KIMMY LIM
CORPORATION LAW
DE LEON REVIEWER 2013
Theories as to origin of Corporation
1. ETHNOLOGICAL THEORY – the concept of collective entity antedates that of the
individual; “groups of men united by the reality or fiction of blood relationship”
into families, clans or tribes were recognized units of primitive society even before
the individual was so regarded; manifestation of the gregarious instinct of man.
2. IMITATIVE THEORY – traces the genesis of the modern corporation to the Greece
of Solon; Blackstone, however, ascribes the birth of the corporation to the political
necessities of Numa Pompilius
Scope of the Code
1. Provides for the incorporation, organization, and regulation of private
corporations, both stock and non-stock, including educational and religious
corporations
2. Defines their powers and provides for their dissolution
3. Fixes the duties and liabilities of directors or trustees and other officers thereof
4. Declares the rights and liabilities of stockholders and members
5. Prescribes the conditions under which corporations including foreign corporations
may transact business
6. Provides penalties for violation of the Code
7. Repeals all laws and parts of laws in conflict and inconsistent with the Code
Sec. 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
 Refers only to private corporations or to corporations organized under the
Corporation Code
Attributes of a Corporation (AB-COL-S-PAP)
1. Artificial Being (a person created by law or by state; a legal fiction)
2. Created by Operation of Law (its existence is dependent upon the consent or grant
of the state EXCEPT corporation by estoppel and de facto corporation)
3. Right of Succession (the corporation exist despite the death of its members as a
corporation has a personality separate and distinct from that of its individual
stockholders. The separate personality remains even if there has been a change in
the members and stockholders of the corporation)
4. Has only the Powers, Attributes and Properties expressly authorized by law or
incident to its existence (limited powers)
DOCTRINE OF CORPORATE ENTITY
 A corporation is a legal or juridical person with a personality separate and apart
from its individual stockholders or members and from any other legal entity to
which it may be connected or related.
 Not in reality a person but the law treats it as though it were a person by process
of fiction
 Stockholders or member who, as natural persons, are merged in the corporate
body, compose the corporation but they are not the corporation
Corporation as an Artificial Personality
(1) LIABILITY FOR ACTS OR CONTRACTS
 GENERAL RULE
o obligations incurred by a corporation, acting through its authorized
agents, are its sole liabilities.
 A corporation may not, generally be made to answer for acts or liabilities of its
stockholders (or members) or those of the legal entities to which it may be
connected and vice versa
(2) LIABILITY WHEN EXCEPTIONAL CIRCUMSTANCES WARRANT
 Personal or solidary liability may be incurred by corporate agents acting in behalf
of the corporation only when exceptional circumstances warrant
o Example: Director or trustee acted in bad faith or gross negligence or
agreed to hold himself personally and solidarily liable with the
corporation
 There is no law that prohibits a corporate officer from binding himself personally
to answer for a corporate debt
(3) RIGHT TO BRING ACTIONS
 A corporation may incur obligations and bring civil and criminal actions in its own
name in the same manner as a natural person
 A corporation has no personality to bring an action and in behalf of its
stockholders or members for the purpose of recovering property
 Whatever mental anguish, wounded feelings and etc the stockholders and officers
of a corporation may suffer cannot be equally felt by the corporation
 A juridical person is not entitled to moral damages. However, a corporation may
have a good reputation which, if debased or besmirched resulting in social
humiliation, may be a ground for recovery of moral damages and attorney’s fees.
 Place of the business of the suing corporation is considered as its residence.
(4) RIGHT TO ACQUIRE AND POSSESS PROPERTY
 It may acquire and possess property of all kinds
 The agreement of co-shareholders to mutually grant the right of first refusal to
each other, by itself does not constitute a violation of the constitutional provision
limiting land ownership to Filipinos and Filipino Corporation
 If a foreign corporation exceeds the 40% the corporation becomes disqualified to
own the land.
 Right of first refusal = shareholders; Capacity to own the land = corporation
(5) ACQUISITION BY COURT OF JURISDICTION
 Where the appearance in the court of the president of the corporation was in the
capacity of counsel of another corporation and not as representative or counsel of
the first corporation, such appearance cannot be construed as voluntary
submission of said corporation to the court’s jurisdiction
(6) CHANGES IN INDIVIDUAL MEMBERSHIP
 A corporation remains unchanged and unaffected to its identity by changes in its
individual membership.
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Corporation as a Person, Resident, or Citizen
(1) AS A PERSON
 Persons are divided into natural and artificial persons
 “person” prima facie includes both and, therefore, as a general rule, includes
corporations
(2) AS A RESIDENT OR NONRESIDENT
 A corporation formed in one State may be, for certain purposes, domiciled or a
resident of another State in which it has its offices and transacts business,
notwithstanding the fiction of the law that a corporation dwells only in the State of
its creation and cannot migrate therefrom.
(3) AS A CITIZEN
 The term “citizen” as it is commonly understood, implies membership in a political
body and, therefore, does not ordinarily include a corporation, unless the general
purpose and import of the statute in which the term is found seem to require it.
TESTS TO DETERMINE NATIONALITY OF CORPORATIONS
(1) INCORPORATION TEST
 Determined by the state of incorporation, regardless of the nationality of its
stockholders.
(2) DOMICILE TEST
 Determined by the state where it is domiciled. The domicile of a corporation is the
place fixed by the law creating or recognizing it; in the absence thereof, it shall be
understood to be the place where its legal representation is established or where
it exercise its principal functions (Art. 51, NCC).
(3) CONTROL TES
 Determined by the nationality of the controlling stockholders or members. This
test is applied in times of war. Also known as the WARTIME TEST
Corporation as a Collection of Individuals
(1) TRUE IN ACTUAL FACT
 It is really the individuals composing it who own its property and carry on the
corporate business, through the corporation and its officers and agents, for their
own profit or benefit
 The idea of the corporation as a legal entity or person apart from its members is a
mere fiction of the law introduced for convenience in conducting business in this
privileged way.
(2) RECOGNIZED FOR MANY PURPOSES
 This concept of a corporation as a collection of individuals owning the corporate
property and doing business through the corporation and in the corporate name
has always been recognized for many purposes as between the stockholders or
members themselves and as between them and the corporation, in order to
enforce and protect their rights.
DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY
 Peculiar situations or valid grounds may exist to warrant the disregard of its
independent being and the piercing of the corporate veil.
 RATIONALE: to remove the barrier between the corporation from the persons
compromising it to thwart the fraudulent and illegal schemes of those who use the
corporate personality as a shield for undertaking certain proscribed activities.
(1) WHEN LEGAL FICTION IS DISREGARDED
 The doctrine that a corporation is a legal entity distinct from the persons
composing is a theory introduced for purposes of convenience and to serve the
ends of justice. But when the veil of corporate fiction is used as a shield to defeat
public convenience, justify wrong, protect fraud, or defend a crime, this fiction
shall be disregarded and the individuals composing it will be treated identically.
 Wrongdoing must be clearly and convincingly established
 Presumption is that the stockholders or officers and the corporation are distinct
entities. The burden of proving otherwise is on the party seeking to have the court
pierce the veil
 When the veil of corporate fiction is pierced, the corporate character is not
necessarily abrogated. The corporation continues for legitimate objectives. It is
pierced in order to remedy injustice
(2) EFFECTS AS TO LIABILITY
 The transactions or acts of the real parties shall be dealt with as though no
corporation had been formed.
 Even if fraud is established, this fact alone is not sufficient to justify the piercing of
the corporate fiction where it is not sought to hold the officers and stockholders
personally liable
(3) APPLICATION OF DOCTRINE IN 3 AREAS
a. Defeat of public convenience as when the corporate fiction is used as a vehicle for
the evasion of an existing obligation
b. Fraud cases or when the corporate entity is used to justify a wrong, protect fraud,
or defend a crime
c. Alter ego cases, where a corporation is merely a farce since it is a mere alter ego or
business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation
Instances where doctrine applied
1. The incorporators and directors belong to one single family
2. Where a corporation functions for the benefit of a single person who has
complete control over the funds and the said person is the sole owner thereof.
3. Where the corporation is a mere instrumentality of the individual stockholder, the
latter must individually answer for corporate obligations
4. Where a corporation is merely an instrumentality, an adjunct, business conduit, or
alter ego of another corporation
5. Where it appears that a corporation is merely a business conduit of its president
6. Where a domestic or Philippine corporation is controlled by aliens
7. Where a corporation is dissolved and its assets are transferred to another
corporation to avoid financial liability of the first corporation to its employees
8. Where all the stockholders or members of a corporation, acting as individuals
instead of formal corporate action, enter into an illegal act
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9. Where a corporation is formed by a seller of a certificate of public convenience for
the purpose of evading his individual contract
10. Where a corporation is used as a subterfuge to commit injustice and circumvent
the labor laws
11. Where a corporation is organized by an insolvent debtor to defraud his creditors
12. Where a corporation is organized as a device in order to evade an outstanding
legal or equitable obligation
13. Though it was shown to be owned by a corporation when in fact it was solely
owned
14. The corporate fiction has also been disregarded in other cases as where it was
used:
a. To shield a violation of the prohibition against forum shopping
b. To avoid a judgment credit
c. To avoid the payment of higher taxes
d. To avoid inclusion of corporate assets as part of the estate of the
decedent
e. To promote unfair objectives
f. To violate a provision under the Labor Code
g. To confuse legitimate issues
h. To avoid judgment in favour of an employee where the corporation is
no longer existing and is unable to satisfy judgment, the employee’s
recourse being against the officers of the corporation who were, in
effect, acting in behalf of the corporation
Application of the “INSTRUMENTALITY” or “ALTER EGO” rule
 The Circumstance rendering the subsidiary an instrumentality. It is manifestly
impossible to catalogue the infinite variations of fact that can arise but there are
certain common circumstances which are important and which, if present in the
proper combination, are controlling.
 These are as follows:
(a)The parent corporation owns all or most of the capital stock of the
subsidiary.
(b)The parent and subsidiary corporations have common directors or
officers.
(c)The parent corporation finances the subsidiary.
(d)The parent corporation subscribes to all the capital stock of the
subsidiary or otherwise causes its incorporation.
(e)The subsidiary has grossly inadequate capital.
(f)The parent corporation pays the salaries and other expenses or
losses of the subsidiary.
(g)The subsidiary has substantially no business except with the parent
corporation or no assets except those conveyed to or by the parent
corporation.
(h)In the papers of the parent corporation or in the statements of its
officers, the subsidiary is described as a department or division of the
parent corporation, or its business or financial responsibility is referred
to as the parent corporation's own.
(i)The parent corporation uses the property of the subsidiary as its own.
(j)The directors or executives of the subsidiary do not act
independently in the interest of the subsidiary but take their orders
from the parent corporation.
(k)The formal legal requirements of the subsidiary are not observed.
 Test in determining the applicability of the doctrine of piercing the corporate veil if
based on the “instrumentality” or “alter ego rule” made by the SC:
(1) INSTRUMENTALITY OR CONTROL TEST - Control, not mere majority or complete
stock control, but complete dominion, not only of finances but of policy and
business in respect to the transaction attacked so that the corporate entity as to
this transaction had at the time no separate mind, will, or existence of its own
(2) FRAUD TEST - Such control must have been used by the
defendant to commit fraud or wrong in contravention of plaintiff’s legal rights
(3) HARM/CAUSAL CONNECTION TEST - The aforesaid control and breach of duty
must proximately cause the injury or unjust loss complained of
Acquisition by court of jurisdiction over corporation or corporations involved
 Applied only to determine established liability. A corporation not impleaded in a
court cannot be the subject to the court’s process of piercing the corporate veil,
hence any proceedings taken against it and its property, would infringe on its right
to due process.
 2 fold implication:
1. Court must first acquire jurisdiction over the corporation or corporations
involved
2. Doctrine must be raised during a full-blown trial over a cause of action duly
commenced involving parties duly brought under the authority of the court
Corporation as a Creation of Law or by Operation of Law
(1) SPECIAL AUTHORITY OR GRANT BY THE STATE REQUIRED
 Corporations cannot come into existence by mere agreement of the parties. They
require special authority or grant from the state.
 Private Corporations – BP Blg 68
 GOCC – Special law (also referred to as charters)
 An exception to the rule that legislative grant or authority is necessary for the
creation of a corporation obtains with respect to corporations by prescription
(2) COMPLIANCE WITH CONDITIONS PRESCRIBED BY LAW
 Corporations can only come into existence in the manner prescribed by law
(3) ENJOYMENT OF PRIVILEGES SUBJECT TO LAWS AND THE CHARTER
 Presumed to be incorporated for the benefit of the public.
 There is a reserved right in the State to inquire how these privileges had been
employed, and whether they had been abused.
Right of Succession of a Corporation
 A corporation has a capacity of continuous existence irrespective of the death,
withdrawal, insolvency or incapacity of individual stockholders or members and
regardless of the transfer of interest or shares of stock.
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 Not immortal; the life of the corporation is limited to the period of time stated in existing partners because partnership is based on this principle
the AOI not exceeding 50 years unless sooner dissolved or extended based on the principle of Delectus
 Corporations created by special laws have the right of succession for the term Personarum
provided May be established for any period of time May not be formed for a term in excess of 50
stipulated by the partners years extendible to not more than 50 years
Powers, Attributes and Properties of a Corporation in any one instance
 Corporation exercises its powers through its board of directors, and/or its duly LP is required by law to add the word “LTD” May adopt any firm name provided it is not
authorized officers and agents to its name identical or deceptively similar to any
 TEST TO BE APPLIED: whether the act of the corporation is in direct or immediate registered firm name or contrary to existing
furtherance of its business, fairly incidental to the express powers and reasonably laws
necessary to their exercise. May be dissolved any time by the will of any Can only be dissolved with the consent of
or all partners state
THEORY OF SPECIAL CAPACITIES/LIMITED CAPACITY DOCTRINE Governed by Civil Code Governed by Corporation Code
 No corporation under the Code, shall possess or exercise any corporate power,
except those conferred by law, its Articles of Incorporation, those implied from Similarities between a Partnership and a Corporation
express powers and those as are necessary or incidental to the exercise of the 1. Juridical personality distinct from that of the individuals composing it
powers so conferred. 2. Can act only through its agents
 The corporation’s capacity is limited to such express, implied and incidental 3. Composed of aggregate individuals (except corporation sole)
powers 4. A (stock) corporation distributes its profits to those who contribute capital to the
 If the act of the corporation is not one of those express, implied or incidental business
powers, the act is ultra vires. 5. Can be organized only where there is a law authorizing its organization. (Privilege
not a right)
6. Taxable
Distinction between a Partnership and a Corporation
Corporation as a Partner
PARTNERSHIP CORPORATION (1) GENERAL RULE
Created by mere agreement of the parties Created by law or by operation of law  Cannot ordinarily enter into partnership with other corporations or with the
May be organized by only 2 persons (except corporation sole) requires at least 5 individuals. The reason are as follows:
Acquires juridical personality from the Begins to have a corporate existence and o The identity of the corporation is lost or merged with that of another
moment of the execution of the contract of juridical personality only from the date of and the direction of its affairs is placed in other hands than those
PAT the issuance of the Certificate of provided by the law
Incorporation by SEC under its official seal o Based on the grounds of public policy (in a partnership the corporation
May exercise any power authorized by the Can only exercise power expressly granted would be bound by the acts of person who are not its duly appointed
partners provided it not contrary to law, by law or implied from those granted or and authorized agents and officers)
morals, good custom, public order and public incident to its existence o Would permit the corporate assets to be subjected to risks and
policy liabilities not contemplated by the stockholders at the time of making
Management is not agreed upon, every Power to do business is vested in the board their investment
partner is an agent of the partnership of directors or trustees (2) EXCEPTIONS
A partner can sue a co-partner who The suit against a member of the board of  It can enter into a joint venture with another where the nature of that venture is in
mismanages directors or trustees who mismanages must line with the business authorized by their charters
be in the name of the corporation o Joint venture need not be registered with the SEC provided that it does
No right of succession Has a right of succession not result in the formation of a new corporation or partnership,
Partners (except LP) are liable personally and Stockholders are liable only to the extent of  provided further that existing laws governing joint ventures
subsidiarily (sometimes solidarily) their investment and implementing rules and regulations are complied with
A partner cannot transfer his interest in the A stockholder has the right to transfer his o A joint venture partnership between a foreign corporation licensed to
partnership so as to make the transferee a shares without the prior consent of the other do business in the Philippines and a domestic corporation with the
partner without the consent of all the other stockholders because a corporation is not manager of the partnership be appointed jointly by the partners from

