Corporation Law - In the absence of summons on the corporation, a
judgment against it is void for lack of jurisdiction and
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.
Attributes of a Corporation:
1. Artificial being;
2. Created by operation of law;
3. Enjoys the right to succession;
4. Has the powers, attributes and properties expressly
authorized by law or incident to its existence.
Doctrine of Corporate Entity
- A corporation is a legal or juridical person with a
personality separate and distinct from its individual
stockholders or members and from any other legal
entity to which it may be connected or related.
- The law treats it as though it were a person by
process of fiction thus facilitating the conduct of
corporate business.
Corporation as an Artificial Personality: Consequences
1. Liability for acts or contracts.
General Rule: obligations incurred by a corporation,
acting through its authorized agents, are its sole
liabilities.
o A corporation may not, generally, be made
to answer for acts or liabilities of its
stockholders and vice versa.
o A suit against certain stockholders of a
corporation cannot be a suit against the
unpleaded corporation itself without
violating the principle that a corporation
has a legal personality distinct and separate
from its stockholders.
2. Liability when exceptional circumstances warrants.
- Thus, it may validly attach when the director/trustee
or officer acted maliciously or in bad faith, or with
gross negligence (Sec. 31, 65)
- There is no law that prohibits a corporate officer
from binding himself personally to answer for a
corporate debt. (Toh v. Solid bank Corp)
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,
4. Right to acquire and possess property.
- It may possess property of all kinds.
- Property acquired by the corporation is in law the
property of the corporation itself as a distinct legal
entity and not that of the stockholders or members
as such and vice-versa.
5. Acquisition by court of jurisdiction
- The personality of the president of a corporation is
distinct from that of corporation itself.
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lack of due process.
6. Changes in individual membership.
- A corporation remains unchanged and unaffected in
its identity by changes in its i+ndividual membership.
Corporation as a Person, Resident, or Citizen
1. As a person
- Persons are divided into natural and artificial
persons. The term “person” prima facie includes
both and, therefore as a general rule, includes
corporations but in a figurative sense only.
2. As a resident or nonresident
- It is deemed a resident or a nonresident of a
particular state or country within the meaning of a
statute, if it is within the purpose and intent of the
statute such as those defining the jurisdiction of the
courts, or relating to venue, taxation, etc.
3. As a citizen
- Citizenship is the status of a citizen with its rights
and privileges and corresponding duties and
obligations.
- In corporation, it is in the sense of indicating the
country under whose laws the corporations were
organized.
Doctrine of Piercing the Veil of Corporate Entity
1. When legal fiction to be disregarded
- Where the fiction of corporate entity is being used
as a cloak or cover for fraud or illegality or “to defeat
public convenience, justify wrong, protect fraud, or
defend crimes.
2. Effect as to liability
- The corporation will be treated merely as an
association of individuals or collection of persons
undertaking business as a group and the liability will
attach personally or directly to the officers and
stockholders.
- Where there are 2 corporations, they will be merged
into one, the one being merely regarded as the
instrumentality, agency, conduit, or adjunct of the
other.
3. Application of doctrine in 3 areas:
1. Defeat of public convenience – when the
corporate fiction is used as a vehicle for the
evasion of existing obligation;
2. Fraud cases – when the corporate entity is used
to justify wrong, protect fraud, or defend a
crime;
3. Alter ego cases
– where a corporation is merely a farce since
it is a mere alter ego or business conduit of
a person
– 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 or another 1. The court must first acquire jurisdiction over the
corporation. corporation/s involved before it can apply the
doctrine.
Instances Where Doctrine Applied 2. The doctrine must be raised during a full-blown
trial over a cause of action duly commenced
1. Where the transaction was entered into by the
involving parties duly brought under the
President who was also the treasurer and general
authority of the court.
manager of a close family corporation where the
incorporators and directors belong to one single Right of Succession of a Corporation
family.
2. Where a corporation functions for the benefit of a - A corporation has a capacity of continuous existence
single person who has complete control over the irrespective of the death, withdrawal, insolvency, or
funds and the said person is the sole owner thereof. incapacity of the individual stockholders or members
In such a case, the corporate entity is but an alter and regardless of the transfer of their interest or
ego or business conduit of the owner. shares of stock.
3. Where the corporation is a mere instrumentality of o The life of the corporation is limited to the
the individual stockholders, the latter must period of time stated in the articles of
individually answer for corporate obligations. incorporation not exceeding 50 years from the
4. Where a subsidiary company is created by a parent date of incorporation unless sooner dissolved or
company merely as an agency of the latter, said period extended.
especially if the stockholders or officers of the two o Corporations created by special laws have the
corporations are substantially the same or their right of succession for the term provided in the
system of operations unified or where parent laws creating them.
company assumes complete control of the operation
of its subsidiary’s business. Powers, Attributes, and Properties of a Corporation
5. In workmen’s compensation cases, where there is
- A corporation may exercise only such powers as are
admission that 2 corporations are sister companies,
granted by the law of its creation. All powers which
operating under one single management, and
may be implied from those expressly provided by
housed in the same building.
law and those which are incidental or essential to
6. Where a corporation is dissolved and its assets are
the corporation’s existence may also be exercised.
transferred to another corporation to avoid financial
liability of the first corporation to its employees, Distinctions between a Partnership and a Corporation
both firms being owned and controlled by the same
persons with the result that the second corporation Partnership Corporation
should be considered a continuation and successor Manner of Creation
of the first entity. Created by mere agreement Created by law or operation
of the parties of law
3 Elements – Piercing the Corporate Veil: Number of Incorporators
Organized by only 2 persons Organized at least 5
1. Instrumentality or control test incorporators (except
- Control - Complete dominion, not only of finances corporation sole)
Commencement of Juridical Personality
but of policy and business in respect to the
Commences from the Commences from the date of
transaction attacked so that the corporate entity as
moment of the execution of issuance of the certificate of
to this transaction had at the time no separate mind, the contract of partnership incorporation by the SEC
will or existence of its won. Powers
2. Fraud test Exercise any power Exercise only those expressly
- Such control must have been used by the defendant authorized by the partners granted by law or implied
to commit farud or wrong, violation of a statutory or from those granted or
other positive legal duty, or dishonesty and unjust incident to its existence
Management
act in contravention of plaintiff’s legal rights.
If not agreed upon, every The power to do business is
3. Harm/Causal Connection Test partner is an agent of the vested in the board of
- The control and breach of duty must proximately partnership directors or trustees.
cause the injury or unjust loss complained of. Effect of Mismanagement
A partner can sue a co- The suit against a member of
Acquisition by Court of Jurisdiction over Corporation/s partner who mismanages the board of
Involved directors/trustees who
mismanages must be in the
- A corporation not impleaded in a court cannot be name of the corporation
the subject to the court’s process of piercing the Right of Succession
corporate veil. No right of succession Has right of succession
- Implications: Extent of Liability to Third Persons

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The partners are liable The stockholders are liable
personally and subsidiarily only to the extent of their Need not be registered with SEC provided does not result
for partnership debts to 3rd investment as represented to new corp. or part.
persons by the shares subscribed by
2. Joint venture with foreign corporation licensed to do
them
business here in the Philippines for undertaking certain
Transferability of Interest
A partner cannot transfer his A stockholder has the right to phases of the construction
interest in the partnership to transfer his shares without 3. Where partnership agreement provides that 2 partners
make the transferee a the prior consent of the will manage the partnership so that the management of
partner without the consent other stockholders the corporate interest is not surrendered
of all the other existing
partners Certain cases where SEC allowed
Terms of Existence
1. All corporate partners must be managing partners and
Established for any period May not be formed for a
stipulated by the partners term in excess of 50 years solidarily liable
extendible to not more than 2. Statue or charters expressly allow
50 years 3. Where one of the partners is a foreign corporation
Firm Name licensed to transact business
A limited partnership is May adopt any firm name
required by the law to add provided it is not identical or Corporation as limited partner
the word “Ltd.” To its name similar to any registered firm
name or contrary to existing Foreign Corporation can be a limited partner in a Philippine
law Limited partnership
Dissolution
May be dissolved at any time Can only be dissolved with Reason:
by the will of any or all of the the consent of the State
partners 1. No express law prohibiting foreign corp.
Laws which Govern
Governed by Civil Code Governed by the Corporation 2. A corporate investor should also be allowed to make
Code passive investments in limited partnership just like an
investor in a corp.

