Vous êtes sur la page 1sur 12


(Ng, A 2017)

I. Introduction

Section 2. Corporation Defined. 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.
- An artificial being with a personality separate and distinct from its members or
- The State must give its consent by special law (charter) or general enabling act
(primary franchise), See Constitutional prohibition (XII, 16): only GOCCs may be
created by special law in the interest of the common good and subject to the test
of economic viability; (XII, 11): public utility 60:40; (XVI, 11(1)): mass media
wholly owned by Filipinos. In any case, where alien ownership is more than 40%,
clearance must be acquired from the Board of Investments
- Continued existence not affected by change in members or stockholders or transfer
of shares to 3rd person
- A corporation, as a creature of law, can exercise only such powers as the law may
choose to grant it VS rights of natural persons: limitation is only insofar as it
violates the rights of another

- Incorporators
o Natural persons
E: cooperatives and corporations primarily organized to hold equities
in rural banks may be incorporators of rural banks (RA 720)
o Not less than 5 but not more than 15
o Majority are residents of the Philippines
o Must own or subscribe to at least 1 share of the capital stock of the
o Special restrictions stock ownership of closely knit groups banking
institutions (persons related to each other within the 3 rd degree of
consanguinity or affinity must not exceed 20%); close corporations expressly
allowed by the Code
- Subscribers source of capital contributions
- Directors and trustees (Sections 6, 23, 36)
- Treasurer-in-trust
Consideration in exchange for shares are proprietary rights granted to the
corporation transfer and convey use, beneficial ownership, pure ownership

ANALYSIS: 1) Who among the parties are involved? 2) What are their rights and


1. Parties (subscribers, incorporators, board, treasurer-in-trust)
2. Capital (stock: 25% of 25% initial subscription of total subscriptions paid up; non-
stock: P1M)
3. Constitutive Documents articles, by-laws (Secs. 14, 47, 36, 23)
4. Consent to Incorporate / Compliance with Code and related statutes (SEC +
regulatory agencies)
- Indivisible requirement, as a corporation is created by consent AND by law
- Existence upon issuance of certificate of incorporation (Sec. 19)
1. The controversy must relate to any of the ff. relationships [Relationship Test
Union Glass v. SEC (1983)]:
a. Between the corporation, partnership, association AND the public
b. Between the corporation, partnership, association AND its stockholders,
partners, members, or officers
c. Between the corporation, partnership, association AND the state insofar as its
franchise, permit or license to operate is concerned
d. AMONG the stockholders, partners, or associates themselves
2. [Controversy Test]
a. A dispute must be rooted in the existence of an intra-corporate relationship
b. The dispute must refer to the enforcement of the parties correlative rights and
obligations, as defined by the Corporation Code and internal and intra-
corporate regulatory rules of the corporation (AOI, BL)

II. Classification of Private Corporations


- Stock: a) capital stock divided into shares, b) corporation must be authorized to
distribute to its shareholders dividends out of its surplus profits main purpose is
to make profits for its shareholders
o Sec. 43 of the Code expressly empowers the board to declare dividends out
of unrestricted RE.
- Non-stock: profits are not distributed among its members but are used for the
furtherance of its purposes but AOI and BL may provide that assets be
distributed among its members upon dissolution

- An incorporated office held by only 1 person only allowed to a religious


- Control of subsidiary corporation is with another corporation (parent corporation)
control in the power to elect the subsidiarys directors, thus controlling its
management policies
- Holding company: where the sole function of the parent company is to hold the
shares of other corporations which it controls
- Investment company: where a corporation holds shares in other corporations not
for the purpose of controlling them but merely to invest therein
- Affiliates: corporations subject to common control and operated as part of a system

III. Formation and Organization of Corporation

(pledge) unconditional obligation

beneficiary PROPERT

3rd parties
Stockholders/ SHARE
Issuance upon SEC certification; if disapproved, corporation
should return money