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among those nominated foreign corporation, may be allowed provided 2. continuity of existence operations
that the agreement expressly stipulates that both parties shall be 3. its credit is strengthened by its 3. its credit is weakened by the
jointly and severally liable for all the obligations of the partners in the continuity of existence limited liability feature
Philippines 4. Centralized management in the 4. lack of personal element.
o Agreement that two partners will manage the partnership so that the board of directors. 5. greater degree of governmental
management of the corporate interest is not surrendered, the general 5. its creation, management, supervision
rule will not apply. organization and dissolution are 6. management and control are
o Cases where SEC has allowed corporations to enter into partnership standardized as they are separated from ownership.
with other corporations or individuals, provided: governed under one general 7. Stockholders have little voice in
 All the corporation partners must be managing partners and incorporation law. the conduct of the business.
consequently, the AOP must stipulate that all the partners 6. limited liability
are and shall be solidarily liable 7. shareholders are not the general 8. Stockholders’ voting rights have
 Statute or their respective charters or AOI must expressly agents of the business become theoretical because of
allow the corporations to enter into partnership agreement 8. transferability of shares the use of proxies and
and the nature of the business venture to be undertaken is widespread ownership
in line with the business authorized by law or AOI
 Where one of the partners is a foreign corporation, it must Sec. 3. Classes of corporations. - Corporations formed or organized under this Code may be
obtain a license to transact business in the country in stock or non-stock corporations. Corporations which have capital stock divided into shares
accordance with the Corporation Code and are authorized to distribute to the holders of such shares dividends or allotments of the
(3) AS A LIMITED PARTNER surplus profits on the basis of the shares held are stock corporations. All other corporations
 A foreign corporation can be a limited partner in a Philippine Limited Partnership are non-stock corporations.
in view of the following:
o There is no existing Philippine law expressly prohibiting a foreign
STOCK CORPORATION
corporation from becoming a limited partner in the partnership  Ordinary business corporation created and operated for the purpose of making a
o A corporate investor should also be allowed to make passive profit which may be distributed in the form of dividends to stockholders on the
investments in a partnership as a limited partner. By being a limited basis of their invested capital
partner, the corporation would not be bound beyond the amount of its  The 2 elements mentioned in Section 3 must be present
investment by the acts of the other partners who are not its duly
appointed and authorized agents and officers NON-STOCK CORPORATION
o Section 42 of the Corpo Code which permits a corporation to invest its  Do not issue stock and distribute dividends to their members; they are created not
fund in another corporation or business, does not require that the
for profit but for public good and welfare
investing corporation be involved in the management of the investee  Charitable, religious, social, civic literary, scientific and political organizations and
corporation with a view to protects its investment.
societies
 No risk that a corporate limited partner would be solidarily  No capital stock which can be subscribed by their members
liable with the partnership  Governed by Title XI
o (US Jurisprudence and common commercial practice) corporations are
o The provisions governing stock corporations, when pertinent, are
not barred from acting as limited partners applicable to non-stock corporations except as may be covered by
o Such ruling would be consistent with the policy to encourage and specific provision of Ttile XI
facilitate domestic and foreign investments in the Philippine business
enterprise Other Classification of Corporations
(1) NUMBER OF PERONS WHO COMPOSE THEM
Advantages and Disadvantages of a Business Corporation a. Corporation Aggregate - more than 1
b. Corporation Sole – usually associated with clergy; it is a religious corporation
ADVANTAGES DISADVANTAGES which consists of one member or corporator only and his successors, such as a
1. has a legal capacity to act and 1. Complicated in formation and bishop
contract as a distinct unit in its management (2) RELIGIOUS OR NOT
own name 2. high cost of formation and