Similarities between a Partnership and a Corporation: 3. Sec. 42 of Corp. Code does not require that the investing
corporation be involved in the management
1. Have a juridical personality separate and distinct
from that of the individuals composing it. 4. Jurisprudence and common commercial practice in US
2. Can act only through agents. indicated that corporations are not barred from acting as
3. An organization composed of aggregate of limited partner
individuals.
4. Distributes its profits to those who contribute capital Advantages of a business corporation
to the business.
1. Has Legal capacity to act and contract in its own name
5. Can be organized only where there is a law
2. Continuity of existence because of its non-dependence
authorizing its organization.
on the lives who compose it
6. A partnership is taxable as a corporation, subject to
3. Credit id strengthen by continuity of existence
income tax.
4. Management is centralized
Corporation as a partner 5. Creation, organization, management and dissolution are
centralized
General rule: a corporation cannot enter into partnership 6. Makes feasible gigantic financial undertaking
with other corporation or with individuals 7. Shareholders have limited liability
8. They are not general agents of the business
Reason: 9. Shares of stock can be transferred w/o the consent of
other stockholders
1. Corp. Can act only through its duly authorized officers
and agents and not bound by acts of anyone else Disadvantage
2. Public policy since it would be bound of the acts of
persons not duly appointed and authorized 1. Complicated in formation and management
3. Corporate assets would be subjected to risk and liabilities 2. High cost in formation and operation
not contemplated by stockholders 3. Credit is weakened by limited liability
4. Lack of personal element in view of transferability of
Exception: shares
5. Greater degree of governmental control and supervision
1. Enter into joint venture
6. Management and control are separated from ownership
Provided: the nature of the venture is in line with
business authorized by their charters

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7. Stockholders voting rights have become theoretical by
use of proxies and widespread ownership 5.
8. Little voice in the conduct of business
Sec. 3. Classes of corporation.- Corporation formed or
organize under this code may be stock or non-stock
corporations. Corporations which have capital stock divided
into shares and are authorized to distribute to the holders of
such shares dividends or allotments of the surplus profits on 6.
the basis of the shares held are stock corporations. All other
corporations are non-stock corporations.
Their legal right to corporate existence
a. De jure corporation - is a corporation existing in fact
and in law
b. De facto corporation - is a corporation existing in fact
but not in law
Whether they are open to public or not
a. Close corporation - is one which is limited to selected
persons or members of a family

Classification of corporation under this Code

b. Open corporation - is one which is open to any person
Stock Corporation Non-stock Corporation who may wish to become a stockholder or member
Ordinary business Do not issue stock and thereto
corporation created and distribute dividends to
operated for the their members and 7. Their relation to another corporation
purpose of making a created for public good a. Parent or Holding Corporation - is one which is so
profit which may be and welfare
related to another corporation that it has the power,
distributed in the form
of dividends to either directly or indirectly, to control or to elect the
stockholders on the majority of the directors of such other corporation
basis of their invested
capital b. Subsidiary corporation - is one related to another
Has capital stock No capital stock corporation that the majority of its directors can be
Sources from investors Sources from elected, either directly or indirectly, by such other
contribution and
corporation which thereby become its parent
donation
corporation. Another corporation owns atleast 50% or
Other Classifications of corporations
majority of the shares
1. Number of person
a. Corporation aggregate - is a corporation consisting of c. Affiliated corporation - is one related to another by
more than one member or corporator owning or being owned by common management or by a
b. Corporation sole or a special form of corporation - is long-term lease of its properties or other control device.
usually associated with the clergy. Consist of one
member or corporator only and his successors, such as 8. Whether public or private purpose
bishop. a. Public corporation - is one formed or organized for the
government or portion of the state
2. Whether religious purpose or not
a. Ecclesiastical corporation - is one organized for b. Private corporation - is one formed for some private
religious purposes. Either corporation sole or religious purpose, benefit, or end
societies.
i. Government-owned or controlled corporations -
b. Lay Corporation - is one organized for the purpose are those created or organized by the government or of
other than for religion. Either eleemosynary or civil. which the government is the majority stockholders

3. Whether charitable purpose or not ii. Quasi-public corporation or private corporations

a. Eleemosynary corporation - is one established or - are those which have accepted from the state the grant
devoted for charitable purpose or those supported by of franchise or contract involving the performance of
charity public duties.

b. Civil corporation - is one established for business or 9. Whether true sense or limited
profit a. True corporation - is one exist by statutory authority

4. Whose laws they have been created b. Quasi-corporation - is one exist without formal
a. Domestic corporation - is one incorporated under the legislative grant
laws of the Philippines
i. Corporation by prescription - is one which
b. Foreign corporation - is one formed, organized or exercised corporate powers for an indefinite period
existing under any laws other than those of the without interference on the part of the sovereign power
Philippines

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 and which by fiction of law is given the status of a
corporation
ii. Corporation by estoppel - is one which in reality is
not a corporation, either de jure r de facto, 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
Governing Law
A corporation created by special law or charter is primarily
governed by such law and suppletorily, by the provisions of
the Code “insofar as they are applicable.”
GOCC’s may be created
1. by original charter or special law which will be governed
under Civil Service Law

Distinctions between Public and Private Corporation 2. by provisions of Corporation Code

Public Private Corporations organized under Corporation Law is under

Subject to governmental Charter of private Labor Code
visitation and control corporation is a contract
between the state and Jurisdiction of SEC
the corporation which,
under constitution  No jurisdiction over corporations with original
prohibiting laws charter or created by special law
impairing the obligation
 However, SEC can rule on the status of the
of contract, renders not
subject to visitation corporation whether GOCC’s or Private Corp.
control and change by
Government, as a member of a corporation, never exercise its
the state except exercise
of the police power sovereignty but acts only as a mere corporator
Created without the Consent of the
consent of the locality to incorporators is Sec. 5. Corporators and Incorporators, stockholders and
be effected necessary to the members.- Corporators are those compose a corporation,
creation of the private whether as stockholder or as members. Incorporators are
corporation those stockholders or members mentioned in the articles of
incorporation as originally forming and composing the
corporation and who are signatories’ therof.
Dual status of public corporation
Corporators in a stock corporation are called
Governmental or public Proprietary or private
stockholders or shareholders. Corporators in a non-stock
Municipal government Corporate legal
individual corporation are called members.
Not liable for damages Liable for damages
Components of a Corporation
occasioned by the
negligent or wrongful
1. Corporators – those who compose the corporation,
action of its officers,
agents or employee whether stockholders or members

2. Incorporators – those corporators mentioned in the

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 application to them, supplemented
by the provisions of this Code, insofar as they are applicable.
Incorporation of private corporation by special act.
The enactment of special act creating a private corporations
is subject to the constitutional limitations that such
corporation shall be owned or controlled by the government.
Reason:
1. to prevent the granting of special privileges
2. to prevent bribery and corruption of the legislature
articles of incorporation as originally forming and composing
the corporation and who are signatories thereof and
acknowledge the same before a notary public
3. Stockholders – owners of shares of stock in a stock
corporation.
4. Members – corporators of a corporation which has no
capital stocks
Note:
 All incorporators are corporators but not all corporators
are incorporators
 Shareholders maybe natural or juridical persons but only
Natural persons are incorporators
Other classes

