creation of de facto
corporation.the following are examples of defects
which do not preclude the creation of a de facto
corporation:
(a) The articles of incorporation fails to state all
the matters required by the Code to be
stated, or state some of them incorrectly;
(b) The name of the corporation closely
resembles that of a pre-existing corporation
that it will tend to deceive the public;
(c) The incorporators or a certain number of
them are not residents of the Philippines;
(d) The acknowledgement of the articles of
incorporation or certificate of incorporation is
insufficient or defective in form, or it was
acknowledged before the wrong officer;
(e) The percentage of Filipino ownership of the
capital stock required for the business is less
than that prescribed by law;
(f) The minimum paid-up capital stock has not
been paid to and received by the corporate
treasurer contrary to his affidavit; and
(g) The failure to submit its by-laws on time.

The recognition of de facto existence has been found


necessary to promote the security of business transaction and
to eliminate quibbling over irregularities.
(1) A third person dealing with a corporation will rarely
be prejudiced if the company is recognized as a
corporation in spite of minor defects in its formation.
(2) Seldom would it be just to allow a wrongdoer to
quibble over such objections to escape liability for
wrongdoing.
(3) Equally, it would be unjust to allow a claimant
against a supposed company to assert the individual
liability of innocent passive investors on the ground
of flaws in the formal steps of incorporation, when
they have attempted in good faith to comply with
statutory requirements and the objecting party is not
prejudiced.
Questioning validity of corporate existence
Assuming that a de-facto corporation actually exists, its
existence as a corporation cannot be collaterally attacked
either by the State or by the private individuals.
(1) The State must bring a direct proceeding (quo
warranto) against the corporation to oust it from the
exercise of corporate powers usurped by it and to
have it dissolved.
(2) As to individuals dealing with it as a corporation,
there is no essential distinction.

The above may be considered as inadvertent or minor defects


or errors which can be excused to prevent injustice.

Direct/collateral attack of corporate existence

Colorable compliance with the law.

(1) Direct attack- one whereby the State, in a


proceeding brought for that purpose, attacks the
existence of the association claiming to be a
corporation.
(2) Collateral attack- one whereby corporate existence
is questioned in some incidental proceedings not
provided by law for the express purpose of attacking
the corporate existence.

To constitute a corporation de facto, there must be, it is true a


colorable compliance with the statute, but there need not to
be a substantial compliance. A substantial compliance makes
the body a corporation de jure.
User or 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
thereof, but it is also necessary to show an actual use or
exercise of corporate powers or franchise.

Rule against collateral attack


(1) Rationale- the general rule against collateral attack
upon corporate existence is based upon the ground,
not of equitable estoppel.
(a) Individual right is not invaded; it is the States
right and authority which are invaded and
usurped.
(b) The rule is in the interest of the public and is
essential to the validity of business transactions
with corporations.
(2) When rule not applicable- the rule that collateral
attack on the organic entity or existence of a
corporation will not be permitted, does not apply,
however, when the lack of right or the wrongdoing of
the corporation is in use because in violation of
public policy or of express or implied statutory
requirement, such as denial of its right to enforce
contracts entered into without compliance with
prohibitions of express or implied statutory or public
policy.

(1) User contemplated. In substance, user consists in


an enjoyment and exercise of such corporate
franchises and powers as would be given by the law
to an association if the attempted organization had
been perfected.
(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
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.
Basis of de facto doctrine.

Where organization not even a de facto corporation.

32

If there has been a bona fide attempt to incorporate, under a


law authorizing incorporation, and the law has been so far
complied with as to make the association what is called a
corporation de facto, the only way in which its corporate
existence can be questioned is in a direct proceeding by the
State, brought for that purpose. Private individuals cannot
raise the objection in such a case, either directly or indirectly,
and nobody can raise the objection collaterally.

formed, a colorable bona fide compliance with that


law, and an assumption or user of corporate powers.
(3) Proof of facts operating as an estoppel- it is not
necessary to prove even a de facto corporate
existence. All that is necessary is to show the facts
that will operate as an estoppel.
Powers and liabilities of a de facto corporation
(1) In general- it is deemed to have a substantial legal
existence and ordinarily, in its relation with all
persons except the State, has the same powers and
is subject to the same liabilities, duties and
responsibilities, as corporation de jure, and is bound
by all such acts as it might rightfully perform if it
were a corporation de jure.
So long as the State acquiesces in its existence and
its exercise of corporate functions, it is under the
protection of the same law and governed by the
same legal principles as de jure corporations, and
may legally do and perform every act and thing
which the same entity could do or perform were it a
de jure corporation.
(2) Liability to
taxation- de facto is subject to
taxation in the same manner to je jure.
(3) Binding effects of the contract- similarly, a
transfer of property to or by a corporation de facto is
valid and binding against all persons except the
State; bonds, deeds, and mortgage executed by such
a corporation are valid, not only as against the
corporation itself, but also against anyone making a
a claim against its assets, whether as a creditor
directly of the corporation or as a creditor of its
creditors or stockholders.
(4) Protecting against unauthorized acts- whether
de facto or de jure, it is entitled to protect itself from
unauthorized acts.

