2.02. CREATED BY OPERATION OF LAW. a) CONCESSION THEORY.

It is a principle in the creation of corporations, under which a corporation is an artificial creature without any existence until it has received the imprimatur of the State acting according to law, through the SEC. The life of the corporation is a concession made by the State. b) FRANCHISES OF CORPORATION. 1) Primary, corporate or general franchises the franchise to exist as a corporation. The primary franchise of a corporation, that is, the right to exist as such, is vested 'in the individuals who compose the corporation and not in the corporation itself' (JRS Business Corp. v. Imperial Insurance, Inc., 11 SC R A 634 [1964]). (i) cannot be transferred without approval of Congtess.

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REVIEWER ON COMMERCIAL LAW Special or secondary franchises - certain rights and privileges conferred upon existing corporations, such as the right to use the streets of a municipality to lay pipes of tracks, erect poles or string wires, or the right to engage in delivery service (ibid.). (i) the special or secondary franchises of a corporation are vested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property, except such special or secondary franchises as are charged, with a public use. (ii) is subject to levy and sale on execution together and including all the property necessary for the enjoyment thereof. c) HOW CREATED. 1) General Law - private corporations are generally created under the provisions of the Corporation Code. This is done by filing the appropriate Articles of Incorporation with the Securities and Exchange Commission; the life of the corporations starts from the issuance of the Certificate of Incorporation. 2) Special Law - public corporations are created through special laws. Private corporation cannot be created by special laws. Exceptions: Government-owned or -controlled corporations which are actually private corporations. 2.03. RIGHT OF SUCCESSION -- capacity to have continuity of existence despite the changes on the persons who compose it. Thus, the personality continues despite the change of stockholders, members, board members or officers. 2)

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BUSINESS ORGANIZATIONS 2.04. POWERS, ATTRIBUTES AND PROPERTIES. a) Theory of Special Capacities/Limited Capacity Doctrine. No corporation under this Code, shall possess or exercise any corporate powers, except those conferred by law, its Articles of Incorporation, those implied from express powers and those as are necessary or incidental to the exercise of the powers so conferred. The corporation's capacity is limited to such express, implied and incidental powers. b) If the act of the corporation is not one of those express, implied or incidental powers, the act is ultra vires. 3. CLASSIFICATION AND DISTINCTIONS. 3.01. What are the classes of corporation? a) As to organizers: 1) public - by State only; and 2) private - by private persons alone or with the State. b) As to functions: 1) public - government of a portion of the State; and 2) private - usually for profit-making functions. c) As to governing law. 1) public - Special Laws and Local Government Code; and 2) private - Law on Private Corporations.

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REVIEWER ON COMMERCIAL LAW d) As to legal status. 1) de jure corporation - corporation organized in accordance with requirements of law; 2) de facto corporation -- a corporation where there exists a flaw in its incorporation. The requisites for its existence are: (i) The existence of a valid law under which it may be incorporated; (ii) An attempt in good faith to incorporate; (ii) Use of corporate powers. Note: Issuance of certificate of incorporation by the SEC is a minimum requirement of continued good faith. If there is substantial compliance, de jure corporation results; only colorable compliance results in de facto corporation. e) corporation by estoppel- group of persons which holds itself out as a corporation and enters into a contract with a third person on the strength of such appearance cannot be permitted to deny its existence in an action under said contract (Sec. 2L CCP). Note: This is actually not a real corporation. 1) Those who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners (meaning up to their personal properties). Those who were not aware of the defect are liable only up to their investment. 2) The Supreme Court ruled in one case that all those who derived benefit from the transaction made by the ostensible corporation, despite knowledge of its legal defects, may

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be held liable for contracts they impliedly assented to or took advantage of (Lim v. Philippine Fishing Gear Industries, Inc., 317 SC R A 728 [1999]). f) corporation by prescription - a corporation that was not formally organized as such but has been duly recognized by immemorial usage as a corporation, with rights and duties maintainable at law. Example: Roman Catholic Church. g) As to existence of stocks. 1) Stock corporation - a corporation in which capital stock is divided into shares and is authorized to distribute to holders thereof of such shares dividends or allotments of the surplus profits on the basis of the shares held (Sec. 3, CCP). In Collector of Internal Revenue v. Club Filipino de Cebu (5 SCR A 321 [1962]), the Supreme Court ruled that even if there is a statement of capital stock, the corporation is still not a stock corporation if dividends are not supposed to be declared, that is, there is no distribution of retained earning. 2) Non-stock corporation - a corporation which does not issue stocks and does not distribute dividends to their members. h) As to laws of incorporation. 1) Domestic corporation - corporation formed, organized or existing under Philippine laws. 2) Foreign Corporation - a corporation formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporation 245