5. Promoters – persons who bring about or causes to bring

about the formation and organization of a corporation by
bringing together the incorporators or the person interested
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in the enterprise, procuring subscription or capital for the
corporation and setting in motion the machinery which leads
to the incorporation of the corporators itself
6. Subscribers – persons who have agreed to take and pay for
original, unissued shares of a corporation formed or to be
formed
Note: all incorporators are subscribers but a subscribers but a
subscriber need not be an incorporators
7. Underwriters – a person who
a. has agreed to buy at stated terms an entire issue
of securities or a substantial part thereof
b. has guaranteed the sale of an issue by agreement
to buy from the issuing party any unsold portion at a stated
price
c. has agreed to use his best effort to market all or
part of an issue
d. has offered for sale stock he has purchased from a
controlling stockholder
8. Board of directors – governing body in a stock corporation
9. Trustees – governing body in a non-stock corporation
10. Corporate Officers – the officers who are identified as
such in the Corporation Code, the Articles of Incorporation, or
the by-laws of the corporation
Agreement or contract with a corporation
1. Bet. Corporators and corporation – agreement is essential.
There can be no such thing as corporation aggregate without
members and a person cannot become member except by
agreement
2. Bet members and corporation – ordinarily no contract
between them. The contract is between each individual
member and the whole body of members represented by the
corporation
Sec. 6. Classification of Shares. – The shares of stock of stock
corporation 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.
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Preferred shares of stock issued by any corporation
may be given preference in the distribution of the assets to
the corporation in case of liquidation and in the distribution
of dividends, or such other preference as may be stated in
the articles of incorporation which are not violative of the
provision 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 stocks or any series thereof: provided, that such
terms and conditions shall be effective upon the filling 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 pesos (P5.00) 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 respect 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 stock with voting rights.
Power to classify
 The shares of stock corporation “may be divided into
classes or series of shares, or both, any of which
classes or series of shares may have rights, privileges
or restrictions as may be stated in the articles of
Incorporation”
 A corporation has unrestricted freedom to issue such
classes or series of shares
Unless
1. Restricted by the law
2. The provision of its articles of incorporation
 Primary classification of shares
1. Common
2. Preferred
Each of which may be divided into other classes
Shares may differ with respect to:
1. Voting rights
2. Dividend rights
3. Right to corporate assets
 There must be at least one class of stock with voting
rights
 A corporation may issue only one class or kind of
share
When Classification of shares may be made
1. First determined by the incorporator as stated in the
Articles of Incorporation
2. After the corporation comes into existence, they may be
altered by the Board of Directors and the stockholders by
amending the articles of incorporation
Note: If the amendment changes or restricts the rights of any
class or authorize preference, any stockholder shall have the
right to DISSENT and DEMAND payment of fair value of his
shares
- A corporation may, furthermore, classify its shares
for the purpose of insuring compliance with
constitutional or legal requirement.
Ex: Class A and Class B. Class A for Filipino and Class B for
Filipino and Foreigner
- Corporation classify shares for reason of expediency
primarily for monitoring purpose
“Doctrine of equality of shares” – means that in the absence
of any provision in the articles of incorporation and in the
certificate of stock to the contrary, all stocks, regardless of
their class nomenclature, enjoy the same rights and privilege
and subject to the same liabilities.
 The Board of Directors has no authority to classify
shares of stock where the articles of incorporations
are silent on the matter
 The consent of the stockholders are necessary to
change the terms and preference of classes of shares
of stocks provided therein
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 If one of shares has the right to vote, all other
classes are presumed to have the same voting power
 The terms and conditions of preferred shares of
stock may be fixed by the board of directors only
when authorized in the articles of incorporation
Capital stock – the amount fixed in the articles of
incorporation, to be subscribed and paid in or agreed to be
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.
a. Authorized capital stock – the amount of capital stock as
specified in the articles of incorporation. Synonymous with
capital stock where the shares of the corporation have par
value
- if shares of stock has no par value, the corporation has no
authorized capital stock but it has capital stock
b. Subscribed capital stock – amount of the capital stock
subscribed, whether fully paid or not. Connotes original
subscription
c. Outstanding capital stock – the total shares of stock issued
to subscribers or stockholders, whether or not fully or
partially paid, except treasury shares
d. Paid-up capital stock – that portion of the subscribed or
outstanding capital stock that is actually paid
e. Unissued capital stock – that portion of the capital stock
that is not issued or subscribed
f. Legal capital – the amount equal to the aggregate par value
and/or issued value of the outstanding capital stock.
Note:
 when par value shares are issued above par, the
premium or excess is not to be considered as part of the
legal capital.
 if no par value shares, the entire consideration received
forms part of legal capital and shall not be available for
distribution
Ex: Authorized Capital Stock: 1,000,000 in 10,000 shares for
par value of 100 per share. 250,000 were subscribed.
Under Sec 13, 25% of the subscription is required to be paid,
thus 62,500 was paid.
Ans:
Authorized capital stock= 1,000,000, Subscribed, outstanding
or issued capital stock= 250,000, paid-up capital stock=
62,500, Unissued capital stock=750,000 and legal capital=
250,000
Capital – indicate the entire property or assets of the
corporation. Includes the amount invested by the
stockholders plus the undistributed earnings less losses and
expenses
 - Strict sense, refers to that portion of the net assets Certificate of stock – a written acknowledgement by the
paid by the stockholders as considered for the corporation of the interest, right, and participation of a
shares issued to them, which is utilized for the person in the management, profits, and assets of a
prosecution of the business of the corporation corporation
- In case of stock dividends, it is the amount that the
corporation transfers from its surplus profit account  It is the formal written evidence of the holder’s
to its capital account ownership of one or more shares and is a convenient
instrument for the transfer of title
Capital Capital stock
Actual corporate property, An amount, abstract Shares of stock Certificate of stock
concrete thing Incorporeal or intangible Tangible property
Fluctuates or varies from day An amount fixed in the property
to day articles of incorporation Right or interest of a person Written evidence of the right
Belongs to the corporation Belongs to stockholders or interest
Real or personal Always personal Issued even if the May not be issued unless the
subscription is not fully paid subscription is fully paid
except in no par share
Capital stock and legal capital Situs is deemed to be the Situs is at the place where it
state where the corporation is located or at the domicile
Capital stock Legal capital has its domicile of the owner even though
Merely an amount and remains unchanged except as the corporation is domiciled
outstanding shares are increased or reduced in number or elsewhere
amount
Limits the maximum or Sets the minimum amount of
number of shares that may the corporate assets which Note: possession of a certificate of stock is not essential to
be issued without formal for the protection of ownership of stock because the right to stock may exist
amendment of the articles of corporate creditors, may not independently of the certificate
incorporation be lawfully distributed to
stockholders Situs of shares of stock

For purpose of execution, Domicile or residence of the

Stock or shares of stock – one of the units into which the attachment, and corporation
capital stock is divided, represents the interest or right which garnishment
the owner has For purpose of registration of Principal office or place of
chattel mortgage on shares business
a. In the management of the corporation through of stock
right to vote For purpose of property Domicile or residence of the
taxation owner
b. In proportion of the corporate earnings through Classes of Shares in general
dividends
1. Par value or no par value
c. upon dissolution and winding up assets of the
2. Voting or non-voting
corporation remaining after the payment of corporate debts
and liabilities. 3. Common or preferred, and preferred shares maybe voting,
convertible, or redeemable
Share of stock Capital stock
Distributive sense, stocks in Collective sense, signify the Preferred maybe
the hands of the whole body of shares of
stockholders stock in the corporation a. Cumulative or non-cumulative

b. Participating or non-participating
Nature of share of stock
4. Promote share
 Represents a distinct undivided share or interest
 Purely inchoate, or mere expectancy of a right in 5. Share in escrow
the management of the corporation
 Constitutes property distinct from the capital or 6. Convertible share
tangible property
7. Founders share
 Incorporeal in nature, the shares are personal
property 8. Redeemable share
 In nature of choses in action
 Do not constitute an indebtedness 9. Treasury Share
 Typifies a proportionate or aliquot part of the
corporation’s property

