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CORPORATIONS 7/23/2018 10:10:00 AM

CORPORATION
 Artificial being created by operation of law, having the right of
succession & the powers, attributes and properties expressly
authorized by law or incident to its existence.
Attributes:
 It is an artificial being
o Doctrine of piercing the veil of corporate entity or corporate
fiction
 the separate personality of a corporation may be
disregarded if such entity is used to defeat public
convenience, justify a wrong, protect fraud, or defend
crime.
 It is created by operation of law
 It has the right of succession
 It has the powers, attributes and properties expressly authorized by
law or incident to its existence
o Doctrine of limited capacity
 A corporation can exercise only the powers expressly
conferred upon it by law and its articles of
incorporation, those implied from such powers expressly
granted, and those that are incident to its existence.
Classification of Corporations
1. As to whether shares of stock are issued or not
a. Stock corporation
b. Non-stock corporation
2. As to the state or country under whose laws it was created
a. Domestic corporation
b. Foreign Corporation
o Tests
 Incorporation test
 Control test
 Grandfather rule
3. As to number of persons composing them
a. Corporation aggregate- more than one
b. Corporation sole- only one
4. As to whether its purpose is public or private
a. Public corporation- organized for the gov’t
b. Private Corporation
5. As to whether its purpose is religious or not
a. Ecclesiastical or religious corporation
b. Lay corporation
6. As to whether its purpose is charitable or not
a. Eleemosynary corporation- public charity
b. Civil corporation- business or profit
7. As to their legal right to corporate existence
a. De jure Corporation
o Created in strict compliance with all the legal requirements
o Cannot be successfully attack
b. De facto Corporation
o Defectively created but with exercise of corporate rights &
franchise
o Has all the powers of de jure
o Due existence can be attack directly in a Quo warranto
proceedings.
o Requisites of a de facto corporation to exist
 There must be a valid law under which it is
incorporated
 There must be an attempt in good faith to incorporate
 There must be an actual exercise of powers
 A certificate of incorporation is issued despite a
defect in its incorporation
 *the ff. will prevent the existence of a de facto
corporation
 absence of articles of incorporation
 failure to file the articles of incorporation
8. As to their relation to another corporation or other corporations
a. Parent or holding corporation
b. Subsidiary Corporation
9. As to whether its shares may be held by the public or not
a. Close corporation- not listed
b. Open corporation- listed, open to public
10. Other classifications
a. Corporation by prescription
b. Corporation by estoppel- in reality not a corporation, but is
considered as one with respect to those who are precluded by their
admission or conduct from denying its existence.
o Liability of persons assuming to act as a corporation and
those dealing with it.
 Liable as general partners for all debts, liabilities and
damages incurred arising as result thereof
 Any person who assumes an obligation to an ostensible
as such, cannot resist performance thereof on the
ground that there as in fact no corporation.
Components of a corporation
 Corporators- those who compose the corporation
 Incorporators- those stockholders/members who are mentioned in
the articles of incorporations originally forming and composing the
corporation and who are signatories of such documents
 Stockholders- corporators of a stock corporation
 Members- corporators of a non-stock corporation
PROMOTERS
 Facilitates the creation of the corporation by negotiating contracts
for its initial operation including subscriptions to its capital stock,
incorporating the business, and helping management start
operations.
 Promoter’s liability on contracts
o Personally liable
o Incorporation does not materialize- remains personally liable
o Corporation is formed, he remains liable until the corporation
ratifies or adopts such contracts, or release him from liability.
Third persons must also agree to absolve him from liability.
 Corporation’s liability on contracts entered into by a promoter
o Not automatically liable
o Will be liable only by the adoption, ratification or novation of
such contracts
Share of stock
 One of the units which the capital stock of the corporation is
divided.
Stock certificate
 Written acknowledgement by the corporation of the stockholder’s
interest in the corporation and its property.