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a. Ecclesiastical Corporation – for religious purposes; classified into corporation sole
and religious societies
b. Lay Corporation – for a purpose other than for religion; eleemosynary or civil
(3) CHARITABLE OR NOT
a. Eleemosynary Corporation – established for, or devoted to, charitable purposes
b. Civil Corporation – for business or profit
(4) STATE UNDER OR BY WHOSE LAWS THEY HAVE BEEN CREATED
a. Domestic Corporation
b. Foreign Corporation – formed, organized, or existing under any laws other than
the Philippines; for tax purposes, further classified into resident or non-resident
(5) LEGAL RIGHT TO CORPORATE EXISTENCE
a. De Jure Corporation – in fact and in law
b. De Facto Corporation – in fact but not in law
(6) OPEN TO PUBLIC OR NOT
a. Close Corporation – limited to selected persons or members of a family
b. Open Corporation
(7) RELATION TO ANOTHER CORPORATION
a. Parent or Holding Corporation – one which is so related to another corporation
that it has the power, either directly or indirectly, through one or more
intermediaries, to control or to elect the majority of the directors of such other
corporation
b. Subsidiary Corporation – so related to another corporation that the majority of its
directors can be elected, either directly or indirectly, by such other corporation
which thereby become its parent corporation; another corporation owns at least a
majority of the shares
c. Affiliated Corporation – related to another by owning or being owned by common
management or by a long-term lease of its properties or other control device
(8) WHETHER THEY ARE FOR PUBLIC (GOV’T) OR PRIVATE PURPOSE
a. Public Corporations – formed or organized for the government of a portion of the
State for the general good and welfare
b. Private Corporation – for some private purpose, benefit or end; may be stock or
non-stock, government-owned or –controlled or quasi-public
a. Private Corporation include:
i. GOCC – government are majority stockholder; Example:
GSIS, NPC, PNR
ii. Quasi-Public – private corporations which have accepted
from the State the grant of franchise or contract involving
the performance of public duties but which are organized
for proft; Example: electric, water, telephone and
transportation companies
 TEST: Created by the State as its own agency or instrumentality for political or
public purpose connected with the administration of the government = PUBLIC
CORPORATION
(9) CORPORATION IN A TRUE SENSE OR LIMITED SENSE
a. True Corporation – exists by statutory authority
b. Quasi-Corporation – exists without a formal legislative grant; exception to the
general rule that corporation can exist only by authority of law
a. Corporation by Prescription – which has exercised corporate powers for
an indefinite period without interference on the part of the sovereign
power and which by fiction of law is given the statues of a corporation
b. Corporation by Estoppel –which in reality is not a corporation because
it is so defectively formed, but is considered a corporation in relation to
those only who, by reason of their acts or admissions, are precluded
from asserting that it is not a corporation
Important distinctions between Public and Private Corporation
PUBLIC PRIVATE
Subject to governmental visitation and Contract between the State and the
control corporation or incorporators; not subject to
control and visitation of the State except in
exercise of police power
May be created without the consent of the Consent of incorporators is necessary to the
locality to be affected creation of a private corporation
Taxation, to question of liability for the torts or negligence of officers and agents and to
various other questions
Dual Status of Public Corporations
 Governmental or public and proprietary or private, and in the exercise of the
former, it is a “municipal government”, while as to the latter, it is a “corporate
legal individual”
 PubCorp engaged in the performance of governmental or public functions is not
liable for damages occasioned by the negligent or wrongful actions of its officers,
agents or employees.
 TEST: Whether or not the act performed is for the common good or it is for the
special benefit or profit of the corporate entity
Sec. 4. Corporations created by special laws or charters. - Corporations created by special
laws or charters shall be governed primarily by the provisions of the special law or charter
creating them or applicable to them, supplemented by the provisions of this Code, insofar
as they are applicable.
Incorporation of a Private Corporation by a Special Act
 Enactment of a special act creating a private corporation is subject to the
constitutional limitation that such corporation shall be owned and controlled by
the government.
 Reason for the restriction:
o To prevent the granting of special privilege to one body of men without
giving all others the right to obtain them in the same condition
o To prevent bribery and corruption of the legislature
Governing Law
 Corporation created by special law is primarily governed by such law and
suppletorily, by the provision of this Code “insofar as they are applicable”
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 Constitution (ART. IX, B-SEC 2[1]) officers and employees of GOCC with original (4) MEMBERS OR COPORATORS OF A CORPORATION
charters are placed under the Civil Service, and thus, subject to the Civil Service  Has no capital stock
Law; Those incorporated under the General Incorporation Law, the Corpo Code,  All incorporators in a stock corporation must now own or at least be a subscriber
are governed by the Labor Code to at least 1 share of the capital stock of such corporation
 GOCC may be organized under the provisions of the Corpo Code and not by special
law; it would be proper to increase its capitalization by amending its AOI instead of Difference of Incorporator and a Corporator
Congress passing legislation to this effect
CORPORATOR INCORPORATOR
Government as a Member of a Corporation stockholder (stock corporation) or signatory to the AOI
(1) JURISDICTION OF THE SEC member (non-stock corporation)
 No jurisdiction over corporations with original charter or created by special law. they may cease to be such if they fait accompli; accomplished fact
However, the SEC can rule on the status of a corporation as to whether it is GOCC subsequently lose their shareholdings (the Articles of Incorporation cannot be
belonging to this type amended to replace them)
(2) RIGHTS POWERS, OR PRIVILEGES no restriction as to number number is limited to 5-15
 The government never exercises its sovereignty may be such through a guardian must have contractual capacity
 Acts merely as a corporator
 The mere fact that the government happens to be a majority stockholder of a Three Other Classes
corporation does not make it a PubCorp (1) PROMOTERS
 Bring about or cause to bring about the formation and organization of a
Sec. 5. Corporators and incorporators, stockholders and members. - Corporators are those corporation by bringing together the incorporators or the persons interested in
who compose a corporation, whether as stockholders or as members. Incorporators are the enterprise, procuring subscriptions or capital for the corporation and setting in
those stockholders or members mentioned in the articles of incorporation as originally motion the machinery which leads to the incorporation of the corporation itself
forming and composing the corporation and who are signatories thereof. (2) SUBSCRIBERS
 A person who has agreed to take and pay for original and unissued shares of a
Corporators in a stock corporation are called stockholders or shareholders. Corporators in a corporation formed or to be formed
non-stock corporation are called members.  May not be a stockholder; he becomes a stockholder only from the time his
subscription is accepted by the corporation or the corporation’s officer is accepted
Components of a Corporation by him
(1) CORPORATORS  All incorporators are subscribers but a subscriber need not be an incorporator
 Compose the corporation, whether stockholders or members; term also includes (3) UNDERWRITER
incorporators and stockholders or members who become such after incorporation  “A person, usually an investment banker, who
of the corporation a. Has agreed, alone or with others, to buy at stated terms an entire issue
(2) INCORPORATORS of securities or a substantial part thereof; or
 Corporators mentioned in the AOI as originally forming and composing the b. Has guaranteed the sale of an issue by agreement to buy from the
corporation and who executed and signed the AOI and acknowledged the same issuing party any unsold portion at a stead price; or
before a notary public; all incorporators are corporators but a corporator is not c. Agreed to use his “best efforts” to market all or part of an issue; or
necessarily all an incorporator d. Has offered for sale stock he has purchased from a controlling
(3) STOCKHOLDERS stockholder
 Owners of shares of stock in a stock corporation
 Owners of the corporation Agreement or Contract with a Corporation
 Also called shareholders (1) BETWEEN CORPORATORS AND CORPORATION
 May be natural or juridical persons but only natural persons can be incorporators  Essential to the existence of a private corporation that there shall be an agreement
 Under Sec 3, to be classified as a stock corporation between the corporators and corporation
o Must have capital stock divided into shares (2) BETWEEN EACH MEMBER AND CORPORATION
o Must be “authorized to distribute to the holders of such shares  There is ordinarily no contract between individual members in the formation of a
dividends or allotments of the surplus profits on the basis of the shares corporation.
held”

