Batas Pambansa Bilang 68
separate and apart from its individual stockholders or members and
THE CORPORATION CODE OF THE PHILIPPINES
Be it enacted by the Batasang Pambansa in session assembled:
TITLE I
GENERAL PROVISIONS
DEFINITIONS AND CLASSIFICATIONS
Section 1. Title of the Code. – This Code shall be known as "The
Corporation Code of the Philippines." (n)
It took effect on May 1, 1980 See. Sec. 149
Scope of the Corporation Code:
1. Provides for incorporation, organization, and regulation of
private corporations, both stock and non stock, including
educational religious corporations
2. Defines the powers and provides for their dissolution
3. Fixes the duties and liabilities of directors or trustees and
other officers thereof
4. Declares the rights and liabilities of stockholders and
members
5. Prescribes the conditions under which corporations
including foreign corporation may transact business
6. Provides for penalties in violation of the code
7. Repeal all laws and parts of laws in conflict and
inconsistent with the Code.
Section 2. Corporation defined. – A corporation is an artificial being
created by operation of law, having the right of succession and the
powers, attributes and properties expressly authorized by law or
incident to its existence. (2)
This definition contemplates only private corporations.
Note that for income tax purposes, the term corporation includes
partnerships, no matter how created or organized, joint stock
companies, joint accounts, association and insurance companies but
does not include general professional partnerships and joint
ventures.
Attributes of the corporation:
1. It is an artificial being
2. Created by operation of law
3. It has the right of succession
4. It has only the powers, attributes and properties expressly
authorized by law or incident to its existence.
Corporation as artificial personality
Doctrinally, a corporation si a legal or judicial person with a personal
from any other legal entity which it may be connected.
As a consequence of this legal concept of corporation:
1. Liability for acts or contracts – The obligations of
corporation are its sole liabilities, even acted by authorized
agents. In vice versa, a corporation cannot be held liable
for the acts and liabilities of its stockholders.
a. A suit against stockholders cannot be ipso facto
be a suit against the unleaded corporation.
Therefore, the corporation must be properly
pleaded to be accorded of due process.
b. A corporate officer is not personally or solidarily
liable with the corporation for money claims of
discharged or retrenched employees unless
acted in evident malice or bad faith. Therefore,
an act of a President in dismissing employees
cannot result a private liability if done in good
faith.
c. All contracts entered into by the name of the
corporation by its regular appointed officers and
agents are contracts of the corporations and not
of the stockholders.
d. An officer who signs a contract in official
capacity cannot be held liable in his individual
capacity unless there is a stipulation. But, the
acts must be within the scope of the officer’s
authority and done in good faith.
e. However, the fictional veil of separate corporate
entity may be pierced if there is bad faith.
Accesite Corporation vs NLRC 2004.
f. Property of the corporation is not the property
of the stockholders or members and may not be
sold by the stockholders or members without
express authorization of its board of directors or
trustees.
2. Liability when exceptional circumstances warrant - The
exception for the aforesaid rule is when exceptional
circumstances so warrant. Thus, it may validly attach:
a. When the director/trustee or officer acted
maliciously or in bad faith, or with gross
negligence. See Sec. 31, 65 )
b. Agreed to hold himself personally or solidarily
liable with the corporation,
c. Made, by specific provision of law, personally
liable for corporate action, or it is proven that
the officer has used the fiction of separate
corporate personality to defraud a third party or
for wrongful acts.
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 Thus, there is no law prohibits a corporate officer from
binding himself personally to answer for a corporate debt.
3. Right to bring actions – Art. 46 of the Civil Code, it may
incur obligation and bring civil and criminal actions in its
own name although it may not do acts that can only be
done by natural person such as practice of medicine.
a. A corporation cannot bring an action for
recovery of property which belongs to its
stockholders or member in personal capacities (
Sulo ng Bayan vs G. Araneta )
b. The right to object to the seizure of papers and
documents of the corporation belongs to such
corporation as an entity because the legality of
seizure can only be questioned by a party whose
rights has been violated.
c. Therefore, mental anguish and wounded feelings
cannot be felt by a corporation. Besmirched
reputation cannot cause mental anguish.
d. However, a corporation may have a good
reputation which, if debased or besmirched
resulting in social humiliation, may be a ground
for recovery of moral damages and atty fees.
Mambulao Lumver Co. Vs Phil. National Bank 22
SCRA 359
There must be a proof of existence of the basis
of the moral damage and its casual relation to
the defendant’s acts.
e. For the purposes of venue, the place of business
of the suing corporation is considered its
residence and not the residence of its president.
4. Right to acquire and possess property – Art. 46 of Civil
Code – It may acquire and possess property of all kings. It
belongs to the corporation itself as separate entity. If the
decedent left a property in the name of the corporation,
the ownership of the corporation for that property shall
not be disturbed.
a. Stockholders/members are not owners of the
corporate property and may not be sold by them
without any express authorization of the board.
b. Shares of stock, even though represent interest
in the property, does not vest any legal right or
title to any of the properties of the corporation.
c. The interest of the shareholders is purely
inchoate, and therefore, does not entitle them
to intervene with litigation involving corporate
property.
d. However, it the elements for piecing the veil of
corporate entity are present, the court can usurp
the power of the president if it does not declare
a property which must belong to the corporation
for purpose of evading third party obligations.
The action is against of its president on the basis
that they are one and the same of the
corporation.
e. Tax exemption granted to a corporation cannot
be extended to include dividends paid by such
corporation to its stockholders.
f. The right of first refusal over the shares pertains
to the shareholders and whereas the capacity to
own land pertains to corporation. Therefore, the
granting of right of first refusal to each other
does not itself a violation of constitutional
provision on land ownership as long it does not
exceed the limitations.