Redeemable Shares
 Those which grant the issuing corporation the power to redeem or
purchase them after a certain period
 Rules:
o They may be issued by the corporation only if expressly
provided in the articles of incorporation
o They may be deprived of voting rights
o They may be purchased or taken up by the corporation upon
the expiration of a fixed period, regardless of the existence of
unrestricted retained earnings in the books of the corporation
o The terms and condition for their redemption must be
stated in the articles of incorporation and the stock certificate
representing the said shares.
Founders’ shares
 Those that grant to the founders certain rights & privileges not
enjoyed by other shares.
 Rules:
o Founders’ share must be classified as such in the articles of
incorporation
o They may be given rights and privileges not enjoyed by other
shares subject to the following limitations:
 If the exclusive right to vote and be voted for in the
election of directors is granted, it must be for a limited
period not exceeding 5 years subject to the approval of
the SEC.
 The five-year period begins form the date of the said
approval.
Treasury Shares
 Those w/c have been issued & fully paid for, but subsequently
reacquired by the issuing corporation by purchase, redemption,
donation or through some other legal means
 Rules:
o They shall have no voting rights as long as they remain in the
Treasury
o Although, they are part of the subscribed stock, they are not
considered outstanding shares.
o Being owned by the corporation, they are not entitled to
dividends
Watered Stock
 Those issued w/o consideration or with no adequate
consideration
Voting Shares
 Those entitled to vote in the meetings of the corporation
Non-Voting shares
 Those w/o voting rights, except in certain cases
 May vote in the following matters:
1. Amendment of the articles of incorporation
2. Adoption and amendment of by-laws
3. Sale, lease, exchange, mortgage, pledge or other disposition of
all or substantially all of the corporate property
4. Incurring, creating or increasing bonded indebtedness.
5. Increase or decrease of capital stock
6. Merger or consolidation of the corporation with another
corporation/s
7. Investment of corporate funds in another corporation or
business
8. Dissolution of the corporation
Limitations when no-par shares are issued
 Subscription to no-par shares shall be deemed fully paid and non-
assessable and the holder of such shares shall not be liable to the
corporation or its creditors in respect thereto.
 May not be issued for a consideration less than P5.00 per
share
 The entire consideration received for no-par shares shall be treated
as capital and shall not be available for distributions as dividends
 Banks, trust companies, insurance companies, public
utilities, and bldg. and loan associations shall not be permitted
to issue no-par value shares of stock
Limitations when preferred shares are issued
 Preferences such as to assets or dividends must be stated in the
articles of incorporation
 Preferred shares may be issued only with a stated par value
 The BOD, when authorized in the articles of incorporation, may fix
the terms and conditions of preferred shares
 Such terms and conditions shall be effective upon the filing of a
certificate thereof with the SEC.
STEPS IN INCORPORATION
1. Verification of the SEC of the name to be used
 No corporate name shall be allowed if the proposed name is:
o Identical or deceptively or confusingly similar to that of any
existing corporation or to any other name protected by law.
o Patently deceptive, confusing or contrary to existing laws.
2. Drafting & execution of the articles of incorporation signed by the
incorporators. The treasurer-in-trust of the proposed corporation must also
execute an affidavit to the effect that:
 @ least 25% of authorized shares are subscribed & that at
least 25% of the subscription has been paid in money and/or
property
 if the payment is in money & deposited in the bank, certificate of
deposit must be obtained from the bank
3. Filing of the articles of incorporation with SEC together with the following
documents:
 Verification certificate authorizing the use by the proposed
corporation of the name stated therein
 Treasurer’s affidavit
 Certificate of bank deposit
 Undertaking to change name if it is similar to the name of another
corporation or the use of such name is prohibited.
