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A.

CORPORATION

1. Definition
 Section 2 of the Corporation Code defined corporation as 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.
 According to Chief Justice Marshall, a corporation is “an artificial
being, invisible, intangible, and existing only in contemplation of
law.”

2. Attributes of a Corporation
 It is an artificial being;
 It is created by operation of law;
 It has the right of succession; and
 It has the powers, attributes and properties expressly authorized by
law or incident to its existence.

B. CLASSES OF CORPORATIONS
 Under Section 3, corporations formed or organized under the
Corporation Code may be stock or non-stock corporations.
 Corporations may also be created by special laws or charters.
 In other statutes and jurisprudence, corporations are further
classified as to: (1) number of components; (2) functions; (3)
manner of creation; (4) legal status; (5) existence of stocks; (6) laws
of incorporation; and (7) relationship.

C. NATIONALITY OF CORPORATIONS

1. Place of Incorporation Test


 Looks to the nation where the corporation was incorporated.
 Under this test, the sovereignty under whose laws a corporation
was organized determines its national character.

2. Control Test
 It requires looking into the nationality, domicile, or residence of
the individuals who control the corporation.
 It is applied if the Filipino ownership of a corporation’s capital
is at least 60% and where the 60-40 Filipino alien shareholding
is not in doubt.
3. Grandfather Rule
 It is resorted to if doubt exists as to the locus of the beneficial
ownership and control of a corporation.
 It is a method of determining the nationality of a corporation which
in turn is owned by another corporation by breaking down the equity
structure of the shareholders.

D. CORPORATE JURIDICAL PERSONALITY

1. Doctrine of Separate Juridical Personality


a. Liability for Torts and Crimes
 A corporation is civilly liable in the same manner as a natural
person for torts.
 The liability of corporations may either be vicarious or direct
personal obligation.
 No criminal action can lie against a corporation for they are
incapable of intent nor can they perform overt acts.
Nevertheless, the officers of the corporation may be held
liable.

b. Recovery of Moral Damages


 As a rule, a corporation is not entitled to moral damages
because it cannot experience physical or emotional suffering.
 A corporation can recover damages if it has a good reputation
that is debased, resulting in social humiliation.

2. Doctrine of Piercing the Corporate Veil


a. Grounds for Application of Doctrine
 The grounds for the application of the doctrine are: (1) When
the corporate fiction is used as vehicle to evade an existing
obligation; (2) When it is used to justify a wrong, protect
fraud, or defend a crime; and (3) Where the corporation is
merely a conduit or alter ego or a person or a business.

b. Test in Determining Applicability


 Three-Pronged Control Test names three factors, namely: (1)
Control which means complete dominion of the corporation;
(2) Such control must have been used to commit fraud or
wrong; and (3) Such control is the proximate cause of the
injury complained of.
 The Totality Circumstances test is an alternative approach
whereby focus is had on a set of circumstances or factors that
serve as indicia of the applicability of the doctrine of piercing
the veil of corporate fiction.

E. INCORPORATION AND ORGANIZATION

1. Number and Qualifications of Incorporators


 Section 10 of the Corporation Code provides for the number and
qualifications of incorporators.
 They are: (1) They must be natural persons; (2) There must be
not less than five but not more than fifteen; (3) They must all be
of legal age; (4) Thee majority must be residents of the
Philippines; and (5) If the stock corporation is a stock
corporation, each must own or be a subscriber to at least one
share.

2. Corporate Name; Limitations on Use of Corporate Name


 The basic policy is that a corporation cannot use a name that
belongs to another even as a trade name.
 A corporation cannot use a name as its corporate name when it
is (1) identical, deceptively or confusingly similar to that of any
existing corporation; (2) already protected by law; or (3) contrary
to law, morals, or public policy or is patently deceptive or
confusing.

3. Corporate Term
 A corporation may exist perpetually unless otherwise stated in its
Articles of Incorporation.

4. Minimum Capital Stock and Subscription Requirements


 No minimum capital stock requirement for stock corporations
unless otherwise provided by special laws.
 The subscription rule at the time of incorporation is no longer
applicable under the Revised Corporation Code.

5. Articles of Incorporation
a. Nature and Function of Articles
 It is the charter or constitution of the corporation.
 Defines the contractual relationships between the State and the
Corporation, the Stockholders and the State and between the
Corporation and Stockholders
b. Contents
 Section 14 enumerates the contents of the articles of
incorporation.
 They are: (1) corporate name; (2) purpose or purposes of the
corporation; (3) principal office; (4) corporate term; (5) names,
nationalities, and residences of the incorporators; (6) the number
of directors or trustees; (7) the names, nationalities and
residences of directors or trustees; (8) amount of authorized
capital stock; and (9) such other matters the incorporators may
deem necessary and convenient.

c. Amendment
 It pertains to amendments in general.
 The law requires the express approval of the stockholders
through an affirmative vote or an assent that is in writing.
 Only a real party-in-interest can question an amendment.

d. Non-amendable Items
 The names of the incorporators cannot be changed and their
number cannot be increased because such information are
considered accomplished facts.

