CORPORATION CODE

B. P. Blg. 68

Brief History of the Code

Passed by the Batasan Pambansa and approved by the president on May 1, 1980, the date of its effectivity It supplanted the old corporation law (Act 1459) which was enacted by the Philippine Commission on March 1, 1906 and took effect on April 1, 1906

Brief History of the Code

Prior to 1906
Spanish Code of Commerce of 1885 Entities were referred to as sociedades

Act No. 1459 of 1906

Aimed at replacing sociedades with the concept of corporations Sociedades were given the option to continue as such or reform or reorganize under the provisions of the new law

Significant Changes introduced by the Code

Eliminated the classification of corporations into public and private Expressly provides for the creation of corporations through special laws or charters New classes of shares are provided It required that where a corporation has more than one purpose, the AoI must state which is the primary purpose and which are secondary purposes

Corporation defined
Corporation is defined as one of the forms of association having the rights and relations, and the characteristic attributes of a legal entity distinct from that of the persons who compose it or act for it in exercising its functions. (SEC opinion dated July 8, 1992)

Attributes of a Corporation
It is an artificial being It is created by operation of law It enjoys the right of succession It has the powers, attributes and properties expressly authorized by law or incident to its existence (Doctrine of Special or Limited Capacity)

1. Artificial Being
A corporation registered under the Code is considered a juridical person with a personality separate and distinct from that of each stockholder A corporation may not be made to answer for acts or liabilities of its stockholders or those of legal entities to which it may be connected or vice versa (Palay Inc. vs Clave, et al, 124 SCRA 638)

Artificial Being; Practical Applications

SH are not personally liable for debts of the corporation either at law or equity, unless fiction of corporate entity is disregarded SH are not owners of corporate properties or assets SH cannot maintain action/s in their own name in connection with corporate affairs, business or property Corp is a taxable entity separate and distinct from its SH who are separately taxed on their dividends

When is corporate fiction disregarded?

DOCTRINE OF PIERCING THE CORPORATE VEIL For purposes of applying this doctrine, a corporation is perceived not as a legal or artificial entity separate and distinct from the persons composing it, but is seen as a mere collection of individuals and considered as an association of persons.

When applied
The corporate fiction of the notion of legal entity may be disregarded when it is used to defeat public convenience, justify wrong, protect fraud, or defend crime, in which instances the law will regard the corporation as an association of persons, or in case of two corporations, will merge them into one. (Remo vs. IAC, 172 SCRA 406)

Probative factors of identity that will justify application of the doctrine:

Stock ownership by one or common ownership of both corporations Identity of directors and officers The manner of keeping corporate books and records Methods of conducting the business

Applicable cases:
Corp is used as a shield to further an end subversive of justice (Cagayan Valley Enterprises Inc. vs. CA, 179 SCRA 230) Corp is used to perpetuate fraud or confuse legitimate issues (Indino vs. NLRC, 178 SCRA 176; Telephone Engineering & Service Co. Inc. vs Workmens Compensation Commission, 104 SCRA 354 )

Applicable cases:
Corp is used as an alter ego or business conduit for the sole benefit of the stockholders (Collector vs. Univ. of Visayas, 12 SCRA 193) One corporation is a mere subsidiary, instrumentality or department of another corporation (Claparols vs. CIR, 65 SCRA 613)

Applicable cases:
Notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime; When SH created the corporation to evade taxes, violate laws, commit fraud, evade just obligations; When the corp is owned by the SH and his dummies, and/or immediate family members (Control Test)

2. Creation of Law
The consent of the State to its creation is a condition precedent before a corporation acquires juridical personality The power to create corporations is one of the attributes of sovereignty Takes the form of a special law or a general enabling act under which persons wishing to act as a corporation may incorporate

3. Right of Succession
Denotes that a corporation continues to exist during the term stated (1) in its articles of incorporation; (2) in the law authorizing the incorporation itself Its existence continues despite the death, withdrawal, insolvency or incapacity of its individual stockholders or members and irrespective of the transfer of shares by a stockholder to third persons

4. Has powers, attributes and properties expressly granted by law

Express powers are enumerated under Sec. 36 of the Code Implied powers those which are reasonably necessary to exercise the express powers and to carry out the purpose/s for which the corp was formed Incidental powers which a corp may exercise by the mere fact of its being a corporation.