 Other documents that may be required such as the endorsement of
government agencies in special corporations
4.Payment of the filing, publication & other fees
5. Issuance of the certificate of incorporation by the SEC
 The issuance of the certificate of incorporation is the operative act
that will grant juridical personality to the corporation. A corporation
commences to have such personality on the date stated in the
certificate w/c is the date of issue
 Kinds of franchise:
o Primary Franchise
o Secondary Franchise
CONTENTS OF THE ARTICLES OF INCORPORATION
1. The name of the corporation
2. The purpose or purposes of the corporation
 Must be lawful
 Must be definitely stated
 If it has more than one purpose, the primary purpose must be
stated separately from the secondary purpose or purposes
 If there are several purpose, it must be capable of being lawfully
combined
3. The Place of the principal office w/c must be in the Philippines
4. The term of existence- shall not exceed 50 YEARS
 the term may be shortened.
 The extension may be extended for periods not exceeding 50 years
in any single instance
o The extension may not be made earlier than 5 years prior to
the original or subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may be
determined by the SEC.
 Any shortening or extension requires amendment of the articles of
incorporation
5. Names, nationalities & residence of the incorporators
 they must be natural persons
 of legal age
 majority must be residents of the Philippines
 not less than 5 nor more than 15
 must own or be a subscriber to at least one (1) share of stock, or a
member of a non-stock corporation.
6. Number, names, nationalities & residence of the directors or
trustees
 shall not be less than 5 nor more than 15
 the nationalities of directors must be indicated to determine if the
number of alien directors does not exceed the number allowed
based on the ratio of the foreign stock ownership of the total
number of shares
 Majority must be residents of the Philippines
7. The amount of authorized capital stock in lawful money of the PH, the
number of shares into which it is divided, and the par value of each. If
shares are w/o par, the no-par shares must be stated.
8. The names of the subscribers, nationalities, numbers of shares
subscribed, amount subscribed, and amount paid
 25% subscribed from authorized, 25% must be paid & not lower
than P5,000
9. Other matters not inconsistent with law & which the incorporators may
deem necessary or convenient
10. The name of the temporary treasurer elected (treasurer-in-trust)
11. Notarial acknowledgement
12. Treasurer’s affidavit

AMENDMENT OF THE ARTICLES OF INCORPORATION


1. Purpose
 it must be for a legitimate purpose or purposes
2. Vote Required
 MAJORITY vote of the Directors, AND
 The Vote or written assent of 2/3 of the outstanding capital stock
(for stock corporation); 2/3 of the members (for non-stock
corporation)
3. Requirements of amendments
 the original and the amended articles shall be indicated by
underscoring the change or changes made.
4. Effectivity
 Upon approval by the SEC; or from the date of filing with the
Commission if not acted upon w/in 6 months(180 days) from
the date of filing for a cause not attributable to the corporation.
Effect of non-use of corporate charter for 2 years
 The corporation shall be deemed dissolved if it does not formally
organize, commence the transaction of its business or the
constructions of its works within 2 years from the date of its
incorporation, unless the same is due to causes beyond the control
of the corporation as may be determined by the SEC.
Effect of continuous non-operation for 5 years
 If a corporation has commenced the transaction of its business but
subsequently becomes continuously inoperative for a period of at
least 5 years, the same shall be a ground for the revocation of
its corporate franchise or certificate of incorporate, unless the
same is due to causes beyond the control of the corporation as may
be determined by the SEC.
Board of Directors, Trustees & Officers 7/23/2018 10:10:00 AM

BOD, Trustees & Officers


 Governing body of a corporation
They have the following principal functions:
 To exercise corporate powers
 To conduct all corporate business
 To control and hold corporate property
Qualifications of a director or trustee
 He must be the owner of at least 1 share of stock which shall
stand in his name on the books of the corporation. In case of a non-
stock corporation, a trustee is required to be a member of the
corporation.
 Majority of the directors or trustees must be residents of the
Philippines
 The number must not be less than 5 nor more than 15
 Must not have been convicted by final judgment of an offense
punishable by imprisonment for a period exceeding 6 years, or a
violation of the Corporation Code, committed w/in 5 years priors
to his election.
Term of office
 Directors or trustees shall hold office for 1 year and until their
successors are elected and qualified. They do not automatically
cease to hold office if they do not have any successors yet.