5. Acquisition by court of jurisdiction –
RE- Voluntary appearance – if a president of a
corporation appears in litigation in behalf of
other corporation, it does not amount to
voluntary submission of the first corporation.
Therefore, there would be an invalid service of
summons and the proceedings can be attacked
by lack of jurisdiction.
6. Changes in individual membership – A corporation
remains unchanged and unaffected in its identity by
changes in its individual membership.
A corporation is regarded as a “person”, “resident” or “citizen”
within the purview of those terms as used in constitutional or
statutory provisions.
As a person-
 Within the meaning of Bill of Rights, therefore, it falls
within the protection hat no person shall be deprived of
life, liberty or property without due process of law, and
likewise, equal protection clause.
 However, as far as liberty is concerned, a corporation is
held not to be a person within the language of the
constitutional provision; the liberty guaranteed is the
liberty of natural and not artificial persons.
 Thus, a corporation may not refuse to show its hand when
charged with an abuse of special privilege and franchises
as distinguished from an individual who can refuse to
answer incriminating questions.
 But also, the corporation is entitled o the right of people
to be secured in their persons against unreasonable
seizures and searches.
As a resident or non-resident –
As a general rule, a corporation is a resident of the state
where it is created. However, it is not always the case.
RE- Attachment under Rules of Court,
A corporation formed in one State may be, for certain
purposes, domiciled or resident tin another State in which
it has its offices and transacts business. It was held that a
foreign corporation licensed to do business in Philippines
is not a non-resident within the meaning of Sec. 424 of
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 Civil Procedure which allows the attachment of the
property of the defendant in an action where the
defendant “resides out of the Philippines, or on whom
summons may be served by publication.
RE- Taxation Purposes
A corporation is a resident if the corporation is engaged in
trade or business within the Philippines. It is a non-
resident if the corporation is not engaged in trade or
business in the Philippines and not having any officer or
place of business therein.
As a citizen –
When the term “citizenship” is used synonymously with residence or
domicile, said use is for jurisdictional purposes only, for corporation
is subject to jurisdiction of the country under which law it was
organized.
Naturally, citizenship of a corporation is not looked into unless
citizenship is an important factor in determination or enjoyment of a
privilege, exercise of a right or even the legality of the contract
entered into by the corporation
Doctrine of Piercing the Veil of Corporate Entity
The separate corporate entity is merely a legal fiction for purposes
of convenience in conducting business in privilege way. The courts
may disregard the theory of separate entity under certain
circumstances, as when the privilege of misused by the corporation.
Instances:
1. Where the fiction of corporate entity is being used
as a cloak or cover for fraud or illegality,
2. Or “to defeat public convenience, justify wrong,
protect fraud, or defend crime, Yutivo Sons
Hardware Co. Vs CA
3. Or for ends subversive of policy and purpose
behind its creation, especially where the
corporation is a closed family corporation, Emiliano
Cano Enterprises Inc vs Court of Industrial Relations
On equitable considerations, this fiction will be disregard and the
individuals composing it or two corporations will be treated as
identical.
Application of the doctrine:
1. Defeat of public conveniences as when the corporate
fiction is used as a vehicle for evasion of an existing
obligation
2. Fraud cases or when corporate entity is used to justify a
wrong, protect fraud, or defend a crime
3. Alter ego cases, where corporation is merely a farce since
it is a mere alter ego or business conduit of a person or
where the corporation so organized and controlled and its
affairs are so conducted as to make it merely an
instrumentality, agency conduit or adjunct of another
corporation. Also if the corporation functions for benefit of
single person.
In the absence of malice, bad faith, or a specific provision of law
making a corporate officer liable, such corporate officer cannot be
made personally liable for corporate liabilities. Pantranco Employees
Assoc. vs NLRC 2009
See. Page30 of De Leon’s Book for more examples where this
doctrine was applied.
Test in determining the applicability of the doctrine of piercing the
corporate veil of the corporate fiction base don’t he instrumentality
of alter ego rule. The absence of any of the three elements below
prevents, under the said rule, piecing the corporate veil:
1. Control, not merely majority or complete stock control,
but complete dominion, not only of finances but of policy
and business in respect to transaction attacked so that the
corporate entity as to this transaction had at the time no
separate mind, will, or existence of its own.
2. Such control must have been used by the defendant to
commit fraud or wrong, violation of statutory or other
positive duty, or dishonest and unjust act in contravention
of plaintiff’s legal rights, and
3. The aforesaid control and breach of duty must proximately
cause the injury o unjust loss complained of.
Corporation as a creation of law or by operation of law-
It is a well established that no corporation can exist without the
consent or grant of sovereign, and that the power to create
corporations is one of the attributes of sovereignty. Corporation as
mere create of the State is presumed to be incorporated for the
benefit of the public.
It is creation of if there is a direct legislative act creating such
corporation. It is by operation of if the corporation come into
existence upon complying with the requirements as provided by the
Corporation Code and other laws.
Right of succession of a corporation
A corporation has a capacity of continuous existence irrespective of
the death, withdrawal, insolvency, or incapacity of the individual
stockholders or members regardless of the transfer of the shares of
stock.
1. The life of the corporation is the limited to the period
stated in the articles of incorporation not exceeding 50
years from the date of incorporation unless sooner
dissolves or the period is extended
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 2. Corporations created by special laws have the right of the name of
succession for the term provides din the laws creating the
them. corporation
7. Right of succession Has no right of Has such right
Powers, attributes and properties of corporation. succession of succession
8. Liability to third The partners Stockholders
A corporation, being purely creation oflaw, may exercise only such persons (except in are liable only
limited partners) to the extent
