LADIA CORPO LECTURE PART 1

Topics:
CLASSIFICATION OF CORPORATIONS
MEETINGS
CONTENT AND FORMAT OF THE AOI
o CORPORATE NAME
o PURPOSE CLAUSE
o PRINCIPAL OFFICE
o CORPORATE TERM
o INCORPORATORS
o DIRECTORS AND TRUSTEES
o DISQUALIFICATIONS OF THE MEMBERS OF THE BOARD
o CAPITAL STRUCTURE OF A CORPORATION
What is the meaning of capital?
CLASSIFICATION OF SHARES
o VOTING AND NON-VOTING SHARES
o TREASURY SHARES
o PAR VALUE AND NO PAR VALUE SHARES
o STOCK WATERING AND CONSEQUENCES
RESTRICTION IN TRANSFERES OF SHARES
ORGANIZATION, COMMENCEMENT AND INOPERATION OF BUSINESS
DE FACTO CORPORATION
o RIGHTS AND OBLIGATIONS OF STOCKHOLDERS, BOD OF A DE
FACTO CORPORATION
CORPORATION BY ESTOPPEL
CORPORATE ENTITY THEORY
PIERCING THE VEIL OF CORPORATE FICTION
AMENDMENT OF THE ARTICLES OF INCORPORATION
Sec. 2 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. It was lifted from the old definition of the law Sec. 3 then now Sec. 2. One of
the most vexing questions of its attributes is being an artificial person. In 1962, the
higher court came out with the decision that a corporation being an artificial being
is not entitled to award of moral damages. It ruled to the effect that awarding moral
damages it ruled to the effect that moral damages may be awarded for physical
sufferings, mental anguish, fright, serious anxiety, besmirched reputation, wounded
feelings, moral shock and social humiliation. A corporation being an artificial person
and existing only in contemplation of law has no feelings. It has no senses and it
cannot therefore experience mental and physical sufferings. In 1968 however, the
higher court handed down a decision in Mambulao Lumber vs. PNP that a
corporation however, may have a good reputation which if besmirched, may be a
ground to award moral damages. Then came the case law in Filipinas

Broadcasting v. Ago Medical Center that article 2219 of the Civil Code
authorizes a person to recover moral damages in cases of libel, slander and other
forms of defamation. By Justice Carpio, Article 2219 does not qualify whether the
plaintiff is a natural or a juridical person. A juridical person can file a complaint
against libel and other forms of defamation and claim moral damages. This was
reiterated in Meralco v. TEAM Electronics in 2007, that when a corporation that
has a reputation that is defaced resulting because of its humiliation in the business
realm, moral damages may be awarded. This established that moral damages may
be awarded to juridical persons in case of libel and other forms of defamation. OF
course sec.2 likewise provides that it has powers, attributes and properties
expressly authorized by law and those incidental to its existence. This is what we
call the doctrine of limited capacity in the corporate form of business. It
means that unlike a natural person, a corporation being a corporation of law can
only do those things that the law allows it to do. Natural person can do anything he
wishes unless it is contrary to law, morals, public order or public policy. The
corporation cannot do that. Otherwise if it does acts not conferred to it by law, the
acts performed are considered ultra vires which are acts beyond corporate powers
or authority.
CLASSIFICATION OF CORPORATIONS
Sec. 3 speaks of the first classification of corporations. There are several
classifications. Sec speaks of stock and non stock corporations. Stock Corporation is
a corporation with capital stock divided into shares and authorized to distribute
allotment of its surplus profits by way of dividends to the shareholders or members.
It has been asked in the bar at least 3 times already. Note that there are
corporations in the country with capital stock but they are not authorized to
distribute their surplus profits by way of dividends. We have most of them, the club
shares, and the sports club. Their shares are very expensive for instance, Manila
Golf Club, its 25 million per share. But since they do not distribute their income or
surplus profits by way of dividends, they are considered non-stock corporations.
Why is it important to know the importance between these types of corporations?
Of course it is important to know that the importance in determining what provision
of the corporation code or what law will apply to the particular corporation involved.
For instance, Sec. 87 or Title 11 of the Corporation Code, it is clear that the
provisions governing stock corporations when pertinent shall be applicable to nonstock corporations except as may be covered by specific provision of that same title
11.
MEETINGS
Sec 51 of meetings says at the city or municipality of the principal office is located
or established. As far as practicable, at the principal office. Sec. 93 of non stock
corporations authorizes a non stock corporation to validly provide in their by laws