(Principle of holdover)
Election of Directors or Trustees
1. They are elected at a meeting called for the purpose
2. They must be present in person or by representative authorized by
written proxy:
 the owners of the majority of the outstanding capital stock, if a
stock corporation
 the majority of members, if a non-stock corporation
3. The election must be by ballot if requested by any voting stockholder or
member. (may be made through other methods like raising of hands.
4. No delinquent stock shall be voted.
5. Methods of voting
 Stock corporation
 Non-stock corporation
o A member may cast as many votes as there are trustees to
be elected but may not cast more than one vote for one
candidate.
Corporate officers
 Immediately after their election, the directors must formally
organized by the election of the following officers:
o President- who must be a director
o Treasurer- may be a director or not
o Secretary- must be a resident or citizen of the Philippines
o Other officers as may be provided in the by-laws
Meeting of directors or trustees
1. Quorum
 is the number of directors or trustees sufficient to transact business
 Quorum in meeting of directors or trustees
o General rule: Majority of the number of directors or trustees
fixed in the articles of incorporation
o Exception: If the articles of incorporation or by-laws provide
for a greater number
 Vote required to have a valid corporate act
o Majority of those present provided there is a quorum except
in the election of officers which requires a majority vote for all
members of the board
 Directors or trustees cannot attend or vote by proxy at board
meetings
ILLUSTRATION:
The articles of incorporation of ABC corporation provide for 15
directors
1. Quorum- at least 8 directors must be present. However, if the by-
laws provide for a quorum of 10, then such must be complied.
2. Voting- if 8 or 9 directors are present, at least 5 must vote for the
approval of the act, if 10 or 11, 6 votes; if 12 or 13, 7 votes and if
14 or 15, 8 votes.
i. In election of officers, however, the minimum vote is 8
regardless of the number of directors present.
Executive committee
 Small group w/in a corporation composed of not less than 3
members of the board the creation of which is provided in the by-
laws
 Purpose is to take immediate action on important matters without a
need of a board meeting particularly when it is difficult to muster a
quorum.
 Functions:
o To act, by a majority vote of all its members, on such specific
matters within the competence of the board as may be
delegated to it in the by-laws or on a majority vote of a
board.
o However, the ff. may not be delegated to the executive
committee:
i. Approval of any action of which any shareholder’s approval is
required (includes distribution of stock dividends)
ii. The filling of vacancies in the board
iii. The amendment or repeal of by-laws or on the adoption of new
by-laws
iv. The amendment or repeal of any resolution of the board which
by its express terms is not so amendable or repealable
v. The distribution of cash dividends to shareholders
Removal of directors or trustees
1. Requisites
 must take place in a regular meeting or a special meeting called for
a purpose
 previous notice of the intention to propose such removal must have
been given to the stockholders or members
 vote required
o Stock corporation- 2/3 of the outstanding capital stock
o Non-stock corporation- 2/3 of the members entitled to vote
2. Cause of removal
 Gen rule
o The removal may be with or without cause
 Exception
o May not be used to deprive minority stockholders or members
of the right of representation in the board of directors or
trustees.
VACANCIES in the office of directors or trustee
1. cause of vacancy
 removal
 expiration of term
 increase in the number of directors
 resignation
 death
 abandonment
 disqualification
2. filing of vacancy
 By the stockholders or members
o If the cause of removal is any of the ff.
 Removal
 Expiration of term
 Increase in the number of directors
o If the cause of vacancy is other than those mention above,
but the remaining directors do not constitute a quorum for
the purpose of filling the vacancy
 By the BOD or trustees
o If the cause is other than those mention above &
o The remaining directors or trustees still constitute a quorum
Disqualification to become directors, trustees or officers
 Persons convicted by final judgment of an offense punishable by
imprisonment for a period exceeding six years
 Persons guilty of violating the corporation code

Time of commission of the offense
o The offense must have been committed with 5 year prior to
the date of election or appointment
Compensation of directors
 Gen rule:
o Directors are not entitled to compensation as such directors
 Exceptions
o Directors are entitled to compensation in the ff. cases:
 When in fixed in the by-laws
 When the giving of compensation is approved by the
stockholders representing at least a majority of the
outstanding capital stock
 When the compensation refers to reasonable per diems
 Limitations on compensation
o Total yearly compensation( excluding per diems) of directors,
as such directors, must not exceed 10% of the net income
before income tax of the corporation during the preceding
year.