(1) Direct or collateral attack. if failure to comply


with conditions precedent prevents the coming into
existence of any corporation either de jure or de
facto, then, on principle and in reason, the question
may be raised collaterally as well as directly, and by
private individuals as well as by the State, unless
there is something to operate as an estoppel.
When a private individual, therefore, raises the
objection that conditions precedent have not been
complied with, the question, in the absence of
elements of estoppel, is whether or not there is a
corporation de facto. If there is, he cannot object;
otherwise, he can.
(2) Capacity to sue or be sued. if a party is not
either de jure or de facto, it has no legal capacity to
sue or be sued. And it follows that where the
corporate existence of the plaintiff suing as a
corporation is defined, the burden is on it to prove its
corporate existence either de jure or de facto, or at
least to show an estoppel on the part of the
defendant to deny such existence.
(3) Liability as partners. if neither a de jure or de
facto corporation results, the incorporators should be
held liable as partners together with stockholders
who subscribed to stocks knowing the failure of the
attempted incorporation of the business.
It is the regular courts who have the jurisdiction and
not the SEC.
(4) Estoppel as a defense- where there is not even a
corporation de facto, a private person may be barred
from raising the objection on the ground that he is
estopped by his conduct, as by having dealt with the
pretended corporation as a corporation, or by having
held it out to the public as a legally constituted
corporation.

Liabilities of officers and members of a de facto


corporation
(1) In general- subject to all the liabilities and penalties
attending to officers and directors duly chosen by a
corporation de jure, including liability under the
criminal law, and their acts are binding when such
acts would be within the power of such officers if the
corporation were one de jure.
(2) Liability as partners to third persons- members
cannot be held liable to third persons who deal with
them in their supposed corporate capacity, merely on
account of technical defect in the formation of the
corporation. On the other hand, where an attempt to
organize a corporation fails by omission of some
substantial step or proceeding required by the law,
its members or stockholders are liable as partners.
(3) Liability among themselves- in actions among
themselves for advances, commissions, etc. the test
of whether the corporation is de jure or de facto has
been disregarded. When persons associate together
and do business as a corporation and the latter is
defectively organized, their rights, duties and
liabilities, as between themselves, should be
deermined and governed by the express or implied
terms, conditions, and limitations contemplated by

Proof of corporate existence


(1) Proof of de jure existence- will depend on the
great extent upon the nature of the proceeding in
which the question is raised and the circumstances of
the particular case. In quo warranto proceedings by
State to test the right of an alleged corporation to
exercise corporate powers, corporate existence de
jure must be shown. It must be made to appear that
there is a valid law creating or authorizing such a
corporation, that there was a valid organization
under it and a substantial compliance with all
conditions precedent.
(2) Proof of de facto existence- if the question of
corporate existence is raised collaterally, it is
sufficient if a de facto existence be shown. In order to
prove de facto corporate existence, to show the law
under which the alleged corporation might have been

33

their agreement. They are not partners unless they


have agreed to be such.

Corporation by estoppel without de facto existence


1)

Section 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.

2)

3)

On who assumes an obligation to an ostensible


corporation as such, cannot resist performance thereof
on the ground that there was in fact no corporation.
(n)

corporation by estoppel may arise even if no de


facto corporation exists.
A corp. by estoppel has no real existence in law.
In it neither de jure nor a de facto corp., but it is
a mere fiction existing for the particular case,
and vanishing where the element of estoppel is
absent.
Even if the ostensible corp. is proven to be
legally non-existent, a party may be estopped to
deny the corporate existence. In order for one to
be estopped to deny the corporate existence of
an organization, he must have contracted or
dealt with it as a corporation.
Note: if not all the associates participated or
consented to the representation, as to them, the
doctrine of estoppel will not apply.

Estoppel to deny corporate existence

Estoppel of persons dealing with a corporation

An unincorporated association which represented itself to be a


corporation, will be estopped from denying its corporate
capacity in a suit against it by third person who relied in good
faith on such representation. It cannot alleged lack of
personality to be sued to evade its responsibility for a contract
it entered into and by virtue of which it received advantages
and benefits.

