CORPORATIONS

are not the corporation.

The code is known as the corporation code of

the Philippines.
Its scope is:

Consequences:

a. It provides for the

incorporation, organization and regulation or
private corporations, both stock and nonstock, including educational and
religious corporations;
b. It defines their powers and provides for
their dissolution;
c. If fixed the duties and liabilities of director
or trustees and other officers thereof;
d. It declares the rights and liabilities of
stockholders or members;
e. It prescribes the conditions under which
corporations including foreign corporations
may transact business;
f. It provides penalties for violations of the
Code and
g. It repeals all laws and parts of laws in
conflict and inconsistent with the Code

a. Corporation is not liable for the debts of

stockholders and vice versa. Rule
is stockholder can lose only up to
the extent of their investment.
b. Corporations can own property separate
from the stockholders
c. Contract validity entered into on behalf or
in the name of the corporation creates rights
and liabilities only for the corporation;
d. A corporation cannot bring a suit
on behalf of a stockholder. The opposite
though is not always the case such as in
derivative suits
e. The corporation is not changed by the
change in identities of its stockholders.
The Doctrine of Piercing the Corporate Veil

Corporation code - General Provisions

A corporation is an artificial being created
by operation of law, having the right of
succession and the powers, attributes and
properties expressly authorized by law or
incident to its existence.
Attributes:
a. It is an artificial being;
b. It is created by operation of law;
c. It has the right of succession, and
d. It has only the powers, attributes and
properties expressly authorized by law or
incident to its existence

Being a mere creature of the law, a

corporation may be allowed to exist solely
for lawful purposes but where the fiction or
corporation entity is being used as a cloak or
cover for fraud of illegality, this fiction will be
disregarded and the individuals composing it
will be treated as identical. The corporate
veil can be pierced if it a) defeats public
convenience, b) justifies a wrong, protects a
fraud or defends a crime or c) it is a mere
alter ego.

The corporation is an artificial being

Note that the creditors of financially troubled

corporations benefit when they succeed in
piercing the corporate veil for they can go
after the assets of individual stockholders.

A corporation is a legal or juridical person

with a personality separate and apart from
its individual members or stockholders who,
as natural persons, are merged in the
corporate body. It is not, in fact, and in
reality, a person but the law treats it as
though it is a person. The stockholders or
members compose the corporation but they

A. A corporation is a Mere Alter Ego if

The parent company owns all or most of the
capital stock
They have common directors or officers
The parent finances the subsidiary
The Parent subscribes to all the capital stock
or incorporates the same
The subsidiary has grossly inadequate capital

6.

7.

8.
9.

10.

The subsidiary has substantially no business

except with the parent or no assets except
those conveyed to or by the parent
The subsidiary is described by the parent as
a department or division or its business
or financial responsibilities are described to
be that of the parent's
The parent uses the property of the
subsidiary
The directors and executives of the
subsidiary do not act independently in the
interest of the subsidiary but take orders
from the parent
The formal legal requirements of the
subsidiary are not observed.

provisions of the Code insofar as they are

practicable.
Note that the enactment of a special act
creating a private corporation is subject to
the constitutional limitation that such
corporation shall be owned or controlled by
the government of and subdivision or
instrumentally thereof.
Classes of persons composing a corporation:
A. Corporations or those who compose the
corporation, whether stockholders or
members. Includes incorporators,
stockholders or members.

Corporations as Created by operation of law

This means that corporations cannot come
into existence by mere agreement of
the parties as in the case of business
partnerships.
Right of Succession of the Corporation
A corporation has a capacity
of continuous existence irrespective of the
death, withdrawal, insolvency, or incapacity
of the individual members or stockholders
and regardless of the transfer of
their interest or shares of stock

B. Incorporators or those corporators

mentioned in the articles of incorporation
as originally forming and composing the
corporation. They are there to incorporate
the corporation and the enable it to became
a body politically and corporate under the
law.
C. Stockholders or owners of shares of stock
in a stock corporation. They may be natural
or juridical persons but only natural persons
can be incorporators.
D. Members or corporators of the
corporation, which has no capital stock