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to do business in its own country or state (Sec. 123, CCP). i) Other Corporations. 1) Close Corporation 2) Special Corporation 3) Educational corporation 4) Religious corporation a. corporation sole b. religious societies j) Corporations going public vs. Corporations going private. A corporation is deemed to be "going-public" when it decides to list its shares in the stock exchange. This includes corporations that will make initial public offering of its shares. A corporation is said to be "going private" when it would restrict the shareholders to a certain group. In a sense, this also includes close or closely held corporation. 3.02. DISTINGUISHED FROM PARTNERSHIP. a) As to manner of creation. - Partnership is created by mere agreement while the existence of the corporation commences only from the issuance of a Certificate of Incorporation by the SEC or in proper cases, passage of a special law. b) As to the number of organizers. - Even two persons may form a partnership while a corporation needs at least five (5) incorporators. c) As to powers. - A corporation is more restricted in its powers because of its limited personality while a partnership is subject only to what may be agreed upon by the partners.

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BUSINESS ORGANIZATIONS d) Authority of those who compose. -- There is mutual agency in partnership and each general partner can represent and bind the partnership while stockholders are not agents of the corporation in the absence of express authority. e) Tranfer of interest. - Corporate shares are freely transferable without the consent of other stockholders (unless there is a stipulation) while interest in the partnership cannot be transferred without the consent of the other partners. f) Succession. -- There is no right of succession in partnership as death of a general partner dissolves the partnership. 3.03. De Facto Corporations vs. De fure Corporations DE JURE DE FACTO 1. one created in strict or 1. one which actually exists substantial conformity for all practical purposes with the statutory requireas a corporation but ments for incorporation. which has no legal right to corporate existence as against the State. 2. right to exist cannot be 2. right to exercise powers successfully attacked even cannot be inquired into in a direct proceeding by collaterally in any private the State. suit. But such inquiry may be made by the State in a proper court proceeding. PROBLEMS: 1. A corporation was created by a special law. Later, the law creating it was declared invalid. May such corporation claim to be a defacto corporation?

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REVIEWER ON COMMERCIAL LAW A: NO. The corporation is not a defacto corporation because the requisites for its existence are absent. There is no valid law under which it was organized and there would be no continuity of good faith. This is specially true if the corporation that was created was a private corporation which was not a governmentowned or -controlled corporation. Private corporations can only be created by special law if it is government-owned or -controlled. 2. Mamuhunan was invited by his friends to invest in A Corp., a newly organized firm engaged in money market and financing operation. Because of his heavy investments, Mamuhunan became the firm's president and, as such, purchased as big number of computers, typewriters and other equipment from Taktak Corp. on installment basis. A Corp. paid the down payment and Taktak Corp. issued the corresponding receipt. To his chagrin, Mamuhunan discovered that the Articles of Incorporation had not been filed by his friends on that date so he hurriedly attended to the matter. No sooner had the Certificate of Incorporation been issued by the SEC, A Corp. became bankrupt after three months. Upon being sued by Taktak Corporation in his personal capacity, Mamuhunan raised among its defenses the doctrines of de facto corporations and corporations by estoppel. Can the two defenses be validly raised? Explain. A: NO, the two defenses cannot be raised because they are not available to Mamuhunan. In the first, there was no de facto corporation because the Articles of Incorporation was not filed with the SEC. There can be no attempt in good faith to incorporate if no Articles of Incorporation was filed with the SEC. In addition, Mamuhunan cannot raise the defense that his corporation is a de facto corporation to defeat a claim. Until the personality is attacked by the State, the de facto corporation can continue as a corporation. The allegation that there was a corporation by estoppel may be correct but the same is not a defense against claimaints. The concept of corporation by estoppel is

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precisely for the purpose of protecting third persons or creditors. The defense is established in favor of persons with whom the corporation deals but not in favor of those who represent themselves as such corporation although it is not, like Mamuhunan. However, Mamuhunan can raise his good faith as a defense and claim that his liability is only up to the extent of his investment. Section 21 of the Corporation Code makes liable as general partner only those who assume to act as a corporation knowing it to be without authority. 4. ADVANTAGES AND DISADVANTAGES. 4.01. ADVANTAGES. a) The capacity to act as a legal unit; b) Limitation of, or exemption from, individual liability of shareholders; c) Continuity of existence; d) Transferability of Shares; e) Centralized management of board of directors; and f) Standardized method of organization, and finance (Salonga, Phil. Law on Private Corporations, 3rd ed., p. 9). 4.02. DISADVANTAGES. a) More complicated in formation and management; b) Higher cost of formation and operation; c) Lack of personal element; d) Greater governmental control and regulation; e) Management and control are separate from ownership; f) Stockholders have little voice in the conduct of business (De Leon, The Corporation Code of the Phil., Annotated, 2002 ed., pp. 48-49).

