Section 5. Corporators and incorporators, stockholders and members.

- Corporators
are those who compose a corporation, whether as stockholders 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 thereof.
Corporators in a stock corporation are called stockholders or shareholders.
Corporators in a non-stock corporation are called members. (4a)
Section 6. Classification of shares. - The shares of stock of stock corporations 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.
Preferred shares of stock issued by any corporation may be given preference in the
distribution of the assets of the corporation in case of liquidation and in the distribution
of dividends, or such other preferences as may be stated in the articles of incorporation
which are not violative of the provisions 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 stock or any series thereof: Provided, That such terms and conditions shall
be effective upon the filing of a certificate thereof with the Securities and Exchange
Commission.
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 (P5.00) pesos 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.
Except as otherwise provided in the articles of incorporation and stated in the
certificate of stock, each share shall be equal in all respects to every other share.
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:
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;
4. Incurring, creating or increasing bonded indebtedness;
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 stocks with voting rights. (5a)
Section 7. Founders' shares. - Founders' shares 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 five (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. (n)
Section 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 the corporation, and upon
such other terms and conditions as may be stated in the articles of incorporation, which
terms and conditions must also be stated in the certificate of stock representing said
shares. (n)
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
again be disposed of for a reasonable price fixed by the board of directors. (n)
TITLE II - INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS
Section 10. Number and qualifications of incorporators. - Any number of natural
persons 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)
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)
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.
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)
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, 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;
6. The number of directors or trustees, which shall not be less than five (5) nor more
than fifteen (15);
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;
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
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.
Section 15. Forms of Articles of Incorporation. - Unless otherwise prescribed by special
law, articles of incorporation of all domestic corporations shall comply substantially
with the following form:
ARTICLES OF INCORPORATION OF
__________________________
(Name of Corporation)
KNOW ALL MEN BY THESE PRESENTS:
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) (non-stock)
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";
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);
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
___________________ ___________________ ___________________
___________________ ___________________ ___________________
___________________ ___________________ ___________________
___________________ ___________________ ___________________
___________________ ___________________ ___________________
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:
NAME NATIONALITY RESIDENCE
___________________ ___________________ ___________________
___________________ ___________________ ___________________
___________________ ___________________ ___________________
___________________ ___________________ ___________________
___________________ ___________________ ___________________
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.
(In case all the share are without par value):
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.
EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock above
stated has been subscribed as follows:
Name of Subscriber Nationality No of Shares Amount
Subscribed Subscribed
_________________ __________ ____________ ____________
_________________ __________ ____________ ____________
_________________ __________ ____________ ____________
_________________ __________ ____________ ____________
_________________ __________ ____________ ____________
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
_________________ ___________________ _______________
_________________ ___________________ _______________
_________________ ___________________ _______________
_________________ ___________________ _______________
_________________ ___________________ _______________
(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.)
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 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.
ELEVENTH: (Corporations which will engage in any business or activity reserved for
Filipino citizens shall provide the following):
"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."
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.
_______________________ _______________________
_______________________ _______________________
________________________________
(Names and signatures of the incorporators)
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 __________________ with Res. Cert. No.
___________ issued at _______________________ on ____________, 19 ______
NOTARY PUBLIC
My commission expires on
_________, 19 _____
Doc. No. _________;
Page No. _________;
Book No. ________;
Series of 19____ (7a)
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.
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.
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.
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:
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;
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.
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 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)
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)
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)
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)
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.
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)
Section 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. (19a)
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.
TITLE III - BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
Section 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. (28a)
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.
Section 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 bylaws, 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 by-laws, 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 are 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 member entitled to vote.
(31a)
Section 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.
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.
Directors or trustees cannot attend or vote by proxy at board meetings. (33a)
Section 26. Report of election of directors, trustees and officers. - Within thirty (30) days
after the election of the directors, trustees and officers of the corporation, the secretary,
or any other officer of the corporation, shall submit to the Securities and Exchange
Commission, the names, nationalities and residences of the directors, trustees, and
officers elected. Should a director, trustee or officer die, resign or in any manner cease
to hold office, his heirs in case of his death, the secretary, or any other officer of the
corporation, or the director, trustee or officer himself, shall immediately report such
fact to the Securities and Exchange Commission. (n)
Section 27. Disqualification of directors, trustees or officers. - No person convicted by
final judgment of an offense punishable by imprisonment for a period exceeding six (6)
years, or a violation of this Code committed within five (5) years prior to the date of his
election or appointment, shall qualify as a director, trustee or officer of any corporation.
(n)
Section 28. Removal of directors or trustees. - Any director or trustee of a corporation
may be removed from office by a vote of the stockholders holding or representing at
least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-
stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote:
Provided, That such removal shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose, and in either case, after
previous notice to stockholders or members of the corporation of the intention to
propose such removal at the meeting. A special meeting of the stockholders or
members of a corporation for the purpose of removal of directors or trustees, or any of
them, must be called by the secretary on order of the president or on the written
demand of the stockholders representing or holding at least a majority of the
outstanding capital stock, or, if it be a non-stock corporation, on the written demand of
a majority of the members entitled to vote. Should the secretary fail or refuse to call the
special meeting upon such demand or fail or refuse to give the notice, or if there is no
secretary, the call for the meeting may be addressed directly to the stockholders or
members by any stockholder or member of the corporation signing the demand. Notice
of the time and place of such meeting, as well as of the intention to propose such
removal, must be given by publication or by written notice prescribed in this Code.
Removal may be with or without cause: Provided, That removal without cause may not
be used to deprive minority stockholders or members of the right of representation to
which they may be entitled under Section 24 of this Code. (n)
Section 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the
board of directors or trustees other than by removal by the stockholders or members
or by expiration of term, may be filled by the vote of at least a majority of the remaining
directors or trustees, if still constituting a quorum; otherwise, said vacancies must be
filled by the stockholders in a regular or special meeting called for that purpose. A
director or trustee so elected to fill a vacancy shall be elected only or the unexpired
term of his predecessor in office.
Any directorship or trusteeship to be filled by reason of an increase in the number of
directors or trustees shall be filled only by an election at a regular or at a special
meeting of stockholders or members duly called for the purpose, or in the same
meeting authorizing the increase of directors or trustees if so stated in the notice of the
meeting. (n)
Section 30. Compensation of directors. - In the absence of any provision in the by-laws
fixing their compensation, the directors shall not receive any compensation, as such
directors, except for reasonable per diems: Provided, however, That any such
compensation other than per diems may be granted to directors by the vote of the
stockholders representing at least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall the total yearly compensation
of directors, as such directors, exceed ten (10%) percent of the net income before
income tax of the corporation during the preceding year. (n)
Section 31. Liability of directors, trustees or officers. - Directors or trustees who wilfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who
are guilty of gross negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as such directors
or trustees shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his
duty, any interest adverse to the corporation in respect of any matter which has been
reposed in him in confidence, as to which equity imposes a disability upon him to deal
in his own behalf, he shall be liable as a trustee for the corporation and must account
for the profits which otherwise would have accrued to the corporation. (n)
Section 32. Dealings of directors, trustees or officers with the corporation. - A contract
of the corporation with one or more of its directors or trustees or officers is voidable,
at the option of such corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the
contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board
of directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in
the case of a contract with a director or trustee, such contract may be ratified by the
vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital
stock or of at least twothirds (2/3) of the members in a meeting called for the purpose:
Provided, That full disclosure of the adverse interest of the directors or trustees
involved is made at such meeting: Provided, however, That the contract is fair and
reasonable under the circumstances. (n)
Section 33. Contracts between corporations with interlocking directors. - Except in
cases of fraud, and provided the contract is fair and reasonable under the
circumstances, a contract between two or more corporations having interlocking
directors shall not be invalidated on that ground alone:
Provided, That if the interest of the interlocking director in one corporation is
substantial and his interest in the other corporation or corporations is merely nominal,
he shall be subject to the provisions of the preceding section insofar as the latter
corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall
be considered substantial for purposes of interlocking directors. (n)
Section 34. Disloyalty of a director. - Where a director, by virtue of his office, acquires
for himself a business opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation, he must account to the latter for
all such profits by refunding the same, unless his act has been ratified by a vote of the
stockholders owning or representing at least two-thirds (2/3) of the outstanding capital
stock. This provision shall be applicable, notwithstanding the fact that the director
risked his own funds in the venture. (n)
Section 35. Executive committee. - The by-laws of a corporation may create an
executive committee, composed of not less than three members of the board, to be
appointed by the board. Said committee may act, by majority vote of all its members,
on such specific matters within the competence of the board, as may be delegated to it
in the by-laws or on a majority vote of the board, except with respect to: (1) approval of
any action for which shareholders' approval is also required; (2) the filing of vacancies
in the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws;
(4) the amendment or repeal of any resolution of the board which by its express terms
is not so amendable or repealable; and (5) a distribution of cash dividends to the
shareholders.