The doctrine of estoppel to deny corporate existence applies


to both domestic and foreign corporations.
1)

2)

(1) Principles as to de facto corporation not


applicable- in certain circumstances- de jure or de
facto may be regarded as a corporation. An
organization which has not complied with the
conditions precedent to even de facto existence is
not, for any purpose, a corporation. Nevertheless, the
incidents of a corporate existence may exist as
between the parties by virtue of an estoppel.
(2) Jurisdictional requirements not subject to
estoppel- the doctrine of corporation by estoppel
cannot
override
jurisdictional
requirements.
Jurisdiction is fixed by law and cannot subject to the
agreements of the parties.
(3) Foundation of doctrine- founded on principles of
equity and is designed to prevent injustice and
unfairness.
Where there is no third person involved and the
conflict arises only among those assuming the form
of a corporation who know that it has been
registered, there is no corporation by estoppel.
(4) Reason behind doctrine(a) An
unincorporated
association
has
no
personality and would be incompetent to act and
appropriate for itself the power and attributes of
a corporation as provided by law;
(b) It cannot create agents, or confer authority on
another act on its behalf;
(c) As it is an elementary principle of law that a
person who acts as an agent without authority or
without a principal is himself regarded as the
principal, possessed of all the right and subject
to all the liabilities of a principal, a person acting
or purporting to act on behalf of a corporation
which has no valid existence assumes such
privileges
and
obligations
and
becomes
personally liable for contracts entered into of for
other acts performed as such agent.

3)

The stockholders or members of a pretended or


ostensible corporation who participated in holding it
out as a corporation are generally estopped or
precluded to deny its existence against creditors for
the purpose of escaping liabilities for the corporate
debts or for the unpaid part of the subscription stock.
So, also are the third persons who deal with such
corporation recognizing it as such and the pretended
corp. itself, estopped from denying its corporate
existence.
All persons not stockholders or members who
assume to act as a corporation knowing it to be
without authority to do shall be liable as general
partners for all liabilities arising as a result thereto.

Persons liable as general partners


-

The Code makes liable as general partners all


persons who assume to act as a corporation, and
they include persons who attempt, but fail, to form a
corporation and who carry on business under the
corporate name. A de facto partnership among them
is created.

Note: only active members of an unsuccessfully attempted


corp., neither de facto or de jure, are liable as partners. On
the other hand, a third party who, knowing an association to
be unincorporated, nonetheless treated it as a corporation
and received benefits from it, may be barred from denying its
corporate existence in a suit brought against the alleged
corporation.

Sec. 22. Effects on non-use of corporate charter and


continuous inoperation of a corporation. - If a
corporation does 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 period of at least five (5) years, the
same shall be a ground for the suspension or
revocation of its corporate franchise or certificate of
incorporation.

34

This provision shall not apply if the failure to


organize, commence the transaction of its businesses
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.

Structure of corporate organization:


1) Binding effects of acts or contracts- action
proposed to be taken by by a corp. involves 2 basis
questions;
1st- in order to bind a corporation, who within the organization
must act on its behalf?
2nd- what is the result if the statutory requirements are not
complied with and proper parties do not act?

Statutory before and after incorporation


The right of exemption from personal liability resulting from
incorporation , being entirely statutory, can be acquired only
on the terms specified by a statute.

2)tri-level structure- standard operating procedure.


1st- at the base are shareholders whose vote is required to
elect BoD.
2nd- directors who constitute the policy making body.
3rd- officers who execute the policies.

Mandatory and directory provisions explained


-non-compliance of mandatory provisions will prevent the
creation of a de jure corp. but departure with directory
provisions will not have this consequence.
-mandatory provisions could either be conditions precedent or
conditions subsequent.

Corporate powers exercised by board of directors


1) Governing body of the corporation- corp. can
only act thru its BoD in case of stock corp., and board
of trustees in case of non-stock corp.

Conditions precedent- are those conditions non-compliance


with will prevent the legal existence of a corporation.
Examples:
1) filing of the articles of incorporation with the SEC;
2) issuance of the cert. of incorp. By the SEC;
3)minimum no. of 5 incorporators;
4) legal requirements that 25% of the authorized capital stock
must be subscribed and 25% thereof paid.
Conditions subsequent- are conditions to be complied with
after acquiring corporate existence in order that a corporation
may legally continue as such. Non-compliance may not affect
corporate existence, but it can be a ground to forfeit its
charter.
Formal organization and commencement of business
-a corp. achieves its legal existence from the date SEC issues
the cert. of incorp. under its official seal, but formal
organization brings a corporation to life.
1)
2)

2)

Binding effect of stockholders action- the


stockholders or member elect the BoD to oversee the
management and operation of a corp. they are not
agents of the corporation and cannot bind it through
their acts.