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5. COMPONENTS OF A CORPORATION: 5.01. a) INCORPORATORS - those mentioned in the articles of incorporation as originally forming and composing the corporation, having signed the articles and acknowledged the same before a notary public. They have no powers beyond those vested in them by the statute. 1) They must be natural persons; 2) At least five (5) but not more than fifteen (15); 3) They must be of legal age; 4) Majority must be residents of the Philippines; and 5) Each must own or subscribe to at least one share. b) CORPORATORS - all the stockholders and members of a corporation including the incorporators who are still stockholders. c) STOCKHOLDERS AND MEMBERS - stockholders are persons who hold or own shares in a stock corporation while members are those who compose the nonstock corporation. d) DIRECTORS AND TRUSTEES - The Board of Directors is the governing body in a stock corporation while Board of Trustees is the governing body in a non-stock corporation. They exercise the powers of the corporation. e) CORPORATE OFFICERS - they are the officers who are identified as such in the Corporation Code, the Articles of Incorporation or the By-laws of the corporation. f) PROMOTER - a self-constituted organizer who finds an enterprise or venture and helps to attract investors, forms a corporation and launches it in business, all with a view to promotion profits (Salonga, p. 71). 1) The corporation is not bound by the contract entered into by the promoter before incorporation

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BUSINESS ORGANIZATIONS unless the contract is ratified (Cagayan Fishing Dev. Co., Inc. v. Sandiko, 65 Phil. 223). (2) The promoter is personally liable for contracts or agreements with third persons contracted in behalf of the future corporation if the corporation does not ratify the same or unless the agreement was expressly made subject to such approval or ratification. (3) The promoter should remit to the corporation profits that he derived that properly pertains to the corporation. g) DIFFERENTIATE CORPORATORS FROM INCORPORATORS.

INCORPORATORS 1. Signatory to Articles.

CORPORATORS 1. Stockholder of stock corporation or member of non-stock corporation. 2. Do not cease to be such. 2. Cease to be such if they are no longer stockholders. 3. Number is limited to 5 to 3. No restriction as to num15. ber. 4. Must have contractual 4. May be such through his capacity. guardian.

5.02. FOR E IGN ST OCKI IO LD E R S. a) Can all the stockholders in a corporation be foreigners? YES, except in fully or partly nationalized corporations. For example, a manufacturer that exports all its products can be wholly-owned by foreigners.

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b)

What are the fully or partly nationalized corporations? 1) Where no foreign stockholder is allowed: (i) Mass Media except recording (Art. XVI, Sec. 11, Constitution). (ii) Retail trade enterprises with paid-up capital of less than US$2.5 Million (Sec. 5, R.A. No. 8762 ). (iii) Private security agencies (Sec. 4, R.A. No. 5487). (iv) Small-scale mining (Sec. 3, R.A. No. 7076). (v) Utilization of natural resources (Art. XII, Sec. 2, Constitution). (vi) Cockpits (Sec. 5, P.D. No. 449). (vii) Manufacture, repair, stockpiling and / or distribution of nuclear weapons (Art. II, Sec. 8, Constitution). (viii) Manufacture of firecrackers and other pyrotechnic devices (Sec. 5, R.A. No. 7183). 2) Up to twenty percent (20%) foreign equity. Private radio communications network (R.A. No. 3846). 3) Up to twenty-five percent (25%) foreign equity. (i) Private recruitment, whether for local or overseas, employment (Art. 27, P.D. No. 44 2 ). (ii) Construction and repair of locally funded works (Sec. 1, C.A. 541). (iii) Construction of defense-related structures (Sec. 1, C. A. 541 ).

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4)

Up to forty percent (40%) foreign equity. (i) Exploration, development and utilization of natural resources (Art. XII, Sec. 2, Constitution); (ii) Realty companies and other corporations that own private lands (Art. XII, Sec. 7, Constitution); (iii) Operation and management of public utilities ( Art. XII, Sec. 11, Constitution); (iv) Culture, production, milling, processing, trading except retail of rice and corn and by-products (Sec. 5, P.D. No. 194: Sec. 15, R.A. No. 8762); (v) Adjustment companies (Sec. 323, P.D. No. 612); (vi) Sauna and steam bath bathhouses, massage clinics and similar activities (R.A. No. 7042 ). 5) Up to sixty percent (60%) foreign equity. (i) Financing companies (Sec. 6, R.A. No. 5980, as amended by R.A. No. 8556). (ii) Investment houses (Sec. 5, P.D. No. 129, as amended by R.A. No. 8366).