powers as are granted by aw of its creation. An express grant,
are liable and of their
however, is not necessary. All powers which may be implied from
subsidiarily for a investment as
thoes expressly provided by law and those which are incidental or partnership represented
essential to the corporation’s existence may also be exercised. Sec. debts to third by the shares
36(11), 45. person subscribed by
them
Test to be applied – 9. Transferability of Transfer of A stockholder
interest interest cannot has the right
Whether the act of the corporation is in direct and immediate make the to transfer his
furtherance of its business, fairly incidental to express powers and transferee a shares
reasonably necessary to their exercise. If so, the corporation has the partner without without the
the consent of all prior consent
power to do it, otherwise not.
other existing of the other
partners, stockholders
Partnership Corporation principle of because the
1. Manner of creation By mere Created by delectus corporation is
agreement of law or personarum not based on
the parties operation of that principle
law [Sec. 63]
2. Number of May be Requires at 10. Term of existence A partnership May not be
Incorporators organized by at least may be formed for
least 2 persons incorporators established for more than 50
except in any period of years
corporation time stipulated extendible to
sole. Sec. 10 by the partners not more
3. Commencement of From moment of From the date than 50 years
juridical personality the execution of of the in any one
contract of issuance of instance [Sec.
partnership the certificate 11]
of 11. Firm Name A limited May adopt
incorporation partnership is any firm
by the SEC required to add name
under its the word “Ltd.” provided it is
official Seal. to its name not identical
Sec. 19 or deceptively
4. Powers May exercise any Can Exercise similar to any
power powers registered
authorized by expressly firm name or
the partners granted by contrary to
provided it is not law or implied existing law
contrary to law, from those Sec. 18
morals, good granted or 12. Dissolution A partnership ay Can only be
customs, public incident to its be dissolve dissolve with
order, or public existence. anytime by the the consent
policy will of any or all of the State.
5. Management When the The power to of the partners [Sec. 117-122]
management is do business is 13. Law which governs Governed by Governed by
not agreed upon, vested in the Civil Code Corporation
ever partner is board of Code
an agent of the directors and
partnership trustees
6. Effect of A partner can A suit may be Similarities between partnership and corporation
mismanagement sue a co-partner filed against
for the board or
mismanagement trustees in
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  Has a separate juridical personality separate and distinct
from that of individuals composing it
 They can act only through agents
 Except for corporation sole, a corporation is an
organization of aggregate individuals like partnership
 Like partnership, a stock corporation distributes its profits
to those who contribute capital to the business
 Like partnership, corporation can be organized only where
there is a law authorizing its organization
 A partnership, ho matter how created or organized is
taxable as corporation, subject to income tax.
A corporation cannot ordinarily enter into partnership
Reasons- A Corporation can only act through its duly authorized
officers and agents and is not bound by the acts of anyone else,
while in partnership, each member binds the firm when acting
within the scope o the partnership business. Therefore, there would
be a conflict with public policy. Such arrangement would permit
corporate assets to be subjected to risks and liabilities not
contemplated by the stockholders at the time making their
investments.
Exceptions:
It may enter into joint venture with another where the nature of
that venture is in line with the business authorized by their charters.
Sec. 36[7]. Joint Venture – association of two or more persons to
carry out a single business enterprise for profit.
There have been cases where the SEC has allowed corporations to
enter into partnerships with other corporations or individuals,
provided:
1. All the corporation partners must be managing partners
and consequently, the articles of partnership must
stipulation that partners are solidarily liable for all
obligations of the partnership
2. The statue of their respect charters or articles of
incorporation must express allow corporation to enter into
partnership agreement and the nature of business venture
to be undertaken by the partnership is in line with the
business authorized by law or the articles of incorporation
fo the constituent corporations, and
3. Where one of the partners is a foreign corporation, it must
obtain a license to transact business in the country in
accordance with Corporation Code.
The corporation-partners shall embody the terms and conditions of
their relation in the partnership agreement, and upon approval of
the SEC, the partnership shall attain juridical personality, separate
and distinct from the corporation-partners. Art. 1768.
Foreign corporation can be a limited partner in a Philippine limited
partnership in view of the following:
1. No existing Philippine law expressly prohibiting foreign
corporation being a limited partner in partnership
2. Just like a corporate investor has power to make passive
investment by buying shares of stock, a corporate
investment may also be allowed to make passive
investment as limited partner
3. Sec. 42 of Corpo Code permits a corporation to invest its
funds in another corporation, and does not require that
the investing corporation be involved in the management
4. Jurisprudence and common commercial practice in Us
indicate that corporations are not barred from acting as
limited partners
5. Such a ruling would be consistent with policy to encourage
domestic and foreign investment
But, the foreign corporation has still to obtain license to do business
in the Philippines and must be authorized under its articles of
incorporation to enter into a partnership agreement.
Advantages of Corporation
1. Has a legal capacity to act and contract as a distinct unit in
its own name
2. It has continuity of existence because of its non-
dependence on the lives of those who compose it
3. Its credit is strengthened by such continuity of existence
4. Its management is centralized in the board of directors
5. Its creation, organization, management, and dissolution
are standardized as they are governed under on general
incorporation law
6. It makes feasible giagantic financial undertakings since it
enables many individuals to invest their separate funds in
the enterprise in order to furnish large amounts of capital
upon which big business depends
7. Shareholders have limited liability
8. They are not general agents of the business
9. Shares of stocks can be transferred without the consent of
other stockholders
Disadvantages of a business corporation –