Classes of corporation:
Stock corporations: the ordinary business
corporation created and operated for the
purpose of making a profit which may be
distributed in the form of dividends
to stockholders on the basis of their invested
capital.
Non-stock corporations do not issue stock
and are created not for profit but for the
public good welfare.
Public versus Private Corporations
Corporations created by special laws: These
shall be governed primarily by the provisions
of the special law or charted creating them
or applicable to them, supplemented by the

Share may be divided and classified, any of

which class may have such
rights, privileges or restrictions as may be
stated in the articles of incorporation.
Stocks or shares of stock are one of the units
into which the capital stock is divided. It
represents the interest or right that the
owner has in the management, in the share
in earnings (dividends) or upon dissolution
and winding up.
Shares represent a distinct undivided share
or interest in the common property of the
corporation. They do not constitute an
indebtedness of the corporation to the
stockholder and are, therefore, not credits.

Classes of Note:
a. Par vs. no par
b. Voting vs. non voting
c. Common
d. Preferred as to assets in case of liquidation
e. Preferred as to dividends, whether
cumulative, non cumulative, participating or
non participating
f. Convertible (from one class to another)
g. Founders
h. Redeemable
i. Treasury

be stated in the articles of incorporation but

they must not be violative of this code. (ex.
violation of the Trust fund doctrine)

No share may be deprived of voting rights

except those classified as Preferred and
Redeemable shares unless otherwise
provided under the code. There must be at
least a class of shares that have complete
voting rights.

Cumulative Preferred Shares entitles the

holder not only to the payment of current
dividends but also to dividends in arrears.

Can common shares be given restricted

voting rights? If approved by the SEC in
Articles of Incorporation, even common
shares can be given restricted voting rights.
In relation to preferred shares there are four
legal limitations:
a. Preferred shares deprived of voting rights
shall still be entitled to vote
on matters enumerated in section 6 ( par.6)
1.
2.
3.

4.
5.
6.
7.

8.

Amendment of the Articles of Incorporation

Adoption and amendment of the By-laws
Sales, lease, exchange, mortgage, pledge or
other disposition of all or substantially all of
the corporate property
Incurring, creating or increasing bonded
indebtedness
Increase or decrease of capital stock
Merger or consolidation of the corporation
with another corporation's
Investment of corporate funds in another
corporation or business in accordance with
this code
Dissolution of the corporation
b. Preferred share of stock issued by a
corporation may be given preferences in the
distribution of the corporate assets or
dividends or such other preferences as may

c. Preferred shares may be issued only with a

stated par value
d. The board can determine the terms
and conditions of the preferred shares if so
allowed in the articles, and such will be
effective only upon filing or a certificate with
the SEC.

S owns 10 preferred shares with par value of

P100 with guaranteed 5% cumulative
dividends. Dividends declared only after 4
years. In this case, S will get P250.00 for his
10 shares as follows:
P 50.00 for each year for the first 4 years
(dividends in arrears) and P 50.00 for the
current year. These have to be paid to S
before dividends is paid to common
shareholders.
Non-cumulative preferred shares entitled to
the holder thereof to the payment of current
dividends only in preference to the common
shareholders. If dividends are not declared in
a given year, the right to the dividends for
that particular year is extinguished.
In the previous example, S would only get
the P 50.00 for the current year.
Participating preferred shares gives the
holder not only the rights to receive the
stipulated dividends at the preferred rate but
also to participate with the common
shareholders in the remaining profits pro rata
after the common shareholders have been
paid the amount of the stipulated dividend
as the preferred rate/
Non-participating preferred shares entitle the
holder to receive the stipulated preferred
dividends only. the balance is given entirely
to the common shareholders.
X corp has 1000 shares with P 100,000 with
par of P100. 300 are preferred at a rate of

10% and 700 are common.

P 5100 was declared as dividends. The
preferred shareholders get P 3000, while the
balance is distributed to the common at P
3.00 each (P 2,100/700)

majority of whom are residents of the

Philippines, may form a private corporation
for any lawful purpose or purposes. Each of
the incorporators of a stock corporation must
own or be a subscriber to at least one (1)
share of the capital stock of the corporation.

If P 11,400 was declared and the preferred

shareholders are participating then the
preferred shareholders get P 3000. The
common get P 7000. Of the remaining P
1,400 the same is divided amongst the
shareholders equally or P 1.40 additional per
share.

Three
1.
2.
3.

