HISTORICAL BACKGROUND

1. Philippine Corporate Law: Sort of Codification of American Corporate Law

Under American sovereignty, attention was drawn to the fact that there was no entity
in Spanish law exactly corresponding to the notion "corporation" in English and
American law; the Philippine Commission enacted the Corporation Law (Act No.
1459), to introduce the American corporation into the Philippines as the standard
commercial entity and to hasten the day when the sociedad anónima of the Spanish
law would be obsolete. The statute is a sort of codification of American Corporate
Law. (Harden v. Benguet Consolidated Mining, 58 Phil. 141 (1933)).

2. The Corporation Law

The first corporate statute, the Corporation Law, or Act No. 1459, became effective on
1 April 1906. It had various piece-meal amendments during its 74-year history. It
rapidly became antiquated and not adapted to the changing times.

3. The Corporation Code

The Corporation Code (Batas Pambansa Blg. 68) took effect on 1 May 1980. It
adopted various corporate doctrines enunciated by the Supreme Court under the old
Corporation Law. It clarified the obligations of corporate directors and officers,
expressed in statutory language established principles and doctrines, and provided
for a chapter on close corporations.

4. Proper Treatment of Philippine Corporate Law

Philippine Corporate Law comes from the common law system of the United States.
Therefore, although we have a Corporation Code that provides for statutory
principles, Corporate Law is essentially, and continues to be, the product of
commercial developments. Much of this development can be expected to happen in
the world of commerce, and some expressed jurisprudential rules that try to apply
and adopt corporate principles into the changing concepts and mechanism of the
commercial world.

DEFINITION (Section 2; Articles 44(3), 45, 46, and 1775, Civil Code)
 Sec. 2 Corporation defined – A corporation is an artificial being created by operation
of law, having the rights of succession and the powers attributes and properties,
expressly authorized by law or incident to its existence.
 Art. 44(3) The following are juridical persons – Corporations, partnerships and
associations for private interest or purpose to which the law grants a juridical
personality, separate and distinct from that of each shareholder, partner or member.
 Art. 45 Juridical persons mentioned in Nos.1 and 2 of the preceding article are
governed by laws creating or recognizing them.
o Private corporations are regulated by laws of general application on the
subject.

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 o Partnerships and associations for private interest or purpose are governed by
the provisions of this Code concerning partnerships.
 Art. 46 Juridical persons may acquire and possess property of all kinds, as well as
incur obligations and bring civil or criminal actions, in conformity with the laws and
regulations of their organization.
 Art. 1775 Association and societies, whose articles are kept secret among the
members, and wherein any pone of the members may contract in his own name with
third persons, shall have no juridical personality, and shall be governed by the
provisions relating to co-ownership.
 A corporation is an artificial being created by operation of law. It has a personality
separate and distinct from the persons composing it, as well as from any other legal
entity to which it may be related.
o “an artificial being” - a person created by law or by state; legal fiction
o “created by law” – its existence is dependent upon the onsent or grant of the
state
o EXCEPT corporation by estoppel and de facto corporation: the definition of a
corporation is merely a guide and does not really provide for the basis of a
corporation

CASES:
 PNB v. Andrada Electric & Eng’ring Co., 381 SCRA 244 (2002)
 Reynoso v. CA, 345 SCRA 355
 Tayag v. Benguet Corporation

TRI-LEVEL EXISTENCE OF THE CORPORATION

1. AGGREGATION OF ASSETS AND RESOURCES – physical assets of the
corporation; the tangibles ( ex. in a grocery, the goods being sold)

2. BUSINESS ENTERPRISE OR ECONOMIC UNIT – the commercial venture; this

includes not only the tangible assets but also the intangibles like goodwill created by
the business

3. JURIDICAL ENTITY – juridical existence as a person; the primary franchise granted

by the state

Why is the distinction between the three levels important?

Each is important in its own way as there are consequences for each. The distinctions
become important and come into play when it comes to dealing with corporation law What
are you selling or buying (and their worth) will depend upon the particular level you choose.
EXAMPLE: If you merely want to purchase the assets and not the business, a simple deed
of sale would suffice and you will not be liable for contingent liabilities. It will be different if
you buy the business as an economic concept. SEC Regulations or Bulk sales Law may be
applied.

RELATIONSHIPS INVOLVED IN A CORPORATE SETTING

A. JURIDICAL ENTITY LEVEL, which views the State-corporation relationship the state
cannot destroy a corporation without observing due process of law

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 B. INTRA-CORPORATE LEVEL, which considers that the corporate setting is at once a
contractual relationship on four (4) levels:
 Between the corporation and its agents or representatives to act in the real world,
such as its directors and its officers, which is governed also by the Law on Agency
 Between the corporation and its shareholders or members
 Between and among the shareholders in a common venture

C. EXTRA-CORPORATE LEVEL, which views the relationship between the corporation

and third-parties or “outsiders”, essentially governed by Contract Law and Labor Law.

Most important level, highest form of law in this level is contract law.

THEORIES ON THE FORMATION OF CORPORATION:

 the SC has looked upon the corp. not merely as an artificial being but more as an
AGGRUPATION OF PERSONS DOING BUSINESS or AN UNDERLYING
ECONOMIC UNIT.
 The corp. is emerging as an enterprise bounded by economics rather than an
artificial personality bounded by forms of words in a charter, minute books & books of
accounts.
 The proposition that a corporation has an existence separate and distinct from its
membership has its limitations. (Separate existence is for a particular purpose.)
There can be no corp. existence w/o persons to compose it & there can be no
association w/o associates.

a. Theory of Concession (Tayag v. Benguet Consolidated, 26 SCRA 242 [1968]).

 corporation – creature of the state
 limited – no other privilege may be exercised beyond grant
 To organize a corporation that could claim a juridical personality of its own and
transact business as such, is not a matter of absolute right but a privilege which
may be enjoyed only under such terms as the State may deem necessary to
impose. (Ang Pue & Co. v. Sec. of Commerce and Industry, 5 SCRA 645 [1962])
 “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,” and the procedure and conditions provided under the law for the
acquisition of such juridical personality must be complied with. Although the
statutory grant to an association of the powers to purchase, sell, lease and
encumber property can only be construed the grant of a juridical personality to
such an association . . . nevertheless, the failure to comply with the statutory
procedure and conditions does not warrant a finding that such association
acquired a separate juridical personality, even when it adopts sets of constitution
and by-laws. (International Express Travel & Tour Services, Inc. v. Court of
Appeals, 343 SCRA 674 [2000]).
 Since all corporations, big or small, must abide by the provisions of the
Corporation Code, then even a simple family corporation cannot claim an
exemption nor can it have rules and practices other than those established by law.
(Torres v. Court of Appeals , 278 SCRA 793 [1997]).

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 b. Theory of Enterprise Entity
 juridical personality
 contractual relation between 5 or more individuals
 recognize existence of an aggregation of individuals (enterprise entity)
 A corporation is but an association of individuals, allowed to transact under an
assumed corporate name, and with a distinct legal personality. In organizing itself
as a collective body, it waives no constitutional immunities and perquisites
appropriate to such a body. (PSE v. Court of Appeals, 281 SCRA 232 [1997]).
 Corporations are composed of natural persons and the legal fiction of a separate
corporate personality is not a shield for the commission of injustice and inequity,
such as to avoid the execution of the property of a sister company. (Tan Boon Bee
& Co., Inc. v. Jarencio, 163 SCRA 205 [1988]).

FOUR CORPORATE ATTRIBUTES BASED ON SECTION 2:

A) A CORPORATION IS AN ARTIFICIAL BEING (“Ability to Contract and Transact”)
 a person created by law or by state; a legal fiction
B) CREATED BY OPERATION OF LAW (“Creature of the Law”)
 its existence is dependent upon the consent or grant of the state EXCEPT
corporation by estoppel and de facto corporation
C) WITH RIGHT OF SUCCESSION (“Strong Juridical Personality”)
 the corporation exist despite the death of its members as a corporation has a
personality separate and distinct from that of its individual stockholders. The
separate personality remains even if there has been a change in the members
and stockholders of the corporation.
D) HAS THE POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY
AUTHORIZED BY LAW OR INCIDENT TO ITS EXISTENCE (“Creature of Limited
Powers”)

FOUR BASIC ADVANTAGEOUS CHARACTERISTICS OF CORPORATE

ORGANIZATION:

1. STRONG LEGAL PERSONALITY

“A corporation is an entity separate and distinct from its stockholders. While not in
fact and in reality a person, the law treats the corporation as though it were a person
by process of fiction or by regarding it as an artificial person distinct and separate
from its individual stockholders.” (Remo, Jr. v. IAC, 172 SCRA 405 [1989]).

The transfer of the corporate assets to the stockholder is not in the nature of a
partition but is a conveyance from one party to another. (Stockholders of F. Guanzon
and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 [1962]).

2. CENTRALIZED MANAGEMENT
As can be gleaned from Sec. 23 of Corporation Code “It is the board of directors or
trustees which exercises almost all the corporate powers in a corporation.” (Firme v.
Bukal Enterprises and Dev. Corp., 414 SCRA 190 [2003]).

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 The exercise of the corporate powers of the corporation rest in the Board of Directors
save in those instances where the Corporation Code requires stockholders’ approval
for certain specific acts. (Great Asian Sales Center Corp. v. Court of Appeals, 381
SCRA 557 [2002]).

3. LIMITED LIABILITY TO INVESTORS AND OFFICERS

One of the advantages of the corporation is the limitation of an investor’s liability to
the amount of investment, which flows from the legal theory that a corporate entity is
separate and distinct from its stockholders. San Juan Structural and Steel
Fabricators, Inc. v. Court of Appeals, 296 SCRA 631 [1998]).

It is hornbook law that corporate personality is a shield against personal liability of its
officers—a corporate officer and his spouse cannot be made personally liable under a
trust receipt where he entered into and signed the contract clearly in his official
capacity. (Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671
[2001]).

Obligations incurred by the corporation acting through its directors, officers and
employees, are its sole liabilities. (Malayang Samahan ng mga Manggagawa sa M.
Greenfield v. Ramos, 357 SCRA 77 [2001]).