1. The corporation is relatively complicated in formation and
management
2. It entails relatively high cost of formation and operations
3. Its credit is weakened by limited liability of stockholders
4. There is ordinarily lack of personal element in view of
transferability of shares
5. There is a greater degree of governmental control and
supervision than in any other forms of business
organization
6. In large corporation, management and control are
separated from ownership
7. The stockholders’ voting rights have become theoretical
particularly in large corporation because of the use of
proxies and widespread ownership
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 8. Stockholders have little voice in the conduct of the
business
Section 3. Classes of corporations. – 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. (3a)
Stock corporation – The two elements mentioned in the Sec. 3
makes the private corporation fall under the definition of stock
corporation. 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.
Non-stock corporation – They do not issue stock and distribute
dividend to their members, they are not created for profit but for
public good and welfare.
The provisions governing stock corporation, when pertinent, are
applicable to non-stock corporation except as may be covered by
specific provision of Title XI, Sec. 87.
Not that some corporations cannot be organized except in the form
of stock corporations like banks. A religious corporation however, it
always non-stock.
Other classifications of corporations-
1. As to number of persons who compose them:
a. Corporation aggregate – more than one member
of incorporator
b. Corporation sole – special form of corporation
usually associated with clergy. It is a religious
corporation that consists of one member or
corporator only and his successors.
2. As to whether they are for religious purposes or not:
a. Ecclesiastical Corporation – or one organized for
religious purposes. They are classified as
corporation sole and religious societies. Sec. 109,
par. 2.
b. Lay corporation – one organized for purpose
other than religion. May either eleemosynary or
civil.
3. As to whether they are for charitable purposes or not:
a. Eleemosynary corporation – devoted for
charitable purposes or those supported by
charity
b. Civil Corporation – one established for profits.
4. As to State under or by whose laws they have been
created:
a. Domestic corporation – corporate in the
Philippines
b. Foreign Corporation – one formed, organized or
existing under laws other than those Ph.
5. As to their legal right to corporate existence:
a. De jure – existing in fact and in law
b. De facto – existing only in fact and not in law
6. Whether they are open for public or not:
a. Close corporation – one which is limited to
selected persons or members of family Sec. 96-
105
b. Open corporation – one which is open to any
person who may wish to become stockholder or
member thereto
7. AS to their relation to another corporation
a. Parent or holding corporation – one which is so
related with another corporation that it has
power, either directly or indirectly, to elect
majority of directors of such other corporation
b. Subsidiary Corporation – one which is so related
with other corporation hat majority of its
directors can be elected either directly or
indirectly by such other corporation. One which
another corporation owns at least a majority of
the shares and thus has control
c. Affiliated corporation – one related to another
by owning or being owned by common
management or by a long-term lease of its
properties or control device. An affiliation exists
between a holding or parent and its subsidiary,
or between two corporations owned or
controlled by the third.
8. As to whether they are public (government) or private
purpose
a. Public corporation – those formed or organized
for government of a portion of the state for
general good or welfare. Public corporations
doing governmental functions are exempt from
liability of torts. They are also exempted from
taxation. The consent of the locality/plebiscite is
also required for their formation.
b. Private corporation – formed for some private
purpose, benefit or end.
i. GOCC – created or organized by the
government or of which government is
the majority stock holder
ii. Quasi-public corporation – corporation
which have accepted from State the
grant of franchise or contract involving
the performance of public duties
9. Whether in true sense or limited sense –
a. True corporation – one which exists by statutory
authority
b. Quasi corporation – one which exist without
formal legislative grant. It is an exception in the
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 general rule that corporation can exist only the
authority of law
i. Corporation by prescription – one
which has exercised corporate powers
for an indefinite period without
interference on the part of sovereign
power and which by fiction of law is
given status of a corporation
ii. Corporation by estoppels – one which
in reality not a corporation, but
considered as such in relation to those
only who, by reason of their acts or
admissions, are precluded from
asserting that it is not a corporation.
Section 4. Corporations created by special laws or charters. –
Corporations created by special laws or charters shall be governed
primarily by the provisions of the special law or charter creating
them or applicable to them, supplemented by the provisions of this
Code, insofar as they are applicable. (n)
Under the constitution, officers and employees of GOCC with
original charters, created by special law, are placed under the Civil
Service. Those incorporation under general incorporation law, the
Corporation Code, are governed by the Labor Code.
Jurisdiction of SEC – has no jurisdiction over corporation with
original charter or created by special law. However, they can rule
whether or not a corporation belongs to this type.
If the government is an incorporator, it never exercises a
sovereignty, and merely acts as incorporator. It doesn’t give greater
rights, power or privileges than any other corporation organized for
same purpose.
Section 5. Corporators and incorporators, stockholders and
members. – Corporators are those who compose a corporation,
whether as stockholders or as members. Incorporators are those
stockholders or members mentioned in the articles of
incorporation as originally forming and composing the corporation
and who are signatories thereof.
Corporators in a stock corporation are called stockholders or
shareholders. Corporators in a non-stock corporation are called
members. (4a)
Corproators - are those who compose a corporation, whether as
stockholders or as member.
Incorproators - are those stockholders or members mentioned in
the articles of incorporation as originally forming and composing
the corporation and who are signatories thereof.
Stockholders – owners of share of stock in stock corporation. Also
called share holders.