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Par value share - one with a specific money value fixed in the
articles of incorporation and appearing in the certificate of
stock
 Purpose: to fix the minimum subscription or
issue price of the shares
 Shares issued less than par value are called
watered stock
 The par value of a stock remains the same
regardless or market value or book value of the
stock EXCEPT when there is a stock split
No par value share – one without any stated value appearing
on the face of the certificate of stock, other words, it is a
stock which does not state how much money it represents
 No par value but it has always an “issued value”
 Does not purport to represent any stated
proportionate interest in the capital stock
measured by the value, but only an aliquot part
of the whole
 A corporation may issue no par value only or
together with par value shares
 No par value stockholders have the same rights
as holders of par value stock
Voting Share – share with right to vote
 Customary to give right to vote to common
stock and withhold it from preferred
 Only “preferred” and “redeemable” may be
deprived of voting rights
 Whenever a vote is necessary to approve a
particular corporate act, such vote refers only to
stocks with voting rights except in certain cases
when even non-voting shares may also vote
Non-voting share – share without right to vote
 If a stock is issued originally with voting rights, it
may not be deprived of the right to vote without
the consent of the holder
 No share may be deprive of voting rights except
those classified and issued as “preferred” or
“redeemable” unless otherwise provided in the
Code.
 The issuance of common stock with feature that
voting rights thereof shall be exercised by
trustee , violates the rule that common shares
cannot be deprive of voting rights
Common share of stock – a share which entitles the holder
thereof to a pro rata division of the profits, if there are any,
and in its assets upon dissolution, without any preference or
advantage over other stockholders or class of stockholders
but equally with all other stockholders EXCEPT preferred
stockholders
 So-called since it is the basic class of stock
issued by private corporation or because its
holders stand in equal footing without extra
ordinary rights or privileges
9
 Have complete voting rights, which cannot be
deprive except provided by law
 Common stockholders are residual owners of
the corporation
o Only gets the assets left over in case of
liquidation after all other securities are
paid
 The common stock, normally, has preference in
the matter of management
 The simplest corporate structure has only one
kind of stock-common.
 When only a single class of stock is issued, then
all shares are alike and all issues are common
stock
Preferred share of stock – one with a stated par value which
entitles the holder thereof to certain preference over the
holders of common stock
 It may only be issued with a stated par value.
 More than 1 class of preferred may be issued
 They are issued to induce persons to subscribe
for shares of corporation. Preference in:
o Dividends
o Distribution of assets
o Such other as maybe stated in articles
Note: each share shall be in all respect equal to every other
share except as otherwise provided in articles of
incorporation and stated in the certificate
 Thus, unless otherwise provided, preferred stocks
are presumed to be voting although they are rarely
given voting privileges
 Guaranteed stock is synonymous to preferred
stock
o Which the payment of dividend is
guaranteed, and sometimes entitled to
arrears in dividends
o While ordinary preferred stock is not
entitled
 Interest bearing stock 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 dividend from net earnings or
surplus only
o In effect, a preferred stock
Promotion share – shares which are issued to promoters, or
those in some way interested in the company, for
incorporating the company, or services rendered in launching
or promoting the welfare of the company such as advancing
fees, advertising, attorney’s fees, surveying, etc.
Shares in escrow – shares subject to 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 express trust
 The legal title remain in the grantor until the
condition is fulfilled, thus subject to suspensive
condition
 Before fulfillment, grantee or holder is not yet
the owner, hence not entitled to the rights
belonging to the stockholder
Convertible share – share which is convertible or changeable
by the stockholder from one class to another class at certain
price and within certain period
 The stockholder may demand conversion at his
pleasure except restricted by the articles of
incorporation
 If the entire authorized stock has been issued
and fully subscribed, it cannot issue additional
stock
 If necessary to create additional common stock
into which preferred stock can be converted, it
is done by reclassifying the preferred shares into
common
Convertibility of share
1. Preferred share to common – preferred shares cannot be
converted into common shares in the absence of an express
provision in the articles of incorporation as to their
convertibility
Reason: The terms of the preferred share contract cannot be
changed without the consent of the stockholders
2. No par value share to par value share – allowed by SEC
provided there would be no change in the stockholders
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
them without changing the total peso amount
of the total outstanding shares
Nature of par value/book value/ market value
1. Par value – represents the amount of money or property
contributed by the shareholders to the capital stock of the
corporation
 Assets cannot always equal to the par value of
outstanding shares since it is constantly in the
state of fluctuation
2. Book value – determined by dividing the total
stockholders’ equity or the net value of the total corporate
assets by the number of shares issued or outstanding.
 since unpaid subscription are considered part of the asset
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
10
3. Market value – the price at which a willing seller would sell
and a willing buyer would buy, assuming that both have
reasonable knowledge of the facts and neither being under
abnormal pressure
--> may be more or less than the par value and book value
 affected by the law of supply and demand
Ex: authorized capital stock 1,000,000 divided into shares
10,000 with par value 100 per share. Capital stock is fully
subscribed and paid.
Book value is determined by dividing 1,000,000 by 10,000
which is shares issued or outstanding.
If corporation makes a profit of 100,000, the increased book
value of each share would be 110.
If loss 100,000, its book value would be 90.
The market value may be 100,110 or 90.
 Corporate stock is “at par” when it is worth its face
value
 It is “above par” or at “premium” when it is worth
more
Limitations or restrictions imposed by law regarding
issuance of NO PAR value shares:
1. Banks, trust companies, insurance companies, and building
and loan associations shall not be permitted to issue no par
value shares of stock
2. Preferred shares of stock of any corporation may be issued
only with a stated par value
3. Shares without par shall be deemed fully paid and non-
assessable and the holder of such share shall not be liable to
the corporation or to its creditors in respect thereto. Means
not liable beyond the issue price
4. Shares without par may not be issued for consideration
less than the value of 5 pesos per share
5. 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
Note: no par value shares has no par value but it has issued
value
Advantage and disadvantage of Par Value Shares
Advantage Disadvantage
1. Easily sold 1. Subscribers are liable to
2. Greater protection to corporate creditors foe their
creditors unpaid subscription
3. Unlikelihood of sale of 2. Stated face value of the
subsequently issued shares shares is not an accurate
at a lower price criterion of its true value
4. Unlikelihood of the
distribution of dividends that
are only ostensible profits
 2. The preference of preferred shares must not be
violative of the provision of this code
Advantage and disadvantage of No par value shares 3. Preferred shares may be issued only with a stated
par value
Advantage Disadvantage
4. BOD may fix the terms and conditions of preferred
1. Issued as fully paid and 1. Legalize large issue of
non-assessable stock for property shares of stock only when authorized by articles of
2. Price is flexible 2. Conceal the money or incorporation
property represented by the - The authority enables the board to tailor its
shares securities to meet changes in the market conditions
3. Low-priced stocks enjoy 3. Promote issuance of which cannot be foreseen at the time of
wider distribution watered stock incorporation
4. Tell no untruth concerning 4. Lesser protection to
- It would not need the concurrence of 2/3 of the
the value of the creditors
stockholder’s contribution outstanding capital if authorized by the articles of
5. Stock dividends are easily incorporation
issued, simplify accounting - Blanket authority not contemplated, hence as a
matter of public policy, SEC does not allow a
provision giving the BOD a blanket authority unless
the guidelines and standards are followed
Kinds of Preferred shares Kinds of Preferred Shares
1. Preferred shares as to assets - shares which gives the 1. Cumulative Preferred shares – is a share which entitles the
holder thereof preference in the distribution of the assets of holder thereof not only to the payment of current dividends
the corporation in case of liquidation but also to dividend in arrears
2. Preferred shares as to dividends - shares which is entitled - if the stipulated dividend is not paid in a given year,
to receive dividends on said share to the extent agreed upon it shall be added to the dividend which shall be due the
before any dividends at all are paid to the holders of common following year and the accumulated dividends must be paid
stock to the holder of said preferred share before any dividend may
be paid to the holders of common stock
- no guaranty that it will receive any dividends.
2. Non-cumulative Preferred share – is a share which entitles
- the corporation is not bound to pay dividends
the holder thereof to the payment of current dividends only
unless the board of directors declare them
in preference to common stockholders
-> Corporation may issue different classes of preferred
-if dividends are not declared in a given year, the
shares
right to the dividends for that particular year is extinguished
-Unless a classification is provided in the articles of
3. Participating Preferred share – is a share which gives the
incorporation, the rule is that preferred shares of stock
holder not only the right to receive the stipulated dividends
enjoys the same preference or privileges
at the preferred rate but also to participate with the holders
-> Preferred stockholders are not creditors but has lien upon of common shares in the remaining profits pro rate after the
corporate property common shares have been paid the amount of the stipulated
dividends at the same preferred rate
-> stock cannot be issued with fixed interest instead of
dividend 4. Non-participating preferred shares – is a share which
entitles the holder thereof to receive the stipulated preferred
- it will make contract of subscription one of loan dividends and no more.