CHAPTER 4: FORMATION AND ORGANIZATIONS OF CORPORATIONS

1. PROMOTIONAL STAGE
This is undertaken by the organizers or promoters who bring together persons interested in
the business venture. They enter into contract either in their own names or in the name of the
proposed corporation.
LIABILITY OF PROMOTERS: GENERAL RULE: a promoter, although he may assume to act
for and on behalf of a projected corporation and not for himself, will be held personally liable
on contracts made by him for the benefit of a corporation he intends to organize. The personal
liability continues even after the formation of the corporation unless there is novation or other
agreement to release him from liability. As such, the promoter may do either of the following
options:
a. He may make a continuing offer on behalf of the corporation, which, if accepted after
incorporation, will become a contract. In this case, the promoter does not assume any personal
liability, whether or not the corporation will accept the offer; b. He may make a contract at the
time binding himself, with the understanding that if the corporation, once formed, accepts or
adopts the contract, he will be relieved of responsibility; or c. He may bind himself personally
and assume responsibility of looking to the proposed corporation, when formed, for
reimbursement.
2. PROCESS OF INCORPORATION
Includes the drafting of the Articles of Incorporation, preparation and submission of additional
and supporting documents, filing with the SEC, and the subsequent issuance of the Certificate
of Incorporation.
CONTENTS OF THE ARTICLES OF INCORPORATION
Sec. 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, 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; 6.
The number of directors or trustees, which shall not be less than five (5) nor more than fifteen
(15);
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; 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 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.
Sec. 15.
F o r m s o f A r t i c l e s o f I n c o r p o r a t i o n . - Unless otherwise prescribed by special
law, articles of incorporation of all domestic corporations shall comply substantially with the
following form:
a. PREFATORY PARAGRAPH
xxx “KNOW ALL MEN BY THESE PRESENTS: 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) (non-stock) corporation under the laws of the Republic of the Philippines” xxx
It must specify the nature of the corporation being organized in order to prevent difficulties of
administration and supervision. Thus, the corporation should indicate whether it is a stock or
a non-stock corporation, a close corporation, corporation sole or a religious corporation.
b. CORPORATE NAME
xxx
AND WE HEREBY CERTIFY: FIRST: That the name of said corporation shall be
".............................................., INC. or CORPORATION"; xxx
The name of the corporation is essential to its existence since it is through it that it can act and
perform all legal acts. Each corporation should therefore, have a name by which it is to sue
and be sued and do all legal acts.
A corporation, once formed, cannot use any other name, unless it has been amended in
accordance with law as this would result in confusion and may open the door to fraud and
evasion as well as difficulties of administration and supervision.
Thus, the organizers must make sure that the name they intend to use as a corporate name
is not similar or confusingly similar to any other name already registered and protected by law
since the SEC would refuse registration if such be the case.
Sec. 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.
The SEC, in implementing the above provision on corporate name, thus requires that a
“Verification Slip” from the Records Division of the Commission be submitted showing that the
proposed name is legally permissible. If the corporate name is available for use, the SEC will
allow the incorporators to “reserve” it for a nominal fee for a specific period until the AOI is
filed with the SEC.
SEC Memorandum Circular No. 14-2000 dated October 24, 2000, provides: In implementing
Section 18 of the Corporation Code of the Philippines (BP 68), the following revised guidelines
in the approval of corporate and partnership names are hereby adopted for the information
and guidelines of all concerned:
1. The corporation name shall contain the word "Corporation" or its abbreviation "Corp." or
"Incorporated", or "Inc.".
The partnership name shall contain the word "Company" or "Co.". For limited partnership, the
word "Limited" or "Ltd." shall be included. In case of professional partnership, the word
"Company" need not be used. 2. Terms descriptive of a business in the name shall be
indicative of the primary purpose. If there are two (2) descriptive terms, the first shall refer to
the primary purpose and the second shall refer to one of the secondary purposes. 3. The
name shall not be identical, misleading or confusingly similar to one already registered by
another corporation or partnership with the Commission or a sole proprietorship registered
with the Department of Trade and Industry.
If the proposed name is similar to the name of a registered firm, the proposed name must
contain at least one distinctive word different from the name of the company already
registered. (The Book of Sir Ladia, 2007 Edition, provides that there must be two other words
different and distinct from the name of the company already registered or protected by law).
4. Business or tradename of any firm which is different from its corporate or partnership name
shall be indicated in the articles of incorporation or partnership of said firm. 5. Tradename or
trademark duly registered with the Intellectual Property Office cannot be used as part of a
corporate or partnership name without the consent of the owner of such tradename of
trademark. 6. If the name or surname of a person is used as part of a corporate or partnership
name, the consent of said person or his heirs must be submitted except of that person is a
stockholder, member, partner of a declared national hero. If such person cannot be identified
or non-existent, an explanation for the use of such name shall be required. 7. The meaning
of initials in the name shall be disclosed in writing by the registrant. 8. Name containing a term
descriptive of a business different from the business of a registered company whose name
also bears similar term(s) used by the former may be allowed. 9. The name should not be
patently deceptive, confusing or contrary to existing laws. 10. The name which contains a
word identical to a word in a registered name shall not be allowed if such word is coined or
already appropriated by a registered firm, regardless of the number of the different words in
the proposed name, unless there is consent from the registered firm of this firm is one of the
stockholders of partners of the entity to be registered. 11. The name of an internationally
known foreign corporation or one similar to it may not be used by a domestic corporation
without the consent of the former. 12. The term "Philippines" when used as part of the name
of a subsidiary corporation of a foreign corporation shall be in parenthesis: i.e. "(Philippines)"
or "(Phil.)". 13. The following words shall not be used as part of a corporate or partnership
names: a. As provided by special laws:
1. "Finance", "Financing" or "Finance and Investment" by corporations or partnerships not
engaged in the financing business (R.A. 5980, as amended) 2. "Engineer", "Engineering" or
"Architects" as part of the corporate name (R. A. 546 and R.A. 1582) 3. "Bank", "Banking",
"Banker", Building and Loan Association", Trust Corporation", "Trust Company" or words of
similar import by corporations or associations not engaged in banking business. (R.A. 337, as
amended) 4. "United Nations" in full or abbreviated form cannot be part of a corporate or
partnership name (R.A. 226) 5. "Bonded" for corporations or partnerships with unlicensed
warehouse (R.A. 245) b. As a matter of policy: 1. "Investment(s)" by corporations or
partnership not organized as investment house company or holding company. 2. "National"
by all stock corporations and partnership. 3. "Asean", "Calabarzon" and "Philippines 2000".
14. The name of a dissolved firm shall not be allowed to be used by other firms within three
(3) years after the approval of the dissolution of the corporation by the Commission, unless
allowed by the last stockholders representing at least majority of the outstanding capital stock
of the dissolved firm. 15. Registrant corporations or partnership shall submit a letter
undertaking to change their corporate or partnership name in case another person or firm has
acquired a prior right to the use of the said firm name or the same is deceptively or confusingly
similar to one already registered unless this undertaking is already included as one of the
provisions of the articles of incorporation or partnership of the registrant.1
RED LINE TRANSPORTATION CO. VS. RURAL TRANSIT CO.
(60 Phil.
549; Sept. 6, 1934) – A certificate of public convenience was issued in the name of Rural
Transit Co. by the Public Service Commission despite opposition of herein petitioner-appellant
Red Line Transportation Co.. It appears that “Red Line Transit Co.” is being used as a trade
name of Bahrach Motors Co.
ISSUE: Who is the real party in interest, Rural Transit Co. which appears in the face of the
application? Or Bahrach Motors, Inc. using the name of the former as a trade name?
HELD: Bahrach Motors, Inc.. There is no law that empowers PSC or any court in this
jurisdiction to authorize one corporation to assume the name of another corporation as a trade
name. Both Rural Transit and Bahrach are Philippine corporations and the very law of their
creation and continued existence requires each to adopt and certify a distinctive name.
The incorporators constitute a body politic and corporate under the name state in the certificate
(Sec. 11, Act. No. 1459). A corporation has the power of succession in its corporate name
(Sec. 13). The name of a corporation is therefore essential to its existence. It cannot change
its name except in the manner provided by law. By that name alone it is authorized to transact
business.
The law gives a corporation on express or implied authority to assume another name that is
unappropriated; still less that of another corporation, which is expressly set apart from it and
protected by law. If any corporation should assume at pleasure as an unregistered trade name,
the name of another corporation, this practice would result in confusion of administration and
supervision. The policy of the law as expressed in our corporation statute and the Code of
Commerce is clearly against such a practice.
UNIVERSAL MILLS CORP. VS. UNIVERSAL TEXTILE MILLS INC.
(78
SCRA 62; July 28, 1977) – In 1953, Universal Textile Mills, Inc. (UTMI) was organized. In
1954, Universal Hosiery Mills Corporation (UHMC) was also organized. Both are actually
distinct corporations but they engage in the same business (fabrics). In 1963, UHMC
petitioned to change its name to
1 http://www.disini.ph/res_sec__mc142000.html
Universal Mills Corporation (UMC). The Securities and Exchange Commission (SEC) granted
the petition.
Subsequently, a warehouse owned by UMC was gutted by fire. News about the fire spread
and investors of UTMI thought that it was UTMI’s warehouse that was destroyed. UTMI had
to make clarifications that it was UMC’s warehouse that got burned. Eventually, UTMI
petitioned that UMC should be enjoined from using its name because of the confusion it
brought. The SEC granted UTMI’s petition. UMC however assailed the order of the SEC as it
averred that their tradename is not deceptive; that UTMI’s tradename is qualified by the word
“Textile”, hence, there can be no confusion,
ISSUE: WON the SEC is correct?
HELD: Yes. There is definitely confusion as it was evident from the facts where the investors
of UTMI mistakenly believed that it was UTMI’s warehouse that was destroyed. Although the
corporate names are not really identical, they are indisputably so similar that it can cause, as
it already did, confusion. The SEC did not act in abuse of its discretion when it ordered UMC
to drop its name because there was factual evidence presented as to the confusion. Further,
when UMC filed its petition for change of corporate name, it made an undertaking that it shall
change its name in the event that there is another person, firm or entity who has obtained a
prior right to the use of such name or one similar to it. That promise is still binding upon the
corporation and its responsible officers
LYCEUM OF THE PHILIPPINES VS. COURT OF APPEALS
(219 SCRA
610; March 5, 1993) - Lyceum of the Philippines Inc. previously obtained from the SEC a
favourable decision on the exclusive use of “Lyceum” against Lyceum of Baguio, Inc.. such
decision assailed by the latter before the SC which was denied for lack of merit.
Armed with the Resolution of the Supreme Court, the Lyceum of the Philippines then wrote all
the educational institutions it could find using the word "Lyceum" as part of their corporate
name, and advised them to discontinue such use of "Lyceum." Unheeded, Lyceum of the
Philippines instituted before the SEC an action to enforce what Lyceum of the Philippines
claims as its proprietary right to the word "Lyceum." The SEC rendered a decision sustaining
petitioner's claim to an exclusive right to use the word "Lyceum." The hearing officer relied
upon the SEC ruling in the Lyceum of Baguio, Inc. case.
On appeal, however, by Lyceum Of Aparri, Lyceum Of Cabagan, Lyceum Of Camalaniugan,
Inc., Lyceum Of Lallo, Inc., Lyceum Of Tuao, Inc., Buhi Lyceum, Central Lyceum Of
Catanduanes, Lyceum Of Southern Philippines, Lyceum Of Eastern Mindanao, Inc. and
Western Pangasinan Lyceum, Inc.,, which are also educational institutions, to the SEC En
Banc, the decision of the hearing officer was reversed and set aside. The SEC En Banc did
not consider the word "Lyceum" to have become so identified with Lyceum of the Philippines
as to render use thereof by other institutions as productive of confusion about the identity of
the schools concerned in the mind of the general public. Unlike its hearing officer, the SEC En
Banc held that the attaching of geographical names to the word "Lyceum" served sufficiently
to distinguish the schools from one another, especially in view of the fact that the campuses
of Lyceum of the Philippines and those of the other Lyceums were physically quite remote
from each other.
On appeal, the CA affirmed the decision of the CA en banc, and denied reconsideration.
ISSUE: WON private respondents can be directed to delete the word “lyceum” from their
corporate names?
HELD: No. The policy underlying the prohibition in Section 18 against the registration of a
corporate name which is "identical or deceptively or confusingly similar" to that of any existing
corporation or which is "patently deceptive" or "patently confusing" or "contrary to existing
laws," is the avoidance of fraud upon the public which would have occasion to deal with the
entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties
of administration and supervision over corporations.
Herein, the Court does not consider that the corporate names of the academic institutions are
"identical with, or deceptively or confusingly similar" to that of Lyceum of the Philippines Inc.
True enough, the corporate names of the other schools (defendant institutions) entities all
carry the word "Lyceum" but confusion and deception are effectively precluded by the
appending of geographic names to the word "Lyceum." Thus, the "Lyceum of Aparri" cannot
be mistaken by the general public for the Lyceum of the Philippines, or that the "Lyceum of
Camalaniugan" would be confused with the Lyceum of the Philippines. Further, etymologically,
the word "Lyceum" is the Latin word for the Greek lykeion which in turn referred to a locality
on the river Ilissius in ancient Athens "comprising an enclosure dedicated to Apollo and
adorned with fountains and buildings erected by Pisistratus, Pericles and Lycurgus frequented
by the youth for exercise and by the philosopher Aristotle and his followers for teaching."
In time, the word "Lyceum" became associated with schools and other institutions providing
public lectures and concerts and public discussions. Thus today, the word "Lyceum" generally
refers to a school or an institution of learning. Since "Lyceum" or "Liceo" denotes a school or
institution of learning, it is not unnatural to use this word to designate an entity which is
organized and operating as an educational institution. To determine whether a given corporate
name is "identical" or "confusingly or deceptively similar" with another entity's corporate name,
it is not enough to ascertain the presence of "Lyceum" or "Liceo" in both names. One must
evaluate corporate names in their entirety and when the name of Lyceum of the Philippines is
juxtaposed with the names of private respondents, they are not reasonably regarded as
"identical" or "confusingly or deceptively similar" with each other.
ISSUE2: WON the word “Lyceum” has acquired a secondary meaning although originally
generic?
HELD: No. The Court of Appeals recognized this issue and answered it in the negative: "Under
the doctrine of secondary meaning, a word or phrase originally incapable of exclusive
appropriation with reference to an article in the market, because geographical or otherwise
descriptive might nevertheless have been used so long and so exclusively by one producer
with reference to this article that, in that trade and to that group of the purchasing public, the
word or phrase has come to mean that the article was his produce (Ana Ang vs. Toribio
Teodoro, 74 Phil. 56). This circumstance has been referred to as the distinctiveness into which
the name or phrase has evolved through the substantial and exclusive use of the same for a
considerable period of time. . . . No evidence was ever presented in the hearing before the
Commission which sufficiently proved that the word 'Lyceum' has indeed acquired secondary
meaning in favor of the appellant. If there was any of this kind, the same tend to prove only
that the appellant had been using the disputed word for a long period of time.
The number alone of the private respondents in the present case suggests strongly that the
Lyceum of the Philippines' use of the word "Lyceum" has not been attended with the exclusivity
essential for applicability of the doctrine of secondary meaning. It may be noted also that at