Members – Corporators in a non-stock corporation, or on which no
capital stocks.
All incorporators in a stock corporation must now own or at least be
a subscriber to at least one (1) share of capital stock of such
corporation.
Three other classes –
Promoters – persons who bring about or cause to bring about the
formation and organization of a corporation by bring together the
incorporators or the persons interested in the enterprise, procuring
subscriptions or capital for the corporation and setting in motion the
machinery which leads to the incorporation of the corporation itself.
Subscribers – persons who have agreed to take and pay for original,
unissued shares of a corporation formed or to be formed.
Underwriter – a person, usually an investment bank, who:
1. Has agreed, alone or with others, to buy at stated terms an
entire issue of securities or substantial part thereof
2. Has guaranteed the sale of an issue by agreement to buy
from issuing party any unsold portion at stated price
3. Has agreed to use his best efforts to market all or part of
an issue
4. Has offered for sale stock he has purchased form
controlling stockholders
Section 6. Classification of shares. – The shares of stock of stock
corporations may be divided into classes or series of shares, or
both, any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of voting
rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code:
Provided, further, That there shall always be a class or series of
shares which have complete voting rights. Any or all of the shares
or series of shares may have a par value or have no par value as
may be provided for in the articles of incorporation: Provided,
however, That banks, trust companies, insurance companies,
public utilities, and building and loan associations shall not be
permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given
preference in the distribution of the assets of the corporation in
case of liquidation and in the distribution of dividends, or such
other preferences as may be stated in the articles of incorporation
which are not violative of the provisions of this Code: Provided,
That preferred shares of stock may be issued only with a stated par
value. The board of directors, where authorized in the articles of
incorporation, may fix the terms and conditions of preferred shares
of stock or any series thereof: Provided, That such terms and
conditions shall be effective upon the filing of a certificate thereof
with the Securities and Exchange Commission.
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Shares of capital stock issued without par value shall be deemed
fully paid and non-assessable and the holder of such shares shall
not be liable to the corporation or to its creditors in respect
thereto: Provided; That shares without par value may not be
issued for a consideration less than the value of five (P5.00) pesos
per share: Provided, further, That the entire consideration received
by the corporation for its no-par value shares shall be treated as
capital and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose
of insuring compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and
stated in the certificate of stock, each share shall be equal in all
respects to every other share.
Where the articles of incorporation provide for non-voting shares
in the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of
all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the
vote necessary to approve a particular corporate act as provided in
this Code shall be deemed to refer only to stocks with voting rights.
(5a)
When classification of shares be made –
By incorporators – by determination in the articles of incorporation
By board of directors and stockholders – after the corporation has
come into existence, they may be altered by the board of
directors/members by amending the articles of corporation.
Corporation to comply with constitutional or legal requirements
A corporation may, furthermore, classify its share of the purpose of
insuring compliance with constitutional or legal requirements, such
as those prescribed in minimum percentage of capital stock
ownership of Filipino citizen in corporation engaged in any business
or activity reserved for Filipino citizens.
Doctrine of equality of shares-
In absence of any provision in the articles of incorporation and in the
certificate of stock to the contrary, all stocks, regardless of their
class nomenclature, enjoy the same rights and privileges and subject
to same liabilities.
The board of directors cannot classify shares of stock where the
articles of incorporation is silent on that matter, without amending
the articles of incorporation.
Capital Stock and Capital Explained-
Capital stock – amount fixed in the articles of incorporation, to be
subscribed and paid in or agreed to be paid in by the stockholders of
a corporation, in money, property, services, or other means at
organization of corporation or afterwards and upon which it is to
conduct its business.
Authorized capital stock – amount of the capital stock as
specified in the articles of incorporation. It is synonymous
with capital stock where the shares of the corporation
have par value.
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.
Subscribed capital stock – amount of the capital stock
subscribed, whether fully paid or not. It connotes an
original subscription contract for the acquisition by
subscriber of unissued shares in a corporation.
Outstanding Capital Stock – is the portion of the capital
stock which is issued and held by persons other than the
corporation itself. The code defined it as “total shares of
stock issued to subscriber or stockholders, whether fully
paid or partially paid.
Paid-up capital stock – the portion of the subscribed or
outstanding capital stock that is actually paid.
Unissued capital stock – is that portion of the capital stock
that is not issued or subscribed. It does not vote and draws
no dividends.
Legal capital – amount equal to the aggregate par value
and/or issued value of the outstanding capital stock.
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 ILLUSTRATION –
Article of incorporation of Corporation X provides that the
authorized capital stock is P1,000,000.00 divided into
10,000 shares of the par value of P100.00 per share. At its
incorporation, only P250,000.00 of the authorized capital
stock was subscribed.
Under the Sec. 13, at least 24% of the subscription required
to be paid, thus, only P62,500 was paid to the treasures of
the corporation.
Only typifies a proportionate or aliquot part of the corporation’s
property, or just the right to share in its proceeds to that extent
when distributed according to law.
Certificate of stock, defined – a written acknowledgment by the
corporation of the interest, right, and participation of a person in
the management, profits and assets of corporation. It is a formal
written evidence of holder’s ownership of one or more shares and is
convenient instrument for transfer of title.
Shares of stock vs certificate of stock –