3)

Extent of judicial review- as long as the directors


act honestly, and their acts or contracts do not
disregard the rights of the minority, the courts will
not interfere. They are not liable for losses if the
cause is merely error in business judgment, not
amounting to bad faith or negligence.

Business judgment ruleGR: Courts will not interfere in the decisions made by the BOD
as regards the internal affairs of the corporation
exception: Unless such contracts are so unconscionable and
oppressive as to amount to a wanton destruction of rights of
the minority.

Acts constituting formal organization- it is the


process of structuring the corp. so that it can carry
out the purposes for which it has been incorporated.
Acts constituting commencement of businesswhen it has performed preparatory acts geared
toward the fulfillment of the purposes for which it
was established (e.g. entering into contracts or
negotiation).

Nature of power of the board of directors or trustees


1) Their powers are original and undelegated. The
stockholders or members do not confer, nor revoke
those powers. They are derivative only in the sense
of being received from the state in the act of
incorporation.
2) Other view is the DELEGATION THEORY- which
holds that the directors are the officers and agents of
the corporation, representing the interest of that
abstract legal entity and those who own shares of
stock and as such, they can bind the corporation
provided that they act within the scope of their
authority.

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 until their successors are elected
and qualified.

Limitations on the powers of the board of directors or


trustees
1) Limitations
or
restrictions
imposed
by
the
constitution, statutes, art. of incorporation, or bylaws of the corp.
2) It cannot perform constituent acts, that is acts
involving the fundamental or major changes in the
corp. (i.e. amend the Art. of incorp.) which require
the approval or ratification of the stockholders or
members.
3) It cannot exercised powers not possessed by the
corp.

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.

Powers exercised by the Board of directors or trustees


as a board

35

-The BoD or trustees must act together as a body in a lawful


meeting, not individually or separately, in order to bind the
corp. for their acts. There must be quorum.

c)

Reasons for the rule:


1) A meeting is necessary in order that any action may
be deliberately adopted, after opportunity for
discussion and interchange of views; and
2) As agents of the corporation managing its affairs,
directors or trustees have power to act other than as
a board.

2)

every director must continuously own at least 1


share of stock during his term, otherwise he shall
be automatically cease to be director; and
d) a majority of the directors must be resident of
the Philippines.
Non-stock corp- must be members of goos standing
thereof and like in stock corp, a majority of them
must be residents of the Philippines.

Natural persons contemplated by law


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

Unlike its officers, directors are not agents of the


corp. per se and they have no power acting individually to
bind the corp.
Exceptions to the rule: where there are extraordinary
situations or conditions to justify the act of the
stockholders or corporate officers as to make a board
action as nothing more than a mere of formality.

Citizenship requirement: there no citizenship requirement


demanded of the members of the BoD under the code.
However, under the Constitution, aliens may not be elected as
directors or officers of a corporations engaged in business or
industries which are totally or partially nationalized.

Powers of directors or trustees to delegate


authority
GR: The directors or trustees have the power to delegate
authority.
- In the absence of authority from the BoD, no
persons, not even its officers, can validly bind a corp.
Exceptions:
1) Discretionary powers exclusively vested or especially
delegated to the BoD.
2) They cannot delegate entire supervision and control
of the corporation.
3) Special powers vested to them.

Stock ownership requirement


1) Holder of legal title- 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.
2) Voting trustee- considered as the legal owner of
the shares transferred to him by virtue of a voting
trust agreement and, therefore, eligible to office of
director.
3) Transferee of qualifying shares- eligible to office
of director.
4) Pledge/pledgor of shares- pledgee is not qualified
to be a director because he holds the shares as a
security and not as a owner. While, a director is not
disqualified when he merely pledged his share.
5) Subscriber of shares in escrow- not eligible
because the holders in not an owner.
6) Transferee of shares he previously solda
director who makes a valid transfer of his shares and
subsequently reacquires the same will not entitle him
to his former position.
7) Transferee at the time of assumption of officequalified even if not the legal owner of the stock at
the time of election.
8) Co-owners of shares- as co-owners of the shares,
the husband and wife shall be considered as 1
stockholder. Hence, either of them and not both of
them may be voted as director.