that the meetings may be held anywhere in the Phils. So if there is a provision of the
AOI of the non-stock corporation to allow the meetings anywhere, they can do so.
Absent the provision in the AOI of the non-stock corporation, then the general rule
pertaining to stock corporations will apply because the law says that the provisions
applicable to stock corporations when pertinent shall also apply to a non-stock
corporation. Note, however in Sec. 51, that speaking of meetings, Metro Manila is
considered as one single city or municipality. It applies to both stock and non-stock
corporations. Speaking of non stock corporations, we were saying that it is governed
by different provisions of the code or the law itself, under Sec 24 of the code,
stockholders in stock corporations are expressly granted by law for cumulative
voting it cannot be denied by a provision on the AOI. But then again, we have
provisions of title 11 of the code that members of a non-stock corporation can cast
only 1 vote per candidate. But again, as I was saying Title 11 was so specific
specifically Sec 89 that voting rights of members of non-stock corporations may be
broadened, limited or denied by a provisions in the AOI so given if there is a
provision in title 11 provides only 1 vote per member, if the AOI provides for
cumulative voting, then so be it. Of course, we also have corporations created by
special law, they are governed by the special law creating them not the Corporation
Code. Further supplemented only by the Code when they are pertinent. Even if it
will run counter to the Corporation Code of the Phil. In Gonzales v. PNB involving
inspection, there is nothing in the Corporation Code that provides or prohibits
stockholders from inspecting the books of incorporation. That is an inherent right
that attach to stock ownership. Of course in that case, Gonzales, a stockholder of
PNB wanted to check the books of the bank but the bank has its own charter. And
the charter provides that the books and records of the bank are subject to
inspection by only the Monetary Board of the Central Bank. And there is also a
special provision that any person violating the laws creating the PNB may be
subjected to fine and or imprisonment. That cannot be done in ordinary stock
corporations because it is an inherent right of the stockholder. I do not know if this
is still applicable because the PNB has been privatized but if the law still stands are
remains unaltered, amended or repealed, the law is the law until amended or
repealed. Another matter asked in the bar regarding different types of corporation,
what law governs employer employee relationship in government owned and
controlled corporations? PNOC EDC v NLRC under present state of the law, the
test determining whether GOCC is under Civil Service laws or the Labor Code is the
manner of its creation. If it has its own charter, then the charter will prevail. Absent
any, it is the Civil service law. When it is incorporated under the Corporation Code, it
is the Labor laws. Absent charter, Civil service law.
Corporations under Sec. 19, commences to exist upon the issuance of certificate of
incorporation or registration by the SEC but is that entirely correct? Under Sec. 19, a
corporation will be vested juridical personality upon the issuance of the certificate of
registration. But that is only a general rule because there is another corporation
that may commence to exist without the issuance of the COR of the SEC. We have

the corporation sole. Under Sec. 112 of the Corporation Code. A corporation sole
commences to exist and a juridical personality upon the filing. UPON THE FILING, is
the word used. Of the AOI with the SEC and NOT upon issuance of COR. Of course
we can also say that those created by special law. The moment the law creating
them exists, they start to exist. OF course that is only the general rule, the rule that
a corporation exists upon the issuance of COR or incorporation.
Content and format of AOI: Sec. 14 and 15 of the Corporation Code
CORPORATE NAME
Art. 1 would be the Corporate Name
Under Sec. 18 of the code, no corporate name shall be allowed by the SEC, if the
proposed name is identical or deceptively or confusingly similar to any existing
corporation or any other name protected by law. The name of the Corporation
designates the corporation in the same manner that an individual designates the
person. This is so because the corporate name is the principal means of
distinguishing it not only to the stockholders and holder but also from other firms
and entities. Under 14 and 15, the corporate name must include the word
Corporation or Inc. either in full or abbreviated term. That is mandated by law. If you
do not include that, the SEC will now allow you to register. Only corporations can
append the words Corporation or Inc. in their name. It cannot be done in a
partnership. That is why it is a means in distinguishing it from other firms and
entities. A corporation once formed with its chosen name cannot choose any other
name unless of course it has been amended in accordance with law as this would
result in confusion and may even open the door to fraud and evasion and as well as
difficulties in administration and supervision. Just like the anti alias law. Parehas lang
yan.
The statutory provision on the use of the corporate name cannot be any clearer,
ruled the court in Philips Export v. CA in 1992. To come within its scope (Sec. 18),
2 requisites must concur, first, that the complainant corporation acquired a prior
right over the use of the corporate name and second, the proposed name is either
identical or deceptively or confusing to an existing corporation or one that may be
protected by law or is patently deceptive, confusing or contrary to law. In that
ruling, the SC ruled that proof of actual confusion need not be shown. It suffices that
confusion is probably or likely to occur. Note therefore, in case of Lyceum of the
Phils. v CA decided by SC, held that the policy underlying the prohibition against
the registration of corporate name which is identical or deceptively or confusingly
similar is the avoidance of confusion or fraud. Of course, if there is no such
confusion or fraud, then the corporate name may be allowed by SEC. In that case,
the Lyceum of the Phils. Instituted an action to bar other institutions in using the
name Lyceum in their chosen name. SC said that corporate names of these
institutions, but confusion or deception is effectively precluded by the appending

the geographic location of the institutions. There is no fraud or deception. Lyceum of

Baguio from Lyceum of the Phils. So much so, that even there seems that there is
similarity, it can be allowed if there is no confusion or deception. That is the intent
of Sec. 18. In the same case, the SC applied the doctrine of secondary meaning
under the patents law in the application of Sec. 18 likewise. Can you appropriate a
word being used another corporation? Maybe yes. Under the doctrine of secondary
meaning a word or phrase originally incapable of exclusive appropriation with
reference on article in the market because of geographic or descriptive might has
been used exclusively by one producer or provider with reference to his article or
service, to that trade or branch, that word or phrase to mean that the article is his
product. If that is the case then, even if it is a generic word, it may exclusively be
appropriated by a corporation.
PURPOSE CLAUSE
In the AOI is the purpose clause. A Corporation can have as many local purpose or
purposes but it does, the law is categorical that it must state the principal purpose.
And of course, the secondary purpose or purposes separately. The importance of the
statement of the purpose clause is that it practically defines the scope the
corporate enterprise. This is connected with the doctrine of limited capacity in the
corporate form of business. It confers and limits the actual authority of the
corporation. In Sec. 45 of the Code, it can only do acts and things as the law allows
it to do. It includes the AOI purpose clause. Allowing a collateral attack on the part
of the contracting parties, to question the validity of the act or contract for being
beyond corporate powers or authority. Normally, purpose clause maybe reasonably
stretched so as to cover these unexpected situations. For instance, PLDT, telecom, it
can be involved in DSL, but it cannot sell computers, they do not have retail
business.
PRINCIPAL OFFICE
Art. 3 speaks of principal office of the corporation. The PO of the corporation
establishes the residence of the corporation. Which is important for:
1. Determining venue of actions for or against the corporation. For the Rules of
Court, if a person is to be sued he can be sued in the city where he resides. If
the action arises not from a contract, the corporation can only be sued in the
city or municipality where it has its principal office because that is the
residence of the corporation.
2. To determine venue of meetings of stockholders or members. (Sec. 51)
meetings for stockholders must be held at their principal office. It must be
noted in the AOI of the non-stock corporation that meetings may be held
anywhere in the Phils. If it is improperly held, then any stockholder may
question the validity of any resolutions arising from that meeting for being
held in an improper venue.
3. Where service of summons be served.