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 Contract is between each individual member and the whole body of members in
their collective capacity, represented by the corporation, that is, between each
member and the corporation.
Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided
into classes or series of shares, or both, any of which classes or series of shares may have
such rights, privileges or restrictions as may be stated in the articles of incorporation:
Provided, That no share may be deprived of voting rights except those classified and issued
as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided,
further, That there shall always be a class or series of shares which have complete voting
rights. Any or all of the shares or series of shares may have a par value or have no par value
as may be provided for in the articles of incorporation: Provided, however, That banks,
trust companies, insurance companies, public utilities, and building and loan associations
shall not be permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the
distribution of the assets of the corporation in case of liquidation and in the distribution of
dividends, or such other preferences as may be stated in the articles of incorporation which
are not violative of the provisions of this Code: Provided, That preferred shares of stock
may be issued only with a stated par value. The board of directors, where authorized in the
articles of incorporation, may fix the terms and conditions of preferred shares of stock or
any series thereof: Provided, That such terms and conditions shall be effective upon the
filing of a certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and non-
assessable and the holder of such shares shall not be liable to the corporation or to its
creditors in respect thereto: Provided; That shares without par value may not be issued for
a consideration less than the value of five (P5.00) pesos per share: Provided, further, That
the entire consideration received by the corporation for its no-par value shares shall be
treated as capital and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring compliance
with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the certificate of
stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases allowed by
this Code, the holders of such shares shall nevertheless be entitled to vote on 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 or other
corporations;
7. Investment of corporate funds in another corporation or business in accordance with this
Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to approve
a particular corporate act as provided in this Code shall be deemed to refer only to stocks
with voting rights.
Power to Classify
 Unless restricted by the law or the provision of its AOI, a corpo has unrestricted
freedom to issue such classes or series of shares as the prospects and needs of its
business may require to attract investors.
o “series” – subdivision of a class of shares
 Primary classification of shares is common and preferred, each of which may be
divided into other classes.
 There must be at least one class of stock, and by SEC 6 (Par. 1), a corpo must have
at least one class of stock with voting rights. A corpo may issue only one class or
kind of share.
When Classification of Shares be made
(1) BY INCORPORATORS
 Classes and number of shares which a corporation shall issue are first determined
by the incorporators as stated in the AOI filed with the SEC
(2) BY THE BOARD OF DIRECTORS AND THE STOCKHOLDERS
 After the corpo comes into existence, they may be altered by the board of
directors and the stockholders by amending the AOI pursuant to SEC 16.
o If the amendment changes or restricts the rights of any class of shares,
or authorizes preferences in any respect superior to those of
outstanding shares of any class, any stockholder shall have the right to
dissent and demand payment of the fair value of his shares
Classification to comply with Constitutional or Legal Requirements
 Corporation may, furthermore, classify its shares for purpose of insuring
compliance with constitutional or legal requirements
 AOI may classify shares of stock into Class A and Class B
o Class A – exclusively by Filipino citizens only
o Class B – either Filipino or Foreigners
o Aliens and foreign corpo cannot own A shares. The articles, however,
may permit aliens to buy A shares.
 Corporations classify shares for reasons of expediency, primarily for monitoring
purposes.
o The PAR VALUE or number of one class of shares may be more than the
others
 Classification of common shares of stocks into A and B shares have never been
obligatory
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o Some corporations which engage in business where there is a cap on
foreign ownership classify their shares with the number of B shares
corresponding to the maximum percentage of foreign ownership
allowed so that they won’t have to keep checking on their foreign
shareholders
 Constitution does not distinguish between common and preferred shares, as the
term “capital”, as used in ART 11 SEC 11, in the computation of the foreign
ownership limit for domestic corporations
o The SC, however, has ruled that the 40% limit refers only to common
stock entitled to vote directors
Shares presumed equal in all respects
(1) AUTHORITY OF THE BOARD OF DIRECTORS TO CLASSIFY SHARES
 Board of Directors has no authority to classify shares of stock where the AOI are
silent on the matter.
(2) CONSENT OF STOCKHOLDERS TO CHANGE OF TERMS AND PREFERENCES OF SHARES
 AOI or the charter of a corpo being considered as a contract between the corpo
and the stockholders, the corpo is under obligation to observe the provisions
thereof and it cannot without the consent of the stockholders, change the terms
and preferences of classes of shares.
(3) RIGHT TO VOTE OF ALL CLASSES OF SHARES
 If one class of shares has the right to vote, all other classes are presumed to have
the same voting power.
 Stockholders have one vote for each share held by them, which excludes fractional
voting
 SEC 6 is construed to mean that unless denied in the AOI, all shares regardless of
class enjoy all the rights of a stockholder.
o Right to vote may be denied by implication as where the AOI provides
that “only holders of common stocks shall have the right to vote”
DOCTRINE OF EQUALITY OF SHARES
 In the absence of any provision in the AOI and in the certificate of stock to the
contrary, all stocks, regardless of their class nomenclature, enjoy the same rights
and privileges and subject to the same liabilities.
CAPITAL STOCK
 Amount fixed in the AOI, to be subscribed and paid in or agreed to be paid in by
the stockholders of a corporation, in money, property, services or other means at
the organization of the corporation or afterwards and upon which it is to conduct
its business, such contribution being made either directly through stock
subscription or indirectly through the declaration of stock dividends
(1) AUTHORIZED CAPITAL STOCK
 The amount of capital stock as specified in the AOI.
 If the shares of stock have no par value, the corporation has no authorized capital
stock, but it has capital stock the amount of which is not specified in the AOI as it
cannot be determined until all the shares have been issued.
 Additional shares may not be issued unless the AOI are amended by vote of
stockholders
(2) SUBSCRIBED CAPITAL STOCK
 Amount of capital stock subscribed, whether fully paid or not.
 Connotes an original subscription contract for the acquisition by a subscriber of
unissued shares in a corporation and would, therefore, preclude the acquisition of
shares by reason of subsequent transfer from a stockholder or resale of treasury
shares
(3) OUTSTANDING CAPITAL STOCK
 Portion of the capital stock which is issued and held by persons other than the
corporation itself.
 Total shares of stock issued to subscribers or stockholders, whether or not fully or
partially paid (as long as there is a binding subscription agreement), except
treasury shares
(4) PAID UP CAPITAL STOCK
 Portion of the subscribed or outstanding capital stock that is actually paid.
 “ACTUAL CAPITAL STOCK” also used to refer to the amount of the capital stock
actually subscribed and paid for
(5) UNISSUED CAPITAL STOCK
 Portion of the capital stock that is not issued or subscribed. It does not vote and
draws no dividends.
(6) LEGAL CAPITAL
 Amount equal to the aggregate par value and/or issued value of the outstanding
capital stock.
 When par value shares are issued above par, the premium or excess is not to be
considered as part of the legal capital.
o No par value shares, the entire consideration received forms part of
legal capital and shall not be available for distribution as dividends
 “STATED CAPITAL” is used instead of legal capital to refer to “the portion of the
amount contributed by purchasers of no par value stock that is credited to the
capital account”
CAPITAL
 Used broadly to indicate the entire property or assets of the corporation. It
includes the amount invested by the stockholders plus the undistributed earnings
less losses and expenses.
o In case of stock dividends, it is the amount that the corporation
transfers from its surplus profit account to its capital account.
o Same amount that can loosely be termed as “trust fund” for the
payment of the debts of the corporation, to which the creditors may
look for satisfaction
Capital Stock and Capital distinguished
CAPITAL CAPITAL STOCK
Actual corporate property; a concrete thing An amount; it is abstract
Fluctuates or varies from day to day Amount fixed in the AOI and is unaffected by