least one of the private respondents, i.e., the Western Pangasinan Lyceum, Inc., used the
term "Lyceum" 17 years before Lyceum of the Philippines registered its own corporate name
with the SEC and began using the word "Lyceum." It follows that if any institution had acquired
an exclusive right to the word "Lyceum," that institution would have been the Western
Pangasinan Lyceum, Inc. rather than Lyceum of the Philippines. Hence, Lyceum of the
Philippines is not entitled to a legally enforceable exclusive right to use the word "Lyceum" in
its corporate name and that other institutions may use "Lyceum" as part of their corporate
names.
PHILIPS EXPORT B.V. et. al. VS. COURT OF APPEALS
(206 SCRA 457;
Feb. 21, 1992) – Petitioner is the registered owner of the trademark PHILIPS and PHILIPS
SHIELD EMBLEM issued by the Philippine Patent Office. Philips Electric Lamp Inc. and Philips
Industrial Development Inc., also petitioners, are the authorized users of such trademark.
Petitioner filed a case with SEC praying for a writ of injunction to prohibit herein respondent
Standard Philips Corporation from using the word “PHILIPS” in its corporate name, which was
denied. On appeal, the CA affirmed the SEC.
ISSUE: WON Standard Philips should be directed to delete the word PHILIPS from its
corporate name?
HELD: Yes. As early as Western Equipment and Su pply Co. v. Reyes , 51 Phil. 115 (1927),
the Court declared that a corporation's right to use its corporate and trade name is a property
right, a right in rem, which it may assert and protect against the world in the same manner as
it may protect its tangible property, real or personal, against trespass or conversion. It is
regarded, to a certain extent, as a property right and one which cannot be impaired or defeated
by subsequent appropriation by another corporation in the same field (Red Line Transportation
Co. vs. Rural Transit Co., September 8, 1934, 20 Phil 549).
A name is peculiarly important as necessary to the very existence of a corporation (American
Steel Foundries vs. Robertson, 269 US 372, 70 L ed 317, 46 S Ct 160; Lauman vs. Lebanon
Valley R. Co., 30 Pa 42; First National Bank vs. Huntington Distilling Co. 40 W Va 530, 23 SE
792). Its name is one of its attributes, an element of its existence, and essential to its identity
(6 Fletcher [Perm Ed], pp. 3-4). The general rule as to corporations is that each corporation
must have a name by which it is to sue and be sued and do all legal acts. The name of a
corporation in this respect designates the corporation in the same manner as the name of an
individual designates the person (Cincinnati Cooperage Co. vs. Bate. 96 Ky 356, 26 SW 538;
Newport Mechanics Mfg. Co. vs. Starbird. 10 NH 123); and the right to use its corporate name
is as much a part of the corporate franchise as any other privilege granted (Federal Secur.
Co. vs. Federal Secur. Corp., 129 Or 375, 276 P 1100, 66 ALR 934; Paulino vs. Portuguese
Beneficial Association, 18 RI 165, 26 A 36).
A corporation 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 individual's name is thrust upon
him ( See Standard Oil Co. of New Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973,
977). A corporation can no more use a corporate name in violation of the rights of others than
an individual can use his name legally acquired so as to mislead the public and injure another
(Armington vs. Palmer, 21 RI 109. 42 A 308).
The statutory prohibition (under Sec. 18 of the Corporation Code) cannot be any clearer. To
come within its scope, two requisites must be proven, namely:
(1) that the complainant corporation acquired a prior right over the use of such corporate
name; and (2) the proposed name is either: (a) identical; or (b) deceptively or confusingly
similar to that of any existing corporation or to any other name already protected by law; or (c)
patently deceptive, confusing or contrary to existing law.
The right to the exclusive use of a corporate name with freedom from infringement by similarity
is determined by priority of adoption. In this regard, there is no doubt with respect to
Petitioners' prior adoption of' the name ''PHILIPS" as part of its corporate name. Petitioners
Philips Electrical and Philips Industrial were incorporated on 29 August 1956 and 25 May
1956, respectively, while Respondent Standard Philips was issued a Certificate of Registration
on 12 April 1982, twenty-six (26) years later. Petitioner PEBV has also used the trademark
"PHILIPS" on electrical lamps of all types and their accessories since 30 September 1922.
The second requisite no less exists in this case. In determining the existence of confusing
similarity in corporate names, the test is whether the similarity is such as to mislead a person,
using ordinary care and discrimination. In so doing, the Court must look to the record as well
as the names themselves. While the corporate names of Petitioners and Private Respondent
are not identical, a reading of Petitioner's corporate names, to wit: PHILIPS EXPORT B.V.,
PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC.,
inevitably leads one to conclude that "PHILIPS" is, indeed, the dominant word in that all the
companies affiliated or associated with the principal corporation, PEBV, are known in the
Philippines and abroad as the PHILIPS Group of Companies.
Respondents argue that there were no evidence presented that there was actual confusion. It
is settled, however, that proof of actual confusion need not be shown. It suffices that confusion
is probably or likely to occur (6 Fletcher [Perm Ed], pp. 107-108, enumerating a long line of
cases).
Moreover, Given Private Respondent's underlined primary purpose in its AOI, nothing could
prevent it from dealing in the same line of business of electrical devices, products or supplies
which fall under its primary purposes. Besides, there is showing that Private Respondent not
only manufactured and sold ballasts for fluorescent lamps with their corporate name printed
thereon but also advertised the same as, among others, Standard Philips (TSN, before the
SEC, pp. 14, 17, 25, 26, 37-42, June 14, 1985; pp. 16-19, July 25, 1985). As aptly pointed out
by Petitioners, [p]rivate respondent's choice of "PHILIPS" as part of its corporate name
[STANDARD PHILIPS CORPORATION] . . . tends to show said respondent's intention to ride
on the popularity and established goodwill of said petitioner's business throughout the world"
( Rollo , p. 137). The subsequent appropriator of the name or one confusingly similar thereto
usually seeks an unfair advantage, a free ride of another's goodwill (American Gold Star
Mothers, Inc. v. National Gold Star Mothers, Inc., et al, 89 App DC 269, 191 F 2d 488).
In allowing Private Respondent the continued use of its corporate name, the SEC maintains
that the corporate names of Petitioners PHILIPS ELECTRICAL LAMPS. INC. and PHILIPS
INDUSTRIAL DEVELOPMENT, INC. contain at least two words different from that of the
corporate name of respondent STANDARD PHILIPS CORPORATION, which words will
readily identify Private Respondent from Petitioners and vice-versa.
True, under the Guidelines in the Approval of Corporate and Partnership Names formulated
by the SEC, the proposed name "should not be similar to one already used by another
corporation or partnership. If the proposed name contains a word already used as part of the
firm name or style of a registered company; t h e p r o p o s e d n a m e m u s t c o n t a i n t
wootherwordsdifferentfromthecompanyalreadyregistered"
(Emphasis ours). It is then pointed out that Petitioners Philips Electrical and Philips Industrial
have two words different from that of Private Respondent's name.
What is lost sight of, however, is that PHILIPS is a trademark or trade name which was
registered as far back as 1922. Petitioners, therefore, have the exclusive right to its use which
must be free from any infringement by similarity. A corporation has an exclusive right to the
use of its name, which may be protected by injunction upon a principle similar to that upon
which persons are protected in the use of trademarks and tradenames (18 C.J.S. 574). Such
principle proceeds upon the theory that it is a fraud on the corporation which has acquired a
right to that name and perhaps carried on its business thereunder, that another should attempt
to use the same name, or the same name with a slight variation in such a way as to induce
persons to deal with it in the belief that they are dealing with the corporation which has given
a reputation to the name (6 Fletcher [Perm Ed], pp. 39-40, citing Borden Ice Cream Co. v.
Borden's Condensed Milk Co., 210 F 510). Notably, too, Private Respondent's name actually
contains only a single word, that is, "STANDARD", different from that of Petitioners inasmuch
as the inclusion of the term "Corporation" or "Corp." merely serves the Purpose of
distinguishing the corporation from partnerships and other business organizations.
The fact that there are other companies engaged in other lines of business using the word
"PHILIPS" as part of their corporate names is no defense and does not warrant the use by
Private Respondent of such word which constitutes an essential feature of Petitioners'
corporate name previously adopted and registered and-having acquired the status of a well-
known mark in the Philippines and internationally as well (Bureau of Patents Decision No. 88-
35 [TM], June 17, 1988, SEC Records).
c. PURPOSE CLAUSE
xxx 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); xxx
The statement of the objects or purpose or powers in the charter results practically in defining
the scope of authority of the corporate enterprise or undertaking. This statement both congers
and also limits the actual authority of the corporate representatives.
The reasons for requiring a statement of the purposes or objects: 1. In order that the
stockholder who contemplates on an investment in a business enterprise shall know within
what lines of business his money is to be put at risks; 2. So that the board of directors and
management my now within what lines of business they are authorized to act; and 3. So that
anyone who deals with the company may ascertain whether a contract or transaction into
which he contemplates entering is one within the general authority of the management.
SECONDARY PURPOSE : Although the Corporation Code does not restrict nor limit the
number of purpose or purposes which a corporation may have, Sec. 14 thereof, requires that
if it has more than one purpose, the primary purpose as well as the secondary ones must be
indicated therein.
PROHIBITION : The following are prohibited by special laws for having any other purpose not
peculiar to them: 1. Educational, religious, and other non-stock corporations cannot include
any other purpose which would change or contradict its nature or to engage in any enterprise
to make profits for is members; 2. Insurance companies cannot engage in commercial banking
at the same time, and vice-versa; and 3. Stock brokers can have no other line of business not
peculiar to them.
RESTRICTIONS AND/OR ADDITIONAL REQUIREMENTS : 1. As a general rule, the purpose
or purposes must be lawful. Hence, the SEC is duty bound to determine the legality of the
corporate purpose/s before it issues the certificate of registration; 2. A corporation may not be
formed for the purpose of practicing a profession like law, medicine or accountancy, either
directly or indirectly. These are reserved exclusively for professional partnerships; 3. The retail
trade, where the corporate capital is less than $2.5M, or its peso equivalent are reserved
exclusively for Filipinos, or for corporations or partnerships wholly owned by such citizen. 4.
As a general rule, corporations with foreign equity are not allowed to engage in restaurant
business but corporations with such foreign equity can purse such undertaking if it is incidental
or in connection with hotel or innkeeping business. 5. Management consultants, advisers
and/or specialists, must submit the personal information sheet of the incorporators and
directors in order that the SEC may be able to find out or determine whether or not the
applicant corporation is qualified to act as such. 6. As a matter of policy, financing companies
are required by the SEC to submit certain additional documents together with their applications
for registration to verify compliance with RA 8556. 7. For bonded warehousing companies, an
undertaking to comply with the General Bonded Warehousing Act must be submitted along
with the AOI. 8. In case the applicant proposes to engage in the business of hospital and/or
clinic, the purpose clause must contain the following proviso: “Provided that purely medical or
surgical services in connection therewith shall be performed by duly qualified physician and
surgeon who may or may not be freely and individually contracted by the parties.” 9. In the
case of Customs Brokerage business, the applicant must submit the license of at least two
customs broker connected with the applicant corporation; 10. Transfer Agents, Broker and
Clearing Houses must submit the certificate of admission to the profession of the CPA of any
officer of the corporation; 11. Carriage of mails cannot be a purpose of a corporation unless a
special franchise has been granted to it. 12. If the corporate purpose or objective includes any
purpose under the supervision of another government agency, prior clearance and/or approval
of the concerned government agencies or instrumentalities will be required pursuant to the
last paragraph of Sec. 17 of the Code.
GENERAL LIMITATIONS: 1. The purpose or purposes must be lawful;
2. The purpose must be specific or stated concisely although in broad or general terms; 3. If
there is more than one purpose, the primary as well as the secondary ones must be specified;
and 4. The purposes must be capable of being lawfully combined.
d. PRINCIPAL OFFICE
xxx THIRD: That the principal office of the corporation is located in the City/Municipality
of............................................, Province of................................................., Philippines xxx
It must be located within the Philippines. The AOI must not only specify the province, but also
the City or Municipality where it is located. In this regard, it is to be observed that the principal
office may be in one place but the business operations are actually conducted in other areas.
The law does not, of course, require a statement of the place of corporate operations and,
therefore, may be dispensed with.
The principal office serves as the residence of the corporation, and is thus important in: (1)
venue of actions; (2) registration of chattel mortgage of shares; (3) validity of meetings of
stockholders or members in so far as venue thereof is concerned.
CLAVECILLA RADIO SYSTEM VS. ANTILLON
(19 SCRA 379; Feb. 18,
1967) – The New Cagayan Grocery filed a complaint against CRS for some irregularities in
the transmission of a message which changed the context and purport causing damages. The
complaint was filed in the City Court of Cagayan de Oro.
ISSUE: WON the action will prosper?
HELD: No. The action was based on tort and not upon a written contract and as such, under
the Rules of Court, it should be filed in the municipality where the defendant or any of the
defendants resides or may be served with summons.
Settled is the principle in corporation law that the residence of a corporation is the place where
the principal office is established. Since it is not disputed that CRS has its principal office in
Manila, it follows that the suit against it may properly be filed in the City of Manila.
The fact that CRS maintains branch office in some parts of the country does not mean that it
can be sued in any of these places. To allow such would create confusion and work untold
inconveniences to the corporation.
e. TERM OF EXISTENCE
xxx 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; xxx
S e c . 1 1 . C o r p o r a t e t e r m . - 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
The corporate term is necessary in determining at what point in time the corporation will cease
to exist or have lost its juridical personality. Once it ceases to exist, its legal personality also
expires and could not thereafter, act in its own name for the purpose of prosecuting it business.
EXTENSION : can be made not earlier than 5 years prior to the expiry date unless there are
justifiable reasons.
f. INCORPORATORS
xxx FIFTH: That the names, nationalities and residences of the incorporators of the
corporation are as follows:
NAME NATIONALITY RESIDENCE ..................... .............................
............................ ..................... ............................. ............................ .....................
............................. ............................ ..................... ............................. ............................
..................... ............................. ............................ xxx
Sec. 5.
Corporators and incorporators, stockholders and members. - Corporators are those who
compose a corporation, whether as stockholders 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 thereof.
Corporators in a stock corporation are called stockholders or shareholders. Corporators in a
non-stock corporation are called members.
CORPORATORS apply to all who compose the corporation at any given time and need not
be among those who executed the AOI at the start of its formation or organization.
INCORPORATORS are those mentioned in the AOI as originally forming the corporation and
who are signatories in the AOI.
An incorporator may be considered as a corporator as long as he continues to be a stockholder
or a member, but not all corporators are incorporators.
Sec. 10.
Number and qualifications of incorporators. - Any number of natural persons 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 a stock corporation must own or be a subscriber to at least one (1) share of
the capital stock of the corporation.
QUALIFICATIONS OF INCORPORATORS : 1. Must be natural persons. It implies that a
corporation or a partnership cannot become incorporators. EXCEPTION: (1) cooperatives; (2)
corporations primarily organized to hold equities in rural banks and may rightfully become
incorporators thereof. It must be noted likewise that the law does not preclude firms and other
entities from becoming stockholders or subscribers to the shares of a stock corporation. Thus,