-> the stock issued with dividends payable by the corporation
may be in nature of interest as where the parties intended
the purchase with agreed cumulative dividends of a fixed
percentage per annum
-> it is immaterial how or where the holder obtained his stock
since the preference belongs to the stock and not to the
stockholder
4 Limitations regarding preferred shares:
1. Preferred shares deprived of voting rights in the
articles of incorporation shall still be entitled to vote
on matters enumerated in Sec 6.
11
- the balance is given entirely to the common stocks
Note: in the absence of an agreement, dividends should be
deemed non-cumulative and non-participating in accordance
with the presumption in Sec. 6 that shares are equal in all
respect unless otherwise stated in articles of incorporations
and in the certificate of stock
5. Cumulative-participating preferred share – the holder is
entitled not only to dividends in arrears but also to
participation with the holders of common stock in the
remaining profits
Sec. 7. Founders’ share – Founders’ share 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 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’ share – shares issued to the organizers and
promoters of a corporation in consideration of some
supposed right or property
- Usually share in profits only after certain percentage
has been paid upon the common stock but are often
given special privileges over other stock at to voting
and as to division of profits in excess of minimum
dividend on the common stock
- Special rights and privilege
o Preference in payment of dividend
o Distribution of assets in case of dissolution
o Right to convert shares
o Right to cumulative dividends
o Etc.
- The exclusive right to vote or be voted in the
election of BOD is granted and such may be exercise
for a limited period not exceeding 5 years subject to
approval of the SEC
o To protect the interest of other
stockholders
General Rule: no share may be deprive of voting rights except
those classified and issued as preferred or redeemable shares
Except: section 7
Refers only to the exclusive right to vote and be
voted for in the election of directors.
Preferred shares are not affected by the provisions in Sec 7.
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 corporation, and upon such other terms and
conditions stated in the articles of incorporation, which
terms and conditions must also be stated in the certificate
of stock representing said shares.
Redeemable shares
Redeemable or callable shares- are shares by their terms are
redeemable at a fixed date or at the option of either the
issuing corporation or the stockholder or both at a certain
redemption price.
(1) Redemption - it is the repurchase, the reacquisition
of stock by a corporation which issued the stock in
12
exchange for cash or property, whether or not the
acquired stock is cancelled, retired or held in the
treasury.
The redemption of stock dividends previously issued
is sometimes used by a corporation as a veil for the
constructive distributions of cash dividends.
(2) When redeemable shares maybe issued- they
maybe issued only when expressly so provided in the
articles of incorporation.
Common shares are never “redeemed”.
(3) Redemption regardless of existence of unrestricted
retained earnings- upon the expiration of the period
fixed, they may be taken up or purchased by the
corporation, regardless of the existence of
unrestricted retained earnings (see sec. 43) in the
books of the corporation
(a) The Rule in Sec. 41 is different. The power of the
corporation to acquire its own shares for the
purposes stated therein is subject to the
condition that there be unrestricted retained
earnings in its books to cover the shares
purchased or acquired. In the case of
redeemable shares, the shareholder is conferred
the right of a creditor to attract corporate
financing.
(b) The issuance of the shares may be likened to the
issuance of bonds or debt papers. Since the
terms and conditions of the purchase are stated
in the AOI, as well as in the corresponding
certificates of stock, corporate creditors and
other shareholders are supposed to be aware of
the same.
(c) Strict compliance with statutory or contractual
provisions of redemption is essential.
(4) Where corporation insolvent- redemption may not
be made where the corporation is insolvent or if
such redemption would cause insolvency or inability
of the corporation to meet its debts as they mature.
Such a limitation is based on the principle that
corporate assets are a trust fund for creditors.
(5) Terms and conditions- all the terms and conditions
affecting such shares must be stated not only in the
articles of incorporation 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 corporation and the preferred
stockholders and strict compliance thereof is
 essential. Thus, the corporation cannot redeem its
preferred shares before the redemption period or at
a discount price in contravention of the AOI to
improve its financial position. The remedy is to
amend the articles by changing the redemption
features of the preferred shares.
(6) Redemption optional with corporation- except as
otherwise provided therein, the redemption rests
entirely with the corporation, and the stockholder is
without right to either compel or refuse the
redemption of his stock. The redeemable shares
provided in Sec.8 are of the optional, not the
obligatory type.
(7) Maintenance of a sinking fund- for the protection of
a stockholders, all corporations 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.
The fund shall be put in a trustee bank and shall not
be invested in risky or speculative ventures.
(8) Purpose of redemption- it is a safeguard to enable a
corporation to retire an obligation or a claim on the
earnings, usually at a premium when it becomes
advisable for purposes of financing.
Unless expressly provided in the AOI and stated in
the certificate of stock, preferred shares shall be
deemed irredeemable.
(9) Effect of redemption- a redemption by the
corporation of its stock is, in a sense, a repurchase of
it cancellation. The retirement of a class of stock
destroys all rights adhering to the shares of that
class.
(a) In the case of redeemable shares reacquired by
the corporation, the same shall be considered
retired and no longer issuable, unless otherwise
provided in its AOI. The rule is different with
respect to treasury shares.
(b) Upon redemption, redeemable shares lose their
status as part of the outstanding or unissued
authorized capital stock. They are considered
treasury shares after redemption if by provision
of the AOI they can be reissued.
(c) Where the reissuance of the redeemed shares is
prohibited, either expressly or impliedly by
silence, the number of authorized shares of the
capital stock of the corporation 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.
13
Section 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. (n)
Treasury shares
Treasury shares- are shares which have been lawfully issued
by the corporation and fully ppaid for and later reacquired by
it either by purchase, redemption, donation, forfeiture or
other lawful means.
(1) Status- Sec. 41 expressly empowers a stock
corporation to purchase or acquire its own shares
for legitimate corporate purposes. Under Sec. 68,
the corporation, in the absence of a qualified bidder,
may bid at the public sale of delinquent shares and
title to the shares purchased shall be vested in the
corporation as treasury shares.
The purchase by the corporation operates, in effect,
as a forfeiture of the shares.
(a) Treasury shares are not retired shares. They do
not revert to the unissued shares of the
corporation but are regarded as pproperty
acquired by the corporation which may be
reissued or resold by the corporation at a price
to be fixed by the board of directors.
(b) Retirement of treasury shares can be effected
by decreasing the capital stock of the
corporation in accordance with Sec.38 for the
purpose of eliminating the treasury shares.
(c) Treasury shares are issued shares but being in a
treasury, they do not have the status of
outstanding shares, in the sense that they do
not constitute a liability of the corporation.
There are, therefore, not a part of outstanding
capital stock.
(d) A corporation may eliminate the 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 of or reissued.
(e) A treasury share or stock, which may be
common or preferred, may be used for a variety
of corporate purposes. It may be held
indefinitely, resold or retired.
(f) Treasury shares must be distinguished from
authorized but unissued shares in that the
acquisition of the former does not reduce the
number of unissued shares or the amount of the
stated capital.
(2) Where acquisition from stockholders- shares may
be acquired by the corporation from stockholders by
purchase, redemption, or donation, or through some
other lawful means.
 (a) If the corporation acquires the shares by
purchase from stockholders, the transaction is,
in effect, a return to them of the value of their
investments in the company, and a reversion of
the shares to the corporation.
(b) On the other hand, if the shares are donated to
the corporation by the stockholders, their act
would simply amount to the surrender of their
stock without getting back their investments
which are, instead, voluntarily given to the
corporation.
In both kinds of acquisition of the corporation,
therefore, the shares would have value but
inasmuch as they have been acquired by the
corporation, they would cease to represent any
right. Treasury shares are recorded at cost.
(3) Dividend restriction on retained earnings- as a
general rule, a corporation can reacquire its own
shares provided it has an adequate amount of
unrestricted retained earnings to support the cost of
the said shares. Thus, the capital stock is preserved.
Accordingly, the amount of such earnings equivalent
to the cost of the treasury shares being held, cannot
be declared and distributed as dividends.
(4) Declaration as property dividend- treasury shares
being unrealized income, are not considered as part
of earned or surplus profits, and, therefore, not
distributable as dividends, either in cash or stock.
But if there are retained earnings arising from the
business of the corporation, treasury shares, being
the property of the corporation, 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 corporation to itself.
(7) Resale – they may be sold by the corporation at any
price the board of directors sees fit to accept, even
at less than par or issued value, the corporation
having already received the full value upon their
initial issuance, provided such price is reasonable
under the circumstances:
(a) Stockholders may rightfully complain if the price
is lower than reasonable.
(b) In case of sale or reissue, the treasury shares
again becomes outstanding stock and regain
whatever dividends and voting rights they
originally held.
(c) Treasury shares differ from retired or cancelled
shares in that while the latter has disappeared
14
altogether, the former may be sold. Sec. 36(6)
expressly authorizes stock corporations to sell
treasury shares subject to Sec.9. Their status on
resale differs from that of newly created shares
which cannot be issued for less than the legal
minimum consideration. (see. Sec. 36)
(d) The sale of treasury shares should be treated as
a sale of ordinary property of the corporation;
hence, the gain there from is subject to tax. The
purpose of the sale is to recover the amount
paid by the corporation for said shares.
Title 2
Incorporation and organization of private
corporations
Section 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. (6a)
Incorporation of a private corporation a mere
privilege.
Generally, incorporation is generated by agreements
of a group of persons, and may, therefore, be
likened to other contracts which individuals may
enter into. But such agreements alone are not
sufficient for a corporation to exist. 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.
Until there is a grant of such right, whether by
special act of the legislature or under the general
law, there can be no corporation. Under Sec. 10, the
formation of a corporation is a matter of right and
cannot be restrained.
Since a corporation is merely a creation of law, it can
be dissolved at any time by legislative enactment
subject to certain limitations.
Advantages of the corporate form
1. Through the process of incorporation, 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
corporate name, and to act as a legal unit.
2. An individual stockholder may invest in the Powers, An unregistered A society or
corporate enterprise as much or as little as he rights, and organization, association not
sees fit, without risking more, and, in the privileges however, can’t engaged in
exercise the business and not
absence of statutes to the contrary, this is the
powers, rights desirous of
limit of his liability, since stockholders are not
and privileges acquiring juridical
personally liable for the debts of the incident to personality need
corporation. They transfer their shares without incorporation not be registered
the consent of the other stockholders. and expressly with SEC.
3. The rights and obligations of a corporation are granted to
not affected by the death or change of the registered
corporations
individual members, but the corporate business
