CORPORATION

GOVERNING LAW
- Batas Pambansa Blg. 68
*The BP did not explicitly declare the old corporation law (Art. 1459) as totally replaced,
but it seems to be the intention of the lawmakers.
CONCEPT
- Corporation as a business organization
- Of three forms of business enterprise, corporation is perhaps the most widely
accepted medium of investment of entrepreneurs.
Other forms of business undertakings:
- Joint accounts, governed Arts. 239-243 of the Code of Commerce
- Joint stock company, similar to partnership but whose shares or interest
therein are transferrable
- Joint tenancy, a co-ownership with a survivorship agreement in favor of the
remaining co-owners
- Business trust, where the beneficial interest is evidenced by transferrable
certificates
Theory of Concession
- juridical capacity is granted non-natural persons only by the grace of law.
Thus, these common law business arrangements would be devoid of any legal
personality within Philippine jurisdiction.
Corporate joint venture, partakes of the character of a joint account between
individuals, of a partnership and of a corporation, but is concentrated only to certain
identified or isolated transactions, and does not undergo the essential formalities and
elements required to vest it with corporate existence.
In a Supreme Court decision, joint venture can be treated like any contract,
innominate in nature, to be regulated and governed primarily by the stipulation of the
parties thereto, and suppletorily by the provisions on obligations and contracts, and
the rules governing the most analogous contract, which is partnership, and by the
customs of the place.
DEFINITION AND ATTRIBUTES
- 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, incident therefrom or incident to its existence.
Juridical Entity
- Has a legal personality of its own
- It may acquire and possess property
- Incur obligations
- Sue or be sued in its name
- Can claim protection of equality and due process
- Subject to Theory of Special Capacities
- Not entitled to moral damages from mental and moral anxieties, but may seek
damages for besmirched reputation or goodwill
Liability for torts and crimes
- Notwithstanding its ideal existence, corporations can be held liable for torts.

While a corporation cannot be arrested, imprisoned or executed, it can be

summoned, fined or ousted by quo warranto from exercising its powers
unlawfully.
- The present legal system recognizes the possible commission of crimes by
corporations for which its responsible officers might personally bear the
criminal liability (Sec. 144, Corporation Code).
Perpetual Succession
- This does not imply corporate immortality.
- It denotes the continuity of corporate life expressed in its charter, or its due
renewal, unaffected by any change of the corporators.
- Corporate term, shall exist for a period not exceeding fifty (50) years from the
date of incorporation, unless sooner dissolved or extended, which period is
extendible for another fifty (50) years in any single instance by amendment of
the articles of incorporation.
- No extension can be made earlier than five (5) years prior to the original or
subsequent expiry dates, unless for justifiable reasons as determined by the
SEC.
Extending or shortening corporate term:
- Written notice of the proposed action, and of the time and place of
meeting addressed to each stockholder/member
- Approval by MAJORITY of the members of the board, and ratified at
a meeting by at least 2/3 of the stockholders or members
- In case of extension, dissenting stockholder may exercise appraisal
rights
Corporate activities
*In general, corporations may do the following:
- Acquire and sell properties of all kinds
- Sue and be sued
- Enter into contracts
*A corporation may file a case, but the same must be duly authorized by the board of
directors. In the same token, a suit can only be compromised or settled with the approval
of the board.
*A stockholder has no SPECIFIC corporate property. What he merely has is an inchoate
right to a SHARE in the value of the properties upon dissolution.
*The corporation has a juridical personality separate and distinct from its stockholders.
But if this right is abused, then this protection is removed. This is commonly referred to
as PIERCING THE VEIL OF CORPRATE FICTION.
- When the veil is pierced, the owner/officer cannot avoid liability by saying that
it is the corporation and not him that is liable. He becomes personally
liable.
HOW DO YOU APPLY THIS DOCTRINE?
- The presumption is, the corporate veil is not being abused.
- The court must, sometimes, pierce the veil of corporate veil.
- The decision must be on a per transaction basis.
- Mere common ownership is not sufficient. It must be proved that the
corporate vehicle was used for purposes contrary to law, such as:
1. For a purpose other than what it was intended for under Corporation
Code
2. To evade a valid obligation