Capital contributions as held by the treasurer-in-trust cannot be withdrawn this will

require collective action (board authorization because the corporation has become the

A. Promotional Stage
- Promoter: one who brings together persons who became interested in the
enterprise, aids in procuring subscriptions and sets in motion the machinery
which leads to the formation of the corporation itself

B. Drafting Articles of Incorporation

1. Corporate name (not patently deceptive, confusing, or contrary to existing
2. Purpose clause (powers as expressly granted, those which might be incidental
to its conferred powers, those reasonable necessary to accomplish its purposes,
and those which may be incident to its existence.
3. Principal office of the corporation (within the Philippines)
4. Term of existence (50 years, extendible)
5. Incorporators and directors; number and qualifications
6. Capital stock; subscription; payment
- Capital stock: the amount fixed in the AOI to be subscribed and paid in or
secured to be paid in by the shareholders of a corporation, at the
organization of the corporation or afterwards, and upon which it is to
conduct operations
- Subscription: the mutual agreement of the subscribers to take and pay for
the stock of a corporation
- Par value (AOI) vs. issued value (AOI, board if authorized, OR majority
interest of stockholders)
7. Other matters (classes of shares, preferences, restrictions, denial of pre-
emptive right, stock ownership)
8. Close corporations (based on provisions in AOI Sec. 96)

C. Filing of Articles; Payment of Fees

- With favorable recommendation of the appropriate government agency for
special corporations
- Bylaws: not a requisite for incorporation but it has consequences with regard
to governance [LGVHAIC v. CA (1997)]

D. Examination of Articles; Approval or Rejection of the SEC (Sec. 17)

- If not compliant, SEC shall give reasonable time for incorporators to correct
objectionable portions

E. Issuance of Certificate of Incorporation (Sec. 19)

- Revocation may then be effected only after prior notice and hearing (quo
warranto proceeding)
- Substantial compliance in good faith with the requirements give rise to the
existence of a de jure corporation.
- Existence of a de facto corporation (with limited liability) depends on the presence
of the ff. conditions:
1. There is an apparently valid statute under which the corporation with its
purposes may be formed
2. There has been colorable compliance with the legal requirements in good faith
3. There has been user of corporate powers
o Except: under the doctrine of operative fact
- Otherwise, the corporation will have no separate and distinct personality
o Except: under the principle of corporation by estoppel (Sec. 21) for that
To 3rd person: dealt and relied on credit of corporation [Cranson v. Intl. Bus
Machines (1964)]
To the corporation act as agents of a principal they know does not exist
[Harill v. Davis (1909)]


1. Approval of by-laws (stockholders/members approval on rules for internal
government of the corporation; subordinate to AOI as to the fundamental nature
and purpose)
As merely internal rules among stockholders, they cannot affect or prejudice 3 rd
persons [Fleischer v. Botica Nolasco Co. (1925)]
2. Election of directors; commencement of business (Sec. 22: formally organize) 2
years from incorporation
3. Election of officers (Sec. 25)
4. Annual financial statements

IV. The Corporate Entity

- The corporate entity is a vehicle used as an extension of the contributors
- Certificate of Incorporation marks the beginning of the corporations existence as a
legal entity, with a personality distinct and separate from its individual
stockholders or members.
- Individual (money, purpose, object) + compliance = corporation (pool of assets:
contributions + borrowings)