under Sec.36 of
continues uninterrupted and unaffected so long the corporation
as the corporate entity continues. Its credit is Code
strengthened by such continuity of existence. Policy of The GR is that courts will not
4. The modern corporation makes great juridical interfere with the internal affairs of
undertakings feasible since it enables many non- an unincorporated association so as
individuals to cooperate in order to furnish the interference to settle disputes between the
members on questions of policy,
large amounts of capital necessary to finance
discipline, or internal government.
the gigantic enterprises of modern times. The
Validity and The fact, that group of persons adopt
resulting large-scale enterprise may be more enforcement a name operate without first being
efficient, thus lowering the costs of production. of acts organized as a legal entity, does not
make their acts necessarily void.
Corporations and associations Their acts may be valid, although
unenforceable under the name they
corporations associations have adopted.
Concept of defined by Sec. A collection of
association 2 of the Code persons who have
joined together Concept of franchise
for a certain
object Franchise- includes any special privilege or right affected with
Possession A legal entity A creature of public interest, conferred by the State on corporations or
of juridical deriving its contract without persons and which does not belong to the citizens of the
personality existence from a legal entity
country, generally as a matter of common right.
franchise separate from the
individuals
As a privilege, a franchise is not exercised by private
composing it.
individuals at their mere will and pleasure only but under
Governing Private Governed by the
law corporations are provisions of NCC such conditions, regulations, and restrictions as the
governed by or some other government may deem necessary to impose in the public
Corporation laws. interest, security and safety.
code
Capacity to Art. 46 CC. Can’t sue or be Primary franchise and secondary franchise
act in its juridical persons sued, it can’t
name may acquire and enter into (1) Primary or corporate franchise- the right or privilege
possess contracts in the granted to individuals by the State to be and act as a
property of all name of the corporation after its incorporation.
kinds as well as association, and
incur obligations neither can it The primary franchise (also known as “general
and bring civil or acquire franchise”) is granted to and vests in the individuals who
criminal actions properties under
compose the corporation and not in the corporation
in conformity its common
with the laws name. itself.
and regulations It’s not
of their competent to act (2) Secondary franchise- franchise to exercise powers and
organization. as agent or create privileges granted to such corporation to the business for
agents or confer which it was created, including those conferred for
upon another purposes of public benefit such as the power of eminent
authority to act domain and other powers and privileges enjoyed by
on its behalf, and public utilities.
those who act or
The secondary franchise is conferred upon the
purport to act as
its corporation after its incorporation and not upon the
representatives individuals who compose the corporation.
or agents do so at
their own risk. Transferability of franchise
15
 “franchise” is generic, covering all the rights granted by
the State. It may mean either the corporate or primary
franchise which is the right granted to a group of
individuals to exist and act as a corporation, or the
secondary or special franchise which is the right granted
to a corporation to exercise certain powers and
privileges.
(1) Primary franchise- in its nature is inalienable. It is
part of the corporation and cannot be sold or
assigned; otherwise, a corporation would be created
without the consent of the legislature. It may be
conveyed provided there is express legislative
authority to do so.
(2) Secondary franchise- which is vested in the
corporation itself, may ordinarily be conveyed or
mortgaged under a general power granted to a
corporation to dispose of its property, except such
franchises as are charged with a public use. Thus, if
the corporation is a public utility, its franchise can
only be sold subject to the prior approval and
authorization of the Public Service Commission. A
secondary franchise is subject to levy and sale on
execution, together with all the property necessary
for the enjoyment thereof.
Steps in the creation of a corporation
(1) Promotion;
(2) Incorporation (Sec.10);
(3) Formal organization and commencement of business
operations. (see Sec.22)
Promotion of corporations
Promotion- a number of business operations peculiar to
the commercial world by which a company is generally
brought into existence.
The formation and organization of a corporation are
brought about generally at the instance and under the
supervision of one or more so-called “promoters”.
A corporation, however, may be formed and organized
by the incorporators themselves without getting the
services of so-called promoters.
Promoters of Corporation
- one who, alone or with others, takers it upon himself
to organize a corporation: to procure the necessary
legislation, where that is necessary; to procure the
necessary subscribers to the AOI, where the
corporation is organized under general laws; to see
that the necessary document is presented to the
proper office to be recorded and the certificate of
incorporation issued; and generally, to “float the
company.”
Stages in corporate promotion
16
(1) Discovery- this stage may represent a new product or
service, or the promoter may simply organize another
company in an existing line of business;
(2) Investigation- this second phase involves an analysis of
needs—financial, management, plant, material and
labor—and a decision whether the estimated earnings
justify the effort; and
(3) Assembly- this last stage consists of bringing together
the property, money, and personnel into an organization.
At this stage, the promoter must have some assurance of
control lest third parties deprive him of the fruits of his
efforts. Control may cover such items, for example, as
patents, leases, options on property, and contracts for
services.
Nature of relations of promoters
(1) To corporation- a promoter has a unique relation to a
corporation representing its interest when it does not
legally exist or has just been created.
(a) The promoters of a corporation are not in any sense
the agents of the corporation before it comes into
existence, for there cannot be an agency unless
there is a principal. But they may, of course, become
the agents of the corporation after it has been
formed provided there is assent, express or implied,
on the part of the corporation.
(b) It is well settled that promoters occupy a fiduciary or
quasi-trust relation toward the corporation when it
comes to existence and towards the subscribers
prior to its organization, as long as they are acting as
promoters.
(c) This fiduciary relation imposes upon the promoter
to act in good faith in all dealings in behalf of the
corporation to protect the corporation from
dishonest promoters.
(2) To subscribers or corporators- they may be agents of the
subscribers or corporators.
(a) Since agency is a contract, it is essential that there is
an agreement to this effect.
(b) Even when there is no agency, the relation between
the promoters and the persons who have become,
or who are expected to become, subscribers for its
capital stock, or corporators, or purchasers of stock
from the corporation, is one of trust and confidence,
so as to impose upon the former the duty to act in
perfect good faith and in the interest of all the
subscribers and corporators.
(c) Subscribers for stock in a proposed corporation do
not, without agreement to such effect, become
partners with the promoters of it.
(d) Stockholders of a corporation cannot be held
personally liable for the compensation claimed by
promoters for services performed by them in the
organization of the corporation in the absence of
any showing that said stockholders contracted such
services.
(3) Inter se- a partnership can be created, as between the
parties themselves, only by mutual agreement, and,
therefore, promoters do not become partners as
 between themselves, in the absence of such agreement, projected corporation preliminary to organization, and
by merely joining in an attempt to create a corporation, the promoters or provisional directors fail to organize the
by uniting in subscriptions for stock, or by otherwise corporation according to the prospectus or other
promoting the creation of the corporation. But such a agreement or abandon the enterprise before it has been
relation may, of course, be created by agreement of the carried into execution, it is a case of money paid on a
parties, in which case it is governed by the general consideration which has failed.
principles of the law of partnership. The subscriber may recover it back from the promoters
or directors in an action at law although the money has
Liability of corporation for promotion fees been applied in payment of preliminary expenses or
otherwise.
(1) General Rule- in the absence of character or statutory
(2) To each other. – While it has been held that as between
provisions, a corporation is not liable to its promoters in
themselves the rights of the stockholders in a defectively
respect for any payment in services rendered or
incorporated association should be governed by the laws
expenses incurred before its incorporation in promoting
of the State relating thereto and not by the rules
it, unless after its incorporation it expressly agrees to
governing partners it is ordinarily held that persons
make such payment or from the other facts the court can
attempt, but fail, to form a corporation and who carry on
infer a new contract to reimburse.
business under the corporate name, occupy the position
(2) Authorization by stockholders- after due organization of
of partners inter se.
the corporation, it may, with the consent of all its
stockholders and where there is no question as to the
rights of subsequent stockholders, authorize the Underwriting Agreements
payment of compensation to promoters and the issuance
to them of stock unless prohibited by statute. There are four (4) general types of underwriting contract.
(3) Amount- the amount of promotion fees that the SEC
allows depends principally upon the effort exerted, the (1) the syndicate may make a firm commitment under which
difficulties encountered, and the expenses incurred in the members severally but not jointly agree to purchase
promoting and organizing the corporation. There is no the whole issue outright at a particular price for resale at
hard and fast rule in this regard. a price differential to the public, or to dealers who sell at
another differential to the public.
(2) the underwriters may make an all-or-nothing
commitment under which they agree to accept liability
Liability of corporation on promoter’s contracts. for the purchase of an issue at a given price only if the
entire issue is not sold – usually within a 30-day period.
(1) Before corporation and organization- Since a corporation
(3) the syndicate may make a standby commitment or rights
cannot before its organization, have agents contract for
offering under which it will purchase and distribute at
itself, or be contracted with, it is not liable upon any
predetermined prices to the public any amount of the
contract which a promoter attempts to make for it prior
issue not taken by stockholders in exercising their pre-
to its organization unless the contract is expressly or
emptive rights.
impliedly adopted or ratified by it after organization is
(4) this merely means that the syndicate will use its best
completed or liability is imposed by statute.
efforts to distribute the issue to the public.
A promoter’s contract does not, by the incorporation of a
Incorporation distinguished from creation
contemplated company, ipso facto become the contract
of the corporation. Incorporation creation
Scope Narrower Not that narrow
(2) After incorporation and organization- under the general
Refers to the Understood in its
rule permitting a corporation to assume liability on a performance of broadest sense,
promoter’s contract, the contract must, of course, be conditions, acts, includes all of the acts
one such as the corporation can itself make. A deeds, and writings and doing from the
corporation as a legal entity cannot assume the by incorporators, enactment of the
obligations of an ultra vires contract made by its and the official acts, general incorporation
certifications or law by the legislature
promoters anymore than it can legally initiate such
records, which give through the promotion,
contract.
the corporation its underwriting,
existence. preparation and
Contracts entered into by promoters “should at most be execution and filing of
deemed suspended, and enforceable only after the the incorporation
incorporation and organization” of the corporation. papers obtaining the
certificate or charter, to
Liability of promoters for failure to organize corporation the organization and
first meeting and
(1) To subscribers. – If money is paid to promoters or election which set the
provisional directors by a subscribers for shares in a corporation in motion