4. FREE TRANSFERABILITY OF UNITS OF OWNERSHIP FOR INVESTORS

Authority granted to corporations to regulate the transfer of its stock does not
empower the corporation to restrict the right of a stockholder to transfer his shares,
but merely authorizes the adoption of regulations as to the formalities and procedure
to be followed in effecting transfer. (Thomson v. Court of Appeals, 298 SCRA 280
[1998]).

DISADVANTAGES OF A CORPORATE FORM

1. Abuse of corporate management

 There is severance of control and ownership. Control will be vested with the BoD,
thus, investors have no say over the use of their investment and little voice in the
conduct of the business.

2. Abuse of limited liability feature

 this feature had been abused and may hurt innocent creditors

3. High cost of maintenance

 the formation and incorporation of a corp. entails a lot of difficulties and costs,
particularly the requirements made by the law so as to qualify for incorporation

4. Double taxation
 Dividends received by individuals from domestic corporations are subject to final
10% tax for income earned on or after 1 January 1998 (Sec. 24(B) (2), 1997
NIRC)

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  Inter-corporate dividends between domestic corporations, however, are not
subject to any income tax (Sec. 27(D)(4), 1997 NIRC)

NATURE AND ATTRIBUTES OF A CORPORATION

1. NATURE OF POWER TO CREATE A CORPORATION (Sec. 16, Article XII, 1987
Constitution)
The Congress shall not except by general law, provide for the formation, organization
or regulation of private corporations, Government-owned or controlled corporations
may be created or established by special charters in the interest of the common good
and subject to the test of economic viability.

P.D. 1717, which created New Agrix, Inc. violates the Constitution which prohibits the
formation of a private corporation by special legislative act which is neither owned nor
controlled by the government, since NDC was merely required to extend a loan to the
new corporation, and the new stocks of the corporation were to be issued to the old
investors and stockholders of the insolvent Agrix upon proof of their claims against
the abolished corporation. (NDC v. Philippine Veterans Bank, 192 SCRA 257 [1990]).

Congress cannot enact a law creating a private corporation with a special charter,
and it follows that Congress can create corporations with special charters only if such
corporations are government-owned or controlled. (Feliciano v. Commission on Audit,
419 SCRA 363 [2004]).

Q: What distinguishes a public corporation from a private corporation owned by the

government?
A: It is not ownership which distinguishes a public corporation from a private
corporation. It is the civil service eligibility of its employees and if the financial records
are subject to the examination of the Commission on Audit. A public corporation is
created by its charter whereas a private corporation is created under the Corporation
Code.

2. CORPORATION AS A PERSON:
(a) Entitled to Due Process
The due process clause is universal in its application to all persons without regard
to any differences of race, color, or nationality. Private corporations, likewise, are
“persons” within the scope of the guaranty insofar as their property is concerned.
(Smith Bell & Co. v. Natividad, 40 Phil. 136, 144 [1920]).
(b) Equal Protection Clause (Smith Bell & Co. v. Natividad, 40 Phil. 136 [1920]).
(c) Unreasonable Searches and Seizure
A corporation is protected by the constitutional guarantee against unreasonable
searches and seizures, but its officers have no cause of action to assail the
legality of the seizures, regardless of the amount of shares of stock or of the
interest of each of them in said corporation, and whatever the offices they hold
therein may be, because the corporation has a personality distinct and separate
from those of said officers. (Stonehill v. Diokno, 20 SCRA 383 [1967]).

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 A corporation is but an association of individuals under an assumed name and
with a distinct legal entity. In organizing itself as a collective body it waives no
constitutional immunities appropriate for such body. Its property cannot be taken
without compensation; can only be proceeded against by due process of law; and
is protected against unlawful discrimination. (Bache & Co. (Phil.), Inc. v. Ruiz, 37
SCRA 823, 837 [1971], quoting from Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652).

Q: Why is a corporation entitled to the rights of due process and equal protection?
CLV: A corporation enjoys constitutional rights. In that manner, it enjoys the same
protection the law grants to an individual. A corporation is entitled to due process and
equal protection by virtue of the juridical personality given by the State through the
primary franchise of the corporation. The constitution did not distinguish whether the
term “person” in Sec. 1 Art. III of the Constitution refers to an individual or a juridical
entity, which therefore extends to private corporations within the scope of the
guaranty.

Q: Why is the corporation entitled to the protection against unreasonable searches

and seizures?
A: The corporation being entitled to due process and equal protection is the
consequence of the State’s grant of a primary franchise to a corporation. It emanates
from the Theory of Concession, whereby the government recognizes not only the
separate juridical personality of the corporation but also grants unto it all the rights
and protections that a natural individual would possess which includes the right to
due process and equal protection.

3. PRACTICE OF PROFESSION
Corporations cannot engage in the practice of a profession since they lack the moral
and technical competence required by the PRC.

A corporation engaged in the selling of eyeglasses and which hires optometrists is

not engaged in the practice of optometry. (Samahan ng Optometrists v. Acebedo
International Corp., 270 SCRA 298 [1997]); (Alfafara v. Acebedo Optical Company,
381 SCRA 293 [2002]).

4. LIABILITY FOR TORTS

A corporation is civilly liable in the same manner as natural persons for torts, because
the rules governing the liability of a principal or master for a tort committed by an
agent or servant are the same whether the principal or master be a natural person or
a corporation, and whether the servant or agent be a natural or artificial person. That
a principal or master is liable for every tort which he expressly directs or authorizes, is
just as true of a corporation as a natural person. (PNB v. Court of Appeals, 83 SCRA
237 [1978]).

Q: When is a corporation liable for tort?

A: A corporation is liable for tort when: (a) the act is committed by an officer or agent
(2) under express direction of authority from the stockholders or members acting as a
body or through the Board of Directors.

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 Q: How can authority given to the agent of the corporation be determined?
A: Either by: (a) such direction by the corporation is manifested, by its board adopting
a resolution to such effect (b) by having takien advantage of such a tortious act, the
corporation through its board, has expressly or impliedly ratified such an act or
estopped from impugning the same.

Q: What is a derivative suit?

A: Since, the act of the board is essentially that of the corporation and therefore
corporate assets cannot escape enforcement of the award of damage to the tort
victim. As a remedy, the stockholders may institute a derivative suit against the
responsible board members and officers for the damages suffered by the corporation
as a result of the tort suit.

5. CORPORATE CRIMINAL LIABILITY (West Coast Life Ins. Co. v. Hurd, 27 Phil. 401
[1914]; People v. Tan Boon Kong, 54 Phil. 607 [1930]; Sia v. Court of Appeals, 121
SCRA 655 [1983]; Articles 102 and 103, Revised Penal Code).

6. RECOVERY OF MORAL AND OTHER DAMAGES

A corporation, being an artificial person, cannot experience physical sufferings,
mental anguish, fright, serious anxiety, wounded feelings, moral shock or social
humiliation which are basis for moral damages under Art. 2217 of the Civil Code.
However, a corporation may have a good reputation which, if besmirched, may be a
ground for the award of moral damages. (Mambulao Lumber Co. v. Philippine
National Bank, 22 SCRA 359 [1968]; APT v. Court of Appeals, 300 SCRA 579
[1998]).

A corporation, being an artificial person and having existence only in legal

contemplation, has no feelings, emotions nor senses; therefore, it cannot experience
physical suffering and mental anguish. Mental suffering can be experienced only by
one having a nervous system and it flows from real ills, sorrows, and griefs of life—all
of which cannot be suffered by an artificial person. Prime White Cement Corp. v.
IAC , 220 SCRA 103 [1993]; LBC Express, Inc. v. Court of Appeals, 236 SCRA 602
[1994]; Acme Shoe, Rubber & Plastic Corp. v. Court of Appeals, 260 SCRA 714
[1996]; Solid Homes, Inc. v. Court of Appeals, 275 SCRA 267 [1997]; NPC v. Philipp
Brothers Oceanic, Inc., 369 SCRA 629 [2001]).

The statement in People v. Manero and Mambulao Lumber Co. v. PNB, that a
corporation may recover moral damages if it “has a good reputation that is debased,
resulting in social humiliation” is an obiter dictum. Recovery of a corporation would be
under Articles 19, 20 and21 of the Civil Code, but which requires a clear proof of
malice or bad faith. (ABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA
589 [1999]).

7. CORPORATE NATIONALITY: UNDER WHOSE LAWS INCORPORATED (Sec.

123)
Section 123: Definition and rights of foreign corporations – For the purposes of this
Code, a foreign corporation is one formed, organized or existing under any laws
other than those of the Philippines and whose laws allow Filipino citizens and

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corporations to do business in the Philippines after it shall have obtained a license to
transact business in this country in accordance with this Code and a certificate of
authority from the appropriate government agency.

There are three tests to determine the nationality of the corporation, namely:

1.) Place of incorporation – that a corporation is of the nationality of the country

under whose laws it has been organized and registered, embodied in Sec. 123 of
the Corporation Code.

2.) Control test – nationality determined by the nationality of the majority

stockholders, wherein control is vested.

Situation #1: 51% Filipino 49% Japanese à Under the control test, the nationality
cannot be determined because for a group of stockholders to exercise control
over a corporation it is required by the Corporation Code that they at least control
60% of the corporation. à Why 60%? Because under the Corporation Code for a
group of persons to incorporate a corporation, at least 5 persons are required by
law. A majority of the 5 is 3 and converting it into percent, one gets 60%. We can
say that in fact 51% is majority but in a group of 5 people 51% is 2 & 1/5, there
really is no 1/5 of a person.

Situation #2: 60% Filipino 40% Japanese à Under the control test, this is
considered a Filipino corporation.

3.) Principal place of business – applied to determine whether a State has

jurisdiction over the existence and legal character of a corporation, its capacity or
powers, internal organizations, capital structure, rights and liabilities of directors.

Q: Do all three tests apply in the Philippines?

A: Yes. The first test is considered the primary test, the second one is used to
determine whether a corporation can engage in nationalized activities in the country,
and the third one is used to determine the jurisdiction of the State to enforce for
instance taxation laws.

Q: What is the importance of determining the nationality of the corporation?

A: It is necessary so as to determine whether or not a corporation can enter into
various transactions or engage in different industries. And also, the legal fiction
supporting a corporation is valid only within Philippine territory.