Cumulative participating preferred share is a

combination of cumulative and participating.
The holder is entitled to dividends in arrears
and participation with the common
shareholders in the remaining profits.

a. Drafting and execution of the articles of

incorporation. The treasurer must execute a
treasurer's affidavit
b. Filing with the SEC of the articles, the
treasurers affidavit, endorsement from the
proper government agency (if covered by
special law) and such other documents as
required by the SEC
c. Payment upon registration and other fees
d. Upon verification and the examination, the
SEC issues the Certificate of Registration.
Only at this time will the corporation be
deemed to be a juridical person.

Redeemable share are shares which a

redeemable at a fixed date or at the option
of either the issuing corporation or the
stockholder both at a certain redemption
price. They must be redeemed regardless of
the existence of unrestricted retained
earnings provided that the corporation has
after such redemption sufficient assets to
cover debts and liabilities inclusive of capital
stock. These may be denied voting rights.
Treasury shares are shares, which have been
issued and fully paid for, but subsequently
reacquired by the issuing corporation by
purchase, redemption, and donation or
through some other lawful means. Such
shares may again be disposed of for a
reasonable price fixed by the board. Only
surplus earning can be used to purchase
treasury shares.

steps in formation of a corporation:

Promotion (not a legal requirement)
Incorporation
Formal organization and
commencement of business operation

Steps in incorporation:

Stock corporations are not required not have

a minimum authorized capital stock unless
otherwise provided by law. But in no case
shall be paid up capital be less than P 5,000
In terms of composition, depending on the
industry where the corporation is classified.
The shareholding may be fully or partially
restricted to Filipinos.
100% industries: Mass media, retail trade
(unless exempted under the retail trade law)

They do not have the same status as

outstanding shares and they are not part of
outstanding capital stock.

70:30 industries: advertising, pawnshops

They cannot be distributed as cash or stock

dividends but may be distributed as property
dividends. They cannot vote and are not
entitled to dividends themselves.

exploration, development and utilization of

natural resources
public service corporations
educational corporations
banking corporations
coast wide shipping
business engaged in domestic trade under
the FIA unless paid in capital more than
$200,000

Corporation code - Incorporation and

organization
Any number of natural persons not less than
5 but not more than 15, all of legal age and a

60:40 industries

Refer to Omnibus Investment Code and the

Priority List

Requisites of a De facto Corporation:

In the case of Gamboa versus Teves (2011)

the SC ruled in relation to foreign ownership
that, "Considering that common shares have
voting rights which translate to control, as
opposed to preferred shares which usually
have no voting rights, the term "capital" in
section 11, Article XII of the Constitution
refers only to common shares. However, if
the preferred shares also have the right to
vote in the election of directors, then the
term "capital" shall include such preferred
shares because the right to participate in the
control or management of the corporation is
exercised through the right to vote in the
election of directors. In short, the term
"capital" in Section 11, Article XII of the
Constitution refers only to shares of stock
that can vote in the election of directors."

a. A valid law under which a corporation

might be incorporated
b. A bond fide attempt to organic under the
law
c. Actual used or exercise in good faith or
corporate powers conferred upon it by law
Stockholders of de facto corporations enjoy
exemption from personal of liability for
corporate obligations, as do stockholders of
de jury corporations.
A De facto corporation, as opposed to a de
jure corporation, is formed due to the
following:
a. The name being closely similar to a preexisting corporation
b. The majority of the incorporators are not
residents
c. The acknowledgements is insufficient or
defective

In setting up the corporation, there must be:

a. Compliance with the 25% - 25% rule. At
least 25% of the authorized capital stock
must be subscribed. At least 25% of the
subscribed must be paid up. In no case shall
the paid up be less than 25%

Corporation by Estoppel:
Persons who participated in holding out a
pretended corporation as a validly organised
corporation are generally estopped of
precluded from denying the existence of
such corporation against creditors to prevent
them from escaping liability for corporate
debts or liabilities.

b. No confusion as to the name. Not

confusingly similar to existing corporations or
names protected under the trademark
c. a legal purpose
d. Compliance with Nationality Requirements

One who assumes an obligation to and

ostensible corporation as such, cannot resist
performance thereof on the ground that
there was in fact no corporation

De Jure Corporation: One created in strict or

substantial compliance with the mandatory
statutory requirements f or the incorporation
and whose right to exist as a corporation
cannot be successfully questioned by any
party.
Da Facto Corporation: One which actually
exists for all practical purposes but which
has no legal right to corporate existence
because it did not comply with all the
requirements necessary to be a de jury
corporation but has complied sufficiently to
be accorded status as against their parties
but not against the state. The state can
question the existence of a corporation
through the Solicitor General filing a quo
warrant proceeding.