6. Registration and Issuance of Certificate of Incorporation


 The issuance of Certificate of Incorporation marks the
commencement of the corporate term.

7. Adoption of By-Laws
a. Nature and Functions of By-Laws
 They are the rules and regulations or private laws adopted for its
internal government and to regulate the conduct and prescribe the
rights and duties of tis members towards itself and among
themselves in reference to the management of its affairs.

b. Requisites of Valid By-Laws


 It (1) must be consistent with the Corporation and other pertinent
laws and regulations; (2) must be consistent with the Articles of
Incorporation; (3) must not be contrary to morals or public
policy; and (4) must not disturb vested rights, impair contracts or
create obligations not sanctioned by law

c. Binding Effect
 The by-laws binds the corporation, stockholders, members
 It also binds those having directions, management and control of
its affairs
d. Amendment or Revision
 Amendment can be made by the stockholders together with the
board, or the Board after due delegation by the stockholders.

F. CORPORATE POWERS

1. General Powers; Theory of General Capacity


 Every corporation incorporated under the Corporation Code is
given general powers under Section 36 thereof.
 According to the Theory of General Capacity, corporation is said
to hold such powers as are not prohibited/withheld from it by
general law.

2. Specific Powers; theory of Specific Capacity


a. 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 a majority vote
of the board of directors or trustees and ratified at a meeting by
the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or by at least two-thirds (2/3) of the
members in case of non-stock corporations.

b. Power to Increase or Decrease Capital Stock or Incur, Create,


Increase Bonded Indebtedness
 A bond indebtedness refers to secured indebtedness or those
secured by real or personal property that are covered by
certificates.
 The exercise of the power to increase or decrease the authorized
capital stock of the corporation results in the amendment of the
Articles of Incorporation.

c. Power to Deny Pre-Emptive Rights


 Pre-emptive right is the right of shareholders to subscribe to all
issues or disposition of shares of any class in proportion to their
shareholdings.
 Pre-emptive right may be restricted or denied under the Articles
of Incorporation, and subject to certain exceptions and
limitations.
 The power to deny pre-emptive right is not contrary to public
policy.

d. Power to Sell or Dispose of Corporate Assets


 A sale, lease, exchange, mortgage, pledge or other disposition of
all or substantially all of the properties and assets of the
corporation, including its goodwill, requires the following: (1) It
must be approved by the majority of the directors or trustees; (2)
There must be assent of stockholders representing 2/3 of
outstanding capital stock or two-thirds of members in a meeting
duly called for the purpose after written notice.

e. Power to Acquire Own Shares


 Section 41 of the Corporation Code authorizes corporations to
acquire their own shares, provided that: (1) the acquisition is for
a legitimate corporate purpose or purposes, and (2) the
corporation has unrestricted retained earnings in its books to
cover the shares to be purchased or acquired.
 The power to acquire its own shares is an express power.

f. Power to Invest Corporate Funds in Another Corporation or


Business
 Under Section 42 of the Corporation Code, 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 two-thirds (2/3) of the outstanding capital
stock, or by at least two-thirds (2/3) of the members in the case
of non-stock corporations, at a stockholder’s or member’s
meeting duly called for the purpose.

g. Power to Declare Dividends


 The Board of Directors has the discretion to declare dividends.
 The decision of the board alone is necessary to declare cash or
property dividends; in the case of stock dividends, the decision
of the Board is subject to the approval of the stockholders
representing 2/3 of the Outstanding Capital of the corporation.

h. Power to Enter Into Management Contracts


 A management contract cannot be entered into with a foreign
corporation for party or wholly nationalized activities that are
covered by the Anti-Dummy Law.
 The contract shall be subject to the approval of 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 the
managing and the managed corporation, at a meeting duly
called for the purpose.
i. Ultra Vires Acts
i. Applicability of Ultra Vires Doctrine
 It applies to acts committed outside the object for which a
corporation is created as defined by the law of its
organization and therefore beyond the powers conferred
upon it by law.

ii. Consequences of Ultra Vires Acts


 If the act is ultra vires because it is not an express, implied
or incidental power, the same may, in certain cases, be
enforced.
 The effect of ultra vires contracts for both partially executed
and wholly executed contracts stated earlier can still be
maintained on the basis of estoppel except against the State.
 The certificate of incorporation may be revoked by the SEC
if the concerned corporation performs ultra vires acts.