Q: It was said that the place of incorporation is the primary test to determine
the nationality of the corporation, why then is there other tests used?
A: There are certain aspects of the Philippine economy that require that the
controlling test in corporations engaging in said type of business be that of Filipinos.
The nationalized economic sectors are primarily focused at making Filipino interests
benefit directly from the bounties of this country. The place of incorporation test need
not have been expressly provided by the Constitution since it is an integral part of our
law specifically the power of Congress to grant primary franchise to corporations. The

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place of incorporation test is deemed the primary test. It is a true test of nationality.
Being a creature of law of the place where it was incorporated, the corporation
cannot escape said law. By providing for the control test, the Constitution is providing
for a secondary test to determine which corporations are entitled to entry in
nationalized sectors.

Q: What is the implication of having a primary test and a secondary test?

A: Simply put, if a corporation does not pass the first test, which the place of
incorporation tests, automatically it is deemed to be a foreign corporation. However,
having passed the first test, the nationality of the corporation may have been
established but this does not mean that the corporation is entitled to enter every
single economic sector of the Philippines. The control test determines now whether
the corporation fulfills the equity requirements of the Constitution. In doing this, the
other tests are made such as: war-time test, investment test and grandfather rule.

GRANDFATHER RULE (Opinion of DOJ No. 18, s. 1989, 19 January 1989; SEC
Opinion, 6 November 1989, XXIV SEC QUARTERLY BULLETIN (No. 1- March
1990); SEC Opinion, 14 December 1989, XXIV SEC QUARTERLY BULLETIN (No. 2
-June 1990)

Shares belonging to corporations or partnerships at least 60% of the capital of which

is owned by Filipino citizens shall be considered as of Philippine nationality, but if the
percentage of Filipino ownership in the corporation or partnership is less than 60%,
only the number of shares corresponding to such percentage shall be counted as of
Philippine nationality. Example: partnership between ABC and X companies. ABC
owns 60% with 40% foreign and 60% Filipino-owned shares while X companies own
40% with 100% Filipino-owned shares. Under the SEC DOJ Rule, such partnership is
Filipino-owned. Moreover, under this rule once the 60% requirement is reached, there
is no more need for tierring.

It must be stressed however that the aforequoted SEC rule applies only for purposes
of resolving issues on investments. The SEC was quick to add: “[h]owever, while a
corporation with 60% Filipino and 40% foreign equity ownership is considered a
Philippine national for purposes of investment, it is not qualified to invest in or enter
into a joint venture agreement with corporations or partnerships, the capital or
ownership of which under the constitution of other special laws are limited to Filipino
citizens only. A joint venture arrangement would mean that such corporation has
become a partner and is deemed then to be acting or involving itself in the operations
of a nationalized activity by the acts of the local partners by virtue of the principle of
mutual agency applicable to partnerships.

There seems to be a conflict as to the applicability of the SEC Rule and to that of the
Foreign Investments Act but each in itself has advantages and disadvantages, since
both require stringent requisites for a corporation to avail of its privileges. But under
the present scenario, the FIA is believed to be the default rule having been enacted
more recently that the SEC Rule.

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GRANDFATHER RULE – a method by which the percentage of Filipino equity in
corporations engaged in nationalized or partly nationalized areas of activity provided
for under the Constitution and other national laws is accurately computed, in cases
where corporate shareholders are part of the ownership structure by considering the
nationality of the second or even subsequent tier of ownership to determine the
nationality of the corporate shareholder.

Q: When is the GFR applied?

A: The GFR is applied in cases where the corporation has corporate stockholders
with alien stockholdings, otherwise, if the rule is not applied, the presence of such
corporate srockholders could diminish the effective control of Filipinos.

SITUATION #1 – Silahis International Hotel, the capital stock of which is 69% owned
by another corporation Hotel Properties Inc. and 31% owned by Filipinos. Hotel
Properties in turn is 53% alien-owned and 47% Filipino-owned. The SEC through the
GFR stated that Silahis International Hotel can engage in partly nationalized business
because the Filipino equity in said corporation is 63.43% while the foreign equity in
said corporation is 36.57%.

ABC INTERNATIONAL HOTEL

Hotel Properties Inc. 69% 53% Foreign

47% Filipino

Filipino stockholdings 31%

47/100 (Hotel Properties) x 69 = 32.43 + 31 (remaining Filipino

stockholdings in ABC)
TOTAL: 63.43%

SITUATION #2 –Whether or not there may be an investment made by Pinoy Inc. in

Mass Media which requires 100% Filipino ownership. Pinoy Inc. is 40% owned by
Pedro, a Filipino, while 60% is owned by ABC, Inc. ABC on the other hand, is a
corporation registered in the Philippines 60% of which is owned by Maria, a Filipino,
while 40% is owned by George, a German.

Q: Can Pinoy, Inc. enter into the operation of a television station?

A: In this situation, is the GFR is applied straight; Pinoy, Inc. would be disqualified
since 24% of Pinoy is owned by George. But under the present investment regime of
the Philippines, the FIA provides that corporations which are 60% owned by Filipino
citizens shall be considered of Philippine nationality. It is defined under said law that
for the purposes of investment such a corporation of 60% Filipino and 40% foreign
equity is allowed to invest in a corporation engaged in a nationalized sector.

Q: Does this not contradict the very provisions of the Constitution?

A: It does not because the main purpose of such provision of the law is to spur
investments into the Philippine economy. What it specifically prohibits is for a
corporation with a foreign equity to engage in nationalized industries. Note the

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 difference in the use of terms, namely “to engage” as opposed to “to invest.”
Engaging in nationalized industries involve direct participation in the exploitation or
use of natural resources or entry into protected industries vested with public interest.
This is what is prohibited from being entered into by non-nationals.

Q: When should the GFR be applied?

A: It should be applied when two requisites are met: (1) when there is involved a
nationalized or partly nationalized sector of Philippine economy and (2) when there is
tierring, meaning the corporation is partly-owned by another corporation.

SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING THE VEIL OF

CORPORATE FICTION

1. SEPARATE JURIDICAL PERSONALITY: A corporation has a personality

separate and distinct from its stockholders or members.

Sources: Sec. 2; Article 44, Civil Code

Importance of Protecting Main Doctrine: The separate juridical personality

includes the right of succession, limited liability, centralized management, and
generally free transferability of shares of stock. Therefore, an undermining of the
separate juridical personality of the corporation such as the application of the piercing
doctrine, necessarily dilutes any or all of those attributes.

(LBP v. Court of Appeals, 364 SCRA 375 [2001]); San Juan Structural v. Court of
Appeals, 296 SCRA 631 [1998]).

Applications:
a. Majority Equity Ownership and Interlocking Directorship:
Ownership of a majority of capital stock and the fact that majority of directors of a
corporation are the directors of another corporation creates no employer-
employee relationship with the latter's employees. (DBP v. NLRC, 186 SCRA 841
[1990])

b. On Being a Corporate Officer

Being an officer or stockholder of a corporation does not by itself make one's
property also of the corporation, and vice -versa, for they are separate entities,
and that shareholders are in no legal sense the owners of corporate property
which is owned by the corporation as a distinct legal person. (Good Earth
Emporium, Inc. v. CA, 194 SCRA 544 [1991]).

The mere fact that one is president of the corporation does not render the
property he owns or possesses the property of the corporation, since that
president, as an individual, and the corporation are separate entities. (Cruz v.
Dalisay, 152 SCRA 487 (1987); Booc v. Bantuas, 354 SCRA 279 [2001]).

c. Dealings Between Corporation and Stockholders

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 The fact that the majority stockholder had used his own money to pay part of the
loan of the corporation cannot be used as the basis to pierce. “It is
understandable that a shareholder would want to help his corporation and in the
process, assure that his stakes in the said corporation are secured.” (LBP v. Court
of Appeals, 364 SCRA 375 [2001]).

Use of a controlling stockholder’s initials in the corporate name is not sufficient

reason to pierce the corporate veil, since by that practice alone does it mean that
the said corporation is merely a dummy of the individual stockholder. A
corporation may assume any name provided it is lawful, and there is nothing
illegal in a corporation acquiring the name or as in this case, the initials of one of
its shareholders. (LBP v. Court of Appeals, 364 SCRA 375 [2001]).

d. On Privileges Enjoyed: The tax exemption clause in the charter of a corporation

cannot be extended to nor enjoyed by even its controlling stockholders. (Manila
Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895 (1936).

e. Obligations and Debts: Corporate debt or credit is not the debt or credit of the
stockholder nor is the stockholder's debt or credit that of the corporation. (Traders
Royal Bank v. Court of Appeals, 177 SCRA 789 [1989]).
A corporation has no legal standing to file a suit for recovery of certain parcels of
land owned by its members in their individual capacity, even when the corporation
is organized for the benefit of the members. (Sulo ng Bayan v. Araneta, Inc., 72
SCRA 347 [2001]).

2. DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION

while the corporation cannot be generally held liable for acts or liabilities of its
stockholders or members, and vice versa because a corporation has a personality
separate and distinct from its members or stockholders, however, the corporate
existence is disregarded under this doctrine when the corporation is formed or used
for illegitimate purposes, particularly, as a shield to perpetuate fraud, defeat public
convenience, justify wrong, evade a just and valid obligation or defend a crime

The notion of corporate entity will be pierced or disregarded and the individuals
composing it will be treated as identical if the corporate entity is being used as a
cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego,
an adjunct, or a business conduit for the sole benefit of the stockholders. (Gochan v.
Young, 354 SCRA 207 [2001]; DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA
501, 363 SCRA 307 [2001]).

Nature of Doctrine: (Traders Royal Bank v. Court of Appeals, 269 SCRA 15 [1997])

The nature of the piercing doctrine is to disregard the separate juridical personality of
a corporation and to hold the actors or the stockholders of the corporation liable for a
wrong committed or a liability avoided. The Supreme Court does not go into an
explanation or direct attribution as to cause of the piercing which at times cause
confusion, so to clarify matters we classify the piercing case into three namely: (1)
fraud (2) alter ego and (3) remedy.