Term of office of directors or trustees


1) One year- term expires 1 year after election to the
office and after their successors are elected and
qualified, as expressly provided by this Code.
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.
3) Modification of term- unlike in the case of nonstock corporation and educational corporations, stock
corporations are not authorized to divide the
members of its BoD into groups with each group
having a different term of office. Their term of office
being fixed by law.
Number of directors or trustees to be elected
1) Stock corporation- must not be less than 5 nor
more than 15.
2) Ordinary non-stock corp.- may be more than 15
but must not be less than 5.
3) Trustees of non-stock educational institutionnot less than 5, nor more than 15.
4) Corporation sole-none. One member or corporator
only.
5) Trustees of religious societies- not less than 5,
nor more than 15.

Reason for the requirement of stock ownership: a man


with financial interest at stake will devote more attention to
the business.
Additional qualifications in the by-laws
1) The qualifications may be prescribed in the by-laws, but it
should not be in conflict with the requirements under the
corporation law.
2) additional qualifications cannot be enforced unless
approved by the stockholders or members and contained in
the by-laws of the corporation.

Note: Election of less than the number required does not


invalidate the title of those elected as long they constitute a
quorum.

Effect of want of eligibility:


Votes cast for the person who is not eligible as a
director cannot elect him.
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 corp are not required to
ascertain their qualifications. Therefore, their acts are valid in
so far as 3rd persons are concerned.

Qualifications of directors or trustees


1) stock corporationa) every director must own atleast 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 corp.;

36

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 a
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 or 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 candidates
as he shall see fit: Provided, That the total number of
votes cast by him shall not exceed the number of
shares owned by him as shown in the books of the
corporation multiplied by the whole number of
directors to be elected: Provided, however, That no
delinquent stock shall be voted. Unless otherwise
provided in the articles of incorporation or in the bylaws, members of corporations 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 held, or if there 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.

3)

directors to be elected multiplied by the number of


his shares shall equal.
Cumulative voting by distribution- a stockholder
may cumulate his shares by multiplying also the
number of his shares by the number of directors to
be elected and distribute the same among as many
candidates as he shall see fit. (please read the
illustrations in the book.)

Right of the stockholder to use cumulative voting


Cumulative voting is a statutory right, hence, a corp.
is without power to deprive the stockholders of its use or even
restrict the right to vote in only 1 way or method.
Situations of cumulative voting
1) Cases growing out conspicuous management or
board failures.
2) Situations grounded in conflicts of important
business interests among stockholders, or between
stockholders and management.
3) Where the stockholders became convinced on rather
general grounds that the BoD was unrepresentative
of, and generally insensitive to, stockholders
interest.
4) Instances involving clashes of strong personalities.
5) Struggles for control of the corp. in which
representation through cumulative voting was an
intermediate objective; and
6)
Cases of anglers- opposition leaders who have
selfish interests.
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 1 vote for one candidate.
Note: in the election of trustees of a non-stock corp. separate
voting by zones or regions is not allowed. It is necessary that
at least a majority of the members entitled to vote must be
present at the meeting held for that purpose.
However, a segregation of votes for regular and
independent directors is allowed.
Sec. 25. Corporate 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.

Election of directors or trustees


The following are the limitations or conditions on the
election of directors/ trustees:
1.) At a meeting of stockholders or members called for the
election 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 majority of the members entitled to vote.
2.) The election must be by ballot if requested;
3.) A stockholder cannot be deprived in the articles of
incorporation or in the bylaws 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.) The candidates receiving the highest number of votes shall
be declared elected.
6.) the meeting may be adjourned if there is failure to hold an
election, but it cannot be adjourned sine die or indefinitely.
7.) The requisite notice must be given.

The directors or trustees and officers to be elected


shall perform the duties enjoined on them by law and
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.

Note: mere designation of directors or trustees without


election will not be sufficient. They must be elected. Their
election must be held substantially once in each year.
Postponement is only allowed if there is a justifiable cause.
Methods of voting
1) Straight voting- every stockholder may vote such
number of shares for as many persons as there are
directors to be elected.
2) Cumulative voting for one candidate- a
stockholder is allowed to concentrate his votes and
give one candidate as many votes as the number of

Directors or trustees cannot attend or vote by proxy at


board meetings.
Corporate officers
The BoD or trustees formulates the broad policy of
the corporation and directs the conduct of its business

37

operations. But the task of actual management and carrying


on the details of business operations and corporate policy are
delegate to the officers elected by it and over whom it
exercises supervision.

3. Secretary Need not be a director unless required by the


bylaws; must be a resident and citizen of the Philippines; and
4. Such other officers as may be provided in the bylaws.
Note: the only officers are those elected or
appointed by the board of directors.
On the other hand, Corporate employees are those
whose duties are of a clerical or manual nature.

The corporate officers are:


1. President Must be a director at the time the assumes
office, not at the time of appointment;
2. Treasurer May or may not be a director; as a matter of
sound corporate practice, must be a resident.

38