17
 full-pledged. (4) The issuance by the Securities and Exchange Commission
of the certificate of incorporation if all the papers filed
after verification and examination are found in order.

There are rules or requirements under special laws to be

Incorporation distinguished from corporation
Incorporation
Only the act by which that
institution is created
Incorporator distinguished from corporator
Incorporator
Signatory of the AOI
Does not cease to be an
incorporator upon sale of his
shares
Gr- 5 to 15 natural persons
Xpn- in case of cooperative,
incorporator of rural bank;
corporation sole
Originally forms part of the
corporation
Gr- Filipino citizenship is not
a requirement
Xpn- when engaged in a
business which is partly or
wholly nationalized where
majority must be residents
Corporation
Legal or juridical institution
Corporator
May or not be signatory of
the AOI
Cease to be a corporator by
sale of his shares in case of
stock corporation. In case of
non-stock corporation, when
the corporator ceases to be a
member
No limit
Not necessarily
Depending on the nature of
business of the corporation.
If it is nationalized, the
citizenship becomes
material.
complied with in organizing business to endow the
corporation with the capacity to transact the business for
which it was created.
Substantial compliance with requirements
Where the formation or organization of corporations is not
governed by special laws (e.g. those engaged in real estate
development), the Securities and Exchange Commission may
accept and approve the articles of incorporation or
amendments therein upon mere showing of a substantial
compliance with the corporation Code (SEC Opinion, Oct. 21,
1988.) and that it meets the guidelines established by the
Commission.
Where there is substantial compliance with the legal
requirements, the registration of the proposed corporation
becomes a matter of right.
Incorporators: number and qualifications
(1) Incorporators must not be less than 5 but not more
than 15;
(2) All of legal age
(3) A majority of whom are residents of the Philippines
(4) Each must own or be a subscriber to at least one
share of the capital stock of the corporation.
(5) If the number of incorporators is more than than 15,
the excess will not be considered as incorporators.