Therefore, authorized capital stock of the corporation is Shares of Stock
P1,000,000.00, the subscribed, outstanding, or issued Incorporeal or intangible
capital stock is P250,000.00, the paid-up capital stock is property
P62,500.00 and the unissued capital stock is P750,000.00. Represents the right or interest
of a person in the corporation
The legal capital is also P250,000.00.
May be issued even if the
subscription is not fully paid, Sec
Capital – the entire property or assets of the corporation. It includes
137 except in no par value. Sec.
the amount invested by the stockholders plus undistributed earnings 6, par3.
less losses and expenses. The situs is deemed to be the
state where the corporation has
Capital Stock vs Capital its domicile.
Certificate of Stock
Tangible property
Written evidence of that right or
interest
As a rule, certificate of stock
may not be issued unless the
subscription is fully paid.
Situs if the place where it is
located or at the domicile of the
owner

1. Capital is the actual corporate property. It is therefore a

concrete thing. Capital stock is an amount. It is therefore,
something abstract.
2. Capital fluctuates or varies from day to day according as
there are profits and losses or appreciation or depreciation
of corporate assets. Capital stock is an amount fixed in the
articles of incorporation and is unaffected by profits and
losses.
3. It is said that capital belongs to the corporation, and
capital stock when issued belongs to the stockholders, and
that capital may be either real or personal property but
capital stock is always personal.
Stock or share of stocks – one of the units into which capital stock is
divided. It represents the interest to right which the owner has.
However, the term “stock” signify the whole body of shares of stock.
Possession of a certificate of stock is not essential to ownership of
stock because the right to stock may exist independently of the
certificate.
Situs of shares of stock for certain purposes
1. For purposes of execution, attachment and garnishment,
the situs is the domicile or residence of the corporation,
which is the place where the principal business of the
corporation is located.
2. For purposes of registration of chattel mortgages on
shares of stock, - the situs if the province or city in which
the corporation has its principal place of business.
3. For purposes of property taxation – as general rule, at the
domicile or residence of the owner.

Nature of shares of stock Notes –

The ownership of shares of stock confers no immediate legal right or
title to any property of the corporation.
Shares of stock constitute property distinct from the capital or
tangible property of the corporation and belong to the different
owners. Incorporeal in nature, the shares are personal property.
[Sec. 63]
They are in nature of chooses in action but are not such in a strict
sense. They do not constitute an indebtedness of the corporation to
shareholders. Hence, no action can be maintained against the
corporation for the return of the contributions of the shareholders as
long as the corporation needs them and is not under dissolution.
Shares of stock in a domestic corporation of non-resident foreigner
are taxable within Philippines because they receive protection and
benefit of our law. Wells Fargo Bank and Union Trust Co. vs Coll. Of
Internal Revenue
Under the National Internal Revenue Code, for purposes of estate
tax, gross estate of resident decedent, whether citizen or alien, or
citizen decedent, whether resident or non-resident, includes his
intangible personal property wherever situated.
Classes of shares in general-
1. Par value or no par value
2. Voting or non-voting

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 3. Common or preferred and preferred shares may be voting, If a stock is originally issued with voting stock, it may not
convertible, or redeemable. They may be: be deprived of voting rights without the consent of the
a. Preferred as to assets in case of liquidation or owner.
preferred as to dividends and the latter, in turn
may etiher: Where non-voting shares are provided for, there shall
i. Cumulative or non-cumulative always be a class or series of shares which have complete
ii. Participating or nonparticipating voting rights.
4. Promotion share
In case there is an amendment of articles of incorporation
5. Shares in escrow
and it affects the changing or restricing the rights of
6. Convertible share
stockholders, the latter shall have the right to dissent or
7. Founders’ share [Sec. 7]
demand payment of fair value of his shares. [Sec. 81]
8. Redeemable share [Sec. 8]
9. Treasury share [Sec. 9]
Common share – one which entitles the holder thereof to a pro rata
division of the profits, if there are any, and in its assets upon
Par value – one with a specific money value fixed in the articles of
dissolution, without any preference of advance over other
incorporation and appearing in the certificate of the stock. It assures
stockholders or class.
creditors that the corporation would receive a minimum amount for
its stock. [Sec. 62]
They have a complete voting rights, and cannot be
deprived of such right except provided by law.
Re- Watered Stock – shares issued less than par value.
[Sec. 65]
Preferred shares – one with stated par value which entitles the
holder thereof to certain preferences over a common stock. Also
The par value of stock remains the same regardless of its
called, guaranteed stock.
market value or book value, except if there is a stock split.
[See annotation in Sec. 43].
It can only be issued only with par value. Sec. 5, par. 2.