6.

FORMATION OF A CORPORATION. The life of a corporation commences from the issuance of the Certificate of Registration by the SEC upon filing of the Articles of Incorporation and other documents. 6.01. THE ARTICLES OF INCORPORATION. a) What are the contents of the Articles of Inc. prescribed under Sec.14 of the Corporation Code? 1) name of corporation;

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2) purpose/s, indicating the primary and secondary purposes; 3) place of principal office; 4) term which shall not be more than 50 years; 5) names, citizenship and residences of incorporators; 6) number, names, citizenship and residences of directors; 7) if stock corporation, amount of authorized capital stock, number of shares; 8) in par value stock corporations, the par value of each share; 9) number of shares and amounts of subscription of subscribers which shall not be less than 25% of Authorized Capital Stock; 10) amount paid by each subscriber on their subscription, which shall not be less than 25% of subscribed capital and shall not be less than P5,000.00; 11) name of treasurer elected by subscribers; and 12) if the corporation engages in a nationalized industry, a statement that no transfer of stock will be allowed if it will reduce the stock ownership of Filipinos to a percentage below the required legal minimum. b) What documents should be filed with the SEC for purposes of securing a certificate of registration of a stock corporation? 1) Articles of Incorporation. 2) Treasurer's Affidavit certifying that 25% of the total authorized capital stocks has been

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BUSINESS ORGANIZATIONS subscribed and at least 25% of such have been fully paid in cash or property. 3) Bank certificate covering the paid-up capital. 4) Letter authority authorizing the SEC to exarnine the bank deposit and other corporate books and records to determine the existence of paid-up capital. 5) Undertaking to change the corporate name in case there is another person or entity with same or similar name that was previously registered. 6) Certificate of authority from proper government agency whenever appropriate like BSP for banks and Insurance Commission for insurance corporations. c) What corporate name cannot be used? 1) Names which are identical, deceptively or confusingly similar to that of any existing corporation including internationally known foreign corporation though not used in the Philippines; 2) Name already protected by law; 3) Name which is contrary to law, morals or public policy. Notes: A corporation which seeks to prevent another from using its name must show that it (a) acquired prior right to use the name and (b) the name is either of 3 mentioned above (Industrial Retractories Corp. of the Phils. v. Refractories Corp. of the Philippines, No. 122174, October 3, 2002). The corporation chooses its name at its peril; and the use of a name similar to one adopted by

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another corporation, whether a business or a nonprofit organization, if misleading or likely to injure in the exercise of its corporate functions, regardless of intent, may be prevented by the corporation having a prior right, by a suit for injunction to prevent its use. It may likewise be directed to change its corporate name ( Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K. sa Bansang Pilipinas, Inc. v. Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan, No. 137592, December 12, 2001, where petitioner was ordered to change its name for being similar to the respondent's name). d) What is the importance/significance of the principal place of business stated in the Articles of Inc.? The principal place of business may determine the venue of court cases involving corporations. It may also determine if service of summons and notices was properly made (Sy v. Tyson E nterprises, Inc., 119 SCR A 367 [1982]). What is the maximum term of a corporation? Can it be extended? A corporation has a maximum term of fifty (50) years. It may be extended for a period not exceeding fifty years in any single instance. However, no extension can be made earlier than five (5) years prior to the expiration of the term (Sec. 11, CCP). Define the following terms: (1) authorized capital stock; (2) subscribed capital stock; (3) paid-up capital; (4) outstanding capital; and (5) capital. 1) Authorized Capital Stock - the amount fixed in the articles of incorporation to be subscribed

e)

f)

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BUSINESSORGANIZATIONS and paid by the stockholders of the corporation (S EC Opinion, August 11, 1997). 2) Subscribed Capital - that portion of the authorized capital stock that is covered by subscription agreements whether fully paid or not. 3) Paid-Up Capital -- the portion of the authorized capital stock which has been subscribed and actually paid (MSCI-NACUSIP Local Chapter v. National Wages and Productivity Commission, 260 SCR A 173 [1997]). 4) Outstanding Capital Stock - the total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid except treasury shares so long as there is a binding subscription agreement (Sec. 137, CCP). 5) Capital - properties and assets of the corporation that are used for its business or operation. PROBLEM: 1. The Articles of Incorporation to be registered in the Securities and Exchange Commission contained the following provisions: a)"First Article. The name of the corporation shall be Toho Marketing Company." b) "Third Article. The principal office of the corporation shall be located in Region III, in such municipality therein as its Board of Directors may designate." c) "Seventh Article. The capital stock of the corporation is One Million Pesos (P1,000,000.00), Philippine Currency." What are your comments and suggested changes to the proposed articles? A: a) The First Article does not comply with the SEC Revised Guidelines on Corporate Names (Mem. No. 14, Series of 2000) which requires the corporate name to contain the