while they cannot qualify as incorporators, they can become corporators or stockholders. 2.
Of Legal Age. Minors cannot be incorporators. They may, however, become stockholders
provided they are legally represented by parents, guardians or administrators. 3. Must own at
least 1 share. 4. Majority must be residents of the Philippines. The law does not provide for
citizenship requirements. EXCEPT: in certain areas of activity or industry wherein ownership
of shares of stock are reserved wholly or partially to Filipino citizens. Hence, all incorporators
may be foreigners provided majority of them are residents. Note that the requirement is
residence and not citizenship.
g. DIRECTORS/TRUSTEES
xxx 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:
NAME NATIONALITY RESIDENCE ..................... .............................
............................ ..................... ............................. ............................ .....................
............................. ............................
..................... ............................. ............................ ..................... .............................
............................ xxx
DIRECTORS compose the governing board in stock corporations. TRUSTEES refer to non-
stock corporations.
There must be at least 5 but not more than 15 directors in a private corporation. EXCEPTIONS:
1. Educational corporations registered as non-stock corporations whose number of trustees,
though not less than 5 and not more than 15 should be divisible by 5. 2. In close corporations
where all stockholders are considered as members of the board of directors (Sec. 97) thereby
effectively allowing 20 members in the board.
The by-laws of a corporation may provide for additional qualifications and disqualifications of
its members of the board of directors or trustees. However, it may not do away with the
minimum disqualifications laid down by the Code. The minimum qualifications of directors and
trustees in a domestic corporation are provided under the 2nd par. Of Sec. 23:
Sec. 23. The board of directors or trustees xxx 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.
QUALIFICATIONS OF DIRECTORS/TRUSTEES: 1. Must own at least 1 share in their own
names or a member (in the case of trustees); 2. Majority must be resident of the Philippines.
Even aliens may be elected as directors, provided that the majority of such directors are
residents of the Philippines. EXCEPT: in activities exclusively reserved to Filipino citizens like
the management of educational institutions and those governed by the Retail Trade Law.
Sec. 27. Disqualification of directors, trustees or officers. - No person convicted by final
judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a
violation of this Code committed within five (5) years prior to the date of his election or
appointment, shall qualify as a director, trustee or officer of any corporation.
DISQUALIFICATIONS: 1. Imprisonment for a period exceeding 6 years; 2. Violation of the
Corporation Code within 5 years prior to the date of election or appointment; 3. Such other
disqualifications that may be provided in the by-laws.
JOHN GOKONGWEI, JR., Petitioner , vs. SECURITIES AND EXCHANGE COMMISSION,
SAN MIGUEL CORPORATION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE
ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL
ORTIGAS, EMIGDIO TANJUATCO and EDUARDO VISAYA, Respondents (GR No. L -
52129; April 21, 1980)
FACTS: Petitioner, stockholder of San Miguel Corp. filed a petition with the SEC for the
declaration of nullity of the by-laws etc. against the majority members of the BOD and San
Miguel. The amended by-laws provided for the disqualification of competitors from nomination
and election in the Board of Directors of SMC. This was denied by the SEC.
ISSUE: Is the disqualification valid?
HELD: Yes. The Court held that a corporation has authority prescribed, by
law, the qualifications of directors. It has the inherent power to adopt bylaws for its internal
government, and to regulate the conduct and prescribe the rights and duties of its members
towards itself and among themselves in reference to the management of its affairs. A
corporation, under the Corporation law, may prescribe in its by-laws the qualifications, duties
and compensation of directors, officers, and employees. Any person who buys stock in a
corporation does so with the knowledge that its affairs are dominated by a majority of the
stockholders and he impliedly contracts that the will of the majority shall govern in all matters
within the limits of the acts of incorporation and lawfully enacted by-laws and not forbidden by
law. Any corporation may amend its by-laws by the owners of the majority of the subscribed
stock. It cannot thus be said that petitioners has the vested right, as a stock holder, to be
elected director, in the face of the fact that the law at the time such stockholder's right was
acquired contained the prescription that the corporate charter and the by-laws shall be subject
to amendment, alteration and modification. A Director stands in a fiduciary relation to the
corporation and its shareholders, which is characterized as a trust relationship. An amendment
to the corporate by-laws which renders a stockholder ineligible to be director, if he be also
director in a corporation whose business is in competition with that of the other corporation,
has been sustained as valid. This is based upon the principle that where the director is
employed in the service of a rival company, he cannot serve both, but must betray one or the
other. The amendment in this case serves to advance the benefit of the corporation and is
good. Corporate officers are also not permitted to use their position of trust and confidence to
further their private needs, and the act done in furtherance of private needs is deemed to be
for the benefit of the corporation. This is called the doctrine of corporate opportunity.
h. CAPITALIZATION
xxx 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. (In case all the share are without par value):
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.
EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock above stated
has been subscribed as follows:
Name of Subscriber Nationality No of Shares Amount Subscribed ........................
.............. ................ ........................... ........................ .............. ................
........................... ........................ .............. ................ ........................... ........................
.............. ................ ........................... ........................ .............. ................
...........................
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-Up ..............................
.............................. .................... .............................. .............................. ....................
.............................. .............................. .................... ..............................
.............................. .................... .............................. .............................. ....................
(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.)
xxx
The Corporation Code requires the AOI to state the authorized capital stock, the number of
shares and/or kind of shares into which the authorized capital is divided, the par value of each
share, if there by any, the names, nationalities and residences of the original subscribers, and
the amount subscribed and paid by each. At least 25% of the subscribed capital must be paid
and in no case may the paid-up capital be less than P5,000.
AUTHORIZED CAPITAL signifies the MAXIMUM amount fixed in the articles to be subscribed
and paid-in or secured to be paid by the subscribers. It may also refer to the maximum number
of shares that a corporation can issue.
SUBSCRIBED CAPITAL STOCK is the total number of shares and its total value for which
there are contracts for their acquisition or subscription. It is in effect, the stockholder’s equity
account showing that part of the authorized capital stock which has been paid or promised to
be paid, or that portion of the authorized capital stock which has been subscribed by the
subscribers or stockholders.
PAID UP CAPITAL STOCK or paid-in capital is the actual amount or value which has been
actually contributed or paid to the corporation in consideration of the subscriptions made
thereon. It may be in the form of cash, property or in the form of services actually rendered to
the corporation as provided under Sec. 62 of the Corporation Code:
Sec. 62.
C o n s i d e r a t i o n f o r s t o c k s . - Stocks shall not be issued for a consideration less
than the par or issued price thereof. Consideration for the issuance of stock may be any or a
combination of any two or more of the following:
1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by
the corporation and necessary or convenient for its use and lawful purposes at a fair valuation
equal to the par or issued value of the stock issued; 3. Labor performed for or services actually
rendered to the corporation; 4. Previously incurred indebtedness of the corporation; 5.
Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding
shares exchanged for stocks in the event of reclassification or conversion.
Where the consideration is other than actual cash, or consists of intangible property such as
patents of copyrights, the valuation thereof shall initially be determined by the incorporators or
the board of directors, subject to approval by the Securities and Exchange Commission.
Shares of stock shall not be issued in exchange for promissory notes or future service.
The same considerations provided for in this section, insofar as they may be applicable, may
be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of incorporation or by the
board of directors pursuant to authority conferred upon it by the articles of incorporation or the
by-laws, or in the absence thereof, by the stockholders representing at least a majority of the
outstanding capital stock at a meeting duly called for the purpose.
SHARES OF STOCKS AND THEIR CLASS IFICATIONS
SHARES OF STOCK designate the units into which the proprietary interest in a corporation is
divided. They represent the proportionate integers or units, the sum of which constitutes the
capital stock of the corporation. It is likewise the interest or right which the owner, called the
stockholders or shareholder, has in the management of the corporation, and in the surplus
profits and in case of distribution, in all of its assets remaining after the payment of its debts.
C E R T I F I C A T E O F S T O C K is a document or instrument evidencing the interest of a
stockholder in the corporation.
Sec. 6.
C l a s s i f i c a t i o n o f s h a r e s . - The shares of stock of stock corporations 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.
Preferred shares of stock issued by any corporation may be given preference in the distribution
of the assets of the corporation in case of liquidation and in the distribution of dividends, or
such other preferences as may be stated in the articles of incorporation which are not violative
of the provisions 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 stock or any series
thereof: Provided, That such terms and conditions shall be effective upon the filing of a
certificate thereof with the Securities and Exchange Commission.
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 (P5.00) pesos 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.
Except as otherwise provided in the articles of incorporation and stated in the certificate of
stock, each share shall be equal in all respects to every other share.
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:
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; 4. Incurring, creating or increasing bonded indebtedness; 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 stocks with
voting rights.
PURPOSE OF CLASSIFICATION: 1. To specify and define the rights and privileges of the
stockholders; 2. For regulation and control of the issuance of sale of corporate securities for
the protection of purchasers and stockholders. 3. As a management control device. 4. To
comply with statutory requirements particularly those which provide for certain limitations on
foreign ownership. 5. To better insure return on investment which can be affected through the
issuance of redeemable shares or preferred shares, i.e., granting the holders thereof,
preference as to dividends and/or distribution of assets in case of liquidation; and 6. For
flexibility in price, particularly, no par shares may be issued or sold from time to time at different
prices depending on the net worth of the company since they do not purport to represent an
actual or fixed value.
COMMON STOCKS are the most commonly issued shares of stock of a corporation. Although
no clear cut definition can be found, it has been described as one which entitles it owner to an
equal or pro-rata division of profits, if there are any, but without any preference or advantage
in that respect over any other stockholder or class of stockholders.
A common share usually carries with it the right to vote, and frequently, the exclusively right
to do so. However, where the AOI is silent, all issued and outstanding shares shall be
considered to have the right to vote and be voted for.
PREFERRED STOCK is a stock that gives the holder preference over the holder of common
stocks with respect to the payment of dividends and/or with respect to distribution of capital
upon liquidation. LIMITATIONS imposed by the Code in the issuance of preferred stocks: (1)
They can be issued only with a stated par value; and (2) The preference must be stated in the
AOI and in the certificate of stock otherwise each share shall be, in all respect, equal to every
other share.
a. PREFERENCE AS TO DIVIDENDS They have the privilege of being paid dividends first
before any other stockholders are paid theirs. The guaranty is not absolute so as to create a
relation of debtor and creditor between the corporation and the holders of such stock. The
amount of preference is stated in the contract of subscription and is usually a fixed percentage
or by specified amount indicated therein.
Participating and Non - Participating Preferred Shares If the preferred shares are participating
, they are entitled to participate in dividends with the common shareholders beyond their stated
preference. Non - participating preferred shares on the other hand are entitled to its fixed
priority or preference only.
Cumulative and Non - cumulative Preference Shares Cumulative preferred shares are those
that entitle the owner thereof to payment not only of current dividends but also back dividends
not previously paid whether or not, during the past years, dividends were declared or paid. In
light of the provision of the Code stating that all shares are equal in all respects unless
otherwise stated in the AOI, a preferred share to be considered cumulative, the same must be
provided for and specified in the certificate.
Non - cumulative preferred shares are those which grant the holders of such shares only to
the payment of current dividends but not back dividends, when and if dividends are paid, to
the extent agreed upon before any other stockholders are paid the same. This type may be
divided into three groups: 1. Discretionary dividend type – depends on the judgment or
discretion of the board of directors. Unless there is grave abuse of discretion as to result in
oppression, fraud or unfair discrimination, the dividend right of stockholders of a particular year
cannot be made up in subsequent years; 2. M a n d a t o r y if e a r n e d – impose a positive
duty on directors to declare dividends every year when profits are earned. In effect, directors
cannot withhold dividends if there are profits. 3. Earned cumulative or dividend credit type –
gives the holder the right to arrears in dividends if there were profits earned during the previous
years. In effect, their right to receive dividends is merely postponed on a later date. The
moment dividends are declared, back dividends earned in previous years but not declared as
such must first be paid to this type of preferred shareholders before the common shareholders
receive theirs.
DIFFERENCE WITH CUMULATIVE PREFERRED: Cumulative preferred are entitled to
dividends whether or not there are profits. Earned cumulative or dividend credit type is entitled
only to arrears if there are profits in those years.
b. Voting Right of Preferred Shares Preferred shares, along with redeemable shares, are
usually denied voting rights as they are allowed to be denied of such as provided in Sec. 6,
but this right must clearly be withheld. However, even if deprived, preferred
shareholders have the right to vote in matters enumerated in the penultimate paragraph of
Sec. 6.
c. Preference Upon Liquidation Such preference must also be stated in the contract,
accordingly giving them the preference to the distribution of corporate assets upon liquidation
or termination of corporate existence. If the preferred shares are cumulative, they have the
right to any arrears in arrears in priority to any distribution of assets to the common
stockholders.
PAR AND NON - PAR VALUE SHARES
Par Value Shares are those whose values are fixed in the AOI. Its par value is the minimum
subscription or original issue price of the shares and indicates the amount which the original
subscribers are supposed to contribute to the capital, which, however, may not reflect the true
value of the shares because the same may fluctuate depending on the liability and networth
of the enterprise.
W a t e r e d S t o c k s are those issued at less than par value where the stockholders will
remain liable for the difference between what he paid and the actual par value thereof (Sec.
65).
No Par Value Shares are those whose issued price are not stated in the certificate of stock
but may be fixed in the AOI, or by the BOD when so authorized the articles or the by-laws, or
in the absence thereof, the stockholders themselves. They do not purport to represent ay
stated proportionate interest in the capital measured by value, but only an aliquot part of the
whole number of shares of the corporation issuing it.
The Code allows the issuance of no par value shares, subject to the following limitations
provided in Sec. 6: 1. Such shares once issued, are deemed fully paid and thus, non-