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 In the cases of fraud, the piercing is done because there is a wrong committed .
Therefore, a person behind the wrong must be held liable which in a corporation are
the directors, since the corporation acts through them. A piercing of the corporate
veil in fraud cases is for the purpose of making the directors directly liable. In
fraud cases, the SC looks into the circumstances of the case searching for elements
of malice or evil motive. An absence of such an evil motive, the courts will not
allow piercing. An example would be the case of TRB v. CA where the Court did not
allow piercing because there was no injury caused. Also in the Umali case, the court
did not allow piercing because the main intent was to annul a real estate mortgage
under an allegation of fraud and not to hold the Directors liable. In both cases,
piecing was not the proper remedy, even if fraud was actually alleged because the
fraud committed was not attributed directly to the acts of the agents of the
corporation.

Equitable Remedy: The doctrine of piercing the corporate veil is an equitable

doctrine developed to address situations where the separate corporate personality of
a corporation is abused or used for wrongful purposes. (PNB v. Ritratto Group, Inc.,
362 SCRA 216 [2001]).

Remedy of Last Resort: Piercing the corporate veil is remedy of last resort and is
not available when other remedies are still available. (Umali v. Court of Appeals, 189
SCRA 529 [1990]).

Purpose of Piercing: Piercing is not allowed unless the remedy sought is to make
the officer or another corporation pecuniarily liable for corporate debts (?). (Umali v.
CA, 189 SCRA 529 [1990]; Indophil Textile Mill Workers Union-PTGWO v. Calica, 205
SCRA 697 [1992]).

CLASSIFICATIONS OF CORPORATIONS

1. In Relation to the State:

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 1.1 Public Corporation (Sec. 3, Act No. 1459). one formed or organized for the
government or a portion of the state; its purpose is for general good and welfare
1.2 Quasi-public Corporation. - marriage of both a public and a private corporation; it
is granted the same powers as a private corp. but they have no incorporators,
SH’s or members
Example: A water district, although established as a corporation, it was
established for the greater good and with no stockholders. They are also placed
under the jurisdiction of the LWUA not the SEC
1.3 Private Corporation (Sec. 3, Act 1459). - one formed for some private purpose,
benefit or end.
 Government’s majority shares does not make an entity a public corporation.
(National Coal Co., v. Collector of Internal Revenue, 46 Phil. 583 [1924]).
 A corporation is created by operation of law under the Corporation Code while
a government corporation is normally created by special law referred to often
as a charter. (Bliss Dev. Corp. Employees Union v. Calleja, 237 SCRA 271
[1994]).

The test to determine whether a corporation is government owned or

controlled, or private in nature is simple. Is it created by its own charter for the
exercise of a public function, or by incorporation under the general corporation
law? Those with special charters are government corporations subject to its
provisions, and its employees are under the jurisdiction of the Civil Service
Commission, and are compulsory members of the GSIS. (Camparedondo v.
NLRC, 312 SCRA 47 [1999])

2. As to Place of Incorporation:
2.1 Domestic Corporation - incorporated in the Philippines
2.2 Foreign Corporation (Sec. 123)
 Sec. 123 Definition and rights of foreign corporations – For the purposes of
this Code, a foreign corporation is one formed, organized or existing under
any laws other than those of the Philippines and whose laws allow Filipino
citizens and corporations to do business in its own country or state. It shall
have the right to do business in its own country or state. It shall have the
right to transact business in the Philippines after it shall have obtained a
license to transact business in this country in accordance with this Code
and a certificate of authority from the appropriate government authority.

 incorporated in another country and that country grants the same rights to
Filipinos in terms of doing business there; it shall have the right to transact
business in the Philippines after it shall have obtained a license to transact
business in this country in accordance with this code & a certificate of
authority from the appropriate government agency ( SEC license after
obtaining BOI certificate )

3. As to Purpose of Incorporation:
3.1 Municipal Corporation – LGU’s
- can sue be sued without their consent ( as provided for by the LGC)

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 - in certain instances considered as an adjunct to the national government
but has been recognized to have a personality separate and distinct from
the national government.

3.2 Religious Corporation (Secs. 109 and 116)

 Section 109. Classes of religious corporations. - Religious corporations
may be incorporated by one or more persons. Such corporations may be
classified into corporations sole and religious societies.

 Section 116. Religious societies. - Any religious society or religious order,

or any diocese, synod, or district organization of any religious
denomination, sect or church, unless forbidden by the constitution, rules,
regulations, or discipline of the religious denomination, sect or church of
which it is a part, or by competent authority, may, upon written consent
and/or by an affirmative vote at a meeting called for the purpose of at least
two-thirds (2/3) of its membership, incorporate for the administration of its
temporalities or for the management of its affairs, properties and estate by
filing with the Securities and Exchange Commission, articles of
incorporation verified by the affidavit of the presiding elder, secretary, or
clerk or other member of such religious society or religious order, or
diocese, synod, or district organization of the religious denomination, sect
or church, setting forth the following:

 That the religious society or religious order, or diocese, synod, or district

organization is a religious organization of a religious denomination, sect or
church;

 That at least two-thirds (2/3) of its membership have given their written
consent or have voted to incorporate, at a duly convened meeting of the
body; That the religious society or religious order, or diocese, synod, or
district organization desires to incorporate for the administration of its
affairs, properties and estate;

 That the incorporation of the religious society or religious order, or diocese,

synod, or district organization desiring to incorporate is not forbidden by
competent authority or by the constitution, rules, regulations or discipline of
the religious denomination, sect, or church of which it forms a part;

 The place where the principal office of the corporation is to be established

and located, which place must be within the Philippines; and

 The names, nationalities, and residences of the trustees elected by the

religious society or religious order, or the diocese, synod, or district
organization to serve for the first year or such other period as may be
prescribed by the laws of the religious society or religious order, or of the
diocese, synod, or district organization, the board of trustees to be not less
than five (5) nor more than fifteen (15). (160a)

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  Since in matters purely ecclesiastical the decisions of the proper church
tribunals are conclusive upon the civil tribunals, then a church member who
is expelled from the membership by the church authorities, or a priest or
minister who is by them deprived of his sacred office, is without remedy in
the civil courts. (Long v. Basa, 366 SCRA 113 [2001]).

3.3 Educational Corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232)
 Section 106. Incorporation. - Educational corporations shall be governed by
special laws and by the general provisions of this Code.
 Section 107. Pre-requisites to incorporation. - Except upon favorable
recommendation of the Ministry of Education and Culture, the Securities
and Exchange Commission shall not accept or approve the articles of
incorporation and by-laws of any educational institution. (168a)
 Section 108. Board of trustees. - Trustees of educational institutions
organized as non-stock corporations shall not be less than five (5) nor
more than fifteen (15): Provided, however, That the number of trustees
shall be in multiples of five (5).
 Unless otherwise provided in the articles of incorporation on the by-laws,
the board of trustees of incorporated schools, colleges, or other institutions
of learning shall, as soon as organized, so classify themselves that the
term of office of one-fifth (1/5) of their number shall expire every year.
Trustees thereafter elected to fill vacancies, occurring before the expiration
of a particular term, shall hold office only for the unexpired period. Trustees
elected thereafter to fill vacancies caused by expiration of term shall hold
office for five (5) years. A majority of the trustees shall constitute a quorum
for the transaction of business. The powers and authority of trustees shall
be defined in the by-laws.
 For institutions organized as stock corporations, the number and term of
directors shall be governed by the provisions on stock corporations. (169a)

3.4 Charitable, Scientific or Vocational Corporations – one established for

charitable, scientific or vocational purposes
3.5 Business Corporation – one established for business purposes

4. As to Number of Members:
4.1 Aggregate Corporation - incorporated by more than one person
4.2 Corporation Sole - is one formed for the purpose of administering and
managing, as trustee, the affairs, property and temporalities of any religious
denomination, sect, or church, by the chief archbishop, bishop, priest, rabbi, or
other presiding elder of such religious denomination, sect or church (Secs. 110
to 115; Roman Catholic Apostolic Administrator of Davao, Inc. v. LRC and the
Register of Deeds of Davao City, 102 Phil. 596 [1957]).

5. As to Legal Status:
5.1 De Jure Corporation
5.2 De Facto Corporation (Sec. 20) - A corporation with some flaw in its
incorporation.

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 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.

5.3 Corporation by Estoppel (Sec. 21) - It is a status acquired by persons who

assume to act as a corporation knowing it to be without authority. Such
persons shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof.

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.

Why is there piercing in a de facto corporation? A: Piercing is allowed because

the intention of the law is to protect the contracts entered into by the
corporation.

6. As to Existence of Shares (Secs. 3 and 5):

Sec. 3 Classes of Corporation – Corporations formed or organized under this Code
may be stock or non-stock corporations. Corporations which have capital stock
divided into shares and are authorized to distribute to the holders of such shares
dividends or allotments of the surplus profits on the basis of the shares held are stock
corporations. All other corporations are non-stock corporations.

Sec. 5 Corporations 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 non-stock corporation are called stockholders or shareholders.

Corporators in a non-stock corporation are called members.

6.1 Stock Corporation - One which has a capital stock divided into shares and is
authorized to distribute to the holders of such shares dividends or allotments of
the surplus profits
6.2 Non-Stock Corporation - All other corporations are non-stock corporations
FORMATION OF A CORPORATION
1. Pre-Incorporation Contracts

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A. Who Are Promoters? - “Promoter” is a person who, acting alone or with others,
takes initiative in founding and organizing the business or enterprise of the issuer
and receives consideration therefor. (Sec. 3.10, Securities Regulation Code [R.A.
8799])

The definition of promoter is important to determine the liability for promoter’s

contract. Before you can make a promoter liable, you must be able to determine
who the promoter is. He must be the one who takes initiative on the founding and
organization of the business venture which eventually ends up as the corporation
being organized.
Q: At the promoter’s stage there is no juridical personality until the SEC issues the
certificate of incorporation. Until the certificate is issued, the stage of the de facto
corporation has not yet been reached. Prior to the de facto corporation stage what
then is the status of the contract entered into by a promoter for and in behalf of
the person or agent who had undertaken the transaction?
A: Unenforceable. It is not binding upon the corporation because it has not given
consent to the authority of the person or agent who had undertaken the
transaction.

Q: How can ratification be done?

A: Ratification can be done in two ways: (1) express ratification – a mere board
resolution making the corporation liable by accepting the contract and (2) implied
ratification – by accepting of benefits

B. Nature of Pre-incorporation Agreements (Secs. 60 and 61; Bayla v. Silang

Traffic Co., Inc., 73 Phil. 557 [1942]).