3. For tax evasion

4. To avoid attachment/ garnishment/ execution
5. To avoid obligations under the Labor Code
6. To avoid the prohibition against forum shopping
7. To avoid compliance against contract restriction on competition
8. To avoid compliance with SEC cease and desist order
*Any of the above grounds must be alleged and proven.
*The ground for piercing must be alleged at trial level.
*The individual stockholder must be impleaded in the case.
WHAT IS THE EFFECT IF THE VEIL IS PIERCED?
- If the corporate veil is pierced and there two corporations involved, then these
two corporations are treated as one corporation.
- If the corporation is merely being used by the stockholder as an alter ego, then
the stockholder and the corporation are solidarily liable.
- If the corporation is merely being used as an alter ego of several stockholders,
the corporation shall be considered as a mere association of individuals, and
the claimant can go against any of the individuals for the entire amount.
ORGANIZING A CORPORATION
*The registration and issuance of the Certificate of Registration signals the birth of the
entitys juridical personality.

Indispensable documents
- Articles of Incorporation
- Treasurers Affidavit
- General Information Sheet
- Secondary franchise
- By-laws
*The Articles of Incorporation, or any amendment thereof may be rejected or
disapproved by the SEC
- That it does not accord substantially with the form prescribed by the
Corporation Code.
- That the corporate purpose or purposes are patently unconstitutional,
illegal, immoral, or contrary to government rules or regulations;
- That the Treasurers Affidavit on the amount subscribed or paid is false.
- That the percentage of ownership of the capital stock is violative of the
Constitution or existing laws.
- That the requisite favorable endorsement of the appropriate government
agency is not obtained.

Effect of non-use of Charter

- If a corporation does not formally organize and commence transaction of its
business or the construction of its works within two (2) years from the date of
the incorporation, its corporate powers cease and the corporation shall be
deemed dissolved.

Effect of Continuous Inoperation

If a corporation has commenced the transaction of its business but

subsequently becomes continuously inoperative for a period of at least five (5)
years, the same shall be a ground for the suspension or revocation of its
corporate franchise or certificate of incorporation.

DIFFERENT CLASSES OF CORPORATION

Stock or non-stock
Sole or aggregate
Religious or lay
Charitable or business
Foreign or domestic
De jure or de facto
Close or open
Parent or subsidiary
True or quasi
Publicly-listed or privately-held
Government-owned or private sector-owned

CAPITAL STRUCTURE
Capital stock
- The amount fixed in the charter or articles of incorporation
Authorized capital stock
- The capital stock divided into shares with par values.
Stated capital
- The capital stock divided into no par value shares. These shares shall be
deemed fully paid and non-assessable, and the holders thereof shall not be
liable to the corporation or to its creditors in respect thereto.
*The shareholder, or the board of directors when authorized by the
Articles of Incorporation, shall fix the issue value of the shares but not to
change the value of share already issued. The Articles of Incorporation
itself may state the issue price of no par value shares. Shares without par
value may not be issued for a consideration less than P5.00 per share.
Capital
- The value of the actual property (assets) of a corporation. Its net worth (or
stockholders equity) is its assets less liabilities.
Shares of stock
The shares or units of the capital stock representing the proportionate interest in the 1)
management, 2) profits, and 3) assets of the corporation.
Prerequisites to incorporation
The Corporation Code requires that at least 25% of the authorized capital stock must be
subscribed and at least 25% of the total subscription must be paid in cash or property, but
in no case shall the paid-up capital be less than P5,000.00
Certain corporations, like insurance companies, may be required by special laws to have
a larger capital structure.
The minimum subscription is computed, under the prevailing view, on the amount, rather
than on the number of shares, of the capital stock, and the subscribers need not pay 25%

each of their subscriptions as long as the total payment paid to the corporation reaches up
to at least 25% of the total subscription.
The unpaid balance is due on the date or dates fixed in the contract of subscription
without the need of call, or in the absence of such fixed dates, upon call in payment by
the Board of Directors.
Non-resident aliens should pay in full unless the balance unpaid is assumed by a resident;
if paid in full by said non-resident aliens, the subscription by the locals should still reach
25% of their subscriptions.
In the case of capital stock divided into shares without par value, it would be enough that
25% of the entire number of aid shares is declared to be subscribed since said shares are
deemed fully paid and non-assessable.
In a non-stock corporation, the amount of its capital as well as the names, nationalities
and residencies of those contributed thereto and the amounts of their respective
contributions, shall be stated in the Articles of Incorporation.
Subscribed capital
The total amount of the capital that persons (subscribers or shareholders) have agreed to
take and pay for.
The Trust Find Doctrine considers this subscribed capital as a trust fund for the payment
of the debts of the corporation, to which the creditors may look for satisfaction. Until the
liquidation of the corporation, no part of the subscribed capital may be returned or
released to the stockholder (except in the redemption of redeemable shares) without
violating this principle.
Thus, dividends must never impair the subscribed capital; subscription commitments
cannot be condoned or remitted; nor can the corporation buy its own shares using the
subscribed capital as the consideration therefor.
Paid-up capital
The amount paid by stockholders on subscriptions or purchases from unissued shares of
the corporation.