assessable; 2. The consideration for its issuance should not be less than P5; 3. The entire
consideration constitutes capital, hence, not available for dividend declaration; 4. They cannot
be issued as preferred stock; and 5. They cannot be issued by banks, trust companies,
insurance companies, public utilities and building and loans associations.
Advantages of no - par value shares: 1. Flexibility in price – no par shares may be issued from
time to time at different prices with the exception only that it shall not be issued at less than
P5; 2. The issuance thereof practically results to the evasion of the danger of liability upon
watered stock in case of overvaluation of the consideration paid for it; 3. There is a
disappearance of personal liability on the part of the holder for unpaid subscription since they
are already deemed fully paid and nonassessable.
VOTING AND NON - VOTING SHARES Voting shares as the name suggests, gives the holder
thereof the right to vote and participate in the management of the corporation, through the
election of the BOD, or in any matter requiring stockholders’ approval.
However, voting shares may practically be denied the right to vote where there exist founders’
shares.
Non - voting shares do not grant the holder thereof, a voice in the election of directors and
some other matter requiring stockholders’ vote.
Only preferred and redeemable shares may be denied the right to vote. But, even if denied
such right, they may still vote on the following matters:
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; 4. Incurring, creating or increasing bonded indebtedness; 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
FOUNDERS’ SHARES are shares issued to the founders of the corporation which are granted
certain right and privileges such as the exclusive right to vote and be voted for in the election
of directors.
Sec. 7.
F o u n d e r s ' s h a r e s . - Founders' shares 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 five (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.
The period of 5 years is non-extendable because it may result in the almost perpetual
disqualification of other stockholders to elect or be elected as members of the BOD resulting
to the lack of proper representation thereat.
R E D E E M A B L E S H A R E S are those subject to redemption as may be provided in the
subscription contract, which are usually attached to preferred shares and other debt securities
like bonds.
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 the corporation, and upon such other terms and conditions
as may be stated in the articles of incorporation, which terms and conditions must also be
stated in the certificate of stock representing said shares
These types of shares grants the corporation the right to repurchase the shares at its option
or at the option of the holder based on the face or issued value plus specified premium, such
redemption may be optional or mandatory at a fixed or future date.
Such repurchase may also be made regardless if there are unrestricted retained earnings.
(see Power to Acquire Own Shares)
TREASURY SHARES
Sec. 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 again be disposed of for a
reasonable price fixed by the board of directors.
Treasury shares, as provided in Sec. 9, are reacquired but not retired. They may be issued for
a price, even less than par, and the purchaser will not be liable to the creditors of the
corporation for the difference of the purchase price and its par value. They may also be
declared as dividends since they are properties of the corporation.
Such shares do not have the right to share in dividends nor the right to vote.
COMMISSIONER OF INTERNAL REVENUE VS. MANNING (66 SCRA 14; Aug. 6, 1975) –
Julius Reese owned 24,700 of the 25,000 authorized capital stock of Manta Trading and
Supply Co., the rest are owned by herein respondents. Upon Reese’ death, his shares was
held in trust by the law firm Ross, Carrascoso and Janda for the private respondent, who were
to continue management of the corporation. These shares considered by the respondents as
treasury shares, prior to full payment, were declared as stock dividends. Such declaration was
assessed by the BIR as distribution of assets subject to income tax.
ISSUE: WON the subject shares are treasury shares?
HELD: No. Treasury shares are stocks issued and fully paid for and reacquired by the
corporation either by purchase, donation, forfeiture or other means and do not have the status
of outstanding shares. They may be re-issued or sold again and while held by the company
participates neither in dividends, because dividends cannot be declared by the corporation to
itself, nor in meeting of the corporation as voting stock for otherwise equal distribution of voting
powers among stockholders will be effectively lost and the directors will be able to perpetuate
their control of the corporation, though it still represent a paid for interest in the property of the
corporation. These features of a treasury stock are lacking in the questioned shares.
In this case, and under the terms of the trust agreement, the shares of stock of Reese
participated in dividends which the trustee received and the said shares were voted upon by
the trustee in all corporate meetings. They were not, therefore, treasury shares. The 24,700
shares were outstanding shares of Reese’s estate until they were fully paid. Such being the
case, their declaration as treasury stock dividend was a complete nullity.
CAPITAL REQUIREMENT S
Sec. 12.
M i n i m u m c a p i t a l s t o c k r e q u i r e d o f s t o c k c o r p o r a t i o n s . - 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
Sec. 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 paidup capital be less than five Thousand (P5,000.00) pesos
From the above provisions, it can be said that there is no minimum capital requirement in order
that a corporation may be duly incorporated except in special cases and provided that at least
P5,000 should be paid-in, which effectively would make the P5,000 the minimum capital
requirement.
The 25% minimum paid-in capital can be paid by any shareholder, meaning that it is not
particularly required that each subscriber pay 25% of their subscription.
There are instances where the SEC, by virtue of an existing law, rules and regulations or
policies, requires the payment of more than the amount provided in the Code, such as
Financing Companies where the required minimum paid-up capital be P10,000,000 (within
Metro Manila), P5,000,000 (other cities), and P2,000,000 (municipalities).
i. RESTRICTIONS AND PREFERENCES
Corporations are not required to provide for certain restrictions and preferences regarding the
transfer, sale or assignment of shares in the AOI except in close corporations which would
subject their shares to specific restrictions as required in Sec. 96 of the Code. They are not,
however, restrained or prohibited from doing so
If the corporation desires to grant such options, restrictions and/or preferences, the same must
be indicated in the AOI AND in all of the stock certificates. Failure to provide the same in the
AOI would not bind the purchasers in good faith despite the fact that the said restriction and/or
preference is indicated in the by-laws of the corporation.
In a close corporation, however, such restrictions and preferences must not only appear in the
articles of incorporation and in the stock certificates BUT ALSO be embodied in the by-laws
of that close corporation otherwise it may not bind purchasers in good faith.
j. THE TREASURER
xxx 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 bylaws, and that as such 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. xxx
k. NO TRANSFER CLAUSE
xxx ELEVENTH: (Corporations which will engage in any business or activity reserved for
Filipino citizens shall provide the following):
"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 recorded in the proper books of the corporation and this restriction shall be
indicated in all stock certificates issued by the corporation." xxx
This indicates the treasurer who has been elected as such until his successor has been
elected and qualified and who is authorized to receive for and in the name of the corporation
all subscriptions, contributions or donations paid or given by the subscribers or members.
l. THE EXECUTION CLAUSE
xxx 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.
(Names and signatures of the incorporators) xxx
The signatures are important as the AOI serves as a contract between the signatories thereof,
by and among themselves, with the corporation, and the latter with the State.
m. TREASURER’S AFFIDAVIT
xxx
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)
xxx
n. NOTARIAL ACKNOWLEDGMENT xxx SUBSCRIBED AND SWORN to before me, a Notary
Public, for and in the City/Municipality of................................. Province
of........................................., this............ day of........................,
19.......; by........................................... with Res. Cert. No..................... issued at................
on....................., 19.........
NOTARY PUBLIC
My commission expires on.........................., 19.......
Doc. No...............; Page No...............; Book No..............; Series of 19.....
xxx
GROUNDS FOR DISAPPROVAL
Sec. 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: 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 if false; 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.
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 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.
After filing of the AOI, the SEC will examine and process them to determine compliance with
the requirements enumerated in Sec. 14 and if the form prescribed under Sec. 15 is complied
with. Only substantial and not strict compliance is required.
The above grounds are not exclusive. There may be other reasons for rejection or disapproval
such as the corporate name is not legally permissible or that the minimum capital requirement
is not sufficient.
3. COMMENCEMENT OF CORPORATE EXISTENCE
Corporate existence is reckoned from the time of the issuance of its CERTIFICATE OF
INCORPORATION or registration. It is only from this time that it acquires juridical personality
and legal existence, EXCEPT: a. Corporations by Estoppel; b. Those created by special laws;
c. Those organized as Cooperatives covered by Bureau of Cooperatives and Home Owners’
Associations covered by Home Insurance Guaranty Corporation. d. Corporation Sole – which
is reckoned from the filing of verified articles. (Sec. 112)
Sec. 19.
C o m m e n c e m e n t o f c o r p o r a t e e x i s t e n c e . - 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.
CAGAYAN FISHING DEVELOPMENT CO. VS. SANDIKO
(65 Phil. 233;
Dec. 23, 1937) – On May 31, 1930, Manuel Tabora executed a Deed of Sale where he sold
four parcels of land in favor of herein petitioner Cagayan Fishing Development Co., said to be
under the process of incorporation. Plaintiff company filed its AOI with the Bureau of
Commerce and Industry on Oct. 22, 1930. A year later, before the issuance of the certificate
of incorporation, the BD of the company adopted a resolution to sell the four parcels of land to
Teodoro Sandiko for P42,000.
ISSUE: WON the subsequent sale to Sandiko is valid?
HELD: No. A duly organized corporation has the power to purchase and hold real property as
the purpose for which such corporation was formed may permit and for this purpose may enter
into such contract as may be necessary. But before a corporation may be said to be lawfully
organized many thing have to be done. Among which, the law requires the filing of the AOI.
It cannot be denied that the plaintiff was not incorporated when it entered into the contract of
sale. It was not even a de facto corporation at that time. Not being in legal existence then, it
did not possess juridical personality to enter into the contract.
Corporations are creatures of the law, and can only come into existence in the manner
prescribed by the law. That a corporation should have a full and complete organization and
existence as an entity before it can enter into a contract or transact any business, would seem
to be self-evident. A corporation, until organized, has no being, franchises or faculties. Nor do
those engaged in bringing it into being have any power to bind it by contract, unless so
authorized by the charter, there is no corporation, nor does it possess franchise or faculties
for it to exercise, until it acquires complete existence.
If the company could not and did not acquire the four parcels of and here involved, it follows
that it did not have the resultant right to dispose the same to the defendant.
D. DEFECTIVELY FORMED CORPORATIONS
A corporation de jure is one created in strict or substantial compliance to the governing
corporation statutes and whose right to exist and act as such could not be attacked in a either
collaterally or through a direct proceeding for that purpose even by the State.
1. DE FACTO CORPORATIONS
A de facto corporation is one that is so defectively created as not to be a de jure corporation
but nevertheless exists, for all practical purposes, as a corporate body, by virtue of its bona
fide attempt to incorporate under existing statutory authority, coupled with the exercise of
corporate powers.
REQUISITES: a. There is a valid statute under which the corporation could have been created
as a de jure corporation (or according to some, an apparently valid statute); b. An attempt, in
good faith, to form a corporation according to the requirements of law which goes far enough
to amount to a “colourable compliance” with the law; c. A user of corporate powers, the
transaction of business in some way as if it were a corporation; d. Good faith in claiming to be
and doing business as a corporation.
Sec. 20.
D e f a c t o 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
ATTACK : From the above provision, the only purpose of determining whether it is a de facto
or de jure corporation is the applicability of the rules on collateral and direct attack. Such that
a de jure is impregnable to either, while a de facto corporation’s existence can only be
questioned in a direct proceeding by the State through a quo warranto. A de facto corporation’s
corporate existence however cannot be attacked collaterally.
THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and AMER MACAORAO
BALINDONG, petitioners, vs. PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG,
HADJI HASAN MACARAMPAD, FREDERICK V. DUJERTE MONDACO ONTAL,
MARONSONG ANDOY, MACALABA INDAR LAO. Respondents GR No. L-28113 ; March 28,
1969)
FACTS: The Municipality of Balabagan was created from the barrios and sitios of the
Municipality of Malabang by virtue of EO No 386 issued by President Garcia by virtue of Sec.
68 of the Revised Administrative Code. Following the decision of the Court in Pelaez vs.
Auditor General, which declared Sec. 68 unconstitutional and that the President had no power
to create a municipality, herein petitioners sought to nullify EO 386 and to restrain the
respondents, who are officers of Balabagan, to vacate said their office and desist from
performing their functions.
Respondents argue that it is at least a de facto corporation and the ruling in Pelaez is not
applicable to it, having been organized under color of a statute before it was declared
unconstitutional, its officers having been either elected or appointed, and the municipality itself
having discharged corporate functions for the past five years. That as a de facto corporation,
its existence cannot be collaterally attacked.
ISSUE: WON the Municipality of Balabagan is a de facto corporation?
HELD: No. In cases where a de facto municipal corporation was recognized as such despite
the fact that the statute creating it was later invalidated, the decision could be fairly made to
rest on the consideration that there was some other valid law giving validity to the organization.
Hence, in the case at bar, the mere fact that Balabagan was organized at the time when the
statute had not been invalidated cannot conceivably make it a de facto corporation, as
independently of the Administrative Code provision in question, there is no other valid statute
to give color of authority for its creation.
An unconstitutional act is not a law; it confers no rights; it imposes no duties; it affords no
protection; it creates no office; it is, in legal contemplation, as inoperative as though it had
never been passed.
HALL VS. PICCIO
(86 Phil 603 June 29, 1950) – Petitioner, together with private respondents signed and
acknowledged the AOI of Far East Lumber and Commercial Co., Inc., after the execution of
which the corporation proceeded to do business by adopting its by-laws and election of its
officers. Subsequently, pending action on the AOI, the respondents filed with the CFI alleging
the corporation to be an unregistered partnership and praying for its dissolution, which was
granted.
Herein petitioner claims that the corporation is a de facto corporation, that its dissolution may
be ordered only in a quo warranto proceedings instituted by the State.
ISSUE: WON it is a de facto corporation?
HELD: No. First, not having obtained a certificate of incorporation, the company, even its
stockholders, may not probably claim “in good faith” to be a corporation.
Such claim is compatible with the existence of errors and irregularities, but not with a total or
substantial disregard of the law. Unless there has been an evident attempt to comply with the
law the claim to be a corporation “under this Act” (Sec. 19) could not be made in good faith.
Second, this is not a suit where the corporation is a party. This is a litigation between a
stockholder of the alleged corporation, for the purpose of obtaining its dissolution. Even the
existence of a de jure corporation may be terminated in a private suit for its dissolution between
stockholders, without the intervention of the State.
2. CORPORATION BY ESTOPPEL
A corporation may exist on the ground of estoppel by virtue of the agreement, admission or
conduct of the parties such that they will not be permitted to deny the fact of the existence of
the corporation. It is neither a de jure nor de facto because of serious defects in its
incorporation or organization, unlike the de facto doctrine, it does not involve a theory that the
irregular corporation has acquired a corporate status generally. It applies to the consequences
of some particular transactions or acts done in the corporate name by associates assuming to