Corporations have certain inherent powers as

stated in Section 36:

10.
11.

To sure and be sued in its corporate name

Succession by its corporate name
To adopt or use a corporate seal
To amend its articles of incorporation
to adopt, amend or repeal by-laws not
contrary to law, morals or public policy
To issue or sell stocks to subscribers and to
sell treasury stocks;
To exercise acts of ownership over its assets
To enter in mergers or consolidations. Merger
is when the companies unite where one
survives. In consolidation two companies

12.
13.
14.

unite and form a new corporation.

To make reasonable donations except to any
political party or candidate
To establish pension plans, retirement, and
other plans for the benefit of directors,
trustees, officers and employees and
To exercise such other powers as may be
essential or necessary to carry out its
purpose or purposes.
POWERS OF A CORPORATION:
Classification of powers:

1.
2.

3.

Those essentially granted or authorized by

law
Those that are necessary to the exercise of
the express or incidental powers (acts in the
usual course of business, to protect debts
owed to the corporation, embarking on a
different business, acts in part or wholly to
protect or aid employees, and acts to
increase business)
Those inherent to its existence (those under
Section 36)
Power to extend or shorten corporate term:
a. requires majority of the board and 2/3 of
the stockholders to approve.
b. Corporate dissolution can be effected this
way
c. subject to appraisal rights
maximum corporate term: 50 years
Power to increase or decrease capital stock
and incur, create of increase bonded
indebtedness:
a. Requires majority of the board and 2/3 of
the stockholders to approve
b. There must be compliance with the 25%
25% rule
c. No decrease of capital stock can be
affected if it will prejudice the rights of
corporate creditors. It is disallowed if it will
relieve existing subscribers from their
obligation.
d. Increase or decrease of capital stock is
subject to SEC approval; Bonds shall be
registered with the SEC prior to issuance.
Shares cannot be issued in excess of the
capital stock.
Power to deny pre-emptive rights:

Pre-emptive right: Whenever the corporation

issues or disposes of new shares of stock of
any class, the new issue must first be offered
to the stockholders in proportion to their
existing shareholdings. This is to safeguard
the right of a stockholder to preserve his
proportionate influence and interest in the
corporation and the relative value of his
holdings. This is protection against
impairment of dilution. Dilution would have
adverse effects on the right to vote, the right
to dividends and the right to net corporate
assets after liquidation.
Pre-emptive rights do not apply to the
following:
a. shares to be issued in compliance with
laws requiring stock offering or minimum
stock ownership by the public.
b. Shares to be issued in good faith with the
approval of the stockholders representing 2/3
of the outstanding capital stock in exchange
for property needed for corporate purposes;
c. Shares to be issued in good faith with the
approval of 2/3 of the stockholders in
payment of previously contracted debt.
If a stockholder does not avail of his preemptive rights, the rights he did not pick up
may be sold to third parties and need not be
subjected to further pre-emptive rights in
favor of the ones who availed of their
respective shares.
Pre-emptive rights to extend even to
treasury shares.
If shares offered for subscription were not
taken up and then later they were offered
there is not right to pre-emption.
Difference of Pre-emptive rights from Rights
of First Refusal:
a. Pre-emptive rights deal with newly issued
shares, while the right of first refusal applies
to shares to be sold by other shareholders
from their existing shareholdings;
b. Pre-emptive rights are inherent to
shareholders while the other is not. For the
right of First Refusal to exist it must be
explicitly stated in the articles of
incorporation.
c. Pre-emptive rights aims to prevent dilution

and maintain percentage ownership in the

corporation. Right of first refusal aims to
maintain ownership of shares amongst the
existing shareholders and keep off third
parties.

assets and hence, an impairment of capital

available for the benefit and protection of
creditors who are preferred over the
stockholders in the distribution of corporate
assets.

Subject to laws on illegal combinations and

monopolies, a corporation may, by majority
of the board and 2/3 of the stockholders, sell,
lease, exchange mortgage pledge or
otherwise dispose of all substantially all of its
property and assets including goodwill. This
is subject to appraisal rights.