- Corporate property is owned by the corporation as a juridical person, and
ownership of shares of a stockholder does not equate to ownership of the property
of the corporation.
- Stockholders merely have an inchoate right or expectancy over corporate property
should it remain upon dissolution of the corporation after all corporate creditors
have been paid.
- Although the stockholders interest in the corporation may be attached by his
personal creditor, the latter cannot use the corporate property to satisfy his claim.
- Because the corporation possesses a personality separate and distinct from that of
its shareholders, a shift in the composition of its shareholders will not affect its
existence and continuity. Thus, notwithstanding the stock sale, the corporation
continues to be the employer of its people and continues to be liable for the
payment of their just claims [SME Bank, Inc. v. Elicerio Gaspar (2013)].
o Asset sale: end up with the business (proprietary right of the corporation)
Require appraisal report (Board + SEC)
o Stock sale: end up with the corporation (same employees)
- Corporations may form consortia/special purpose vehicle to acquire ownership of
other corporations. If the foreign shareholdings of a landholding corporation
exceeds 40%, it is not the foreign stockholders ownership of the shares which is
adversely affected but the capacity of the corporation to own landthe corporation
becomes disqualified to own land [J.G. Summit Holdings, Inc. v. CA (2005)].
Citizenship belongs to stockholders thus, even a domestic corporation may be
prohibited from owning land if alien ownership of its shares exceed 40%,
- Estate planning through a corporation [Cease v. CA (1979)] infuse property into
the corp., bequeath shares; [Delpher Trades Corp. v. IAC (1988)] siblings
maintained control of the property (as a corporation), thus no breach of the grant
of right of first refusal.

TRUST FUND DOCTRINE [Halley v. Printwell (2011)]

- A stockholder is personally liable for the corporations financial obligations to the
extent of his unpaid subscription. Subscription to the capital stock of a corporation
constitute a fund to which creditors have a right to look up to for satisfaction of
their claims, and the assignee in insolvency can maintain an action upon any
unpaid stock subscription in order to realize assets for the payment of its debts.


- A corporation will be looked upon as a legal entity as a general rule, and until
sufficient reason to the contrary appears, but when the notion of legal entity is
used to defeat public convenience, justify wrong, protect fraud, or defend crime,
the law will regard the corporation as an association of persons.
- Mere instrumentality, alter-ego or business conduit [Marvel Building v. David

- May materialize between 2 existing companies through acquisition of shares, may
form conglomerates; and what exists between the entities is a fiduciary
- The subsidiary need not be wholly owned
- Control by the parent company is inevitable, as these corporations usually have the
same set of directors, but when the directors exercise functions as officers of the
subsidiary corporation, the veil of corporate entity will not be pierced. The
determining criteria is the intimacy and inseparability of control [Koppel v. Yatco

V. Promoters Contracts Prior to Incorporation


- While a corporation is not bound by engagements made by its promoters before its
organization, it may, after its organization, make such arrangements its own
contracts. But the agreement must be one which the corporation itself could make
and one which the usual agents of the company have express or implied authority
to make [McArthur v. Times Printing Co. (1892)].
- Filing of suit may be considered the corporations act of adoption, as in Builders
Duntile v. Dunn (1929).
- While a franchise cannot take effect until the grantee corporation is organized, the
franchise may, nevertheless, be applied for before the company is fully organized
and becomes valid upon adoption, acceptance, ratification by the formed
corporation [Rizal Light v. PSC and Morong Electric Co., Inc. (1968)].


- Principal-agent relationship
- In the absence of any express or implied agreement to the contrary, a promoter is
personally liable for contracts made by him on behalf of the proposed corporation;
and the fact that the corporation when formed has adopted or ratified the contract
does not release him from responsibility, unless a novation was intended.
o Exception: If the contract is made on behalf of the corporation and the other
party agrees to look to the corporation and not to the promoters for payment
[Quaker Hill v. Parr (1961)].

- GR: The corporation is not liable to pay compensation, as this would be an
imposition on innocent investors.
- E: The corporation expressly binds itself to pay the promoter upon incorporation.


- A promoter stands in a fiduciary relation to the corporation which he is interested
in, and he is charged with all the duties of good faith which attach to other trusts.
If the promoter violates this trust, it is not a wrong committed against the
shareholders as individuals nor to shareholders collectively. It is a wrong done to
the corporation as an independent entity, and thus indirectly affects the rights of
those who are or who may be stockholders [Old Dominion Copper Mining and
Smelting Company v. Bigelow (1909)].