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according as there are profits or losses or profits and losses.  A share of stock only typifies a proportionate or aliquot part of the corporation’s
appreciation or depreciation of corporate property, or the right to share in its proceeds to that extent when distributed
assets; may be greater or lesser than the according to law.
capital stock o Does not represent property of a corporation
Belongs to the corporation; may be real or When issued, belongs to stockholders;
personal property always personal property CERTIFICATE OF STOCK
 Written acknowledgment by the corpo of the interest, right, and participation of a
Capital Stock and Legal Capital distinguished person in the management, profits, and assets of a corporation.
 Legal Capital is merely an amount and remains unchanged except as outstanding  Formal written evidence of the holder’s ownership of one or more shares and is a
shares are increased or reduced in number or amount convenient instrument for the transfer of title
 Capital Stock limits the maximum amount or number of shares that may be issued
without formal amendment of the AOI Share of Stock and Certificate of Stock distinguished
 Legal Capital sets the minimum amount of the corporate assets which for the
protection of corporate creditors, may not be lawfully distributed to stockholders SHARE OF STOCK CERTIFICATE OF STOCK
Incorporeal or intangible property Tangible property
STOCK OR SHARES OF STOCK Represents the right or interest of a person Written evidence of that right or interest
 One of the units into which the capital stock is divided. in a corporation
 It represents the interest or right which the owner has - May be issued even if the subscription is not General rule, a certificate of stock may not
a. In the management of the corporation in which he takes part through fully paid, except in no par shares be issued unless the subscription is fully paid
his right to vote Situs of the share of stock is deemed to be May have a situs at the place where it is
b. In a portion of the corporate earnings, if and when segregated in the the state where the corpo has its domicile located or at the domicile of the owner, even
form of dividends which is ordinarily the State under whose though the corpo is domiciled elsewhere
c. Upon its dissolution and winding up, in the property and assets of the laws it was created
corporation remaining after the payment of corporate debts and
liabilities to creditors  Possession of a certificate of stock is not essential to ownership of stock because
the right to stock may exist independently of the certificate
Capital Stock and Shares of Stock distinguished
 The term “stock” or “share of stock” is commonly use in a distributive sense to Situs of Shares of Stock for certain purposes
refer to the stock in the hands of the stockholders and, therefore, belongs to them (1) PURPOSES OF EXECUTION, ATTACHMENT, AND GARNISHMENT
 Capital stock is used in a collective sense to signify the whole body of shares of  Situs is the domicile or residence of the corporation which is the place where the
stock in a corporation principal office of the corporation is located
(2) REGISTRATION OF CHATTEL MORTGAGES ON SHARES OF STOCK
Nature of Share of Stock  Situs is the province or city in which the corporation has its principal office or place
 The ownership of share of stock confers no immediate legal right or title to any of business
property of the corporation. (3) PURPOSES OF PROPERTY TAXATION
 Each share merely represents a distinct undivided share or interest in the common  General Rule
property of the corporation o The situs of the intangible property is at the domicile or residence of
 It constitute property distinct from the capital or tangible property of the the owner
corporation and belong to the different owners  Exception
 Incorporeal in nature, the shares are personal property of the stockholder. o Not controlling when it is inconsistent with express provisions of
 The property of the corporation does not belong, in law, to the stockholders but to statute, or when justice does not demand that it should be, as where
the corporation as a distinct legal entity or artificial person the property has in fact a situs elsewhere
 They are in the nature of choses in action but are not such in a strict sense. They o NIRC, for purposes of estate tax, the gross estate of a resident decent,
do not constitute an indebtedness of the corporation to the shareholder and are, whether citizen or alien, or a citizen decent, whether resident or non-
therefore, not credits as to make the stockholder a creditor of the corporation resident, includes his intangible personal property wherever situated.

Classes of Shares in General

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1. Par value or no par value o Corpo are prohibited from issuing multiple voting and non-voting
2. Voting or non-voting common shares nor can they limit the maximum number of votes per
3. Common or preferred, and preferred shares may be voting, convertible, or stockholder irrespective of the number of share he holds
redeemable. They may be:  Only shares classified and issued as “preferred” or “redeemable” may be deprived
a. Preferred as to assets in case of liquidation or preferred as to dividends of voting rights, unless otherwise provided in this Code
and the latter, in turn, may be either:  Whenever a vote is necessary to approve a particular corporate act, such vote
i. Cumulative or non-cumulative refers only to stocks with voting rights except in certain cases when even non-
ii. Participating or non-participating voting shares may also vote
4. Promotion share o One share, one vote
5. Share in escrow
6. Convertible share NON-VOTING SHARE
7. Founders’ share  Share without voting
8. Redeemable share  If stock is originally issued as voting stock, it may thereafter be deprived of the
9. Treasury share right to vote without the consent of the holder
 Where no-voting shares are provided for, the Code requires that there shall always
PAR VALUE SHARE be a class or series of shares which have complete voting rights
 One with a specific money value fixed in the AOI and appearing in the certificate of  The issuance of common stock with a feature that voting rights thereof shall be
stock exercised by a trustee violates the rule that common shares cannot be deprived of
 Primary purpose is to fix the minimum subscription or issue price of the shares voting rights
 A corporation may issue shares with different par values. Shares issued less than  In case any amendment of the AOI has the effect of changing or restricting the
par value are referred to as “watered stocks” rights of any stockholder, the latter shall have the right to dissent and demand
 Par value of a stock remains the same regardless of the market value or book value payment of the fair value of his shares
of the stock, except when there is a stock spli
o It is not usually the price at which investors buy or sell stock COMMON SHARES
 One which entitles the holder thereof to a pro rata division of the profits, if there
NO PAR VALUE SHARE are any, and in its assets upon dissolution, without any preference or advantage in
 One without any stated value appearing on the face of the certificate of stock. It is that respect over the stockholders or class of stockholders but equally with all
a stock which does not state how much money it represents other stockholders except preferred stockholders
 No par value but it has always an “issued value” (ie, consideration fixed by the  Basic class of stock which private corporations generally issue
corporation for its issuance)  Have complete voting rights and they cannot be deprived of said rights except as
 Does not purport to represent any stated proportionate interest in the capital provided by law
stock measured by value, but only an aliquot part of the whole number of such  Common stockholders are the residual owners of the corporation.
shares of the issuing corporation  Common stock has preference in the matter of management
 A corpo may issue no par value only, or together with par value shares.  Simplest corporate structure has only one kind of stock – all common. When only a
 No par value stockholders have the same rights as holders of par value stock single class of stock is issued, then all shares are alike and all issues are common
 Capital stock of a corporation issuing only no par shares is not set forth by a stated stock
amount of money, but instead is expressed to be divided into a stated number of
shares, such as 1000 shares. PREFERRED SHARE
 One with a stated par value which entitles the holder thereof to certain
VOTING SHARE preferences over the holders of common stock
 A share with a right to vote  May be issued only with a stated par value
 Generally, customary to give the right to vote to the common stock and to  Are designed to induce persons to subscribe for shares of a corporation
withhold it from the preferred  The term “guaranteed stock” is sometimes used synonymously with preferred
o Each common share shall be equal in all respects to every common stock on which the payment of dividend is guaranteed and a distinction is
share. sometimes drawn to the effect that guaranteed stock is entitled to arrears in
dividends, while ordinary preferred stock is not