Advantages of the corporate form

Enjoys perpetual succession Independent juridical personality (own property, contract obligations, sue and be sued in its name as an individual) SH shall have no personal liability beyond the value of their shares Entitled to immunity against unreasonable search and seizures Transfer of interest is easier and will not dissolve the corporation

Classes of Corporation
Stock Corporations Non-stock corporations Close corporations (Sec. 96) Educational corporations (Sec. 106) Religious corporations (Sec. 109) Foreign corporations (Sec. 123)

Stock Corporations
Must have capital stock divided into shares Must be authorized to distribute to its stockholders dividends out of its surplus profits on the basis of the shares held

Businesses required to organize as stock corporations:

Banks (R.A. 720) Finance companies (R. A. 5980, as amended) Investment houses (P.D. 129) Investment companies (R.A. 2629) Condominium corporations (R.A. 4726)

Conversion Policies
Non-stock to stock:
Dissolution under Title XIV of the code Incorporation into a stock corporation

Stock to non-stock: Amendment of its Articles of Incorporation

Other corporations
Corporation sole Religious or ecclesiastical corporation Lay, charitable or eleemosynary corporation Public and private corporations Domestic and foreign corporations De jure and de facto corporations Close corporations

Corporations created by special law or charter

Owned and controlled by the government in the interest of the common good and subject to the test of economic viability Need not register with the SEC to acquire legal personality Does not divest these GOCCs with immunity from suit

Sec. 5
Corporators are those who compose a corporation whether as stockholders in case of a stock corporation or as members in case of non-stock corporation Must have the legal capacity to contract

Sec. 5
INCORPORATORS those originally forming and composing the corporation, having signed the articles and acknowledged the same before a notary public The name of an incorporator may not be changed, deleted or amended for the reason that the same is an accomplished fact at the time of incorporation Must be a natural person

Stockholders or Shareholders
Are owners of shares in a stock corporation. May be natural or juridical persons MEMBERS are corporators of a nonstock corporation

Classification of Shares
Applicable only to stock corporations Initially determined by the incorporators when they execute the articles of incorporation and file the same with the SEC Rights, privileges, preferences and restrictions must be stated in the AoI to be legally effective

Classification of Shares
Authority to classify shares, not absolute:
No share may be deprived of voting rights except 1). those considered delinquent; 2). for founders shares that are accorded complete voting rights; 3). Preferred or redeemable shares unless otherwise provided in the code. Equality of shares Preferred shares with stated par value

Classification of Shares
Authority of the Board to fix terms and conditions of preferred stocks
Effective upon the filing with the SEC of a Sec. Cert. under oath relative to the resolution of the board fixing the terms of the preferred shares Must be stated in the AoI (amend if needed)

Classification of Shares
No par value shares consideration must not be less than P5.00 Banks, trust companies, insurance companies, public utilities and building and loan associations are not permitted by the code to issue no-par value shares Shares without par value deemed fully paid

CAPITAL:
Refers to the money, property or means contributed by the stockholders as the form or basis for the business Used synonymously with capital stock, as meaning the amount subscribed and paidin and upon which the corporation is to conduct its operations

CAPITAL STOCK:
Authorized capital stock Subscribed capital stock Outstanding capital stock Paid-up capital stock Unissued capital stock

Classes of Shares:
Common shares Preferred shares Par value shares No-par value shares Redeemable shares Treasury shares Founders shares

Distinction bet. Shares of stock and Certificate of stock

Incorporeal or intangible property Represents the interest or right of a person in the corporation May be issued even if subscription not fully paid (Sec. 137) Concrete and tangible property Written evidence of that interest or right May be issued only of subscription is fully paid (Sec. 64)

Sec. 7 Founders Share

Shares issued to those who founded the corporation Sometimes called management shares Absolute right to be voted as members of the board is limited to 5 years from date of approval by the SEC Other privileges granted not subject to the 5 year limitation

Sec. 8 Redeemable Shares

Device use to create more capital 2 classes of redeemable shares:
Compulsory or obligatory Directory or optional

Restriction: must not render the corporation insolvent upon redemption (Trust Fund Doctrine) Effect: shares considered as retired no longer issuable, unless otherwise provided

Sec. 9 Treasury Shares

Shares which have been earlier issued as fully paid and have thereafter been acquired by the corporation, by purchase, donation, redemption or through some other lawful means Corporation must have surplus profits to reacquire them

Sec. 9 Treasury Shares

Not entitled to dividends Cannot be reverted back to the status of authorized but unissued shares, but are regarded as property acquired by the corporation which may be reissued and sold by it at a price to be fixed by the board

Sec. 9 Treasury Shares

Being unrealized income, not considered as part of earned or surplus profits and therefore not distributable as dividends either in cash or stock While in the corporationss treasury, it has no voting rights Being property, they may be resold for a reasonable price or best price obtainable