No par value – one without any stated value appearing on the face
Interest bearing stock – the corporation agrees absolutely
of certificate of stock. It is a stock which does not state how much
to pay interest before dividends are paid to common
money it represents.
stockholders. It is legal only when construed as requiring
payment of interest as dividends form net earnings or
It shall always have an issue value, the consideration fixed
surplus only.
by the corporation for its issuance.
Note – even they have preferred shares, they do not have
It does not represent proportionate interest, but an
a lien on the corporate property.
aliquot part of the whole number of such shares of the
issuing corporation. They have the same rights as with par
Promotional shares – issued to promoters, or those in some way
value. A corporation may issue no par value shares only or
interested in the company, for incorporating the company, or for
in combination with par value.
services rendered in launching or promoting the welfare of the
company, such as advancing the fees for incorporating, advertising,
Example of this are 100 shares, 200 shares, etc. Thus, by
attorney’s fees, survey, etc.
removing the par value of the shares, the attention of the
persons interested in the financial condition of the
Shares in escrow – share subject o an agreement by virtue of which
corporation is focused on the value of assets and mount of
the share is deposited by the grantor or his agent with a third person
its debts.
to be kept by the depository until the performance of certain
condition (usually payment of the full subscription price ) or of the
Voting shares – generally customary to give the right to vote to the
happening of certain event contained in the agreement.
common stock and to withhold it from preferred.
Convertible shares – share which is convertible or changeable by the
Only shares classified and issued as “preferred” or
stockholders form on class to another class ( like preferred to
“redeemable” may be deprived of voting rights. [Art. 6,
common ) at a certain price within a certain period.
par. 1] However, common voting stocks will have no right
to vote for its directors in case founders’ shares [Sec. 7]
However, conversion is not automatic. An amendment to
were issued.
the articles of incorporation is required to formalize the
conversion which must not result in watering of stock or
Non voting shares – are shares without right tot vote.
issuance of stocks in excess of authorized capital stock of
the corporation.

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 In absence of express provision in the articles of Advantages of no par value shares –
incorporation, preferred shares cannot be converted into
the common. No par value to par value is allowed by SEC 1. Issued fully paid and non-assessable
provided that there would be no change in the 2. Their price is flexible
stockholders’ percentage interest in the total asset of the 3. Low-priced stocks (most no par shares are low priced )
corporation. enjoy wider distribution
4. They tell no untruth concerning the value of stockholder’s
Par Value Book Value Market Value contribution
Amount of money May be determined Price at which a 5. Stock dividends are more easily issued, thereby simplifying
indicated in the by dividing the total willing seller would accounting procedures.
certificate of stocks. stockholders’ equity sell and a willing
or net value o f the buyer would buy, Disadvantages of no par value
total corporate assets assuming that both
have reasonable 1. Legalize large issues of stock for property
knowledge of facts
2. Conceal the money or property represented by the shares
and neither being
abnormal pressure. 3. Promote issuance of watered stock
It is affected by the 4. Less protection to creditors
law of supply and
demand. Kinds of preferred shares –

As to assets – gives the holder thereof preference in the distribution

Statutory restrictions regarding the issuance of no par value shares of the assets of the corporation in case of liquidation

 Banks, trust companies insurance companies, and building As to dividends – holders will first receive dividends before common
and loan associateions shall not be permitted to issue no stock holders.
par values shares of stock
 Preferred shares of stock of any corporation may be issued Limitations regarding the issuance of preferred shares –
only with stated par value
1. Preferred shares deprived of voting right sin the articles of
 Shares issued without par value shall be deemed fully paid
incorporation shall still be entitled to vote on matters
and non-assessable and the holder of such shares shall not
enumerated in Sec. 6, although not be entitled to vote on
be liable to the corporation or to its creditors in respect
other matters
thereto. It simply means that the holder shall not be
2. The preferences of preferred shares must not be violative
liable beyond the issued price, not withstanding the
of the provisions of the Code
change of its value.
3. Preferred shares may be issued only with par value
 Shares without par value may not be issued for
4. The board of directors may fix the terms and conditions of
consideration less than the value of five pesos per share
preferred shares or any series thereof when so authorized
[Sec. 5, par. 3]
by the articles of incorporation and such terms and
 The entire consideration received by the corporation for conditions shall be effective upon filing of certificate
its no par value shall be treated as capital and therefore thereof with the SEC.
not be available for distribution of dividends.
Authority of the board to fix terms and conditions of preferred
Advantages of par value shares – shares-

1. Easily sold as the public is more attracted to buy these It does not need the 2/3 votes of outstanding capital stock.
kind of shares
2. Greater protection to creditors Kinds of preferred shares as to dividends –
3. Unlikelihood of sale of subsequent shares at lower price
4. Unlikelihood of distribution of dividends that are only Cumulative preferred share – entitles the holder thereof
ostensible profits not only to the payment of current dividends but also to
dividends in arrears. Simply stated, if the stipulated
Disadvantages of par value shares – dividend is not paid in the given year, it shall be added to
the dividend which shall be due to the following year and
1. Subscribers are liable to corporate creditors for their accumulated dividends must be paid to the holder of said
unpaid subscription share before any dividend may be paid to holders of
2. The stated face value of the share is not an accurate common stock.
criterion of its true value