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 Interest bearing stock on which the corporation agrees absolutely to pay interest
before dividends are paid to common stockholders is legal only when construed as
requiring payment of interest as dividends from net earnings or surplus only
PROMOTION SHARES
 Shares as are issued to promoters, or those in some way interested in the
company, for incorporating the company, or for services rendered in launching or
promoting the welfare of the company, such as advancing the fees for
incorporating, advertising, attorney’s fees, surveying and etc.
 Shares as are issued to those who may originally own the mining or valuable rights
connected therewith, in consideration of their deeding the same to the mining
company when the company is incorporated
SHARE IN ESCROW
 Share subject to an agreement by virtue of which the share is deposited by the
grantor or his agent with a third person to be kept by the depository until the
performance of a certain condition or the happening of a certain event contained
in the agreement
 Escrow deposit makes the depository a trustee under an express trust
 Legal title to the subject matter to be conveyed remains in the grantor until the
condition is fulfilled. (issuance is subject to suspensive condition)
 Before the fulfilment of the condition, the grantee or holder is not yet the owner
of the shares and consequently, he is not entitled to the rights belonging to a
regular stockholder
CONVERTIBLE SHARE
 Which is convertible or changeable by the stockholder from one class to another
class at a certain price and within a certain period (from preferred to common)
 EXCEPT:
o As may be restricted by the AOI, the stockholder may demand
conversion at his pleasure.
 Where the corpo has previously issued stock to the entire authorized limit, it
cannot, of course, issue additional stocks if the authorized common stock of the
corpo is fully subscribed.
 Although the preferred shares possess the quality of being convertible into
common shares per AOI, such conversion is not automatic.
o Amendment is necessary
Convertability of Shares
(1) PREFERRED SHARES INTO COMMON
 In the absence of an express provision in the AOI as to their convertability,
preferred shares cannot be converted into common.
(2) NO PAR VALUE SHARE TO PAR VALUE
 The conversion of no par value shares to par value is allowed by SEC provided that
there would be no change in the stockholder’s percentage interest in the total
assets of the corporation.
 If the conversion would result in the increase in the number of shares, the same
should be allocated to the existing stockholders in proportion to the number of
shares held by then without changing the total peso amount of the total
outstanding shares.
Nature of Par Value/Book Value/Market Value
(1) PAR VALUE
 The par value indicated in the certificate of stock represents the amount of money
or property contributed by the shareholder to the capital stock of the corporation.
 The assets of a company cannot always be equal to the par value of the
outstanding stock, the assets being constantly in a state of fluctuation as the
business prospers or declines
 Means face value or value equal to the face of the stocks or bonds.
(2) BOOK VALUE
 Par value does not always reflect its book value or its actual or true value which
may be determined by dividing the total stockholders’ equity or the net value of
the total corporate assets by the number of shares issued or outstanding.
 Unpaid subscriptions are considered part of the assets of a corporation which the
board of directors may at any time declare due and payable, they should be
included in the computation of book value
 Book values does not attach to unissued or reacquired shares
(3) MARKET VALUE
 Par value and book value may be more or less than market value
 The price at which a willing seller would sell and a willing buyer would buy,
assuming that both have a reasonable knowledge of the facts, and neither being
under abnormal pressure
 Affected by supply and demand
Presumption as to Value of Corporate Stock
 Corporate stock is “at par” when it is worth its face value and “above par” or at a
“premium” when it is worth more.
 No presumption exists, in the absence of supporting evidence, that corporate
stock is worth its par or face value.
 However, in the absence of contrary evidence, there is a presumption that
corporate stock is worth its par or face value
Statutory restrictions regarding the issuance of no par value shares
1. Bank, trust companies, insurance companies, and building and loan associations
shall not be permitted to issue no par value share stocks
2. Preferred shares of stock of any corporation may be issued only with a stated par
value
3. Shares issued without par value shall be deemed fully paid and non-assessable and
the holder of such shares shall not be liable to the corporation or to its creditors in
respect thereto.
a. Means that the holder shall not be liable beyond the issued price,
notwithstanding a change in their value
4. Shares without par value may not be issued for a consideration less than the value
of 5 pesos per share
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5. The entire consideration received by the corporation for its no par value shares  Share the holder of which is entitled to receive dividends on said share to the
shall be treated as capital, and, therefore, shall not be available for distribution as extent agreed upon before any dividends at all are paid to the holders of common
dividends. stock
 There is no guarantee that it will receive any dividends. The corpo is not bound to
Consideration for No Par Value Shares pay dividends unless the board of directors declare them.
 Since the value of corporate stocks fluctuate and rarely represents the par value, o Preference means that holders of common stock may receive dividends
corporations are authorized to issue no par value shares. only after the satisfaction of the prior claims on dividends of preferred
o Such shares may aid the investor to understand the factors which stockholders.
determine stock value
 While all the par value stocks must be issued at a uniform value or price, no par Preference among Preferred Shares
value stocks may be issued from time to time at different prices or values although  A corpo may issue more than one class of preferred stock as to assets or as to
the holders of all these shares are entitled to share equally in the distribution of dividends.
the profits and assets of the corporation o Certain preferred shares may be given first preference or second
preference on earnings
Advantages and Disadvantages of Par Value Shares  Unless a classification is provided in the AOI, the rule is that preferred shares of
stock enjoy the same preferences and privileges.
ADVANTAGES DISADVANTAGES
Easily sold as the public is more attracted to Subscribers are liable to corporate creditors Preferred Stockholders not Creditors of the Corporation
buy this kind of shares for their unpaid subscription  Preferred shares are not part of the corpo’s stock
Greater protection to creditors Stated face value of the share is not an (1) LIEN UPON CORPORATE PROPERTY
accurate criterion of its true value  Preferences granted to preferred stockholders do not give them a lien upon the
Unlikelihood of sale of subsequently issued property of the corporation nor make them creditors of the corporation, the rights
shares at a lower price of the former being always subordinate to the latter
Unlikelihood of the distribution of dividends (2) STOCK ISSUED WITH A FIXED INTEREST
that are only ostensible profit  Stock cannot be issued with a fixed interest instead of dividends inasmuch as this
will make the contract of subscription one of loan and make the corporation a
Advantages and Disadvantages of No Par Value Shares debtor of the subscriber
 Shareholders, common and preferred, are risk takers who invest capital in the
ADVANTAGES DISADVANTAGES business and who can look only to what is left after corporate debts and liabilities
Issued as fully paid and non-assesable They legalize large issues of stock for are fully paid.
(3) STOCK ISSUED WITH DIVIDENDS PAYABLE IN THE NATURE OF INTEREST
property
 Dividends payable by the corpo may be in the nature of interest as where the
Price is flexible They conceal the money or property
parties, under an agreement, intended the repurchase by the corporation of
represented by the shares
preferred shares with agreed cumulative dividends of a fixed percentage per
Low-priced stocks enjoy wider distribution They promote issuance of watered stock
annum, on their respective schedule dates to be an absolute or unconditional
They tell no untruth concerning the value of Lesser protection to creditors
obligation which does not depend on the financial ability of the corpo
the stockholder’s contribution
(4) STOCK ISSUED WITH DIVIDENDS PAYABLE GUARANTEED
Stock dividends are more easily issued,  The fact that dividends are, in terms, guaranteed, does not make them creditors.
thereby simplifying accounting procedure They are entitled to dividends only when there are profits out of which dividends
may be declared.
Kinds of Preferred Shares (5) STOCK ISSUED TO CREDITORS
(1) PREFERRED SHARE AS TO ASSETS  It is immaterial how or where the holder obtained his stock since the preference
 Share which gives the holder therof preference in the distribution of the assets of belongs to the stock and not to the stockholder.
the corporation in case of liquidation
 Preferred stock, standing alone, creates a preference only to dividends and not to Limitations regarding issuance of Preferred Shares
assets in case of liquidation 1. Preferred shares deprived of voting rights in the AOI shall still be entitled to vote
(2) PREFERRED SHARE AS TO DIVIDENDS on matters enumerated in SEC 6, PAR 6