4. Registration of chattel mortgage. Shares of stocks maybe mortgaged or

pledged by the owner. If it is, where should it be registered? Under the
mortgage law, it must be registered in the registry of deeds of the city where
the principal office of corp. is located and or established. And if the owner
resides in a different city or municipality, it must also be registered in the city
or municipality where the owner resides. If you did not comply with the
requirement, then it will not bind subsequent creditors or third parties. Case
law of Sua Uhang v. Magsasaka.

CORPORATE TERM
Article 4 is the corporate term. Under Sec. 11, a corporation can exist for a period of
not more than 50 years from the date of its incorporation, or unless sooner
dissolved or the period is extended. It may be extended for periods not exceeding
50 years for any single instance by the amendment of the AOI. The law further
states that no extension be made earlier than 5 years prior to the original expiration
of the term stated in the AOI. Unless there are justifiable reasons for earlier
extension as may be determined by the SEC. You cannot file an amendment
extending your corporate term, lets say 7 years before. That is the general rule. But
if there are justifiable reasons then it may be done. Once the corporate term expires
without any extension has been made by amendment of the AOI, the corporation
ceases to exist as a body politic and loses its juridical personality for the purpose of
executing its business purpose. There will be no need of any procedures
administrative or otherwise to determine what point in time the corporation cease
to exist because the period of existence is stated in the AOI. You have agreed that
the corporation shall live only for 50 years. Bago mamatay, dapat humingi ka ng
extension sa Diyos. Once the term expires, the corporation is dead for the purpose
of continuing the business for which it was formed or organized. This was reiterated
in the year 2011 in the case Majority stockholders probi? Industrial
Operations vs. Lim but even though, we will note that a corporation either
dissolved through expiration of term or any other way will continue to have been
vest with a body politic for a period of 3 years for the purpose of liquidation and
winding up corporate affairs but CANNOT BE FOR THE PURPOSE of continuing the
business for which it was organized.
INCORPORATORS
Art. 5 would be the incorporators. The names, nationalities and residences of the
incorporators. The incorporators are the stockholders or members originally
forming and composing the corporation and who are signatories of the AOI. Sec 10
provides that any number of natural persons not less than 5 but not more than 15
all of legal age and majority of whom are residents of the Philippines may be
incorporators. With that provision, a corporation cannot generally be an incorporator

because it is not a natural person. Because under RA 720 as amended by PD 122, it

allows cooperatives and corporations primarily organized to hold and engage in
rural bank to be incorporators, other than that a corporation cannot be an
incorporator because it is not a natural person. Second, can a minor be an
incorporator? No. even if represented by parents or legal guardians. Minors cannot
be incorporators. May corporations have incorporators consisting solely of
foreigners? Yes. There is no nationality requirement. The only requirement that
majority of them must be residents of the phils. Unless you have the nationalization
clause. Example the media should be reserved for Filipino citizens, therefore no
foreigners can hold equity in the mass media. Unless therefore provided by law, a
corporation created under Philippine laws can have an incorporators solely
consisting of foreigners. The Retail Trade Law of the Phils. If the Paid up capital is
not less than 2.5 million dollars, the retail trade shall be own solely by foreigners. To
be an incorporator, one must subscribe to at least 1 share of the corporation. Note
not less than 5. Any number of persons not less than 5. Can it be organized by a
single individual? Again the Corporation Sole can be organized by a single individual
according. To sec 110 of the code.

DIRECTORS AND TRUSTEES

Art.6 speaks of Directors and Trustees. Normally when you speak of directors, it is
the governing board of a stock corporation. They are generally referred to as board
of trustees in a non stock corporation. According to Sec 138 of the Code, the
governing board of a non stock corporation or other special corporations may be
designated in any other appropriate name. There is nothing to stop non stock
corporation to change their governing body. Board of governors Rotary Club.
Again, not less than 5, not more than 15. He must own at least 1 share of the capital
stock which share shall stand in his name in the books of corporation. Majority shall
be residents of the Phils. And such other qualifications as may be provided in the by
laws. According to sec. 47 of the Code, item 5, the by laws may provide for
additional qualifications and these qualifications to become a director of the
governing board. There is no citizenship requirement but only residency. Majority
must be residents of the Philippines. Again a domestic corporation created under
Philippine laws can have a governing board consisting solely of foreigners as long as
the majority requirement would be met. Unless the law otherwise requires. For
instance Sec 4 of the Art 14 of the Philippine Constitution. Subject to certain
exceptions. Management of educational institutions shall be vested solely to Filipino
citizens. Even if constitution allows foreigners a max of 40% of the shares of stock
of an educational institution, they cannot serve as members of the board because
directors are the corporate managers and the law, the constitution is specific;
management of educational institutions shall be vested to Filipino citizens. Of
course, he must own at least 1 share of the capital stocks which shall stand in his
name in the books. The question is, should he be the equitable or beneficial owner