Sec. 60 Subscription contract – Any contract for the acquisition of unissued stocks
in an existing corporation or a corporation still to be formed shall be deemed as
subscription within the meaning of this Title, notwithstanding the fact that the
parties refer to it as a purchase or some other contract.

Sec. 61 Pre-incorporation subscription – A subscription for shares of stock of a

corporation still to be formed shall be irrevocable for a period of at least six
months from the date of subscription unless all the other subscribers consent to
the revocation, or unless the incorporation of said corporation fails to materialize
within said period or within a longer period as may be stipulated in the contract of
subscription: Provided, that no pre-incorporation subscription may be revoked
after the submission of the articles of incorporation to the SEC.

 Sec. 61 of the Corp. Code governs a pre-incorporation subscription

agreement.
 Sec. 61 says that a pre-incorporation subscription agreement is irrevocable.
The only manner by which you can revoke it is if ALL of the other subscribing
stockholders consent to the revocation.
 Sec. 61 is a clear demonstration of the fact that a promoter’s contract can be
valid and even irrevocable.

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  In the case of a pre-incorporation subscription agreement that contract is valid
because there are in fact two parties. The party subscribed and all of the other
parties who have subscribed to the other incorporators and all of them bind
themselves together to form the corporation. That is why it is irrevocable
unless the other party which is all of the other subscribers, agree.

C. De Facto Corporation (Sec. 20)

Sec. 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.

Every corporation is deemed de jure until proven otherwise.

 De Jure Corporation – formed in accordance with law; perfectly incorporated;

consequences: separate juridical personality and perfect liability.
 De Facto Corporation – formed also in accordance with law but falls short of
the requirements provided by law. Such is awarded a separate juridical
personality, it may thus enter into contracts, it may sue and be sued (note:
third parties may sue the corporation, incorporators may sue but the
corporation cannot sue). Note also that such has imperfect liability and only
the actors will be held liable. In proceeding against such, compliance with due
process must be had.

Only the State through a quo warranto proceeding may do such.

The doctrine of de facto corporation applies as to the first level relationship (as
between the State and corporations) and also to the third level of relationship (as
between third persons and corporations). If it primarily concerns the first level,
why does it draw its vitality from the third level? Because without such,
transactions shall have no effect but with such, despite the defects, the contracts
are valid and enforceable. But because of its primary relation to the first level,
third persons cannot question the legal personality of such de facto corporation.

Not all corporations which lack elements are de facto corporations.

Elements for Existence of De Facto Corporation:

1. Valid law under which it is incorporated: The Corporation Code
2. Attempt in good faith to incorporate – colorable compliance: The corporation
must have filed its Articles of Incorporation and the SEC duly issued a
Certificate of Incorporation. The minimum requirement for this requisite is the
issuance of a certificate such that even if you honestly believed that you
incorporated (and all the other requisites are present), it is still not a de facto
corporation.
 The above is needed to prove reliance in good faith.
 Issuance of certificate of incorporation – minimum requirement under
this number.

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  Assumption of corporate powers: Minimum requirement: election of the
Board of Directors (BoD).
Q: Why must there be an election of the BoD?
A: Since the corporation has a juridical personality, the only way by
which it can be said that there was good faith in entering a transaction
is that there must be a BoD by which a corporation can act. If there is
no BoD there is no good faith on the part of the corporation because it
knows that it can only act through the BoD not on the part of the parties
dealing with the corporation because it knows that there must be BoD
for the corporation to bind itself. This is also important because this is
by which the corporation manifests itself. (Remember: notion of a ghost
– A ghost manifest itself through signs, in the same manner, a
corporation manifests its existence through the existence of the BoD).

If any of the above element is absent can the principle be invoked by third
persons? No, but they may have a remedy under the principle of corporation
by estoppel. Can such be used in all instances? No, when both parties knew
that no corporation existed, such may not be invoked.

D. Corporation by Estoppel (Sec. 21; Salvatierra v. Garlitos, 103 Phil. 757 [1958];
Albert v. University Publishing Co., 13 SCRA 84 [1965]; Asia Banking Corp. v.
Standard Products, 46 Phil. 145 [1924]; Madrigal Shipping Co., v. Ogilvie, 55 O.G.
No. 35, p. 7331)

When group of persons assume to act as corporation, knowing it to be without

authority, such persons shall be liable as general partners for all debts, liabilities
and damages incurred or arising as a result thereof (Sec 21). In case of action
against such group of person, they cannot resist the performance on their
obligation or raise the defense of lack of corporate personality to escape their
liability (ibid).

Nature of the Doctrine

Founded on principles of equity and designed to prevent injustice and unfairness,
the doctrine applies when persons assume to form a corporation and exercise
corporate functions and enter into business relations with third persons. Where no
third person is involved in the conflict, there is no corporation by estoppel. A failed
consolidation therefore cannot result in a consolidated corporation by estoppel.
(Lozano v. De Los Santos, 274 SCRA 452 [1997])

Relevant Jurisprudence
A party cannot challenge the personality of the plaintiff as a duly organized
corporation after having acknowledged same when entering into the contract with
the plaintiff as such corporation for the transportation of its merchandise. (Ohta
Dev. Co. v. Steamship Pompey, 49 Phil. 117 [1926]).

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 A person who accepts employment in an unincorporated charitable association is
estopped from alleging its lack of juridical personality. (Christian Children’s Fund
v. NLRC, 174 SCRA 681 [1989]).

One who deals with an organization which is not duly incorporated is not
estopped to deny its corporate existence when his purpose is not to avoid liability.
(Int’l Express Travel v. Court of Appeals, 343 SCRA 674 [2000]).

2. The Corporate Contract.

The first step in the formation of corporation is filing to SEC the Articles of
Incorporation (AOI) with corresponding treasurer’s affidavit indicating that 25 percent
of the capital stock has been subscribed and 25 percent of such subscribed stock
has been actually paid and is in his possession. In case of banks, banking institution,
insurance corporation etc. (see last par of Sec. 17), favorable recommendation of the
government agency is necessary before such corporation may be formed. After
payment of appropriate fees, SEC shall issue a certificate of incorporation
which commence the corporate existence of the corporation (Sec. 19).

Thereupon the incorporators, stockholders/members and their successors shall

constitute a body politic and corporate under the name stated in the AOI for the
period of time mentioned therein, unless said period is extended or the corporation is
sooner dissolved in accordance with law (Ibid).

In case SEC failed to act on a valid application, mandamus may be filed to compel
SEC to issue such certificate; in case of rejection, petition for review under Rule 43 is
applicable.

See http://www.sec.gov.ph

3. ARTICLES OF INCORPORATION
The article of incorporation is:
1. A CONTRACT – an agreement that gives rise to obligations:
a. Between the corporation and the state (because it is under the AI by which
the state grants the primary franchise.) The state manifests its consent
through the SEC while the corporation manifests its consent by the filing of
the AI, through the incorporators and eventually through the Board of
Directors.
b. Between the state and stockholders
c. Between the corporation and stockholders à the stockholders manifest their
consent through their subscription of stocks and through voting à as
against the corporation, the stockholders do not have individual standing
but only standing as a group.
d. Among stockholders à in this situation they now have individual standing.
e. Between the stockholders and the Board of Directors
f. Between the corporation and the public (since the AOI is a public
document.)
2. A PUBLIC DOCUMENT – because it is registered with the SEC. Such works with
the doctrine of public notice that when the public deals with the corporation, the

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 contents of AI binds them whether they in fact have seen the AI or not. When a
person enters into a contract or any transaction with a corporation whether or not
he has checked with the SEC the terms and conditions of the AI, he will be bound
by it. He cannot claim ignorance of the charter of the corporation.

Nature of the Contract: The charter is in the nature of a contract between the
corporation and the government. (Government of P.I. v. Manila Railroad Co., 52 Phil.
699 [1929]).

Contents:
1. Corporate name;
2. Primary and secondary purposes;
3. Principal office;
4. Term of the corporation (Sec. 11 and 14);
5. Names, nationalities and residences (NNR) of incorporators;
6. Number of directors or trustees, 5-15;
7. Names, nationalities and residence of the Incorporating Directors;
8. Capital stock, number of which it is divided and par value and NNR of original
subscriber and amount paid by each: in non-stock corporation, the capita
and NNR of contributors and the amount contributed;
9. Treasurer’s Affidavit of subscription;
10. Favorable recommendation of government agency (if necessary, Sec. 17); and
11. Other matter not inconsistent with law.

Sec. 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:
a. As to Number and Residency of Incorporators: Sec. 10. Number and
Qualifications of Incorporators – Any number of natural persons not less than
five but not more than fifteen, 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 share of the capital stock of the corporation.

b. Corporate Name - Sec. 18: No corporate name may be allowed by the SEC if the
proposed name is identical or deceptively confusing or 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.

Relevant Jurisprudence:
Similarity in corporate names between two corporations would cause confusion to
the public especially when the purposes stated in their charter are also the same
type of business. (Universal Mills Corp. v. Universal Textile Mills Inc., 78 SCRA 62
[1977]).

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 Section 18 of Corporation Code expressly prohibits the use of a corporate name
which 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.” The policy behind the foregoing
prohibition is to avoid fraud upon the public that will 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. (Industrial
Refractories Corp. v. Court of Appeals, 390 SCRA 252 [2002]); Lyceum of the
Philippines v. Court of Appeals, 219 SCRA 610, 615 [1993]).

A corporation may change its name by the amendment of its articles of

incorporation, but the same is not effective until approved by the SEC. Philippine
First Insurance Co. v. Hartigan, 34 SCRA 252 (1970).

A change in the corporate name does not make a new corporation, and has no
effect on the identity of the corporation, or on its property, rights, or liabilities.
Republic Planters Bank v. Court of Appeals, 216 SCRA 738 (1992).

The name of a corporation is very important, the incorporators constituting as

body politic and corporate under the name stated in the articles of incorporation
for the period of time mentioned therein. Such name is fatal in commercial
transactions. The public may only know the corporation through its name.

c. Purpose Clause
It confers as well as limits the powers which a corporation may exercise. Other
reasons:
(1) Prospective investors shall know the kind of business the corporation deals
with;
(2) Management shall know the limits of its action;
(3) A third party can know whether his dealing with the corporation is within the
corporate functions and powers; and
(4) For the administrative supervision and monitoring of the State, to determine
which particular agency shall have jurisdiction over the operations of the
corporation.