be a corporation.
Sec. 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.
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.
From the above provision, it is clear that the doctrine of estoppel may apply to the alleged
corporation or to a third party transacting with the former.
As to the Corporation – the members who purported to be a corporate body cannot deny their
purported existence as a corporation in an action against them on the contract, where the third
persons were induced to deal with the supposed corporation. They cannot avoid liability on
the ground of lack of personality to be sued.
As to third persons – they are estopped from denying the existence of the alleged corporation
in a suit to enforce a contract. However, the association of persons must have purported or
acted, and were treated by the third persons, as corporations. The doctrine also applies when
the third person tries to escape liability on a contract from which he has benefited on the
irrelevant ground of defective incorporation.
LOZANO VS. DE LOS SANTOS (274 SCRA 452; June 19, 1977) – Petitioner Reynaldo
Lozano and respondent Antonio Anda agreed to consolidate their respective Jeepney
Associations, to which they are presidents. They conducted an election for one set of officers
of the consolidated association, where petitioner was the winner. Respondent, however,
refused to abide by the agreement which prompted petitioner to institute an action for damages
in the trial court which was denied for being intra-corporate, and was held to be within the
jurisdiction of the SEC.
ISSUE: WON there is corporation by estoppel placing the case within SEC jurisdiction?
HELD: None. The unified association was still a proposal and had not been approved by the
SEC, neither had its officers and members submitted their AOI. Their respective associations
are distinct and separate entities, petitioner and private respondent does not have an intra-
corporate relation much less do they have an intra-corporate dispute. The SEC has no
jurisdiction over the complaint.
The doctrine of corporation by estoppel advance by private respondent cannot override
jurisdictional requirements. Jurisdiction is fixed by law and is not subject to the agreement of
the parties.
Corporation by estoppel is founded on principle of equity and is designated to prevent injustice
and unfairness. It applies when persons assume to form a corporation and exercise corporate
functions and enter into business relations with third persons. Where there is no third person
involved and the conflict arises only among those assuming to form a corporation, who
therefore know that it has not been registered, there is no
corporation by estoppel.
ALBERT VS. UNIVERSITY PUBLISHING CO., INC. (13 SCRA 84; Jan. 30, 1965) – Jose
Aruego, president of defendant University Publishing Co, Inc. entered into a contract with
plaintiff for the publishing of the latter’s revised commentaries on the Revised Penal Code,
which the defendant failed to pay the second instalment due. The CFI of Manila rendered
judgment in favor of plaintiff, such judgment reduced by the Supreme Court to P15,000.
The CFI issued a writ of execution against Aruego, as the real defendant, stating the discovery
that there is no such entity as University Publishing Co., Inc.
ISSUE: WON the writ of execution may be effected upon Aruego?
HELD: Yes. On account of non-registration, University cannot be considered a corporation,
not even a corporation de facto. It has therefore, no personality separate from Aruego it cannot
be sued independently.
The doctrine of corporation by estoppel is inapplicable. Aruego represented a non-existent
entity and induced not only the plaintiff but even the court of belief of such representation. He
signed the contract as “President” of University and obviously misled plaintiff in to believing
that University is a “corporation duly organized and existing under the laws of the Philippines”.
One who has induced another to act upon his wilful misrepresentation that a corporation was
duly organized and existing under the law, cannot, thereafter, set up against his victim the
principle of corporation by estoppel.
SALVATIERRA VS. GARLITOS, ET AL.
(103 Phil. 757; May 23, 1958) – Petitioner Manuel T. Vda de Salvatierra, owner of a parcel of
land, entered into a contract of lease with Philippine Fibers Processing Co., Inc., allegedly a
corporation. For failure to comply with the obligations under the lease, petitioner filed a
complaint in the CFI where the company was declared in default and decision was rendered
in favor of petitioner. Defendant Refuerzo filed a motion claiming that he should not be made
personally liable in the decision which was granted by the Court. Hence, this petition.
ISSUE: WON Refuerzon can be made personally liable?
HELD: Yes. While as a general rule, a person who has contracted or dealt with an association
in such a way as to recognize its existence as a corporate body is estopped from denying the
same in an action arising out of such transaction or dealing, yet this doctrine may not be held
applicable where fraud takes part in the said transaction. In the instant case, on plaintiff’s
charge that she was unaware of the fact that the company had no juridical personality,
defendant Refuerzo gave no confirmation or denial and the circumstances surrounding the
execution of the contract led to the inescapable conclusion that plaintiff Salvatierra was really
made to believe that such corporation was duly organized in accordance with law.
The rule on the separate personality of a corporation is understood to refer merely to
registered corporations and cannot be made applicable to the liability of members of an
unincorporated association. The reason behind this doctrine is obvious – since an organization
which before the law is non-existent has no personality and would be incompetent to act on
its behalf; thus, those who act or purport to act as its representatives or agent do so without
authority and at their own risk. And, as is it elementary principle of law that a person who acts
as an agent without authority or without principal is himself regarded as the 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 or for
other acts performed as such agents.
In acting on behalf of a corporation which he knew to be unregistered, the president of the
unregistered corporation Refuerzo, assumed the risk of reaping the con the consequential
damages of resultant right, if any, arising out of such transaction.
CHANG KAI SHEK SCHOOL VS. CA
(172 SCRA 389; April 18, 1989) – Private respondent Faustina Oh has been teaching in the
herein petitioner
School since 1932 for a continuous period of 33 years until that day that she was told that she
had no assignment for the next semester. She filed a suit before the CFI against the school
and later on amended her complaint to include certain officials. The CFI of Sorsogon
dismissed the complaint. On appeal, the CA reversed the decision and held herein petitioner
school liable but absolved the other defendants.
ISSUE: WON the School can be held liable?
HELD: Yes. Even though the school failed to incorporate as mandated by law, it cannot now
invoke such non-compliance with the law to immunize it from the private respondent’s
complaint. There should also be no question that having contracted with the private
respondent every year for 32 years and thus represented itself possessed of juridical
personality to defeat her claim against it. According to Art. 1431 of the Civil Code: “through
estoppel an admission or representation is rendered conclusive upon the person making it
and it cannot be denied as against the person relying on it”.
As the school itself may be sued in its own name, there is no need to apply Rule 3, Sec. 15
,under which the persons joined in an association without any juridical personality may be
sued with such an association. Besides, it has been shown that the individual members of the
board of trustees are not liable, having been appointed only after the private respondent’s
dismissal.
ASIA BANKING CORP., plaintiff-appelle VS. STANDARD PRODUCTS CO., INC., defendant-
appellant (46 Phil. 144; Sept. 11, 1924) – This action was brought to recover the balance due
of a promissory note executed by herein appellant. The court rendered judgment in favor of
the plaintiff.
At the trial of the case the plaintiff failed to prove affirmatively the corporate existence of the
parties and the appellant insists that under these circumstances the court erred in finding that
the parties were corporations with juridical personality and assigns same as reversible error.
ISSUE: WON parties herein are corporations with juridical personality?
HELD: Yes. There is no merit whatever in the appellant's contention. The general rule is that
in the absence of fraud a person who has contracted or otherwise dealt with an association in
such a way as to recognize and in effect admit its legal existence as a corporate body is
thereby estopped to deny its corporate existence in any action leading out of or involving such
contract or dealing, unless its existence is attacked for cause which have arisen since making
the contract or other dealing relied on as an estoppel and this applies to foreign as well as to
domestic corporations. (14 C. J., 227; Chinese Chamber of Commerce vs. Pua Te Ching, 14
Phil., 222.)
The defendant having recognized the corporate existence of the plaintiff by making a
promissory note in its favor and making partial payments on the same is therefore estopped
to deny said plaintiff's corporate existence. It is, of course, also estopped from denying its own
corporate existence. Under these circumstances it was unnecessary for the plaintiff to present
other evidence of the corporate existence of either of the parties. It may be noted that there is
no evidence showing circumstances taking the case out of the rules stated.
INTERNATIONAL EXPRESS TRAVEL & TOURS SERVICES, INC. VS. CA (343 SCRA 674;
Oct. 19, 2000) – Petitioner International Express Travel & Tours Services, Inc. entered into an
agreement with the Philippine Football Federation through its president Henry Kahn, herein
private respondent, where the former supplied tickets for the trips of the athletes to the
Southeast Asian Games and other various trips. The Federation failed to pay a balance of
P265,894.33 which led petitioner to file a civil case in the RTC of Manila which decided in its
favor and holding Henry Kahn personally liable. On appeal, the CA reversed the decision of
the RTC absolving Kahn from personal liability holding that the Federation had a separate and
distinct personality.
ISSUE: WON Henry Kahn can be made personally liable?
HELD: Yes. While we agree with the appellate court that associations may be accorded
corporate status, such does not automatically take place by the
mere passage of RA 3135 otherwise known as the Revised Charter of the Philippine Amateur
Athletic Federation and PD 604. It is a basic postulate that before a corporation may acquire
juridical personality, the State must give its consent either in the form of a special law or a
general enabling act. Nowhere can it be found in RA 3135 and PD 604 any provision creating
the Philippine Football Federation. These laws merely recognized the existence of national
sports associations and provided for the manner by which these entities may acquire juridical
personality.
The recognition of Philippine Amateur Athletic Federation required under RA 3135 and the
Department of Youth and Sports Development under 604, extended to the PFF was not
substantiated by Kahn. Accordingly, the PFF is not a national sports association within the
purview of the aforementioned laws and does not have corporate existence of its own.
This being said, it follows that private respondent Kahn should be held liable for the unpaid
obligations of the unincorporated PFF. It is a settled principle in corporation law that any
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 or for other acts performed as such agents.
We cannot subscribe to the position taken by the appellate court that even assuming that the
PFF was defectively incorporated, the petitioner cannot deny the corporate existence of the
PFF because it had contracted and dealt with the PFF in such a manner as to recognize and
in effect admits its existence. The doctrine of corporation by estoppel is mistakenly applied by
the respondent court to the petitioner. The application of the doctrine applies to a third party
only when he tries to escape liability on a contract from which he has benefited on the
irrelevant ground of defective incorporation. In the case at bar, the petitioner is not trying to
escape liability from the contract but rather is the one claiming from the contract.
GEORG GROTJAHN GMBH & CO. VS. ISNANI
(235 SCRA 216; Aug. 10,
1994) – Petitioner is a German company who was granted a license to establish a regional or
area headquarters in the Philippines. Private respondent Romana Lanchinebre was a sales
representative of petitioner who made advances totalling P35,000 which were left unpaid.
Petitioner filed a complaint for the collection of a sum of money which was dismissed by the
judge holding, among others, that the license of petitioner does not include the license to do
business in the Philippines.
ISSUE: WON petitioner has capacity to sue?
HELD: Yes. Private respondent is estopped from assailing the personality of petitioner. “The
rule is that the party is estopped to challenge the personality of a corporation after having
acknowledged the same by entering into a contract with it. And the doctrine of estoppel to
deny corporate existence applies to foreign as well as domestic corporation; one who has
dealt with a corporation of foreign origin as a corporate entity is estopped to deny its corporate
existence and capacity. The principle will be applied to prevent a person contracting with a
foreign corporation from later taking advantage of its non-compliance with the statutes chiefly
in case where such person has received the benefits of the contract” (Merill Lynch Futures,
Inc. vs. CA).
In the case of Merill Lynch Futures, the SC held that a foreign corporation doing business in
the Philippines may sue in Philippine courts although not authorized to do business here
against the Philippine citizen who had contracted with and been benefited by said corporation.
Citing and applying the doctrine laid down in Asia Banking Corp. vs. Standard Products Co.,
Inc.
IN SUMMARY: it appears that if a corporation by estoppel exist and enters into a contract and
transact business with a third party, the latter has three possible remedies: 1. He may file a
suit against the ostensible corporation to recover from the corporate properties; 2. He may file
the case directly against the associates personally liable who held out the association as a
corporation; and 3. Against both the ostensible corporation and persons forming it, jointly and
severally. The last two remedies may not, however, be availed of if the third party by his
conduct is estopped from denying the existence of the association as a corporation and as
such, recovery should be limited only against the corporate assets.
INDIVIDUAL LIABILITY of associates should not be overlooked. If the doctrine of corporation
by estoppel cannot be applied in their favor because the third party dealing with it has not, in
any manner, deemed to have chosen to deal with it as a corporation or in short not, estopped
to deny corporate existence, the associates can be held liable either as partners or principals.
WHO SHOULD BEAR THE LOSS : The better view is that those who actively participated in
holding out the association as a corporation should be held personally liable by virtue of the
express provision of Sec. 21 which provides that “all persons who assume to act as a
corporation kno wing it to be without authority to do so shall be liable as general partners for
all debts, liabilities and damages incurred or arising” therefrom.
4. ORGANIZATION AND COMMENCEMENT OF BUSINESS
a. CORPORATE ORGANIZATION
Sec. 22.
E f f e c t s o n n o n - u s e o f c o r p o r a t e c h a r t e r a n d c o n t i n u o u s 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.
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.
Once the certificate of incorporation has been issued, the corporation MUST formally organize
and commence its business.
NON - USE OF CORPORATE CHARTER: Apparent from the above provision is that the
failure of the corporation to organize within 2 years would result in it automatic dissolution,
unless, of course, its failure to do so is due to causes beyond its control.
F O R M A L O R G A N I Z A T I O N : refers to the process of structuring the corporation to
enable it to effectively pursue the purpose for which it was organized. It includes: a.
Organizational meeting of the stockholders to elect the BOD; b. Adoption of by-laws, if not
simultaneously filed with the AOI, and its subsequent filing with the SEC which must be within
1 month from the issuance of the certificate of incorporation; c. Organizational meeting of the
BOD to elect the corporate officers, adoption of corporate seal, accepting pre-incorporation
subscriptions, establishing the principal office and such other steps necessary to transact the
legitimate business for which the corporation was formed.
Strict compliance is not required. Substantial compliance therewith is sufficient. Thus, it has
been held in the case of Perez vs. Balmaceda that a corporation is deemed to have formally
organized if it had a governing board which direct its affairs, as well as a treasurer and a clerk,
and that through these instrumentalities, it actually functioned and engaged in the business
for which it was organized. It cannot be held to have forfeited its charter simply because it has
not been shown that is also had a president and a secretary.
b. COMMENCEMENT OF BUSINESS/TRANSACTION
This means that the corporation has actually functioned and engaged in business for which it
was organized which must be done within two years from the issuance of the certificate of
incorporation lest it is deemed dissolved. This may take the form of entering into contracts
which tend to pursue its business undertaking or other acts related thereto.
If a corporation has commenced its business but subsequently becomes inoperative
continuously for a period of at least 5 years, the same shall be merely a ground for suspension
or revocation of its corporate franchise or certificate of registration.