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2. Must not be violative of the provisions of this Code
3. May be issued only with a stated par value
4. BOD may fix the terms and conditions of preferred shares of stock or any series
therof only when so authorized by AOI and such terms and conditions shall be
effective upon filling a certificate therof with the SEC
Authority of BOD to fix terms and conditions of Preferred Shares
(1) BENEFITS FROM AUTHORITY GIVEN
 The authority enables the board, without delay and expense of amendment of the
AOI, to “tailor its securities to meet changes in market conditions which cannot be
foreseen at the time of incorporation or later amendment of the AOI...”
(2) CONCURRENCE OF STOCKHOLDERS NOT REQUIRED
 It would not need the concurrence of 2/3rds of the outstanding capital under SEC
16 for the board to fix the terms and conditions of the preferred shares where
authorized by the AOI
(3) BLANKET AUTHORITY NOT CONTEMPLATED
 It would be contrary to SEC 6 of the Code to give the BOD blanket authority to fix
the terms and conditions of the preferred shares without stating the privileges,
preference, restrictions, or rights of the preferred shares.
 SEC does not allow a provision giving the BOD a blanket authority to fix the terms
of preferred shares unless such guidelines are followed in the determination
thereof.
Kinds of Preferred Shares as to Dividends
(1) CUMULATIVE PREFERRED SHARES
 Share which entitles the holder thereof not only to the payment of current
dividends but also to dividends in arrears.
(2) NON-CUMULATIVE PREFERRED SHARES
 Share which entitles the holder thereof to the payment of current dividends only
in preference to common stockholders.
 If dividends are not declared in a given year, the right to the dividends for that
particular year is extinguished
(3) PARTICIPATING PREFERRED SHARES
 Shares which gives the holder thereof not only the right to receive the stipulated
dividends at the preferred rate but also to participate with the holders of common
shares in the remaining profits pro rata after the common shares have been paid
the amount of the stipulated dividend at the same preferred rate
(4) NON-PARTICIPATING PREFERRED SHARES
 Share which entitles the holder thereof to receive the stipulated preferred
dividends and no more.
 The balance is given entirely to the common stocks
 In the absence of an agreement, dividends should be deemed non-cumulative and
non-participating in accordance with the presumption established in SEC 6
(5) CUMULATIVE-PARTICIPATING PREFERRED SHARE
 Share which is a combination of the cumulative share and participating share.
 Holder is entitled not only to dividends in arrears but also, after receiving his
preferred shares of dividends, to participation with the holders of common stock
in the remaining profits.
Sec. 7. Founders' shares. - Founders' shares classified as such in the articles of incorporation
may be given certain rights and privileges not enjoyed by the owners of other stocks,
provided that where the exclusive right to vote and be voted for in the election of directors
is granted, it must be for a limited period not to exceed five (5) years subject to the
approval of the Securities and Exchange Commission. The five-year period shall commence
from the date of the aforesaid approval by the Securities and Exchange Commission.
FOUNDERS’ SHARES
 Shares issued to the organizers and promoters of the corporation in consideration
of some supposed right or property. Such shares usually share in profits only after
a certain percentage has been paid upon the common stock, but are often given
special privileges over other stock as to voting and as to division of profits in
excess of minimum dividend on the common stock
(1) SPECIAL RIGHTS AND PRIVILEGES
 Shares of stock of a corporation, close or non-close, may include founders’ shares
classified as such in the AOI
 May be given special rights and privileges not enjoyed by the owners of other
stock including common stocks, such as preference in the payment of dividends
and/or distribution of assets...to encourage them to make large investments in the
proposed corpo
(2) EXCLUSIVE RIGHT TO VOTE AND BE VOTED
 The exclusive right to vote and be voted for in the election of directors is granted,
such right must be for a limited period not exceeding 5 years subject to the
approval of SEC, the period to commence from the date of said approval
 5 year limit and the SEC approval requirement are designed to protect the interest
of the other stockholders against possible abuse by a minority holding founders’
shares granted exclusive right to vote and be voted for in the election of directors,
to hold office for an unlimited term.
o Limitation not extendable
 SEC 7 provides for an exception to the rule in SEC 6 PAR 1
 Limitation refers only to the exclusive right to vote and be voted for in the election
of directors, a right normally enjoyed by holders of common shares, the class of
shares which are supposed to have complete voting right
 Preferred shares are not affected
Sec. 8. Redeemable shares. - Redeemable shares may be issued by the corporation when
expressly so provided in the articles of incorporation. 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, and upon such other terms
and conditions as may be stated in the articles of incorporation, which terms and conditions
must also be stated in the certificate of stock representing said shares.
REDEEMABLE OR CALLABLE SHARES
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 Shares, usually preferred, which by their terms are redeemable at a fixed date or
at the option of either the issuing corpo or the stockholder or both at a certain
redemption price
(1) MEANING OF REDEMPTION
 It is repurchase, the reacquisition of stock by a corpo which issued the stock in
exchange for cash or property, whether or not the acquired stock is cancelled,
retired or held in the treasury.
 Redemption of stock dividends previously issued is sometimes used by
corporations as veil for the constructive distribution of cash dividends.
(2) WHEN REDEEMABLE SHARES MAY BE ISSUED
 Refer to shares issued by a corpo which said corpo may purchase or take up from
their holders upon the expiration of a fixed period and upon such terms and
conditions expressly provided in its AOI and certificate of stock representing said
share
 Issued only when expressly provided in the AOI
 Common shares are never redeemed
(3) REDEMPTION REGARDLESS OF EXISTENCE OF UNRESTRICTED RETAINED EARNING
 Upon expiration of the period fixed, they may be taken up or purchased by the
corpo, regardless of the existence of unrestricted retained earnings in the books of
corpo
 Rule in SEC 41 is different.
o In case of redeemable shares, the shareholder is conferred the right of
a creditor to attract corporate financing
 Issuance of the shares may be likened to the issuance of bonds or debt papers
 Strict compliance with statutory or contractual provisions of redemption is
essential
 Retirement or redemption of stock by a corporation is different from a purchase
by a corporation of its own stock.
(4) WHERE CORPORATION INSOLVENT
 Redeemable shares may be redeemed regardless of the existence of unrestricted
retained earnings, provided that the corpo has, after such redemption, assess in its
books to cover debts and liabilities inclusive of capital stock.
 Redemption cannot be made where the corpo is insolvent or if such redemption
would cause insolvency
 Limitation is based on the principle that corpo assets are trust fund for creditors
(5) TERMS AND CONDITIONS
 All the terms and conditions affecting such shares must be stated not only in the
AOI but also in the certificate of stock representing said shares
 Provisions in the articles relating to the redemption of preferred stock are, in
effect, a contract between the issuing corpo and the preferred stockholders and
strict compliance thereof is essential.
 Corpo cannot redeem before the redemption period or at a discount price in
contravention of AOI to improve financial position
o Remedy is to amend the articles by changing the redemption features
of the preferred shares
(6) REDEMPTION OPTIONAL WITH CORPO
 Redeemable shares provided in SEC 8 are of the optional, not obligatory type
(7) MAINTENANCE OF A SINKING FUND
 For protection of stockholders, all corpo which have issued redeemable shares
with mandatory redemption features are required by the SEC to set up and
maintain a sinking fund where cash is gradually set aside in order to accumulate
the amount necessary to meet the redemption price of redeemable shares at
specified dates in the future
 Fund shall be deposited with a trustee bank and shall not be invested in risky or
speculative ventures
(8) PURPOSE OF REDEMPTION
 Restriction to be exercised in the discretion of the BOD for the benefit of the
owners of the corpo, holders of common shares.
 Safeguard to enable a corpo to retire an obli or claim on the earnings, usually at a
premium when it becomes advisable for purposes of financing
 Unless otherwise stated in the AOI and certificate of stock, preferred shares shall
be deemed irredeemable
(9) EFFECT OF REDEMPTION
 Redemption by the corpo of its stock is a repurchase of it for cancellation.
 Retirement of a class of stock destroys all rights adhering to the shares of that
class
 Upon redemption, redeemable shares lose their status as part of the outstanding
or unissued authorized capital stock
o Considered treasury shares after redemption if by provision of the AOI
they can be reissued
 Where the reissuance of redeemed shares is prohibited, the number of authorized
shares of the capital stock of the corpo is reduced accordingly, and the AOI must
be amended to reflect such reduction
(10) VOTING RIGHTS
 Redeemable shares may be deprived of voting rights in the AOI, unless otherwise
provided in the Code
Sec. 9. Treasury shares. - Treasury shares are shares of stock which have been issued and
fully paid for, but subsequently reacquired by the issuing corporation by purchase,
redemption, donation or through some other lawful means. Such shares may again be
disposed of for a reasonable price fixed by the board of directors.
TREASURY SHARES
 Shares which have been lawfully issued by the corpo and fully paid for and later
reacquired by it either by purchase, redemption, donation, forfeiture or other
lawful means
(1) STATUS
 Sec 41 empowers a stock corpo to purchase or acquire its own shares for
legitimate corpo purposes.
 Only surplus earnings may be used for the purchase of treasury sales
 Treasury shares are not retired shares. They do not revert to the unissued shares
of the corpo but are regarded as property acquired by the corpo which may be
reissued or resold by the corpo at a price to be fixed by the BOD
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 Retirement of treasury shares can be effected by decreasing the capital stock of
the corpo in accordance with SEC38 for the purpose of eliminating the treasury
shares
 Are issued shares but being in the treasury, they do not have the status of
outstanding shares, in the sense that they do not constitute a liability of the corpo
 Corpo may eliminate treasury shares by reducing its authorized capital stock. Since
they do not lose their status as issued shares, they cannot be treated as new issues
when disposed or reissued
 May be used for a variety of corpo purposes such as for stock bonus plan for
management and employees, or for acquiring another company
 Must be distinguished from the authorized but unissued shares in that the
acquisition of the former does not reduce the number of issued shares or the
amount of stated capital stock and their sale does not increase the number of
issued shares or the amount of stated capital
(2) WHERE ACQUISITION FROM STOCKHOLDERS
 Shares may be acquired by the corpo from stockholders by purchase, redemption,
or donation, or through some other lawful means
o If by purchase from stockholders, the transaction is a return to them of
the value of their investment in the company and a reversion of the
shares to the corpo
 In such cases, it is required that the corpo must have surplus
with which to but the shares so that the transaction will not
cause an impairment of its capital
o If donated, their act would simply amount to the surrender of their
stock without getting back their investments which are voluntarily
given to the corpo
 Treasury shares are recorded at cost
(3) DIVIDEND RESTRICTION ON RETAINED EARNINGS
 GENERAL RULE
o A corpo can reacquire its own shares provided it has an adequate
amount of unrestricted retained earnings to support the cost of the
said share. Capital stock is preserved
 Amount of such earnings equivalent to the cost of the treasury shares being held,
cannot be declared and distributed as dividends
o Restriction shall be lifted only after the treasury shares are reissued or
retired in accordance with law
(4) DECLARATION AS PROPERTY DIVIDEND
 Treasury shares are being unrealized income, are not considered as part of earned
or surplus profits and therefore not distributable as dividends.
o BUT, if there are retained earnings arising from the business of the
corpo, treasury shares may properly be distributed as property
dividend
(5) VOTING RIGHTS
 Treasury shares have no voting rights as long as they remain in the treasury
(6) RIGHT TO DIVIDENDS
 Neither are treasury shares entitled to dividends or assets because dividends
cannot be declared by a corpo to itself.
(7) RESALE
 They may be sold by the corpo at any price the BOD sees fit to accept, even at less
than par value or issued value, the corpo having already received the full value
upon their initial issuance, provided such price is reasonable under the
circumstances:
o Stockholders may rightfully complain if the price is lower than the
reasonable
o In case of sale or reissue, the treasury shares again becomes
outstanding stock and regain whatever dividends and voting rights they
originally held
o Treasury shares differ from retired or cancelled shares in that while the
latter has disappeared altogether, the former may be sold. SEC 36(6)
expressly authorizes stock corpo to sell treasury shares subject to the
provision of SEC 9. Their status on resale differs from that of newly
created shares which cannot be issued for less than the legal minimum
consideration
o Resale of treasury shares should be treated as a sale of ordinary
property of the corpo; hence, the gain therefrom is subject to tax. The
purpose of the sale is to recover the amount paid by the corpo for said
shares.
Sec. 10. Number and qualifications of incorporators. - Any number of natural persons not
less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are
residents of the Philippines, may form a private corporation for any lawful purpose or
purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at
least one (1) share of the capital stock of the corporation.
Incorporation of a private corporation a mere privilege
 GENERAL RULE
o Incorporation is generated by agreements of a group of persons and
may, therefore, be likened to other contracts which individuals may
enter into.
 EXCEPTION
o However, it is necessary that legislative authority be obtained to put a
stamp of state intervention in the creation of corporations, such power
being one of the attributes of sovereignty.
o The right to be and act as a corporation does not belong to any person
as a natural or civil right, but as a special privilege conferred upon a
group of persons by the sovereign power of the state
 Since a corpo is a creation of law, it can be easily dissolved at any time by
legislative enactment subject to certain limitations
Advantages of the Corporate Form
1. Any number of persons may unite in a single enterprise without using their own
names, without difficulty or inconvenience, and with the valuable right to contract,
to sue and be sued, to hold or convey property in the corpo name, and to act as a
legal unit
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2. Individual stockholder may invest in the corporate enterprise as much or as little