3. How Exercised
a. By the Shareholders
 Assent of shareholders representing 2/3 of the outstanding
capital stock is necessary in the sale or disposition of all or
substantially all of the corporation’s assets under Sec. 40.
 Ratification by the shareholders of the approval of the board to
pursue secondary purpose is necessary under Sec. 42.

b. By the Board of Directors


 Generally, mere resolution by the board is enough for the
exercise by the board of the general powers of a corporation.

c. By the Officers
 Corporate powers are exercised by officers through delegation
by the board.

4. Trust Fund Doctrine


 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.

G. BOARD OF DIRECTORS AND TRUSTEES

1. Doctrine of Centralized Management


 All businesses of the corporation shall be conducted and all its
properties shall be held by the Board of Directors or Trustees.

2. Business Judgment Rule


 Under this rule, the will of the majority of the Board members
controls in corporate affairs, and contracts intra vires entered into by
the board of directors are binding on the corporation and courts will
not interfere unless such contracts are unconscionable and
oppressive as to amount to a wanton destruction of rights of the
minority.

3. Tenure, Qualifications, and Disqualifications of Directors or Trustees


 Tenure The tenure represents the term during which the incumbent
actually holds office. It may be shorter or longer than the term for
reasons within or beyond the power of the incumbent.
 The qualifications of a director are: (1) he must own at least one
share of the capital stock of which he is a member; (2) majority of
the directors or trustees must be residents of the Philippines.
 The disqualifications of a director are: (1) conviction by final
judgment of an offense punishable by imprisonment for a period
exceeding six years; or (2) violation of the Corporation code
committed within five years prior to the date of his election.

4. Elections
a. Cumulative Voting/ Straight Voting
 Cumulative voting is defined as a method of concentrating votes
devised to give sufficient opportunity to minority shareholders to
secure representation in the board.
 Straight voting is a method of voting wherein every shareholder
may vote such number of shares for as many persons as there are
directors to be elected.

b. Quorum
 A quorum is the minimum number of members of a group or
committee required to be in attendance in order for that group to
be able to take official action.

5. Removal
 The requisites for a valid removal are: (1) it must take place either
at a regular meeting of the stockholders called for the purpose; (2)
the call for a special meeting shall be made by the secretary on order
of the president or on the written demand of stockholders
representing at least a majority of the outstanding capital stock; (3)
there must be previous notice to the stockholders or members of the
intention to remove a director; (4) the removal must be by a vote of
the stockholders representing 2/3 of the outstanding capital stock or
2/3 of members; (5) a director who was elected by the minority must
be removed only for cause.

6. Filing of Vacancies
 Vacancies may be filled either by the stockholders or by the
remaining directors constituting a quorum depending on the reason
for the vacancy.

7. Compensation
 In the absence of any provision in the by-laws, the directors shall
not receive any compensation, as such directors, except for
reasonable per diems.

8. Rules on Fiduciaries’ Duties and Liabilities


 Management has three paramount duties, namely: (1) obedience; (2)
diligence; and (3) loyalty.

9. Responsibility for Crimes


 Corporate officers or employees may be held individually liable if
they are found to have actually participated in the commission or
omission amounting to a crime

10. Inside Information


 The information that is known to the company’s board of directors,
management and/or employees
 An inside information is obtained by someone by means other than
a public disclosure.

11.Contracts
a. By Self-Dealing Directors with the Corporation
 It is discouraged as there can be no real bargaining because the
director is acting on both sides of the trade.

b. Between Corporations with Interlocking Directors


 A fair and reasonable contract with interlocking directors is
allowed subject to the provisions of the Code.

12. Executive Committee


 It is a body created by the by-laws and composed of not less than 3
appointed members of the board which subject to the statutory
limitations, has all the authority of the board to the extent provided
in the board resolution or by-laws.

13. Meetings
a. Regular or Special
i. When and Where
 Regular meetings shall be held annually on a date fixed in the
by-laws or if not, on any date after April 15 of every year
 Special Meetings shall be held at any time deemed necessary
by the by-laws
 Shall be held in the principal office or if not in the
municipality or city where such office is located

ii. Notice
 Written notice of regular meetings shall be sent to
stockholders/members at least 21 days prior to the meeting
 Written notice of special meetings shall be sent to
stockholders/members at least 1 week unless a different
period is provided in the by-laws

b. Who Presides
 The chairman or, in his absence, the president shall preside at
all meetings unless the by-laws provide otherwise

c. Quorum
 Consist of stockholders representing a majority of the
outstanding capital stock or majority of members

d. Rule on Abstention
 The general rule is that the abstention is counted in favor of
the issue that won the majority vote unless there is clear
evidence to contrary