RULE on Self-dealing directors, trustees or officers
 A contract of the corporation with one or more of its directors,
trustees or officers is voidable at the option of the corporation,
unless all the following requisites are present:
o Presence of such director in the board meeting in which the
contract was approved was not necessary to constitute a
quorum
o The vote of such director or trustees was not necessary for
the approval of the contract
o The contract is fair and reasonable under the circumstances
o In case of an officer, the contract w/ the officer has been
previously authorized by the board of directors or trustees
RULE on contracts between corporations with interlocking directorate
Interlocking Directorate
 When one, some, or all of the directors of one corporation, is/are
also directors of another corporation or other corporations. (when a
director holds seats in the board of directors of two or more
corporations)
 Requisites for its validity
o There is no fraud
o The contract is fair and reasonable under the circumstances
o The interest of the interlocking director is nominal
 His presences in the board meeting was not necessary
to constitute a quorum
 His vote is not necessary for the approval of the
contract
*stockholdings exceeding 20% of the outstanding capital stock shall
be considered substantial for purposes of interlocking directors.
FIDUCIARY DUTIES of Directors
1. Duty of Obedience
2. Duty of Diligence
3. Duty of Loyalty
LIABILITY of Directors or Trustees for damages
1. Grounds for liability to pay damages
 By willingly and unknowingly voting for or assenting to patently
unlawful acts of the corporation
 By being guilty of gross negligence or bad faith in directing the
affairs of the corporation
 By acquiring any personal or pecuniary interest in conflict of their
duty as such directors or trustees
2. Nature of liability
 Joint & Several (SOLIDARY)
3. To whom liable
 To the corporation, its stockholders or members or other persons
who suffer damages resulting from the acts aforementioned
DOCTRINE OF CORPORATE OPPORTUNITY
 … when by virtue of his office, he acquires for himself a business
opportunity which should belong to the corporation, he must
account for all such profits derived by him from the said business
opportunity by refunding the profits to the corporation.
POWERS OF CORPORATION 7/23/2018 10:10:00 AM

KINDS OF POWERS
1. EXPRESS POWERS- expressly granted to a corporation by its charter
 GENERAL EXPRESS POWERS
1. To sue and be sued in its corporate name
2. Of succession by its corporate name for the period of time
stated in the articles of incorporation and the certificate of
incorporation
3. To adopt and use a corporate seal
4. To amend its articles of incorporation
5. To adopt by-laws, not contrary to law, morals, or public policy
and to amend or repeal the same
6. In case of stock corporations, to issue or sell stocks to
subscribers and to sell treasury stocks; and to admit members
in case of non-stock members
7. To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage etc. with such real and personal property,
including securities and bonds of other corporations, as the
transaction of the lawful business of the corporation may
reasonably and necessarily require
8. To enter into with other corporations merger or consolidation
9. To make reasonable donations…
10. To establish pension to its employees, trustees, directors,
officers..
11. To exercise such powers necessary to carry out its purpose
 SPECIFIC EXPRESS POWERS
1. Power to extend or shorten corporate term
a. Vote required:
 Majority vote of the BOD or trustees, AND
 2/3 of outstanding capital stock; 2/3 of the members in
a meeting called for a purpose
b. the articles of incorporation are amended to effect such
extension or shortening of corporate term
Appraisal right
 right of a stockholder to demand payment of the fair
value of his shares when he dissents from certain
corporate acts
 any stockholder who dissents(disagree) from the act to
extend or shorten the corporate term may exercise his
appraisal right
2. Power to increase or decrease capital stock
a. Vote required:
 Majority vote of BOD, AND
 2/3 of the outstanding capital stock in a meeting called
for a purpose
b. The increase or decrease of capital stock must be certified to
in a certificate duly signed by a majority of the directors and
countersigned by the chairman and the secretary of the
stockholder’s meeting and setting for among other information,
the increase or decrease in capital stock, and in case of increase,
the names of subscribers, nationalities, residences, etc., the vote
obtained.