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 Non-cumulative share – entitles the holder to the
payment of current dividends only in preference to
common stockholders. If dividends are not declared in a
given year, the right to the dividends for that particular
year is extinguished.
Participating preferred share – share which gives the
holder thereof not only the right to receive the stipulated
dividends at the preferred rate but also to participate with
the holders of common shares in the remaining profits pro
rata after the common shares have been paid the amount
of the stipulated dividend at the same preferred rate.
Non-participating preferred share – entitles the holder
thereof to receive the stipulated preferred dividends no
more.
Cumulative-participating preferred share – combination
of cumulative and participating share. This means that the
holder is entitled not only to dividends in arrears but also,
after receiving his preferred share of dividends to
participation with holders of common stock in the
remaining profits.
Section 7. Founders’ shares. – Founders’ shares classified as such in
the articles of incorporation may be given certain rights and
privileges not enjoyed by the owners of other stocks, provided that
where the exclusive right to vote and be voted for in the election
of directors is granted, it must be for a limited period not to exceed
five (5) years subject to the approval of the Securities and
Exchange Commission. The five-year period shall commence from
the date of the aforesaid approval by the Securities and Exchange
Commission. (n)
Founders’ share – hsares issued to organizers and promoters of a
corporation in consideration of some supposed righ tor property.
Special right and privileges – such founder’s shares may be given
special rights and privileges not enjoyed by the owner of other
shares of stocks.
Exclusive right to vote and be voted – They can include in founder’s
share an exclusive right to vote and be voted subject to the
following limitations:
a. Limited for period of five years, non extendible.
b. Subject to the approval of the SEC
c. The five year period shall commence from the
date of the aforesaid approval of Sec.
This article is an exception in Sec. 6, where other shareholders are
deprive of their right to vote. The limitation refers only to exclusive
right to vote and be voted. After the limitation, founders and others
will have equal rights. Status of preferred shares remains even after
5 years.
Section 8. Redeemable shares. – Redeemable shares may be issued
by the corporation when expressly so provided in the articles of
incorporation. They may be purchased or taken up by the
corporation upon the expiration of a fixed period, regardless of the
existence of unrestricted retained earnings in the books of the
corporation, and upon such other terms and conditions as may be
stated in the articles of incorporation, which terms and conditions
must also be stated in the certificate of stock representing said
shares. (n)
Redeemable shares – usually preferred, which by their terms are
redeemable at a fixed date or t the option of either the issuing
corporation or stockholders or both at a redemption price.
Redemption – repurchase, the reacquisition of stock by a
corporation which issued the stock in exchange of cash or property,
whether or not th acquired stock is cancelled, retired or withheld.
When redeemable shares may be issued – only when expressly so
provided in the articles of incorporation.
As distinguished in Sec. 41, it is subject to the condition that there
be unrestricted retained earnings before ht corporation acquire its
own shares. In redeemable shares, it is regardless.
However, redemption may not be made where the corporation is
insolvent or if such redemption would cause insolvency or inability
of the corporation to meet its debts as they mature.
Redemption optional with corporation – Except as otherwise
provided therein, the redemption rests entirely with corporation
and the stockholder is without right to compel or refuse the
redemption of its stock.
Preferred shares shall always be irredeemable, unless expressly
provided in the articles of incorporation or certificate of stock.
Note – Upon redemption, redeemable shares lose their status as a
part of the outstanding or uniussued authorized capital stock. They
are considered treasury shares after the redemption if by provision
of the articles of incorporation, they can be reissued.
Where the reissuance of redeemed shares is prohibited either
expressly or impliedly by silence, the number of authorized shares of
capital stock of the corporation is reduced accordingly, and the
articles of incorporation must be amended to reflect such reduction,
[Sec. 16]
Redeemable shares may be deprived of voting rights in the articles
of incorporation unless otherwise provided in the code.
Section 9. Treasury shares. – Treasury shares are shares of stock
which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation by purchase, redemption,
donation or through some other lawful means. Such shares may
again be disposed of for a reasonable price fixed by the board of
directors. (n)
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Treasury shares – shares which have been lawfully issued by the
corporation and fully paid for and later reacquired by it either by
purchase, redemption, donation for either and other lawful means.

Note – in Sec. 41, only surplus earnings may be used for the
purchase of treasury shares. Under sec 68, the corporation in the
absence of qualified bidder, may bid at the public sale of delinquent
shares.

Treasury shares do not revert to unissued shares of corporation but

are regarded as property acquired by corporation which may be
reissued or resold by the corporation t a price to be fixed by the
board. They are not retired shares. Also, they do not have the
status of outstanding shares, because they are in the treasury.

Declaration of property as dividend – Treasury shares being

unrealized income, are not considered as part of earned or surplus
profits, and therefore not distributable as dividends, either in cash
or stock. But if there are retained earnings arising form business of
the corporation, treasury shares, being the property of the
corporation, may properly distributed as property dividend.

Voting rights – they have no voting rights as long as they remain in

the treasury, uncancelled and subject to reissue.

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