VI. Corporate Powers (Secs. 6, 36-45)


- Constitutional provisions (proscriptions)
o Mining companies, public utilities
- Applicable statutes/rules/regulations
- Corporation Code (cf. Sec. 6, 36) exercise of corporate authority
- Constitutive documents (Primary/secondary purposes)


- Ordinary course of business
o Express powers
o Implied or necessary powers
Sec. 36 (11): such as are essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation
Sec. 45: such as are necessary or incidental to the exercise of the powers
so conferred
o Incidental powers
Sec. 2: powers, attributes and properties expressly authorized by law or
incident to its existence i.e. to sue or be sued, to disenfranchise or remove
- Special dispensation
o Example: [RP v. Acoje Mining (1963)]: the resolution was not ultra vires, it
appearing that it covers a subject which concerns the benefit, convenience and
welfare of its employees and their families
- Intra-corporate transactions


- The term ultra vires should be distinguished from an illegal act, for the former is
merely voidable which may be enforced by performance, ratification or estoppel.


- Board of Directors Majority vote
- Corporate Officers Resolutions of Board
- Stockholders Ratification/Conformity/Assent 2/3 Vote

IX. Financing the Corporation

(Ownership of
the corporation)
Stockholders/ CREDITORS
Subscribers Shares Business of the Corporation Financial
i) secured/unsecured
(Investors) of Stock -Property/Assets Accommodations ii) trade
(Equity Interest) iii)
perpetual creditors

Rights to Revenues from Combination of

Securities Business Operations Debt/Equity Securities

Equity Interest Indivisible (subject matter of subscription) Baltazar v. Lingayen

Gulf (1965) no longer applicable
Unconditional: obligation to pay subscription price; obligation to issue
certificate(s) for total shares

- Corporation Code Sections 6-9, 39, 43, 60-6
- Civil Code provisions on: loans, security arrangements, rights of creditors
(concurrence/preference of credits)
Remedies of a corporation are cumulative re: delinquency sales (already
outstanding, because subscription has been allocated to the subscriber)
delinquency sales are for the entire block but nothing prevents the buyer from
buying less than the number of shares for sale.
o Case 1: Subscription receivables + interest = entire block
o Case 2: Bid big amount to cover subscription receivables cost but cannot buy
all shares the shares that are left will revert to the original subscriber

P2,000,000 Authorized Capital Stock: Fashion/Cosmetics: Silver Linings Cosmetics
Par Value: P1.00 = 2 million shares
Initial Subscription: 500,000 shares = P500,000.00
Unissued Shares: 1,500,000 shares Board determines when to issue, in accordance with
conditions of the corporation.

100,000 shares Initial Payment Subscriptions

each Receivable
Ms. Bries P100,000 P25,000 P75,000
Ms. Gallardo P100,000 P25,000 P75,000
Ms. P100,000 P25,000 P75,000
Ms. Marcelo P100,000 P25,000 P75,000
Mr. Salud P100,000 P25,000 P75,000
P500,000 P125,000 P375,000