c. Subscription and paid-in capital requirements in case of
increase
 The treasurer must execute a sworn statement
attesting the 25%, 25%, P5000 requirement has been
obtained.
d. In case of decrease, the same should not prejudice the rights
of corporate directors. (not violative of the trust fund doctrine)
TRUST FUND DOCTRINE
 The capital stock and assets of the corporation are held
in trust for creditors. Accordingly there shall be no
distribution of assets to shareholders until the claims of
creditors have been paid or appropriations of such
assets have been made for the payment of such claims.
e. The increase or decrease of capital stock must be approved by
the SEC.
3. Power to incur, create or increase bonded indebtedness
a. Vote Required:
 Majority vote of the BOD or trustees, AND
 2/3 of the outstanding capital stock, 2/3 of the
members in a meeting called for a purpose
b. The incurring, creating or increasing of bonded indebtedness
must be certified to in a certificate duly signed by a majority
of the directors and countersigned by the chairman and the
secretary of the stockholders’ meeting and setting forth,
among other information, the actual indebtedness incurred,
created or increased, the actual indebtedness of the
corporation on the day of the meeting, the vote required, etc.
c. The incurring, creating or increasing of bonded indebtedness
must be approved by the SEC
d. The bonds so issued must be registered with the SEC which
shall have the authority to determine the sufficiency of the
terms therof.
4. Power to deny pre-emptive right
o Refers to the right of existing stockholders to purchase or
subscribe to all issuances to sisposition of shares of any class,
in proportion to their respective stockholdings, before such
shares are offered to the public.
5. Power to sell, lease, exchange, mortgage, pledge or otherwise
dispose all or substantially all of its property
a. Vote required
 Majority vote of the board of directors or trustees, AND
 2/3 of the outstanding capital stock or 2/3 of the
members called for a purpose
6. Power to acquire its own shares
a. The acquisition must be for a legitimate purpose or purposes
b. The corporation must have unrestricted retained earnings
7. Power to invest corporate funds in another corporation or
business or for any other purpose
a. Vote required
 Majority vote of the board of directors or trustees, AND
 2/3 of the outstanding capital stock or 2/3 of the
members in a meeting called for a purpose
b. Exercise of appraisal rights (by any stockholder(s) who
dissents/disagree)
8. Power to declare dividends
a. Stock dividends: Vote Required
 Majority vote of directors present to provided there is a
quorum, AND
 2/3 of outstanding capital stock entitled to vote in a
meeting called for a purpose
b. Cash Dividends: Vote Required
 Majority vote of directors provided there is a quorum
9. Power to enter into management contract
o A contract whereby a corporation delegates the management
or operation of its business to another corporation. (service
contract or operating agreement)
o Vote required
 Majority vote of the BOD or trustees present provided
there is a quorum
 Majority of the outstanding capital stock or majority of
the members entitled to vote in a meeting called for the
purpose.
o ULTA VIRES ACTS (beyond the powers)
 Acts which a corporation may not perform because they
are not within their express, incidental or implied
powers.
2. IMPLIED POWERS- necessary to carry into effect powers which are
expressly granted
1. Acts in the usual course of business
2. Acts to protect debts to the corporation
3. Acts which involve embarking on a different line of business
4. Acts designed to protect or aid employees
5. Acts to increase the business corporation
3. INCIDENTAL POWERS or INHERENT POWERS- by reason of its very
existence as a corporation
1. power of succession
2. power to have a corporate name
3. power to adopt a corporate seal
4. power to acquire, hold or dispose property as its business may
reasonably require
5. power to adopt and amend its by-laws