as he sees fit, without risking more, and, in the absence of statutes to the contrary,
this is the limit of his liability. Stockholders are not liable for the debts of the
corporation. They can transfer their shares without the consent of the other
stockholders
3. Rights and obligations of a corporation are not affected by death or change of the
individual members, but the corpo business continues uninterrupted and
unaffected so long as the corpo entity continues. Its credit is strengthened by such
continuity of existence
4. Modern corpo makes great undertakings feasible since it enables many individuals
to cooperate in order to furnish the large amounts of capital necessary to finance
the gigantic enterprises of modern times.

Corporations and Associations Distinguished

CORPORATION
Defined by SEC 2 of this Code
Legal entity deriving its existence from
franchise
Private corporations are governed by the
Corpo Code
Can acquire properties of all kinds and may
incur obligations and bring civil or criminal
actions
Must be registered in the SEC
ASSOCIATION
Is one of vague meaning, used to indicate a
collection of persons who have joined
together for a certain object...formed for
moral, benevolent, social, patriotic, or
political purposes
Narrower sense of term, is a creature of
contract without a legal entity separate from
the individuals composing it
Associations are generally governed by the
provisions of the Civil Code
Cannot sue or be sued, cannot enter into
contracts, cannot acquire properties; not
competent to act as agents
The fact that a group of persons adopt a
name and operate without first being
organized as a legal entity, does not make
their acts necessarily void
Need not be registered in the SEC; An
unregistered organization, however, cannot
exercise the powers, rights and privileges
incident to incorporation and expressly
granted to registered corpo under SEC 36
General Rule: courts will not interfere with
the internal affairs of an unincorporated
assoc as to settle disputes bet members on
questions of policy, discipline and internal
gov’t

Concept of Franchise


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Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof: Provided, however, That when any such
ostensible corporation is sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its lack of corporate
personality.

On who assumes an obligation to an ostensible corporation as such, cannot resist

performance thereof on the ground that there was in fact no corporation.

Estoppel to deny corporate existence

 An unincorporated association which represented itself to be a corporation, will be
estopped from denying its corporate capacity in a suit against it by a third person
who relied in good faith on such representation

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