of the shares to qualify as member of the board? No. It suffices that he has the
legal title Lee v. CA, what is material is the legal title to and not beneficial
ownership of the stock as appearing the books. At least one share in the books, no
matter as how he holds the share, in trust or otherwise, he can be a director. Which
is different in the old law which states that he must in his own right own at least 1
share of the capital stock of the corporation. Now, only legal title is required. This
legalizes the concept of nominees in the board of directors of subsidiary
companies. For instance PNB owns 100% of the PNB IFL group. How can there be
BOD in the PNB IFL if all the shares are owned by one single entity? They assign
shares to them in trust for PNB itself and they qualify to be directors. There are no
dummies in corporate business practice. They are called nominees. Katulad ng
PNOC-EDC was put up it was 100% owned by PNOC. They entrust to certain
persons, they are legal owner of the shares as long as they are listed in the books
as the owner of at least one share.
DISQUALIFICATIONS OF THE MEMBERS OF THE BOARD
27, Disqualifications of members of the board. It is conviction, conviction
CONVICTION! By final judgment of an offense punishable by imprisonment for a
period exceeding 6 years. Kaya if charged ka lang, qualified ka pa din or violation of
the Corporation Code of the Philippines 5 years prior to the date of his election. Of
course if he ceases to be a stockholder of the corporation under Sec. 23 of the
Code, he will also automatically cease to be a director. Again as may be provided for
in the by-laws. The by-laws may provide for additional qualifications and
disqualifications for membership in the board of directors. In the case of
Gokongwei v SMC the by laws of SMC was amended to disqualify a member from
being elected as a member of the board if he happens to own a substantial interest
in another competitor corporation and the by-laws was validly amended by the
corporation and the Sc ruled that Gokongwei in that instance is not qualified. We
also have the case of Government v El Hogar Filipino which requires for
additional qualifications for membership in the board. Ang nakalagay sa by-laws nila
eh a stockholder may qualify to be a member of the board if he owns at least 5
thousand shares of stock. Other than that, you do not have to have that amount of
shares of stock. But Sec. 47 provides that the by-laws may provide additional
qualifications and disqualifications in the board of directors.
CAPITAL STRUCTURE OF A CORPORATION
Art. 7 would be the capital structure of a corporation. In the case of a non-stock
corporation, the SEC would merely require statement as to the contributed capital
for its operational expenses and the names and nationalities who contributed to its
capital. In the case however of the stock corporation, Sec 14 item 8 requires every
stock corporation to provide in their AOI, the authorized capital stock, the number of
shares in which it is divided, the par value of shares, the number and amount of
shares subscribed and the paid up capital. Sec 13 provides that at least 5% of the

ACS must be subscribed and that at least of 25% of the total subscriptions must be
paid. The wording is 25% of the TOTAL subscription must be paid. Which means that
the law does not require that each of the subscribers maybe at least 25% of their
respective subscriptions. Which means anyone, or just some of them of the
stockholders may pay in the requisite minimum paid up capital. Lets say the ACS is
1 million, 25% is 250,000. 5 of them subscribed at 50,000 each, paid in capital
requirement is 62,500. At least 25% of the total subscription. So, kung 5
nagsubscribe ng tig 50,000, yung number 1 and 2 subscriber binayaran 100,000.
You have already complies. At least 25% of the TOTAL SUBSCRIPTIONS must be paid
in. There is nothing to prevent the corporation in subscribing the total capital and
paying the entire ACS, that is only the min. requirement: at least 25 % of the TOTAL
ACS has been Subscribed and that at least 25% of the TOTAL SUBSCRIPTIONS must
have been paid in. In no case therefore that the total capital be less than
5,000pesos. Even if the law says that in no case shall the paid up capital be less
than 5,000 pesos, there are certain business activities where the law requires a
higher paid up capital. Like financing company act of the Phil. Requiring that a
financing company located in Manila must be at least 10Million pesos. Other cities
and municipalities 5 million pesos. Tulad sa POEA, recruitment of workers abroad.
Ngayon 3 million na. For construction companies, paid up capital is 100,000, ni
isang poste di mo matayo. Under Construction Classification Board of the Phils. Only
triple AAA companies can undertake such projects. There is a case in June 2011,
which involves PLDT whether or not PLDT has violated our nationalization laws,
whether or not PLDT violated the requirement.
What is the meaning of capital?
Majority of the SC in Sec. 11 of Art. 12 of the Phil. Constitution, refers on the shares
of stock entitled to vote in the election of directors. If you are not entitled to vote,
hindi capital ung cinotribute mo. In that case, PLDT issued preferred non voting
shares which were held by foreigners and a minority stockholder questioned the
validity of this and questioning whether is it violative of nationalization laws. The
ruling of the court is specific, capital refers only to shares of stock entitled to vote
in the election of directors. Considering that common shares have voting rights,
normally they have the exclusive right to do so, they have voting rights which
translates to control. As opposed to preferred shares which usually has no voting
rights because according to Sec. 13 of the Code, only preferred and redeemable
share maybe denied the right to vote. That is why the court said that preferred
shares usually has no voting rights. The term capital under the constitution only
refers only to common shares, but if the preferred shares have the right to vote, in
the election of directors, then the term capital shall also include preferred shares in
the capital because the right to participate in the control and management of the
corporation is exercised through the right to vote in election of directors. The court
ruled that the term capital under the constitution, refers to shares that can vote in
the election of directors. Pero may dissenting opinion si Justice Velasco, the

corporation Code defines outstanding stocks as the total stocks issued by the
corporation it does not distinguish between common and preferred shares, which
means it includes all types of shares whether voting or non-voting. He cites the
ruling of the opinion of SEC , the SEC defines capital as both voting and non-voting
in determining the nationality of the corporation. Capital denotes the sum total of
the shares, subscribed and paid, or to be paid, irrespective of the nomenclature by
the corporation in the conduct of its operation. Hence, non-voting preferred shares
shall be considered in the computation of the 60-40 requirement of alien
involvement. If ever asked in the bar, follow the majority rule, unless if they will
ask you the opinion.