Subscribers have 500K shares. But in so far as exercising voting rights are concerned,
subscribers have 2M shares
Original subscribers have a pre-emptive right to additionally issued shares in
proportion to their interest in the company. So if 1,500,000 shares were issued, each
would have a pre-emptive right to 300,000 shares. Subscribers would have to give initial
payment of P75,000 (25% of P300,000). Subscription receivable of the corporation from
each subscriber would be P300,000.
If the subscriber is unable to pay, the entire block of 400,000 will be sold in a
delinquency sale.
- Common stocks: one which entitles the owner of such stocks to an equal pro rata
division of profits
- Preferred stocks: entitles the holder to preferences either in dividends or in the
distribution of assets upon liquidation
o Can only be issued with a stated par value
o Preferences must be stated in both the certificate of stock and AOI or AOI
must contain authority for the Board to fix the terms and conditions of the
preferred stock
As to dividends: Participating/non-participating; Cumulative/non-
cumulative; Discretionary/ Mandatory dividend type; Earned cumulative
As to voting rights: By contract usually denied the right to vote; but unless
such right is clearly withheld, preferred stockholder would have the right to
vote, since it is incident to stock ownership
Upon liquidation [Hay v. Hay (1951)]
- Par value shares: stated in the AOI and is the minimum issue price of such share
<> watered stock; cannot be issued until the subscriber has paid his subscription
in full
- No-par value shares: value not stated in the certificate but may be fixed in AOI, by
Board if authorized, or by the shareholders; minimum price is P5; cannot be issued
by banks, trust companies, insurance companies, public utilities, building and loan
associations; AOI must state that it issues no-par shares and the number
- Treasury shares: reacquired by the issuing corporation by purchase, redemption,
donation or other means
- Redeemable shares: expressly provided in the articles of incorporation and stated
in the certificates of stock; allowed although there are no unrestricted retained
- Founders shares: stated in AOI, given rights and privileges not enjoyed by owners
of other stocks


- Pre-incorporation subscription (Sec. 13, 66)
- Post-incorporation subscription


- Purpose is to preserve existing proportional rights of the stockholders
- Can be subject to contractual arrangements by the corporation itself, stockholders,
and 3rd parties
Rule #1: Pre-emptive rights over all issuances of shares of stock {No dilution;
Reward for initial subscribers (maintaining proportionate interest)}
Rule #2:Exercise/Waiver of pre-emptive right = exclusive to stockholder(s)
consideration due to waiver
- Denial of Pre-emptive Right {AOI, Board, Stockholder} approval/conformity
o vs Close corporations: GR: grant of preemptive right, E: AOI provides otherwise
- Benefit(s) accruing to corporation & stockholders in the event of denial of pre-
emptive right
- Denial of Pre-emptive right {Total all issuances of shares; Selective specific
tranches of issuances}

EXIT return of investment {Uncertainty}
(i) Dividends discretionary/availability of unrestricted retained earnings;
classification of shares
- Need Board approval
(ii) Sale/Transfer Market conditions/Profitability/Demand
- Need 3rd party that will meet expectations
(iii) Redemption (Section 8)/Repurchase of shares (Section 41 unrestricted
retained earnings)

(i) Long-term
(ii) Short term
(iii) Perpetuals [Jordan Co. v. Allen (1949)]
(iv) Suppliers Credit
- Maturity Date(s) grace period
- Stated interest {Fixed, Floating}
- Security Arrangement(s) {Lien; Indirect control/management Covenant:
Affirmative, Negative}
XII. Consideration for Shares (Sec. 62)

- Indivisible and unconditional: a partial payment of a subscription does not entitle
the stockholder to a certificate for the total number of shares subscribed by him;
his right consists only in equity to a certificate of the total number of shares
subscribed for, upon payment of the balance [Baltazar v. Lingayen Gulf (1965)].
- Promissory notes and future services are not allowable considerations because
their realization is not certain
- Property rights (conveyance of ownership and title OR beneficial use) have to be
approved by the Board AND approved by the SEC AND necessary/convenient for
its use and lawful purposes (Sec. 62)
- When a person subscribes to shares in a corporation, he oftentimes does not pay
for his subscription in full. Any unpaid balance would then be a debt owed by the
subscriber to the corporation, for which he may be liable to pay interest (Sec. 66).
- He may not be released from such obligation to pay the unpaid balance, unless it is
with the consent of all stockholders, without prejudice to creditors, and upon
adequate consideration. A corporation may, however, enter into a bona fide
compromise with a subscriber who is unable to pay his shares which he has
surrendered to the corporation [Lingayen Gulf v. Baltazar (1953)].
- Corporation is allowed to mingle common par with different par values and no-par
o Voting rights the same for stocks with par values P1 and P100.