WHAT ARE THE DIFFERENT CLASSIFICATIONS OF SHARES?

COMMON SHARES
Each share units shares equally pro rata on the profits. There are no
preferences or advantages.
PREFERRED SHARES
These enjoy certain privileges over that of common shares. The
preference may be as to assets upon dissolution or as to profits.

CUMULATIVE and NON-CUMULATIVE SHARES

Cumulative shares have pre-agreed percentage on dividends. If the
corporation did not earn for that particular year, the pre-agreed percentage on dividends will be
carried over to the next year.
A non-cumulative share is the opposite.
PAR and WITHOUT PAR SHARES
Share with par value are equities where its value of is pegged at a pre-set
price. It is no-par shares of no amount is indicated.

There are types of corporations that can only issue shares with par value,
namely: banks, trust companies, insurance companies, public utilities, and building and loan
associations.
There can be no preferred no-par shares.

VOTING and NON-VOTING SHARES

Voting shares are those with which voting rights are given. Non-voting
shares refer to those class of shares where the right to vote is expressly withheld by the Articles
of Incorporation.
Common shares cannot be deprived of voting rights. This is only
possible in the case of preferred or redeemable shares.
Nonetheless, even if the right to vote has been expressly withheld from a
class of shares, shareholders cannot be deprived of their right to vote on the following matters:
Amendment of the Articles of Incorporation
Adoption and amendment of the by-laws
Sale of all or substantially all of the assets
Incurring or increase of bonded indebtedness
Increase or decrease of the ACS
Merger of consolidation
Investment of corporate funds in another corporation
Dissolution
What, then, can be withdrawn?
Election of directors
Removal of directors
Stock dividends
Management contracts
REDEEMABLE SHARES
These are shares which should be bought back/ redeemed by the
corporation either at the corporations or stockholders option or at a fixed date the moment the
stipulated conditions are met even if the there are not enough unrestricted retained earnings,
provided that the corporation will remain solvent after the redemption.
Generally, redeemable shares, unlike treasury shares, are considered
retired upon redemption and may no longer be re-issued by the corporation.
TREASURY SHARES
These are shares which have already been issued and paid for, but later
on re-acquired by the corporation through purchase, donation or any other means.
These shares can be re-sold at a price to be set by the board. If the
corporation decides to sell its treasury shares, existing stockholders must be given the
opportunity to exercise their pre-emptive rights.
A corporation can retire treasury shares provided it amends its Articles of
Incorporation to reduce the ACS in the amount equivalent to the amount of treasury shares to be
retired.
FOUNDERS SHARES
Shares held by the founders of the corporation may, as provided for in
the Articles of Incorporation, enjoy such benefits and special rights over the ordinary
stockholders, such as the exclusive right to vote directors.
SHARES IN ESCROW

These are shares held by a third person (usually a bank) and transferred
upon the occurrence of an agreed event.
WHAT IS BY-LAWS?
By-laws are the internal rules of a corporation adopted by the
stockholders or incorporators. It governs how the corporation should be run.
WHEN SHOULD THE BY-LAWS BE FILED?
The By-laws must be filed with the SEC within one month from the
approval by the SEC of the Articles of Incorporation.
If no by-laws are filed with the SEC within the one month period, the
SEC may administratively revoke the Certificate of Registration of the corporation on the ground
of non-operation
HOW ARE BY-LAWS APPROVED?
The By-laws must be approved by stockholders representing majority of
OCS.
Prior endorsement, however is necessary from the concerned government
agency if the corporation is a:

Bank
Insurance company
School
Public utility
Other special corporations governed by special laws

HOW ARE BY-LAWS AMENDED?

By-laws can be amended directly by the stockholders and the board, or
by the board only through a delegated authority from the stockholders.
DIRECT AMENDMENT
Majority of the board
Stockholders representing majority OCS
DELEGATED AMENDMENT
Delegation by the stockholders representing 2/3 OCS
Majority of the board

WHAT ARE THE CONTENTS OF BYLAWS?