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REVIEWER ON COMMERCIAL LAW word "corporation" or its abbreviation "Corp.," Incorporated or "Inc." Hence, the name should be either be "Toho Marketing Corporation" or " Toho Marketing Company, Incorporated," "Toho Marketing Corp." "Toho Marketing, Inc." b) The Third Article should indicate the City or the Municipality and the Province in the Philippines, and not merely the region. c) The Seventh Article must indicate the number of shares into which the capital stockis divided, and the par value if any as well as those without par value. 6.02. AMENDMENT OF ARTICLES OF INCORPORATION. a) Procedure. Majority vote of directors or trustees and written assent of the stockholders representing 2/3 of outstanding capital or 2/3 of members of non-stock corporations. b) When effective. Upon approval of SEC or if not acted upon by SEC within six (6)months from the date of filing provided that delay cannot be attributed to the corporation. c) Congress. The passage of statutes amending the Corporation Code or special laws may result in the amendment of the Articles of Incorporation provided that no vested right is impaired (Sec. 145, CCP).

BY-LAWS. 7.01. BY-LAWS ---relatively permanent and continuing rules of action adopted by the corporation for its own government and that of the individuals composing it and those having the direction, management and control of its affairs, in whole or in part, in the management and control of its affairs and activities (China Banking Corporation v. C A, 270 SCR A 503 [1997 ], 8 Fletcher, Sec. 4166 ).

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7.02. REQUISITES OF VALID BY-LAWS. a) It must be consistent with Corporation Code, other pertinent laws and regulations (See Fleishcher v. Botica Nolasco, 47 Phil. 583; Barretto v. La Previsora Filipina, 59 Phil. 212). Example: A provision in the By-laws granting a permanent seat in the Board of Directors is contrary to the Code (Grace Christian High School v. Court of Appeals, 281 SCR A 133 [1997]). b) It must be consistent with the Articles of Incorporation. Hence, in case of conflict, the Articles of Incorporation prevails (Loyola Grand Villas Homeowners [South] Asso., Inc. v. Court of Appeals, 276 SC R A 681 [1997]). c) It must be reasonable and not arbitrary or oppressive. d) It must not disturb vested rights, impair contract or property rights of stockholders or members or create obligations unknown to law (See Thomson v. Court of Appeals, 298 SCR A 280 [1998]), where the Court disallowed absolute restriction on the right to transfer and Salafranca v. Philamlife (Pamplona), 300 SC R A 469 [1998]), where the Court declared that amended By-laws should not undermine the security of tenure of an employee by declaring non-existent the position. 7.03. ADOPTION AND AMENDMENT. a) Original By-laws: 1) may accompany the Articles of Incorporation and SEC will approve it together with the Articles; or 2) filed within one (1) month from notice of issuance of certificate of incorporation, in which case it must be: (i) approved by stock-

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holders constituting at least a majority of outstanding capital and (ii) a copy (signed by approving stockholders or members, certified by majority of directors or trustees, and countersigned by corporate secretary) must be filed with the SEC. Note: Non-filing within one (1) month is a ground to forfeit franchise and will not result in automatic dissolution (Loyola Grand Villas [ South] H omeow ners v. C A, 276 SC R A 681 [1997 ]). Amendment. May be made by the (1)Stockholders together with the Board, or (2) Board only. 1) Stockholders together with Board: majority of board plus majority of outstanding capital stock. 2) By the Board as delegated by 2/3 of outstanding capital stock or 2/3 of members. 7.04. BINDING EFFECT OF PROVISIONS OF BY-LAWS. a) As to the Corporation and its components -binding not only upon the corporation but also on its stockholder, members and those having direction, management and control of its affairs. b) As to Third Persons - not binding unless there is actual knowledge. Third persons are not even bound to investigate the content because they are not bound to know the By-laws which are merely provisions for the government of a corporation and notice to them will not be presumed (China Banking Corp. v. C A, 270 SC R A 503 [1997]). Examples: Provisions of the By-laws on delinquency sale shall not be binding on a pledgee (Ibid.). In PMI Colleges v. NLRC (277 SCR A 462 [19971), the provision in the By-laws enumerating b)

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