Power to invest corporate funds in another

corporation or business or of any other
purpose:

A sale involves all of substantially all of the

assets if thereby the corporation would be
rendered incapable of continuing the
business or accomplishing the purpose for
which it was incorporated. this does not
apply though if such actions are done in the
ordinary course of business or it the
proceeds will be appropriated for the conduct
of its remaining businesses.

a. Requires majority of the board and 2/3 of

the stockholders.
b. Investment may be in any other
corporation, business or for any purpose
other than its primary purpose
c. Notice and meeting requirements must be
met
d. This is the subject to appraisal rights
e. Where the investment is reasonably
necessary to accomplish its primary purpose
as stated in the articles the approval of the
stockholders or members shall not be
necessary.

Power to acquire own shares:

Power to declare dividends:

a. This must be a legitimate corporate

purpose and done on good faith and
conditions of corporate affairs warrant it
c. The corporation must have sufficient
unrestricted retained earning and capital is
not impaired.
c. Shares purchased shall be booked as
treasury shares.

Dividends: that part or portion of profits or a

corporation set aside declared and ordered
by the directors to be paid ratably to the
stockholders on demand or at a fixed time.

Valid purposes:
a. Eliminate fractional shares;
b. collect of compromised a debt from unpaid
subscriptions and to purchase delinquent
shares
c. Pay dissenting or withdrawing
stockholders.
Trust Fund Doctrine: The assets of the
corporation as represented by its capital
stock are "trust funds" to be maintained
unimpaired and to be used to pay corporate
creditors on the sense that there can be no
distribution of such assets among
stockholders without provision being first
made for the payment of corporate debts
and that any such disposition of it is a fraud
on the creditors of the corporation and
therefrom void. The purchase amounts to
repayment to the stockholder of his
proportionate share from the corporate

Limitations on declaration of dividends:

a. There mist be unrestricted retained
earnings
b. Cash dividends need only board approval
but stock dividends news approval of 2/3 of
the stockholders
c. Property dividends needs SEC approval
Unrestricted Retained earnings:
a. Retained Earning = Assets - (liabilities and
capital)
b. Unrestricted means they have not been
reserved or set aside by the board of
directors for some corporate purpose nor are
required by law to be earmarked for some
other purpose specified by law.
There is no obligation on the part of the
board to distribute all the retained earnings
as dividends. However, stock corporations
cannot retain surplus profits in excess of
100% of their paid-in capital except:
a. When justified by definite corporation

expansion projects or programs approved by

the board.
b. When the corporation is prohibited under
any loan agreement with any financial
institution or creditor, whether local or
foreign from declaring dividends without
its/his consent, and such consent has not yet
been secured; or
c. When it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the corporation,
such as when there is a need for special
reserve for probable contingencies.
If stocks are delinquent, cash dividends shall
be applied to repayment of the delinquency.
If stock dividends are declared, delinquent
stockholders do not get their shares until
they pay off their delinquency.
Basis for share in dividends is total
subscription not total paid up.
Power to enter into management contracts:
a. Must be approved by majority of both
board and stockholders
b. If there are significant (more than 1/3)
inter stockholders or inter directors (more
than majority) approval needed is 2/3 of the
stockholders
c. Management contracts cannot exceed 5
years
d. Under a management contract, a
corporation undertakes to manage or
operate all or substantially all of the business

of another corporation.
Ultra Vires Acts:
No corporation shall possess or exercise any
corporate powers except those conferred by
this code or by its articles of incorporation
and except as are necessary or incidental to
the exercise of the powers so conferred.
Ultra Vires acts are not necessarily illegal
acts. If a contract is illegal it cannot be
ratified. If the contract is not illegal but
beyond the powers of a corporation the same
is merely voidable.
Effects of Ultra Vires acts, which are not
illegal:
a. If still executory on both sides then it
cannot be enforced.
b. If fully performed on both sides, neither
party can lawfully set it aside or to recover
what has been given.
c. When performed only on one side,
recovery is permitted in most courts.
When a contract is not on its face necessarily
beyond the scope of the power of the
corporation by which it is made, it will, in the
absence of proof to the contrary be
presumed to be valid. An act is presumed
valid unless clearly shown to be otherwise.
END