CLASSIFICATION OF SHARES
Sec. 6 empowers the stock corporations to provide for classification of shares or
series of shares which may grant the holder certain rights and privileges not
otherwise accorded to holders of other types of shares. Rights and privileges must
be clearly provided for in the AOI or in the contract of subscription, otherwise under
par.4 sec. 6, all type of shares, irrespective of their classification shall have the
same rights and privileges. Doctrine of equality of shares. Thats why we are
saying the preferred shares, if there is nothing in the AOI or contract of
subscriptions which would prevent them from voting, they have the right to vote.
Kaya if you want to grant certain rights and privileges to certain shareholders, you
have to indicate the rights and privileges. Unless otherwise provided in the AOI or
the contract of subscriptions, why should the corporation classify its shares?
First, to define and specify the rights and privileges of the stock
holders. The corporation can issue voting and non-voting shares or the preferred
and common shares. Siyempre if voting shares ka, you have the right to vote in all
the meetings of the stockholders. Kung non-voting ka, you do not have the right to
vote in instances provided for by law. Preferred shares may be granted the right to
receive the dividends first with specified amount or percentage of dividends
declared by the corporation before any stockholders may receive their share of the
surplus profits of the corporation.
Second is for the regulation or control of the issuance of the shares
of stocks for the protection of not only the existing stockholder but also
the purchasers of the shares. Title 12 of the Code Close Corporation the
corporation, corporation, all shares of stocks shall be to be held of record, by not
more than 20 specified persons. There is exclusivity of stock ownership in a close
corporation. You cannot be one of the stockholders if you are not one of the
specified persons in the AOI. Gusto kasi nila, maging exclusive ung enterprise. So
much so, the stockholders will be amply protected if provided for by the AOI.

Of course, it may also be as a management control devise. Mag-issue

ka ng voting and non-voting shares. Non voting di sila makaelect ng directors.
Issuance of Founders shares we note that founders shares under the code may be
granted the exclusive right to vote and voted upon in the election of the members
of the boards and other corporate officers which may be valid for a maximum period
of 5 years which shall be approved by the SEC. If that is the case, then for that
specified period of time, kung hindi ka founder share holder, you are not qualified to
vote and be elected as member of the board. You have control of the corporate
enterprise. Likewise, the other reason is to comply with the statutory requirements
particularly with nationalized or partly nationalized industries for instance
Development of Natural Resources. Min. ownership of Filipino. citizens is 60%. Let us
say there are 1 million shares. 600,000 class A shares to be owned and held
exclusively by Filipino citizens. The remaining 400,000 to be owned or held by
another person. You have guaranteed yourself that the nationalization laws will
never be violated. You have complied with the statutory requirements of the
Philippines. Dahil yung 60% na yan, Filipino lang ang pwedeng humawak, under the
no transfer clause of the AOI, it provides that no transfer of shares of stocks shall
be required to be allowed to be recorded in the books of incorporation if it is
violative of the naturalization laws. Kahit na itransfer mo yung shares na exclusive
for Filipinos, hindi irerecord ng corporation yan. Guaranteed ang compliance with
nationalization clause.
Of course it may also be better ensure return of investment. You
would be looking at the redeemable and preferred shares. The redeemable shares
are likened to a bond. Inissue yan ng corporation to return them either on demand
or on a specified date and with a specified rate or interest. The same holds true with
the preferred shares. Ang preferred shares would normally be granted the rights to
receive dividends on certain percentage or specified amount of dividends before
any other stockholder may receive their share. So merong specified return on their
investment.
VOTING AND NON-VOTING SHARES
We were saying awhile back that if a corporation would opt to provide for voting and
non voting shares. Sec. 6 provides that only preferred and redeemable shares may
be denied the right to vote. Unless specifically stated, they have the same rights
and privileges under the doctrine of equality of shares. Common shares, cannot be
denied the right to vote. It usually carries the right to vote and frequently the
exclusive right to do so. It must be observed that there could be more than 1 kind of
share, each share, irrespective of their classification shall be equal in all respects.
Non voting shares are not counted or included in determining compliance with the
voting requirements to pass a valid corporate act. But they are not absolutely
denied voting rights. In the last paragraph of Sec. 6, if you take a look at Sec. 6 it
provides that except as provided in the immediately preceding paragraph, the vote
necessary to approve a particular corporate act, as provided in the code, is deemed