By-laws must contain provisions on the following:
Stockholders meeting (regular and special)
Time and date
Manner of calling
Manner of voting
Required quorum
Proxy forms
Annual election of directors
Directors meeting (regular and special)
Time and date
Manner of calling
Manner of voting

 No proxies allowed
Election of officers
Directors and officers
Qualifications
Duties
Compensation
Manner of issuance of stock certificates
Penalties for violation of the by-laws
Other matters on governance that the incorporators may wish to include
The following matters must be contained in the Articles of Incorporation,
not merely in the by-laws:
Classification of shares
Preferences of shares
Founders shares
Redeemable shares
Corporate purpose
Corporate term
Capitalization
Corporate name
Denial of pre-emptive rights

WHEN AND WHERE MAY DIRECTORS MEETING BE HELD?

The regular meetings of the board of directors shall be monthly, unless
the by-laws provides otherwise. Special meetings may be held at anytime upon the call of the
president or as provided for by the by-laws.
The meetings may be held anywhere, even outside of the Philippines,
unless the by-laws provides otherwise.

WHAT ARE SOME OF IMPORTANT MATTERS TO REMEMBER IN A

DIRECTORS MEETING?
Written notices of meetings must be sent to the directors at least one day prior to the date
of the meeting, unless the by-laws provides for a longer notice period. Notices may be
waived by the director, expressly or impliedly.
A director must attend personally. He cannot send a proxy.
Ordinarily, to pass a resolution, the vote required is majority of the directors present,
there being quorum. The only exception to this is in the election of officers, when the
required vote is majority of ALL the directors.
The President presides over the board meeting, unless the by-laws provides otherwise. In
most instances, the Chairman of the Board is authorized to preside.

WHEN AND WHERE MAY STOCKHOLDERS MEETING BE HELD?

(Stockholders meeting may either be regular or special.)
With respect to regular meeting, stockholders must meet annually on the
date fixed under the by-laws; if no date is specified in the by-laws, then on any day of April, as
may be decided by the Board. Two-week prior notice must be given to the stockholders unless a
different period is specified in the by-laws.

Special stockholders meeting may be held as often as provided under the

by-laws; or as often as necessary. One-week written notice must be given to each stockholder
unless a different period is specified in the by-laws.
Whether it is a regular or special meeting, it should be held, in the
principal office indicated in the by-laws. If it is not possible, then it should be held at least in the
city or municipality where the principal office is located.
If the place indicated as principal office is simply Metro Manila, then
meeting can be held anywhere in Metro Manila.

WHAT MUST BE INDICATED IN THE NOTICE AND AGENDA?

The notice to the stockholders must be in writing, sent to the
stockholders address on record, within the period required by law or the by-laws. The notice
must contain the agenda, or what matters will be taken up in the meeting.
The following matters must be stated in the agenda if the same will be
discussed during the meeting:
Adjournment due to lack of quorum
Removal of a director
Filing up of a board vacancy
Ratification of a directors self-dealing action
Extending (or shortening) the corporate term
Amendment to increase (or decrease) the ACS
Amendment to create (or increase or decrease) bonded indebtedness
Sale of all (or substantially all) of the corporate assets
Investment in another corporation
Investment in another line of business
Declaration of stock dividends
Entering into a management contract
Merger or consolidation
To set the issue price for a no-par share
Amendment of by-laws
Amendment of the articles of incorporation to convert the corporation into a close
corporation
Voluntary dissolution

WHAT ARE THE CONSEQUENCES OF AN IMPROPERLY CALLED MEETING?

If the stockholders meeting is improperly called, as when there no
notices, or notices were sent only to one faction of stockholders, then the entire proceedings is
void, and all the resolutions passed during the meeting are likewise null and void.
If it is a special stockholders meeting, the notice must specify what
corporate act is going to be discussed. If not, then the notice is incomplete and the resolution is
invalid. The meeting itself would be valid insofar as the other resolutions are concerned.
NEXT TOPICS
Corporate structure
Doctrine of limited liability
Doctrine of immunity
Corporators
Directors, Trustees and Officers

Election
Powers and liabilities
Removal
Filling of vacancies
Capital structure
Increasing and decreasing capital stocks
Issue and transfer of stocks
Pre-emptive right
Certificate of stock
Delinquent stocks
Call