LADIA NOTES:
FORMATION AND ORGANIZATION
 3 stages
1. Creation
2. Re-organization or quasi-reorganization
3. Dissolution/winding-up
 Purpose clause
- Defining the scope of authority of the corporate enterprise pr undertaking. Both
confirmed and limited
 4 limitations of purpose clause
1. Lawful
2. Specific or stated concisely
3. More than one, the primary and secondary must be specified
4. Lawfully combined
- Provision that states, cannot be issued less than par, exception is treasury shares
because it can be issued less than par

 A corporation commences only upon issuance of the certificate, prior thereto it has no
being and cannot transact business. Promoters cannot act for a projected corporation

 Metro Manila- paid up capital requirement is 10 M

 Non- stock- mere mention of the operating capital

 Mention the authorized capital

 Restrictions

- Mandatory in close
- Not mandatory in ordinary

 Non-stock

- If value is not more than 100,000

 A corporation cannot use any other name unless it has been amended

 Section 19

- If confusingly similar it will not be allowed to be registered

- Verification slip from the records officer

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)

- Words corporation or inc. either in full or abbreviated form must be included

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)

 Doctrine of secondary meaning

- A word or phrase originally incapable of exclusive appropriation [usually generic] with

reference to an article in the market, because of geographically or otherwise
descriptive, might nevertheless have been used so long and so exclusively by one
producer with reference to his article that, in that trade and to that branch of the
purchasing public, the word or phrase has become to mean that the article was his
product.

 Section 18

- Lyceum of the Philippines case, the additional geographical name does not make it
confusingly similar
- actual confusion is not necessary- Philips case “it is enough that there is probable
confusion”

 2 requisites must be proven

- that the complainant corporation acquired a prior right over the use of such corporate
name
- identical, deceptively or confusingly, patently deceptive

 principal office

- statement of principal office is required

- city and municipality not only province must be specified
- principal office NOT operations office
- necessary because it will establish the residence of corporations
- venue of actions for or against the corporations
- venue of meetings
- section 51 meetings may only be within the boundaries of the city where the principal
office
- non-stock may be held anywhere in the Philippines, if provided in its by-laws
- where summons may be served
- registration of chattel mortgage must be registered in the register of deeds where the
principal office is located

Clavecilla Radio System vs. Antillon

- action not upon a written contract

- city where the defendant resides

 term of existence

- corporate term required

- determining what point in time the juridical personality will cease to exist
- enter into contract only when it has juridical personality
- once it ceases to exist, it no longer has personality
- exist for another 3 years only for purposes of liquidation
- Dissolution- it is automatic

 When should extension be made?

- General rule: Not earlier than 5 years

- Exception: unless there are justifiable reasons

 May it be extended after expiration?

- Alhambra cigar vs. SEC once it ceases to exist it has no vested politic, exist only for a
period of 3 years only for liquidation and for that purpose only

 Article 5 How many incorporators should there be?

- 5-15

 May a corporation be an incorporator?

- General rule: only natural persons

- Exception: cooperatives and corporation primarily organized to hold equities in rural
banks

 How about minors?

- NO, because they must be of legal age

 May a corporation organized by incorporators consisting solely of foreigners

- Yes, there is no nationality requirement only residence, as long as majority are

residents of the Phil
 Define incorporators <sec.5>

- Those person mentioned in the articles as originally forming the corporation and who
are signatories of the articles of incorporation.
- Must be signatories to be incorporators

Section 5. Corporators and incorporators, stockholders and members. -

Corporators are those who compose a corporation, whether as stockholders 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 thereof.

Corporators in a stock corporation are called stockholders or shareholders.

Corporators in a non-stock corporation are called members. (4a)

 Define corporators <sec.5>

- All persons who compose the corporation at any given time and need not be among
those who execute the articles of incorporation at the start of its formation and
organization.
- Originally or subsequently
- Section 5 provides:
Corporators in a stock corporation are called stockholders or shareholders.
Corporators in a non-stock corporation are called members. (4a)

 May a corporation be a corporator?

- YES. There is nothing to prevent a corporation from being a stockholder

 Incorporator must subscribe to 1 share

 There are those that are exclusively reserved to Filipinos

 An incorporator maybe a corporator as long as he is a stockholder

 section 6

Section 6. Classification of shares. - The shares of stock of stock corporations

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.

Preferred shares of stock issued by any corporation may be given preference

in the distribution of the assets of the corporation in case of liquidation and in the
distribution of dividends, or such other preferences as may be stated in the articles of
incorporation which are not violative of the provisions 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 stock or any series thereof: Provided, That such terms
and conditions shall be effective upon the filing of a certificate thereof with the
Securities and Exchange Commission.

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 (P5.00) pesos 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.

Except as otherwise provided in the articles of incorporation and stated in the

certificate of stock, each share shall be equal in all respects to every other share.

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:

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;

4. Incurring, creating or increasing bonded indebtedness;

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 stocks with voting rights. (5a)

 How many directors should there be?

- General rule: Not less than 5 not more than 15

- Exceptions:
1. Educational corporations registered as non stock corporation whose number of
trustees, though not less than five and not more than [15] should be divisible by five
[5], meaning they must have either five, ten, or fifteen trustees and no other;
2. In close corporations where all the stockholders are considered as members of the
board of directors thereby effectively allowing twenty members in the board.
3. The by-laws of a corporation may provide for additional qualifications and
disqualifications of its members of the board of directors or trustees. However it may
not do away with the minimum disqualifications lay down by the Code.

 Qualifications of the governing board

- Requires mere residency <sec. 23>

Section 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. (28a)

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.

 May a domestic corporation have a governing board consisting solely of foreigners?

- YES, section 23 majority of them must be residents of the Philippines, no nationality

requirement

 Anti-dummy act <sec.2-A>

- If the business undertaking or activity is only partially nationalized, aliens can be

elected as such directors, [unless the law provides otherwise] but their number shall
only be in proportion to their equity or participation in the capital stock of the
corporation.

 Disqualifications <sec.27>

- The disqualifications provided for is absolute and may not be done away with.
Corporate by-laws may, however, provide for additional qualifications and
disqualifications.

Section 27. Disqualification of directors, trustees or officers. - No person

convicted by final judgment of an offense punishable by imprisonment for a period
exceeding six (6) years, or a violation of this Code committed within five (5) years prior
to the date of his election or appointment, shall qualify as a director, trustee or officer
of any corporation. (n)
  Section 27 and 23 minimum disqualifications and qualifications

Lee vs. CA

- By laws may provide for additional

 Gov’t vs. El hogar Filipino, Gokongwei vs. SMC

Capital structure
Foundation- minimum paid-up capital 3M
Authorized capital 1 M No. of shares 1M shares par value
1.00
Amount of shares subscribed
50 K A
50 K B
C 250K
D
E
PAID UP =62,500
Corporation cannot exceed more than 1 M it is the maximum amount it cannot issue more
unless amended
Maximum shares it can issue is 1M shares unless amended
 How much shares should be subscribed?

- Must be at least 25% of the authorized capital stock

 Paid- up must be at least 25%-minimum

 Section 30

- Total subscription compliance with minimum 25% total

- Any combination would comply with the minimum required by section 30

Section 30. Compensation of directors. - In the absence of any provision in the

by-laws fixing their compensation, the directors shall not receive any compensation,
as such directors, except for reasonable per diems: Provided, however, That any such
compensation other than per diems may be granted to directors by the vote of the
stockholders representing at least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall the total yearly compensation
of directors, as such directors, exceed ten (10%) percent of the net income before
income tax of the corporation during the preceding year. (n)

 Minimum for a domestic corporation?

- In no case shall the paid- up capital be less than 5k

 Is there a minimum authorized capital imposed by the code?

- If there is minimum paid-up logically there should also be a minimum capital =5000

 Minimum paid-up capital for a financing company metro manila 10 M if located in MM

 Shares of stock

 Purpose of classification

- To specify and define the rights and privileges of the stockholders;

- For regulation and control of the issuance of sale of corporate securities for the
protection of purchasers and stockholders.

- As a management control device.

- To comply with statutory requirements particularly those which provide for certain
limitations on foreign ownership and shares like overseas employment agencies
requiring to own at least 75% of the shares of stock thereof.

- To better insure return on investment which can be affected through the issuance of
redeemable shares or preferred shares, i.e., granting the holders thereof, preference
as to dividends and/or distribution of assets in case of liquidation; and,

- For flexibility in price, particularly, no par shares may be issued or sold from time to
time at different price depending on the net worth of the company since they do not
purport to represent an actual of fixed value.