- One giving credit to a corporation is entitled to rely upon its ostensible
capitalization as basis for the credit given, and that, when the corporation issues
watered stock and thereby assumes an ostensible capitalization in excess of its real
assets, the transaction necessarily involves the misleading of subsequent creditors,
and, whether done with that purpose actually in mind or not, is at least a
constructive fraud upon its creditors [Rhode v. Dock-Hop Company (1920)]
- Recovery is permitted against the owner (not transferee) of stock issued by the
corporation as fully paid.

- On demand (Sec. 80)
- Remedies of a corporation are cumulative: delinquency sale (Sec. 68), action in
- Ability to set off subscription receivable with liability to creditors making the
corporation the creditor as to the subscriber [Lumanlan v. Cura (1934)]
- When insolvency supervenes upon a corporation and the court assumes jurisdiction
to wind it up, all unpaid stock subscriptions become payable on demand, and are at
once recoverable in an action instituted by the assignee or receiver appointed by
the court [Velasco v. Poizat (1918)].
- When as stockholder becomes delinquent, he loses all his rights as such except
only the right to dividends (Sec. 71)
- Holders of unpaid but non-delinquent stock have all the rights of a stockholder,
except that they may be required to pay interest on the unpaid stocks if so
provided by the by-laws.
XIII. Dividends/Purchase by Corporation of Its Own Shares
- 2 Requirements
o Unrestricted retained earnings (cash or property)
The undistributed earnings of the corporation which has not been
allocated for any managerial, contractual or legal purposes and which are
free for distribution to the stockholders as dividends
Retained earnings do not include transactions involving treasury stock, as
purchase and sale of such stock are regarded as contractions and
expansions of paid-in capital.
As to appropriation and use of retained earnings, the first priority is still
the corporation (business) expansion, possible future loss, contingencies,
agreements with creditors, reserve requirements
o Dividend declaration by the Board of Directors (discretionary)
If the declaration of the dividend is fairly made out of profits existing at the
time of the declaration, a creditor-debtor relation is established between
the corporation and the stockholders for payment of the dividend to the
stockholder [McLaren v. Crescent Planning Mill Co. (1906)]
Under Sec. 43, Board may be compelled to declare dividends if the
omission amounts to a violation of the fiduciary relationship between the
Board and the stockholders
- Kinds:
o Cash
o Property
o Stock: corporate profits are transferred to capital stock and shares of stock
representing the increase in capitalization are distributed
Unless there are available unissued shares of the corporation, stock
dividends cannot be declared without first increasing the capital stock
Require approval of 2/3 of the outstanding capital stock
A share of stock coming from stock dividends cannot be issued to one who
is not a stockholder of a corporation [Nielson & Co. Inc. v. Lepanto
Consolidated Mining Co. (1968)].
o Repurchase of shares (Sec. 41) allows you to realize the value that you paid
for it (vs cash dividend declaration of only 10%)
May be converted to Treasury Shares or creates reduction of authorized
capital stock
Payment is made out of surplus profits and the acquisition is for a
legitimate corporate purpose

- Whether or not there should be a distribution of dividends to the stockholders in
any given year and the form of such dividends are matters addressed to the
business judgment of the board of directors, and unless its decision is tainted with
bad faith, fraud or gross negligence, the courts will not interfere, and the
stockholders will be bound by it.
- If upon complaint of a stockholder, the court finds that a surplus was unreasonably
accumulated, it may order the payment of dividends [Keough v. Paul Milk Co.
- The amount which each stockholder receives as his share of the dividends is based
on the amount of stock held by him, regardless of whether or not he has paid his
full subscription. However, if his shares have become delinquent, any cash
dividends due his shares will first be applied to the amount of the delinquency plus
costs and expenses. If the dividends consist of stock, the stockholder will not get
the same until he has paid his full subscription.
- Upon declaration, the right of the stockholders to be paid dividends vests and
becomes a debt owing by the corporation to each stockholder. No revocation of the
dividends can be made unless the declaration has not yet been announced or
communicated to the stockholders.