to refer only to stocks with voting rights. So kung walang voting rights ung holder,
hindi siya kinocount to determine the voting requirement. May 1 million shares. 25%
are non voting shares. One of the matter is entering in management contract
majority ang requirement. Hindi 50% +1 of the entire shares but 50% +1 of the
750,000 shares of the voting shares. In determining the voting requirement.
However, there are instances when non-voting shares are entitled to vote under the
same provisions of Sec. 6 like amendment of AOI, adoption and amendment of the
by laws, increase and decrease in capital stock, sale or disposition of all or
substantially all of the assets of the corporation, merger or consolidation,
investment of corporate funds and dissolution. If these are to be taken up, then
even non-voting shares will be included in determining the voting requirement. Take
note, wala diyan yung voting of directors. That is why the issuance of voting and
non voting shares is a management control devise. Wala ring diyan yung entering in
management contracts, so kung hindi naenumerate diyan, non voting shares are
not included in voting requirements imposed by law to pass a valid corporate act.
Exclude the non-voting shares to end up at majority requirement. Hindi mo isasama
yung non-voting shares if it does not fall under those in Sec.6 of the Code. Only
preferred and redeemable shares may be denied the right to vote. In the same case,
of Gamboa v. Teves, common shares cannot be deprived of the right to vote in
any corporate meeting and even further any provision in the AOI restricting right of
common share holders is invalid. Any provision is INVALID. You cannot provide that,
under the law only preferred and redeemable shares may be deprived the right to
vote. But you can observe that common shares MAY be effectively denied the
right to vote in the election of corporate directors if founders shares are issued and
are granted exclusive right to vote and be voted upon under Sec. 7. You cannot
provide in AOI that they are denied the right to vote. Invalid provision.
TREASURY SHARES
The other types of shares treasury shares shares of stock that has been fully
paid up but subsequently reacquired by the issuing corporation either by purchase,
redemption, donation or by any other lawful means. Under Sec. 57 of the Code,
treasury shares, even if they remain the treasury, have no voting and dividend
rights. Of course these shares may subsequently be reissued by the corporation by
a price to be determined by the board of directors. If they are reissued they will
become outstanding stocks again. And titling the holder to exercise the rights of the
stockholder to vote and receive dividends. Treasury if nasa treasury ng corporation.
Kapag inissue ulit, outstanding shares na.
PAR VALUE AND NO PAR VALUE SHARES
STOCK WATERING AND CONSEQUENCES
The par and no par value shares. Par may stated value. The corporation can issue
shares in the certificate that they are no par value shares. The code allows the

corporation to issue no par value shares but there are restrictions and limitations on
the right of a corporation to issue no par value shares. Under Sec. 6 of the Code,
once they are issued, they are deemed fully paid and non assessable, the
consideration of the issuance of the no par value shares shall be not less than 5
pesos per share. The entire consideration constitutes capital hence not available for
dividend declaration. What does that mean? Lets say min. of no par value is 5
pesos, if lets say issue value increases to 10 pesos. Difference 5 pesos is capital not
profit, therefore dividends cannot be declared because dividends can only be
declared out of the unrestricted retained earnings hindi earnings ung 5 pesos ng
corporation. They cannot be issued as preferred shares. And they cannot be issued
by banks, insurance companies, trust companies, public utilities, buildings and loans
associations. Itong first statement, once issued they are deemed fully paid and non
assessable. Baliktarin natin 10 pesos no par value share noon, inissue 5 pesos, that
is stock watering. Stock watering are those shares that are issued fully paid up
when in fact they are not fully paid up. Ang basis ng termination ng watered stock is
the par value or issued value. According to Sec. 65 of the code, If there is stock
watering, the stockholder and the members of the board are solidarily liable for the
difference in the water in the stock. If it is a par value share 1 peso per share issued
at 80 centavos, the stockholder and those with the knowledge of the issuance are
solidarily liable. Paano kung no par value shares? The stockholder will not be
solidarily liable with the board of directors. Sabi nga ng Sec. 9, they are deemed
fully paid and not assessable, ung mga directors lang who consented or who had
knowledge will be solidarily liable. The stockholder will NOT BE LIABLE.
RESTRICTION IN TRANSFERES OF SHARES
The next article is the restrictions in transfers of shares. The code does not require
corporations to provide for restrictions on transfer of shares of stocks. There is
nothing in the law that restricts them to do so, like the right of first refusal.
Granting the existing stockholders the right in purchasing the shares of a selling
stockholder before they may sell the same to outsiders. If the corporation desires, it
must provided in the AOI and stock certificates issued by it to be binding against 3rd
persons. In the case of a close corporation, one of the requirements that close
corporation may exist, to be governed specially by title 12, that all of its shares of
any class shall be subjected to one or more specified restriction on transfer of
shares allowed by the code. If you do not provide for a restriction on transfer of
shares of Class C shares, yung C shares walang restriction, hindi na yun close
corporation.
You have the no transfer clause which shall be proper for our naturalization laws.
The ???
ORGANIZATION, COMMENCEMENT AND INOPERATION OF BUSINESS

After its incorporation or registration, Sec 22 requires every corporation registered

under its general provisions that it must organize and commence the transaction of
business within a period of 2 years from the date of incorporation. Its failure to do
so, will result to the automatic dissolution of the corporation. It ceases to exist as a
corporation. If it has commenced but subsequently becomes inoperative
continuously for at least a period of at least 5 years, the same is merely A GROUND
for suspension or revocation of the corporate franchise which means that there
should be proper notice and hearing before it may be suspended or revoked, that is
continuous inoperation for 5 years, failure to organize is automatic dissolution. Note
in Sec. 22 if the failure to organize, or commence the transaction or continuously
operate is due to causes beyond the control of the corporation as determined by the
SEC, automatic dissolution, suspension or revocation will not ensue. Of course, we
have seen how the de jure corporation is organized, from corporate name to
acknowledgement. There are other corporation that may be formed even if does not
contain all.
DE FACTO CORPORATION
The de facto corporation under Sec. 20. One that is so defectively created so as not
to be a de jure corporation. But nevertheless exist for all practical intents as a
corporate body by virtue of its bonafide attempt to incorporate under an existing
statutory authority coupled with corporate powers exercise in good faith under sec.
20, the due incorporation of any corporation, claiming in good faith to be a
corporation under the code and its rights to exercise corporate powers shall not be
inquired into collaterally and in any private suit in which private suit that such
corporation may be a party. Such inquiry may be made by the Sol Gen in a quo
warranto proceeding. While it may not be a de jure corporation due to an
irregularity in its organization, constitution or even some omission in statutory
requirement from the statute which it may have been a de jure corporation, it
nevertheless exist as a corporate body. Separate and distinct from the stockholders
and members composing IF ALL THE REQUISITES FOR ITS EXISTENCE AS A
CORPORATION ARE PRESENT:
1. There must be a law or an apparently validly statute in which it could have
been formed or organized as a de jure corporation
2. An attempt in good faith to form a corporation according to the requirements
of the law which should go far enough to a colorable compliance with the said
law
3. Use of corporate powers in good faith.
All these requisites must concur so as to consider it as a de facto corporation. If one
of them is missing, it does not exist as a corporation at all. And the rules against the
collateral attack on its existence will not also apply. Any person can question its
existence as a corporate body if that is the case. Like the case of Municipality of
Balabang v. Benito where an EO was issued contrary to the municipal code of the