 Section 6

- Each shall be equal in all respects to every other share

 Preferred shares

- Specific preference
- Dividends or during liquidation

 No par

- Can sell it with the network of the corporation

 Distinction between the subscribed and outstanding stocks?

- Section 137

Section 137. Outstanding capital stock defined. - The term "outstanding capital
stock", as used in this Code, means the total shares of stock issued under binding
subscription agreements to subscribers or stockholders, whether or not fully or partially
paid, except treasury shares. (n)

- Voting and dividend rights, it refers to the outstanding capital stocks

- Only outstanding stocks are allowed to vote and receive dividends
- Actually the same
 Treasury shares

- are also subscribed shares

- while they remain in the treasury, no voting and dividend rights
- may be reissued by the corporation
- once reissued they become outstanding stocks again

 common shares

- carry the right to vote

 preferred shares

- grants the holder preference

- preference as to dividends
- preference as to distribution of the remaining assets upon dissolution or
- both
- YOU MUST STATE THE PREFERENCE BECAUSE IF NOT THEY ARE PRESUMED
TO BE EQUAL
- It may include such other preferences not inconsistent with the Code. This is so
because Section 6 of the said law allows a stock corporation to issue preferred shares
subject only to the limitations imposed therein which are:
a. They can be issued only with sated par value; and,
b. The preferences must be stated in the articles of incorporation and in the certificate of
stock, otherwise, each share shall be, in all respect, equal to every other share.

 Participating

- Must be stated because the presumption is that it is participating

 Cumulative

- Irrespective of whether or not they where earned

 Preferred

- May be denied
- Unless denied they are still entitled

 What if hindi i-declare kahit na may dividends rights for the previous years? May they
be denied dividend rights because they are non holders of non-cumulative? NOTE:
YOU CANNOT COMPEL THE CORPORATION TO DECLARE DIVIDENDS UNLESS
IT EXCEEDS 100 % PAID UP CAPITAL SEC. 43

Section 43. Power to declare dividends. - The board of directors of a stock

corporation may declare dividends out of the unrestricted retained earnings which shall
be payable in cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash dividends due on delinquent
stock shall first be applied to the unpaid balance on the subscription plus costs and
expenses, while stock dividends shall be withheld from the delinquent stockholder until
his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be
issued without the approval of stockholders representing not less than two-thirds (2/3)
 of the outstanding capital stock at a regular or special meeting duly called for the
purpose. (16a)

Stock corporations are prohibited from retaining surplus profits in excess of one
hundred (100%) percent of their paid-in capital stock, except: (1) when justified by
definite corporate expansion projects or programs approved by the board of directors;
or (2) when the corporation is prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring dividends without its/his
consent, and such consent has not yet been secured; or (3) when it can be clearly
shown that such retention is necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve for probable contingencies.
(n)

- It depends because there are three types of non-cumulative preferred shares

- Discretionary dividend type
- Mandatory if earned
- Earned cumulative or dividend credit type

 Compare cumulative share from non-cumulative, earned cumulative or dividend credit

type

- Cumulative share –whether or not earned

- Non-cumulative earned cumulative or dividend credit type- only if earned

 Par

- stated par value; shall not be issued less than par

 No par

- without stated par value

- once fully paid no longer liable

 Corporations cannot use its capitals in declaring dividends; not all can issue no par
value section 6

 Voting

- entitled to vote at any motion brought up in writing

 Non-voting

- not entitled to vote

 What types of shares may be denied of the right to vote?

- Preferred and redeemable shares

 Is it correct to state that common shares can never be denied the right to vote?

- Only preferred and redeemable shares are denied unless provided in this code
- PWEDENG MA-DENY YUNG COMMON SHARES, KASI YUNG FOUNDER’S
SHARES MERON SILANG EXCLUSIVE RIGHTS NA SILA LANG ANG MERON, SO
PWEDE SILANG BUMOTO WITH REGARDS TO SOMETHING NA HINDI NA SAKOP
NG COMMON SHARE RIGHTS

- Example: founders shares- may be given certain rights and privileges

- Even common shares may be denied the right to vote of founders’ shares issued
<sec.7>

Section 7. Founders' shares. - Founders' shares 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
five (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. (n)

 Do you include non-voting shares in passing a valid corporate act?

- Even non-voting shares are entitled to vote under section 6

 Redeemable shares

- Discretionary/optional

- Obligatory or mandatory

 Generally a corporation can reacquire its own shares if it has unrestricted retained
earnings

 Exception: redeemable shares may be reacquired irrespective of retained earnings

 Treasury shares

- They are treasury while in the treasury account of the corporation

 May they be reissued by the corporation?

- YES

 If they are reissued will they be denied the right to vote?

- Once reissued they shall become outstanding stocks again and purchasers shall be
entitled to all the rights and privileges as the other holders have

 Section 57 treasury shares have no voting and dividend rights. Why not?

Section 57. Voting right for treasury shares. - Treasury shares shall have no
voting right as long as such shares remain in the Treasury. (n)

- Answer: commissioner vs. manning page 62 first par.

 “Although authorities may differ on the exact legal and accounting status of so-
called treasury shares, they are more or less in agreement that treasury shares are
stocks issued and fully paid for and reacquired by the corporation either by purchase,
donation, forfeiture or other means. Treasury shares are therefore issued shares but
being in the treasury they do not have the status of outstanding shares. Consequently,
although a treasury share, not having been retired by the corporation re-acquiring it,
may be re-issued or sold again, such shares, as long as it is held by the corporation
as a treasury share, participates neither in dividends, because dividends cannot be
declared by the corporation to itself, nor in meetings of the corporation as voting stock,
for otherwise equal distribution of voting powers among stockholders will be effectively
lost and the directors will be able to perpetrate their control of the corporation, though
it still represents a paid for interest in the property of the corporation. The foregoing
essential features of a treasury stocks are lacking in the questioned shares.
In this case, and under the terms of the trust agreement, the shares of stock of
Reese participated in dividends which the trustee received and the said shares
were voted upon by the trustee in all corporation meetings. They were not, therefore,
treasury shares.”
 When the law speaks of outstanding rights it does not include treasury shares

 Treasury shares may be reissued

- They are actually assets of the corporation

- Once re-issued they become outstanding stocks again

- The corporation may cancel them; in effect there will be a reduction in the outstanding
capital stocks

- The code does not require ordinary corporations to provide for restrictions, but it does
not likewise prohibit restrictions

- Example: right of first refusal

- The restriction must be contained in the articles of incorporation

- If provided in by-laws but not in the articles of incorporation then it will not be binding

- Restrictions and preferences are mandatorily required in close corporations

- If it does not provide restrictions it is not a close corporation

- Specified persons- close corporations

- If not one of those specified you are not included because there is exclusivity in close
corporations

- Should also be in the by-laws not only in the articles of incorporation

 No transfer clause

 Execution clause
 Acknowledgment

 Treasurer affidavit part of the articles of incorporation

 Section 23-27 minimum qualifications, but there may be additional

 Grounds for disapproval

- Only substantial and not strict is required

 May the SEC refuse or reject registration?

- <Section 17>

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:

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;

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.

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 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)

- But the grounds in section 17 are not exclusive

 When will the corporation commence to exist?

- Section 19

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)

 A corporation de jure can come into existence only upon the issuance of the certificate
of registration by the SEC? TRUE OR FALSE?

- TRUE

- EXCEPTION: CORPORATION SOLE <sec. 112>

Section 112. Submission of the articles of incorporation. - The articles of

incorporation must be verified, before filing, by affidavit or affirmation of the chief
archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, and
accompanied by a copy of the commission, certificate of election or letter of
appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder,
duly certified to be correct by any notary public.

From and after the filing with the Securities and Exchange Commission of the
said articles of incorporation, verified by affidavit or affirmation, and accompanied by
the documents mentioned in the preceding paragraph, such chief archbishop, bishop,
priest, minister, rabbi or presiding elder shall become a corporation sole and all
temporalities, estate and properties of the religious denomination, sect or church
theretofore administered or managed by him as such chief archbishop, bishop, priest,
minister, rabbi or presiding elder shall be held in trust by him as a corporation sole, for
the use, purpose, behalf and sole benefit of his religious denomination, sect or church,
including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries
thereof. (n)

- CORPORATION SOLE- upon filing of the verified articles of incorporation, once filed
it is vested with a judicial capacity

 General rule section 19

- Vested with judicial capacity upon issuance of the certificate by the SEC

o However it is not accurate according to atty. Ladia because there are those that
can issue for example cooperatives- BUREAU OF COOPERATIVES which
register, home insurance guaranty corporation- HOME OWNERS

Cagayan Fishing vs. Sandika

- Corporations are created by law

- Commence to exist upon issuance by the CONCERNED government corporation or

agency

- Prior there to it has no being

- The transfer of the property was not valid, it likewise did not have the right to transfer

 De jure

- Strict or substantial compliance

 De facto

- 4 requisites must go hand in hand take out anyone of them there can be no de facto
corporation

1. There is a valid statute under which the corporation could have been created as a de
jure corporation.

2. An attempt, in good faith, to form a corporation according to the requirements of law,

which goes far enough to amount to a “colorable compliance” with the law;

3. A user of corporate powers, the transaction of business in some way as if it were a

corporation; and,

4. Good faith in claiming to be and doing business as a corporation.

 Are the rights and obligations between officers and directors of a de jure and de facto
the same?

- YES. Governed by the same law, rules and regulations

 Only important in determining, is for the purpose of applying the rules with regards to
the direct and collateral attack

 The existence of a de jure cannot be questioned even by the State, either directly or
indirectly

 Existence of a de facto can be questioned only by the State directly in a quo warranto
proceeding only

Municipality of Malabang vs. Benito

- What is the missing link so as to consider it a de facto? A law, because the executive
order is unconditional

- An unconditional act affords no rights, creates no office

- Legal contemplation it was never passed at all

- It can therefore be questioned by any person

 If the certificate of registration has not been issued, may a corporation de facto exist?

- NO!

- Number 4 requirement, good faith in claiming to be and doing business as a

corporation

Hall vs. Piccio

- Missing link is good faith

- The certificate was not yet issued by the SEC, the members knew and therefore they
were not acting in good faith, therefore anybody can question its existence
 Corporation by estoppel

- So defectively formed so that they are not to be considered a de jure or de facto

- General partners- liable even beyond his promise even his personal properties are
prone to attachment

Lozano vs. Delos Santos

- Founded on principle of equity

- Exercise corporate powers

- Enters with business with 3rd parties

- When there is no 3rd persons involved and the problem arises between there members,
therefore they themselves know that there is no corporation by estoppel

Albert vs. University

- 1965 case, no section 21 yet

- Applied where the rules governing agency

- A person purporting in behalf of a non existing corporation

- Section 21, you arrive at the same decision

Chiang Kai Siek vs. CA

- SC based its decision from the provision of the education act

- It cannot immune itself by virtue of its non compliance with the law

 Assuming there was no law?

- YES, it may still be sued as a school for the past 32 years the school represented itself
as possessed of juridical personality

 General rule: a 3rd party transacting with a non existent corporation shall be estopped
to deny

Asia banking vs. standard products

- General rule: absence of fraud a person who has dealt with a non incorporated
corporation shall be stopped to deny from actions in which it had benefited

- Exemptions: when there is fraud the general rule shall not apply

Salvatierra vs. Garlitos

- As a general rule a person who has contracted it a corporation lacking personality

- Doctrine is not applicable where fraud takes part in the transaction

 Another exemption

International express travel and tours vs. CA

- No fraud in this case

- How come Kahn was made liable?

- Doctrine of incorporation

- Applies only if that person is trying to escape from a contract where he is benefited

- In this case petitioner is not trying to escape liability, but rather the one claiming from
the contract

 Would this apply to foreign corporation?

- YES, it may apply

- Georg Grotjahn vs. Isnami

 A foreign corporation cannot gain access to our courts unless they attain a license to
engage in business in the Philippines but applying corporation by estoppels, the court
allowed

 Municipality of Malabang case

- No law, hence may be questioned by any person

- An unconstitutional act is not a law, t confers no rights, it imposes no duties, it affords

no protections, it crates o office, it is in legal contemplation, as inoperative as though
it had never been passes

 Hall vs. Piccio

- No good faith

 Corporation by estoppel

- Admission, conduct or agreement

- Will not apply among members themselves there must be a 3rd party

- Cannot escape when benefited

- General rule: you deal with a corporation, as to estop it

- Exceptions: 1. fraudulently misrepresents the third person may file an action directly
to those members, 2. 3rd party will not be estopped if he is not trying to escape liability

 2 possible remedies

- Chiang kai siek case

- Albert case
  What would be the effect if the corporation failed to commence transaction?

- Automatic

 Operated but becomes subsequently inoperative for 5 years only a ground for
suspension, proper notice and hearing

 Commencement

Example realty company