The purpose must be lawful, having only one primary purpose and many
secondary purposes.

d. Corporate Term (Sec. 11)

Sec. 11 Corporate Term – A corporation shall exist for a period not
exceeding fifty years (50) 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 years (50) 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 years (5) prior
to the original or subsequent expiry dates unless there are justifiable
reasons for an earlier extension as may be determined by the SEC.

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 The purpose of the limit emphasizes the contractual nature of the corporation –
the extension must be approved by the State.

No extension of term can be effected once dissolution stage has been reached,
as it constitutes new business. (Alhambra Cigar v. SEC, 24 SCRA 269 [1968]).

e. Principal Place of Business (Sec. 51)

Sec. 51 Place and time of meetings of stockholders or members –
Stockholders’ or members’ meetings, whether regular or special, shall be
held in the city or municipality where the principal office of the corporation
is located and if practicable in the principal office of the corporation:
Provided, That Metro Manila shall, for purposes of this section, be
considered a city or municipality.

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

All proceedings had and any business transacted at any meeting of the
stockholders or members, if within the powers or authority of the
corporation shall be valid even if the meeting be improperly held or called,
provided all the stockholders or members of the corporation are present or
duly represented at the meeting.

f. Minimum Capitalization (Sec. 12)

Sec. 12 Minimum capital stock required of stock corporation – Stock
corporations incorporated under this Code shall not be required to have
any minimum authorized capital stock except as otherwise specifically
provided for by special law, and subject to the provisions of the following
section.

Capital stock is the amount fixed in the articles of incorporation, to be subscribed

and paid in by the shareholders of a corporation, either in money or property,
labor or services, at the organization of the corporation or afterwards and upon
which it is to conduct its operation. It represents the equity of the stockholders in
the corporate assets.

Authorized capital stock is synonymous with capital stock where the shares of
the corporation have par value. (see Secs. 14[8], 15 [seventh].) If the shares of
stock have no par value, the corporation has no authorized capital stock, but it
has capital stock, the amount of which is not specified in the articles of
incorporation as it cannot be determined until all the shares have been
issued. (Ibid.) In this case, the two terms are not synonymous.

g. Subscription and Paid-up Requirements

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 percent

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 (25%) 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
pesos (P5,000).

It means that of the authorized capital stock applied for, 25% thereof must be
subscribed. Of the 25% subscribed thereof must be paid up. Example, a
corporation is by 5 individuals and they ask for an authorized capital stock of P2M,
how much must each subscribe to? P125,000.

Subscribed capital stock is the amount of the capital stock subscribed whether
fully paid or not. It connotes an original subscription contract for the acquisition by
a subscriber of unissued shares in a corporation (see Secs. 60, 61.) and would,
therefore, preclude the acquisition of shares by reason of subsequent transfer
from a stockholder or resale of treasury shares. (Sec. 9.)

Outstanding capital stock is the portion of the capital stock which is issued and
held by persons other than the corporation itself. The Code defines the term as
“the total shares of stock issued to subscribers or stockholders, whether fully or
partially paid (as long as there is a binding subscription agreement), except
treasury shares.” (Sec. 137.) It is thus broader than “subscribed” capital stock.

RATIONALE: The purpose of such a requisition is that the State may be assured
of the successful prosecution of the work and that creditors of the company may
have to the extent, at least, of the required subscription, the means of obtaining
satisfaction for their claims.

TRUST FUND DOCTRINE

The capital stock of the corporation especially its unpaid subscriptions is a trust
fund for the benefit of the general creditors of the corporation. (Ong Yong v. Tiu,
401 SCRA 1 [2003]).

h. Steps and Documents Required in SEC

In addition to the AI, documents required are:
1.) Treasurer’s Affidavit – accompanied by a sworn statement of the
Treasurer that at least 25% of the capital stock authorized is subscribed
and at least 25% of such have been fully paid in cash or property – fair
valuation of which is equal at least to 25% of the said subscription, such
paid-up capital not being less than P5,000.

2.) Certificate of deposit

3.) Letter of authority for the SEC authorizing it to examine the bank deposit,
books of account and supporting records as to the existence and utilization
of the paid- up capital stock

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 4.) Written undertaking to change their partnership or corporate name in
case there is another person, firm, entity wit a prior right to use of the
said income or one similar to it.

4. Grounds for Disapproval (Sec. 17) - Sec. 17 Grounds when articles of incorporation
or amendment may be rejected or disapproved – The SEC 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
approval:
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 the
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.

5. Amendments to the Articles of Incorporation (Sec. 16)

Sec. 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 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 2/3 of the members if it be a non-
stock corporation.

Procedure:
1. Majority vote of the BOD concerning the amendment of AOI(Sec. 16);
2. Notice to the stockholder together with the proposed amendment (Sec. 50);
3. Affirmative votes of the stockholders representing 2/3 of the outstanding shares;

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 4. Filing of the original and amended AOI, under oath (corporate secretary and
majority of the BOD), to SEC;
5. In case of banks, banking institution (see last par of Sec. 17), favorable
recommendation of the government agencies is necessary; and
6. Approval of SEC or non-action within six months from the date of filing for causes
not attributable to corporation will commence the effectivity of the amendment.

6. Commencement of Corporate Existence (Sec. 19) - Sec. 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 SEC 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.

BY-LAWS
1. Nature and Functions
 Every corporation has the inherent right to adopt by-laws for its internal
government & to regulate the conduct & prescribe the rights and duties
of its members towards itself & among themselves in reference to the
management of its affairs. (Gokongwei v. SEC, 89 SCRA 337 [1979])
 The by-laws of a corporation are its own private laws which substantially have
the same effect as the laws of the corporation. They are in effect written
into the charter. In this sense, they become part of the fundamental law of
the corporation which the corporation and its directors and officers must
comply with.(Peña v. CA, 193 SCRA 717 [1991])

Q: Distinguish by-laws from AoI.

A: The AoI is not an internal document that binds the parties to a corporate
setting. It is also a document that binds the State. The BL is an
intramural document; it’s supposed to bind the inner workings of a corp.

Q: Are the AoI and BL public documents?

A: Yes, both are public documents because they are not valid and binding
without the approval of the SEC.

Q: Does the BL have to be approved by the SEC?

A: Yes, prior to the approval of the SEC, the by-laws are not binding since
the code expressly requires the approval of the SEC to be binding upon
the SHs and members. Absent the codal provision, it is binding because
of a corp.’s inherent power to adopt its own by-laws.

Q: Do BL bind the public?

A: As a general rule, BL provisions do not bind the public, except if the
third person has knowledge of the BL provision.

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 o By-Laws Cannot Be Contrary to Law and Charter
o By-Law Provisions Cannot Be Unreasonable or Be Contrary to the Nature
of By-laws
o By-Law provisions cannot discriminate

2. Adoption Procedure (Sec. 46)

Section 46. Adoption of by-laws. - Every corporation formed under this Code must,
within one (1) month after receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission, adopt a code of by-laws
for its government not inconsistent with this Code. For the adoption of by-laws by the
corporation the affirmative vote of the stockholders representing at least a majority of
the outstanding capital stock, or of at least a majority of the members in case of non-
stock corporations, shall be necessary. The by-laws shall be signed by the
stockholders or members voting for them and shall be kept in the principal office of
the corporation, subject to the inspection of the stockholders or members during
office hours. A copy thereof, duly certified to by a majority of the directors or trustees
countersigned by the secretary of the corporation, shall be filed with the Securities
and Exchange Commission which shall be attached to the original articles of
incorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted

and filed prior to incorporation; in such case, such by-laws shall be approved and
signed by all the incorporators and submitted to the Securities and Exchange
Commission, together with the articles of incorporation.

In all cases, by-laws shall be effective only upon the issuance by the Securities and
Exchange Commission of a certification that the by-laws are not inconsistent with this
Code.

The Securities and Exchange Commission shall not accept for filing the by-laws or
any amendment thereto of any bank, banking institution, building and loan
association, trust company, insurance company, public utility, educational institution
or other special corporations governed by special laws, unless accompanied by a
certificate of the appropriate government agency to the effect that such by-laws or
amendments are in accordance with law. (20a)

There can be no automatic dissolution simply because the incorporators failed to file
the required by-laws under Sec. 46 of Corporation Code. There is no outright
“demise” of corporate existence. Proper notice and hearing are cardinal components
of due process in any democratic institution, agency or society. In other words, the
incorporators must be given the chance to explain their neglect or omission and
remedy the same.” (Loyola Grand Villas Homeowners v. CA, 276 SCRA 681 [1997]).

3. Contents
Section 47. Contents of by-laws . - Subject to the provisions of the Constitution, this
Code, other special laws, and the articles of incorporation, a private corporation may
provide in its by-laws for:

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

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

The required quorum in meetings of stockholders or members and the manner of

voting therein;

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

The qualifications, duties and compensation of directors or trustees, officers and

employees;

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

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

The penalties for violation of the by-laws;

In the case of stock corporations, the manner of issuing stock certificates; and
Such other matters as may be necessary for the proper or convenient transaction of
its corporate business and affairs. (21a)

4. Amendments (Sec. 48)

 Power to amend may be delegated to the BoD

Section 48. Amendments to by-laws. - The board of directors or trustees,

by a majority vote thereof, and the owners of at least a majority of the
outstanding capital stock, or at least a majority of the members of a non-
stock corporation, at a regular or special meeting duly called for the
purpose, may amend or repeal any by-laws or adopt new by-laws. The
owners of two-thirds (2/3) of the outstanding capital stock or two- thirds
(2/3) of the members in a non-stock corporation may delegate to the
board of directors or trustees the power to amend or repeal any by-laws
or adopt new by-laws: Provided, That any power delegated to the board
of directors or trustees to amend or repeal any by-laws or adopt new by-
laws shall be considered as revoked whenever stockholders owning or
representing a majority of the outstanding capital stock or a majority of
the members in non-stock corporations, shall so vote at a regular or
special meeting.

Whenever any amendment or new by-laws are adopted, such

amendment or new by-laws shall be attached to the original by-laws in
the office of the corporation, and a copy thereof, duly certified under
oath by the corporate secretary and a majority of the directors or

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 trustees, shall be filed with the Securities and Exchange Commission
the same to be attached to the original articles of incorporation and
original by-laws.