Phils. Balabagan was created. The latter would have not been considered a de facto
corporation and its existence may be attacked by any person in interest. Citing the
Pelaez doctrine under the law, it was ruled that an unconstitutional law is not a law.
It confers no rights, it imposes no duties, it affords no protection and creates no
office. It shall be in legal contemplation as though it had never been passed at all. It
cannot be a de facto corporation because there is no law or an apparently valid
statute for it to be formed as a de facto corporation. In the case of Hall v. ___
between and among the supposed stockholders, a de facto corporation cannot exist
if the cert of registration has not been issued by the SEC. Because between and
among themselves aware of the fact of the non-registration and they cannot
therefore claim in good faith to be an act as a corporation. Absent of the requisites,
it cannot be considered a corporation and may be attacked collaterally by any
interested party. Sec. 20 will not apply.
RIGHTS AND OBLIGATIONS OF STOCKHOLDERS, BOD OF A DE FACTO
CORPORATION
Are the rights, obligations and responsibilities of the stockholders, board of directors
of a de facto corporation the same or similar to those of the de jure corporation?
-

Yes. They are subject to the same laws, rules and regulations for a de facto
corporation. The only importance between them is for the purpose of
determining the applicability of whether or not their existence as such
corporations may be questioned or attacked. That is the existence of the de
jure corporation cannot be attacked even by the state. While the de facto
corporation may be attacked by the state in a quo warranto proceeding but
only by the state of course. But only by the state of course. Parehas sila if
may solidary liability sa pag issue ng watered stock sa de jure corporation,
ganun din sa de facto corporation. The stockholders of the de facto
corporation can exercise their right to check the books of the corporation
similarly with the de jure corporation.

CORPORATION BY ESTOPPEL
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Sec. 21 is the corporation by estoppels. It says all persons who assume to act
as a corporation knowing it to be without authority to do so, will be liable as
general partners for all debts, liabilities and damages incurred or arising
therefrom. Provided that when the corporation is sued under transaction
entered into it or any tort claim against it cannot use the defense of its lack of
its corporate capacity. That is the consequence of corporation by estoppels.
21 is the consequence. It is not the definition. It is defined as neither a de
jure or de facto corporation by virtue of a serious defect in its organization as
a corporate body but nonetheless exist as a corporate body by virtue of their
agreement, admission or conduct. It may a3pply for or against the
corporation or a third party dealing with the particular corporation. The GR:

any person who has contracted or dealt with an association in such a way as
to recognized or effect or admit its legal existence as corporate body cannot
deny its juridical personality in an action arising therefrom. The case of Asia
Banking v. Standard Products if such be the case, he cannot allege lack of
personality on the part of the supposed corporation that it has not been
registered. Hindi naman registered edi no personality to sue. This doctrine
will not hold true however where fraud takes part in the transaction like the
case of Salvatierra v. garlitos? Where in that case, a plaintiff was charged
that she was unaware of the fact that the association had no juridical
personality the defendant gave no confirmation nor denial. In the
circumstances attendant to execution of the contract lead to the conclusion
that the plaintiff was really made to believe that such corporation was duly
formed and organized in accordance with law. She cannot be estopped in
denying that there is no corporation to speak of and prevent her from making
the associates personally liable as provided under Sec. 21. Likewise in the
case of International Express Travel and Tours v CA the application of
the doctrine of corporation by estoppel applies to a third party only where he
is trying to escape liability on a contract from which he has benefitted on the
irrelevant ground of defective incorporation. Kahit na alam mo walang
corporation, nakipagdeal ka, kung hindi mo naman tinatakbuhan ung
obligation mo, at ineenforce mo yung right mo, hindi ka in estoppel. To claim
that the associates are not personally liable. He will not be stopped from
claiming from the associates. As held in the case of Lozano v. Santos
corporation by estoppels is founded on principles of equity. It is designed to
prevent injustice and unfairness. It applies when persons assume to form a
corporation and exercise corporate functions and enter into contract with 3 rd
person. If there is no third person and the conflict on arise between those in
the corporation, there can be no corporation by estoppels. The liability of the
associates of the alleged corporation cannot be over looked, if the doctrine of
corporation by estoppels cannot be applied because the third party dealing
with it cannot in any manner deemed to have chosen to deal with it as an
association. The associates shall be liable as general partners. But who shall
be liable? All the associates? Or only the active ones? Kasi 22 is clear. The
better view seems to be therefore that only those who actively participated in
holding out the association as corporation shall be held liable as expressed
provision of sec. 21. All persons who assume to act as a corporation and the
word used is knowing it without authority to do so shall be liable as general
partners for all debts, liabilities arising therefrom. Now, considering this
express provision of sec 21, is the doctrine of limited shareholders
liability in the corporate form of business applicable to stockholders in a
corporation by estoppels? Because that is one of the advantages of corporate
form of business. There is shareholders limited liability in the corporate form
of business. NO. there is no such thing in a corporation by estoppels. Because
Sec. 21 is very clear. All persons who assume to act as a corporation and the

word used is knowing it without authority to do so shall be liable as

general partners . You all know that general partners may be liable ever
beyond his promised contributions. Even his personal properties not used in
the business maybe subject to attachment or foreclosure by the creditors.
Kaya there is no such thing as shareholders limited liability in the case of
corporation by estoppel because they are liable as general partners.
CORPORATE ENTITY THEORY
-