The amended or new by-laws shall only be effective upon the issuance
by the Securities and Exchange Commission of a certification that the
same are not inconsistent with this Code. (22a and 23a)

“Admittedly, the right to amend the by-laws lies solely in the discretion of the
employer, this being in the exercise of management prerogative or business
judgment. However this right, extensive as it may be, cannot impair the obligation of
existing contracts or rights. . . If we were to rule otherwise, it would enable an
employer to remove any employee from his employment by the simple expediency of
amending its by-laws and providing that his/her position shall cease to exist upon the
occurrence of a specified event.” (Salafranca v. Philamlife (Pamplona) Village
Homeowners, 300 SCRA 469 [1998]).

CORPORATE POWERS, AUTHORITY AND ACTIVITIES

A. Corporate Power and Capacity (Art. 46, Civil Code; Secs. 36 and 45; Land Bank of the
Philippines v. COA, 190 SCRA 154 [1990])

Art. 46, Civil Code - Juridical persons may acquire and possess property of all
kinds, as well as incur obligations and bring civil or criminal actions, in conformity
with the laws and regulations of their organization.

Sec. 36 Corporate powers and capacity – Every corporation incorporated under

this Code has the power and capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporations in accordance with the provisions of this
Code;
5. To adopt by-laws, not contrary to law, morals or public policy, and to amend or
repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell
treasury stocks in accordance with the provisions of this Code; and to admit
members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property, including
securities and bonds of other corporations, as the transactions of the lawful
business of the corporation may reasonably and necessary require, subject to
the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in
this Code;

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 9. To make reasonable donations, including those for the public welfare or
hospital or charitable, cultural, scientific, civic or similar purposes: Provided,
That no corporation, domestic or foreign shall give donations in aid of any
political party or candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out
its purpose or purposes as stated in the articles of incorporation.

Sec. 45 Ultra vires acts of corporations – No corporation under this Code shall
possess or exercise any corporate powers except those conferred by this Code or by
its articles of incorporation and except such as necessary or incidental to the
exercise of the powers so conferred.

A corporation has only such powers as are expressly granted to it by law and by its
articles of incorporation, those which may be incidental to such conferred powers,
those reasonably necessary to accomplish its purposes and those which may be
incident to its existence. (Pilipinas Loan Company v. SEC, 356 SCRA 193 [2001]).

Where Corporate Power Lodged

A corporation has no power except those expressly conferred on it by the
Corporation Code and those that are implied or incidental to its existence. In turn, a
corporation exercises said powers through its board of directors and/or its
duly authorized officers and agents. . . In turn, physical acts of the corporation, like
the signing of documents, can be performed only by natural persons duly
authorized for the purpose by corporate by-laws or by a specific act of the
board of directors. (Shipside Inc. v. Court of Appeals, 352 SCRA 334 [2001]).

Unless otherwise provided by the Corporation Code, corporate powers are

exercised by the Board of Directors, which they may delegate to an executive
committee, officers or contracted managers. The delegation, except for the executive
committee, must be for specific purposes, which makes the officers the agents of the
corporation, and accordingly the general rules of agency as to the binding effects of
their acts would apply. For such officers to be deemed fully clothed by the
corporation to exercise a power of the Board, the latter must specially
authorize them to do so. (ABS-CBN Broadcasting Corp. v. Court of Appeals, 301
SCRA 572 [1999]).

PRIMARY RULE: The Board of Directors/Trustees is the repository of all corporate

powers (sec. 23).

The source of power of the board of directors is therefore primary and not delegated
power from the stockholders or members of the corporation. However, there are
specified instances in the Corporation Code where the particular exercise of power of
the corporation by the board, in order to be binding and effective, requires the
consent and ratification of the stockholders or members, on one hand, and the State,
on the other hand.

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 IN CONSONANCE WITH CONTRACT LAW PRINCIPLES – in conformity with the
principles of contract law, that a party cannot relieve himself from the contractual
terms and conditions, much less amend or alter them, without the consent or
approval of the other party or parties.

EXCEPTION TO THE GENERAL RULE, in cases where the stockholders consent is

required, majority rules. The consent or dissent of the stockholders is recognized by
their majority vote or their qualified two-thirds as the case may be which would bind
even those who abstained or dissented. For those who dissented, there is a way out
for them by way of exercising their appraisal right (depending on the issue).

B. ULTRA VIRES DOCTRINE

Sec. 45 Ultra vires acts of corporations – No corporation under this Code shall
possess or exercise any corporate powers except those conferred by this Code or by its
articles of incorporation and except such as necessary or incidental to the exercise of
the powers so conferred.

Sec. 45 of the Corporation Code is the statutory embodiment of the Ultra Vires Doctrine
that provides that the corporation cannot exercise powers beyond what had been
granted to it by statute or by its articles of incorporation except such as necessary or
incidental to the exercise of powers so conferred. It was meant to control and regulate
the actions of corporations.

BASIS OF ULTRA VIRES DOCTRINE (Two Corporate Principles):

A corporation is a creature of the law and has only such powers and privileges as are
granted by the State – the ultra vires doctrine is a product of the theory of concession as
provided in Sec. 2.

The doctrine upholds the fiduciary duty of directors and officers to the stockholders or
members – such duty dictates that the corporation engages only in transactions to which
the stockholders and members bind themselves by way of the provisions of the purposes
clause. This is also necessarily including an obligation not to enter into transactions
which violate the law.

TEST TO DETERMINE ULTRA VIRES – Whether the act in question is in direct and
immediate furtherance of the corporation’s business, fairly incident to the express
powers and reasonably necessary to their exercise. The strict terms “direct and
immediate” refers to the business of the corporation while the liberal terms “fairly
incident” and “reasonably necessary” with reference to the powers of the corporation.
With regard to the business of the corporation as the reference point, much latitude is
given to the corporation to enter into various contracts as long as they have logical
relation to the pursuit of such business. On the other hand, when the purpose clause
used limiting words that Court will hold such corporation to such limited business.

ULTRA VIRES ACTS DISTINGUISHED FROM ACTS WHICH ARE ILLEGAL PER SE

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 Illegal acts of a corporation are those acts which are contrary to law, morals, or public
order or contravenes some rule of public policy or public duty are void. Such acts or
contracts cannot be the basis of any court action nor acquire validity by performance,
ratification or estoppel.

Ultra vires acts are those which are not illegal and void ab initio but are within the scope
of the articles of incorporation are merely voidable and may become binding and
enforceable when ratified by stockholders. Said ratification cures the infirmity of the
corporate act and makes it valid and enforceable.

TYPES OF ULTRA VIRES CASES

First Type Ultra Vires: An ultra vires act is one committed outside the object for which a
corporation is crated as defined by the law of its organization and therefore beyond the
power conferred upon it by law. The term “ultra vires“ is “distinguished from an illegal act
for the former is merely voidable which may be enforced by performance, ratification, or
estoppel, while the latter is void and cannot be validated.” (Atrium Management Corp. v.
Court of Appeals, 353 SCRA 23 [2001]).

Second Type Ultra Vires: When the President enters into speculative contracts, without
prior board approval, and without subsequent submission of those contracts to the Board
for approval or ratification, nor were the transactions included in the reports of the
corporation, such contracts do not bind the corporation. It must be pointed out that the
Board of Directors, not the President, exercises corporate powers. (Safic Alcan & Cie v.
Imperial Vegetable Oil Co., Inc., 355 SCRA 559 [2001]).

Ratification of Ultra Vires Acts: (Pirovano v. De la Rama Steamship Co., Inc., 96 Phil.
335 [1954]; Carlos v. Mindoro Sugar Co., 57 Phil. 343 [1932]; Republic v. Acoje Mining
Co., 3 SCRA 361 [1963]; Crisologo Jose v. Court of Appeals, 177 SCRA 594 [1989];
aHarden v. Benguet Consolidated Mining Co., 58 Phil. 140 [1933]).

C. EXPRESS POWERS
1. Enumerated Powers (Sec. 36)
Sec. 36 Corporate powers and capacity – Every corporation incorporated under this
Code has the power and capacity:
1.) To sue and be sued in its corporate name;
2.) Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate of incorporation;
3.) To adopt and use a corporate seal;
4.) To amend its articles of incorporations in accordance with the provisions of
this Code;
5.) To adopt by-laws, not contrary to law, morals or public policy, and to amend
or repeal the same in accordance with this Code;
6.) In case of stock corporations, to issue or sell stocks to subscribers and to
sell treasury stocks in accordance with the provisions of this Code; and to
admit members to the corporation if it be a non-stock corporation;
7.) To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property, including

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 securities and bonds of other corporations, as the transactions of the lawful
business of the corporation may reasonably and necessary require, subject
to the limitations prescribed by law and the Constitution;
8.) To enter into merger or consolidation with other corporations as provided in
this Code;
9.) To make reasonable donations, including those for the public welfare or
hospital or charitable, cultural, scientific, civic or similar purposes: Provided,
That no corporation, domestic or foreign shall give donations in aid of any
political party or candidate or for purposes of partisan political activity;
10.) To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees; and
11.) To exercise such other powers as may be essential or necessary to carry out
its purpose or purposes as stated in the articles of incorporation.

2. Extend or Shorten Corporate Term (Secs. 37 and 81 [1])

“Sec. 37 Power to extend or shorten corporate term – A private corporation may
extend or shorten its term as stated in the articles of incorporation when approved by
majority vote of the board of director or trustees and ratified at a meeting by the
stockholders representing at least 2/3 of the outstanding capital stock or by at least
2/3 of the members in case of non-stock corporation. Written notice of the proposed
action and of the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage prepaid or
served personally. Provided, that in case of extension of corporate term, any
dissenting stockholder may exercise his appraisal right under the conditions provided
in this code.”

3. Increase or Decrease Capital Stock (Sec. 38)

“Sec. 38 Power to increase or decrease capital stock; incur, create or increase
bonded indebtedness – No corporation shall increase or decrease its capital stock
or incur, create or increase any bonded indebtedness unless approved by a majority
vote of the board of directors and, at a stockholder’s meeting duly called for the
purpose, 2/3 of the outstanding capital stock shall favor the increase or diminution of
the capital stock, or the incurring, creating, or increasing ant bonded indebtedness.
Written notice of the proposed increase or diminution of the capital stock or of the
incurring, creating, or increasing of any bonded indebtedness and of the time and
place of the stockholders meeting at which the proposed increase or diminution of
the capital stock or the incurring or increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder at his place of residence as
shown on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally.”

4. Incur, Create or Increase Bonded Indebtedness (Sec. 38 – see quoted provision

above)
Bond – security representing denominated units of indebtedness issued by a
corporation to raise money or capital obliging the issuer to pay the maturity value at
the end of a specified period which should be not less than 360 days.

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 That is why not all indebtedness of the corporation requires the ratification of the
stockholders, only bonded indebtedness require the ratification of the stockholders.

A bond in contrast to a promissory note represents a unit of a large indebtedness,

whereas a promissory note represents a single indebtedness and may stand on its
own. Mostly all properties of the corporation i.e. the business enterprise comprise of
the security of such bonded indebtedness.

Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms
thereof.

5. Sell or Dispose of Assets (Sec. 40)

“xxx…a corporation may by a majority vote of its board of directors or trustees, sell,
lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of
its property and assets including its goodwill, upon such terms and conditions and for
such consideration, which may be money, stocks, bonds or other instruments for the
payment of money or other property or consideration as its board of directors or
trustees deem expedient, when authorized by the vote of stockholders representing
at least 2/3 of the outstanding capital stock, or in the case of non- stock corporation,
by the vote of at least 2/3 of the members, in a stockholders’ or members’ meeting
duly called for that purpose. xxx”

6. Invest Corporate Funds for Non-Primary Purpose Endeavor (Sec. 42; De la

Rama v. Ma-ao Sugar Central Co., 27 SCRA 247 [1969])
“xxx…a private corporation may invest its funds in any other corporation or business
or for any purpose other than the primary purpose for which it was organized when
approved by a majority of the board of directors or trustees and ratified by the
stockholders representing at least 2/3 of the outstanding capital stock, or at least by
2/3 of the members in the case of non-stock corporations, at a stockholders’ or
members’ meeting duly called for that purpose. xxx”

7. Declare Dividends (Sec. 43; Nielson & Co. v. Lepanto Consolidated Mining Co., 26
SCRA 540 [1968])
“Sec. 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
dividend 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 paid subscription is fully
paid: Provided further, that no stock dividend shall be issued without the
approval of stockholders representing not less than 2/3 of the outstanding
capital stock at a regular or special meeting duly called for that purpose.

Stock corporations are prohibited from retaining surplus profits in excess of

100% of their paid-in capital stock, except: (1) when justified by definite
corporate expansion projects or programs approved by the board of directors;

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 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 when there is
need for special reserve for probable contingencies.”

8. Enter into Management Contracts (Sec. 44; Nielson & Co., Inc. v. Lepanto
Consolidated Mining, 26 SCRA 540 [1968]; Ricafort v. Moya , 195 SCRA 247 [1991]).
Sec. 44 Power to enter into management contracts – No corporation shall
conclude a management contract with another corporation unless such
contract shall have been approved by the board of directors and by
stockholders owning at least the majority of the outstanding capital stock, or
by at least a majority of the members in the case of a non-stock corporation
of both managing and the managed corporation at a meeting duly called for
that purpose: Provided, That (1) where a stockholder or stockholders
representing the same interest of both the managing and managed
corporations own or control more than 1/3 of the total outstanding capital
stock entitled to vote of the managing corporation; or (2) where a majority of
the members of the board of directors of the managing corporation also
constitute a majority of the members of the board of directors of the managed
corporation, then the management contract must be approved by the
stockholders of the managed corporation owning at least 2/3 of the total
outstanding capital stock entitled to vote, or by at least 2/3 of the members in
the case of a non-stock corporation. No management contract shall be
entered into for a longer period than five years for any one term.

The provisions of the next preceding paragraph shall apply to any contract
whereby a corporation undertakes to mange or operate all or substantially all
of the business of another corporation, whether such contracts are called
service contracts, operating agreements or otherwise: Provided however,
That such service contracts or operating agreements which relate to
exploration, development, exploitation or utilization of natural resources may
be entered into for such periods as may be provided by the pertinent laws or
regulations.

9. Implied Powers
 When the articles expressly provide that the purpose of the corporation was to
“engage in the transportation of person by water,” such corporation cannot
engage in the business of land transportation, which is an entirely different line of
business, and, for which reason, may not acquire any certificate of public
convenience to operate a taxicab service. Luneta Motor Co. v. A.D. Santos, Inc., 5
SCRA 809 (1962).

 A corporation whose primary purpose is to generate electric power has no

authority to undertake stevedoring services to unload coal into its pier since it is
not reasonably necessary for the operation of its power plant. NPC v. Vera, 170
SCRA 721 (1989).

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  A corporation organized to engage as a lending investor cannot engage in
pawbroker.

 Philipinas Loan Co. v. SEC, 356 SCRA 193 (2001).

 A mining company has not power to engage in real estate development. Heirs of
Antonio Pael v. Court of Appeals, 372 SCRA 587 (2001).

 An officer who is authorized to purchase the stock of another corporation has

implied power to perform all other obligations arising therefrom such as payment
of the shares of stock. Inter-Asia Investments Industries v. Court of Appeals, 403
SCRA 452 (2003).

10. Incidental Powers

The act of issuing checks is within the ambit of a valid corporate act, for it as for
securing a loan to finance the activities of the corporation, hence, not an ultra vires
act. Atrium Management Corp. v. CA, 353 SCRA 23 (2001).

D. BOARD OF DIRECTORS

All corporate powers, business conducted and all property of corporations are exercised
by the BOD/T (Sec. 23). BOD/T are selected thru an election and they shall hold office
for one year and until their successors are elected and qualified
(ibid). Stockholders cannot interfere with the board’s exercise of its powers and functions
except when the law expressly gives them the authority.

Directors owe their duties to corporation rather than to individual shareholders. The
directors or trustees shall not act individually nor separately but as a body in a lawful
meeting. Contracts entered into without a formal board resolution does not bind the
corporation except when majority of the board has knowledge of the contract and the
contract benefited the corporation.

Qualification of Directors/Trustees
Every director must own at least one (1) share of the capital stock of the corporation,
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. Majority of BOD/T should be
resident of the Philippines (ibid).

Disqualifications: grounds
1. Conviction by final judgment of an offense punishable by imprisonment for a
period exceeding six (6) years; or
2. Violation of corporation code committed within five (5) years prior to the date of
his election or appointment (Sec. 27).

Election of BOD/T

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1. Notice to the stockholder/members of the election as provided in AOI;
2. Presence of, in person or by proxy, majority of the outstanding capital stock / member
entitled to vote;
3. Election by ballot;
4. Candidate receiving highest number of votes shall be declared elected; and
5. Report to the SEC, within 30 days, the names, nationality and residences of the
elected officers and directors/trustees. Deaths and resignation must likewise be
reported.

In a stock corporation, stockholders may exercise cumulative voting or straight

voting. Cumulative voting is done by casting as many votes as he has number of
shares multiplied by the number of directors up for election. This provides the minority an
opportunity to elect a representative to the board of directors.

Straight voting is done by casting votes as he has number of shares multiplied by the
number of directors to a single candidate. The total number of votes cast by a
stockholder 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.

Members of a non-stock corporation may cast as many votes as there are trustees to be
elected but may not cast more than one vote for one candidate (Sec. 24
and 89). Cumulative voting is not specifically allowed in a non stock corporation;
however, its by-laws or AOI may be broadened as to give that right to the members (Sec.
89). Take note that delinquent stock has no voting rights (Sec. 24 &71).

Corporate officers
The officers execute polices laid down by the board and perform the duties enjoined by
them by the AOI and by-laws. Immediately after the election of BOD/T, the directors of a
corporation must formally organize the election of:
1. A president, who shall be a director;
2. A treasurer who may or may not be a director;
3. A secretary who shall be a resident and citizen of the Philippines, and
4. Such other officers as may be provided for in the by-laws (Sec. 25)

Any two 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. Directors and trustees cannot attend or vote by proxy in a board meeting
(ibid) compared to stockholders which can attend and vote by proxy in a stockholder’s
meeting( Sec. 58).

The Corporation Code does not require that one elected or appointed as vice-president
of a corporation should be the owner of shares of stock of the corporation (Baguio vs.
CA, 226 SCRA 366, 1993)

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 (Sec. 35). Such

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committee may act on specific matter within the competence of the board as may be
delegated by the by-laws or majority vote of the board, except the following:
1. Approval of any action for which shareholders' approval is also required;
2. Filing of vacancies in the board;
3. Amendment, repeal or adoption of by-laws;
4. Amendment or repeal of any resolution of the board which by its express terms is
not so amendable or repealable; and
5. Distribution of cash dividends to the shareholders.

Quorum
Majority of the number of director/trustees shall constitute the quorum for the transaction
of the business unless the AOI or by-provide otherwise. Majority of the directors/trustees
constituting the quorum shall be valid as corporate act except the election of officer
which requires majority of all the members of the board (Sec. 23).

Compensation of Directors
1. Reasonable per diem;
2. Provision in the by-laws fixing their compensation; and
3. Compensation granted by majority of the stockholders.

In no case shall the total yearly compensation of directors, as such directors, exceed
10% of the net income before income tax of the corporation during the preceding
year (Sec. 30). The said compensation is applicable only to directors; thus, when the
director is an officer as well, the BOD/T may grant compensation to them because the
prohibition in Sec. 30 does not apply [Western Institute of Technology v Salas].

Liability of Board of Directors

BOD/Ts are jointly and severally liable in the following instances:
1. If they willfully/ knowingly vote for or assent to patently unlawful acts of the
corporation;
2. They are guilty of gross negligence or bad faith in directing the affairs of the
corporation;
3. They acquire any personal or pecuniary interest in conflict with their duty as such
directors or trustees (Sec. 31);
4. Issuance of watered stock (Sec. 65);
5. Disloyalty of directors (sec. 34);
6. He agrees to hold himself personally and solidarily liable with the corporation; and
7. He is made, by a specific provision of law, to personally answer for his corporate
action (Tramat Mercantile, Inc. vs. CA).

The director is liable when he takes advantage of information by virtue of his office to the
disadvantage of the corporation (Special Fact Doctrine).

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