Corporate Entity Theory. The corporation exists separately and independently

from the stockholders members, directors, and are not affected by the rights
and liabilities of stockholders members, directors and vice versa. They exist
independently and separately but when the notion of corporate entity is used
to defeat public convenience, justify wrong, protect fraud, or defend crime.
The law will regard the corporation as mere association of persons. Or in case
of 2 or more corporations, they will merge them into 1, one would be
considered as a conduit, adjunct or instrumentality of the other.

PIERCING THE VEIL OF CORPORATE FICTION

- The corporate entity theory is only a GR cannot apply in cases when the SC
is justified in piercing the veil of corporate fiction but for the separate juridical
personality of the corporation to be disregarded, the wrongdoing must be
clearly and convincingly established fraud must be proven by clear and
convincing evidence amounting to more than preponderance. It cannot be
justified by speculation and can never be ???. The mere fact the corporation
can own alone the entire corporation, like PNB IFL entirely owned by the
PNB. There mere fact owns all shares of stocks of PNB IFL, they can justify
piercing the veil of corporate fiction. IN the case of Borromeo v CA and this
finds the justification as the instrumentality rule. Also enunciated in
Concept Builders v NLRC to the effect that when one corporation is
organized and controlled and its affairs are conducted so that it is in fact a
mere instrumentality or adjunct of the other, the fiction of corporate entity of
the instrumentality may be disregarded. The SC laid down 3 tests for the
applicability of piercing the veil of corporate fiction. In relation to these
instrumentality rule:
- 1. Control when you speak of control, it is not merely majority or complete
stock control. Hindi yung pag-aari niya ng shares of stocks but rather
domination not only of the finances but of policy and business practices in
respect to transaction attack so that the corporate entity as to this particular
act or transaction had at that time no separate mind, will or existence of its
own.
- 2. Such control must have been used to commit fraud or wrong doing to
perpetuate violation of the plaintiffs legal rights

3. Control and breach of duty must proximately cause the injury or unjust
cause complained of. Under the same ruling, the absence of any one of
the elements prevents piercing the veil of corporate fiction.
Yamamota v. Nishino Leather industries

AMENDMENT OF THE ARTICLES OF INCORPORATION

16- amendment of the AOI. Except as otherwise provided in the code, or a
special law, and for legitimate purposes any provision or matters stated in
the AOI may be amended by a majority vote of the members of the BOD
subject to the written assent of the stockholders, owning and representing at
least 2/3 of the OCS. Amendments shall take effect upon the approval of the
SEC or from the date of its filing with the said commission if not acted upon
by it within a period of 6 months from the date of filing. It retroacts to the
date of its filing. That will apply only in cases of ordinary or regular
amendments because under Sec 38. Increase or decrease capital stock will
only be valid upon the approval of the SEC. If the SEC does not approve the
increase or decrease, it will up to the applicant to check with the SEC.
-

23. Unless Otherwise provided for in the code. All corporate powers, all
business are conducted and all properties are controlled by the BOD. They
are the corporate managers and are the ones who can act for and behalf the
corporation. They must SIT AND ACT AS A BODY in a validly conducted
meeting to have a valid corporate act or transaction. Individual directors
cannot bind the corporation by their individual acts unless: there is a valid
delegation of authority, expressly conferred, where the person is clothed with
actual or apparent authority or when expressly or impliedly ratified. The
quorum requirement in the directors meeting is majority of the members of
the boards as fixed in the AOI. Ung nakalagay the quorum requirement for a
valid directors meeting is the majority of the members of the boards as fixed
in the AOI and every decision of at least a majority of the directors present at
a meeting at which there is a quorum would pass a valid corporate act. Thus
when the quorum requirement is the majority of the entire members, the
voting requirement is not majority of the entire members of the board but
majority vote of those present at which there is a quorum. Exception of this is
the election of corporate officers which requires the vote of the majority of
the entire members of the board or when the AOI or by laws require a greater
quorum or voting requirement. If there are 9 members of the board as fixed
in the AOI and 2 of them resigned or passed away, the vacancy created by
the resignation or death have not been filled up, there are 9 members, now
there are only 7 living members, what is the quorum requirement? It is still 5.
The code is specific. Majority of their number as fixed in the AOI. So, 9 sila, 5
nag-attend ng meeting. 3 bumoto na bumili ng generator. Is there a valid
corporate act? Yes. Quorum requirement majority requirement 5. Voting
requirement is majority of those present at which there is a quorum. Unless,

it involves the election of corporate officers which would require the vote of
the majority of the entire members of the board or when the AOI or by laws
require a greater quorum or voting requirement. We were saying that they
must generally sit and act as a body, the BOD to pass a valid corporate act,
are the directors required to be PHYSICALLY PRESENT to have a valid
meeting? NO! THE e-commerce law, allows the members of the BOD to
meet via teleconference or BDO conference. There is no authority to
stockholders meetings.