Unless otherwise provided in AOI, a corporation

Steps in incorporation cannot impose other qualifications. The same rule
shall apply to stockholders.
Incorporation includes the following:

(1) Drafting and execution of the articles of incorporation by
the incorporators and other documents required for
registration of the corporation. In this connection, the
person chosen as temporary treasurer pending
incorporation must also execute:
(a) An affidavit certifying compliance with subscription
and paid-up requirements as to capital stock.
(2) Filing with the Securities and Exchange Commission of
the articles of incorporation together with the following:
(a) Treasurer’s affidavit in the form prescribed in
Section 15 showing at least 25% of the entire
authorized shares has been subscribed and at least
25% of the subscription has been paid in cash and/or
property to the corporation (Ibid); and
(b) In case the corporation is governed by a special (e.g.
educational institution), a favorable
recommendation of the appropriate government
agency (i.e., Department of Education, Culture and
Sports) that such articles of incorporation is in
accordance with the law.
(3) Payments of the filing and publication fees; and
18
(1) These 5 or more persons must be natural persons.
Consequently, a corporation cannot be an incorporator
of another corporation.
As an example of an exception to the rule, Sec. 4 of R.A.
7353 (Rural Banks Act of 1992) provides that duly
established cooperatives and corporations primarily
organized to hold equities in rural banks may organize
rural banks and/or subscribe to shares of stock of any
rural bank. If the corporation is a cooperative, it may
become an incorporator of a rural banking corporation.
A corporation may become a stockholder in another
corporation by subscribing to or purchasing the latter’s
stock for the power of one corporation to own stock in
another corporation is entirely different from its power
to create or itself become one of the incorporators of
another corporation.
(2) The incorporators must have the capacity to enter into a
valid contract, the act of forming a corporation as
between the parties being contractual. The AOI, under
 Sec.15 must be acknowledged by the incorporators
before a notary public.
(3) A majority of the incorporators must be residents of the
Philippines, the rest may be persons who are neither
residents nor citizens of the Philippines.
Hence, a corporation composed entirely of aliens may be
incorporated as long as the majority of the incorporators
are residents of the Phil. EXCEPT in the case of
nationalized corporations.
The residence requirement is likewise mandatory.
Sec.10, does not require that the majority of the
members must also be residents. A situation, wherein
majority of the members of a corporation are
nonresidents is allowable. But a majority of the directors
or trustees of all corporations must be residents of the
Phil.
(4) By specific constitutional and legal provisions, citizenship
is a necessary qualification for incorporators in a
corporations in which a certain percentage of the capital
stock is required to be owned by Filipino citizens.
(5) The code now expressly requires that “each of the
incorporators of a stock corporation must own or be a
subscriber to at least 1 share of the capital stock of the
corporation”.
Requirement regarding minimum number of incorporators
mandatory
The requirement of the law regarding the minimum number
of incorporators is mandatory and a de jure corporation
cannot be legally formed by less than the prescribed number
except in the case of a corporation sole.
(1) Reduction of stockholders or members to less than
minimum- the number of stockholders/members after
the corporation is organized may become less than the
minimum number required for incorporation without
affecting corporate existence unless valid grounds exist
for piercing or lifting the corporate veil.
(2) Beneficial ownership in one individual- beneficial
ownership is not necessary, and a person who holds the
legal title to stock is qualified to become an incorporator.
The validity of the incorporation is not affected by the
fact that it is formed in the interest of a single individual,
and that the other persons under his control, without
any substantial interest, or without the individual
responsibility who may only be called “qualifying
stockholders”, or who are popularly known as dummies
or “men of straw.”
(3) Subsequent accumulation of shares in one individual-
nor is the existence of the corporation originally formed
by the required number of incorporators affected by the
subsequent accumulation of all the shares in the hands
of one individual unless, as previously said,
circumstances exist to justify the piercing of the veil of
corporate entity.
19
Section 11. Corporate term. - A corporation shall exist for a
period not exceeding fifty (50) years from the date of
incorporation unless sooner dissolved or unless said period
is extended. The corporate term as originally stated in the
articles of incorporation may be extended for periods not
exceeding fifty (50) years in any single instance by an
amendment of the articles of incorporation, in accordance
with this Code; Provided, That no extension can be made
earlier than five (5) years prior to the original or subsequent
expiry date(s) unless there are justifiable reasons for an
earlier extension as may be determined by the Securities
and Exchange Commission. (6)
Term of corporate existence
The corporation shall exist for the term specified in the AOI
not exceeding 50 yrs., unless sooner legally dissolved or
unless its registration is revoked upon any of the grounds
provided by law. The corporate life may be reduced or
extended by amendment of the AOI by complying with the
procedural requirements laid down in Sec.37.
Extension of corporate term
(1) Limitations. – The extension of corporate term is subject
to the following limitations:
(a) The term shall not exceed 50 years in any one
instance;
(b) The amendment is effected before the expiration
of the corporate term existence, for after
dissolution by expiration of the corporate term
there is no more corporate life to extend.
(c) The extension cannot be made earlier than five
(5) years prior to the expiration date unless there
are justifiable reasons therefor as may be
determined by the Securities and Exchange
Commission.
(2) Effect of extension/expiration of term. – The mere
extension of the corporate term of existence made
before the expiration of the original term constitutes a
continuation of the old, not the creation of a new,
corporation.
(3) Automatic extension of the term. – Section 11 allows the
automatic extension of the corporate existence by
amendment of the articles of incorporation within the
five (5)-year period before the expiration date of the
existing term, during which the Securities and Exchange
Commission may look, if necessary, into the financial
structure of the corporation and its past operations or
actuations.
The code places no limits to the number of extensions
that may be made.
Period of corporate existence a matter of public interest.
(1) Period not subject to agreement. – The state has an
obvious interest in the term of life of corporations, since
the conferment of juridical capacity upon them during
such period is a privilege that is derived from statute. It is
obvious that no agreement between the stockholders or
 members can result in giving rise to a new and distinct
personality, possessing independent rights and
obligation, unless the law itself shall decree such result.
(2) Purpose of limitation. – The State is naturally interested
that this privilege be enjoyed only under the conditions
and not beyond the period that it sees fit to grant; and,
particularly, that it be not abused in fraud and to the
detriment of other parties; for this reason, it has been
ruled that the limitation (of corporate existence) to a
definite period is an exercise of control in the interest of
the public.
Section 12. Minimum capital stock required of stock
corporations. - Stock corporations incorporated under
this Code shall not be required to have any minimum
authorized capital stock except as otherwise specifically
provided for by special law, and subject to the
provisions of the following section.
Capital stock requirement.
The Code does not set a minimum authorized capital
stock except as otherwise provided by special law as long
as the paid-up capital as required by Section 13 is not
less than P5,000.00.
Special laws may, however, require a higher paid-up
capital, as in the case of commercial banks, insurance
companies, and investment houses.
Filipino percentage ownership
By specific constitutional and legal provisions,
Filipino ownership of a certain percentage of the capital
stock or capital required in certain cases, such as:
(1) Corporations for exploration, development, and
utilization of natural resources. – at least 60% of the
capital of which is owned by the citizens of the
Philippines.
(2) Public service corporations. – at least 60% of the
capital of which is owned by the citizens of the
Philippines.
(3) Educational corporations. – other than those
established by religious orders and mission boards,
at least 60% of the capital of which is owned by the
citizens of the Philippines. The control and
administration of educational institutions shall be
vested in Filipino citizens;
(4) Corporations engaged in mass media and
advertising industry, -- the first must be wholly (i.e.,
100%) owned and managed by Filipino citizens.
(5) Banking corporations. – at least 60% of the voting
stock of a domestic corporation shall be owned or
controlled by Filipino citizens;
(6) Corporations engaged in retail sale. – enterprises
with less than U.S.$2.5 million paid-up capital are
reserved exclusively for Filipino citizens and
corporations wholly-owned by Filipino citizens;
(7) Rural Banks- no less than 40% of the voting stocks of
which shall be owned by citizens of the Phil. Or
20
corporations at least 60% of whose capital is owned
by such citizens.
(8) Corporations engaged in coastwise shipping- at
least 60% of the capital stock of which or of any
interest in said capital is totally owned by citizens of
the Phil.
(9) Financing Companies- at least 60% of the capital
stock shall be owned by citizens of the Phil.
(10) Corporations engaged in the pawnshop business-
at least 70% of the voting capital stock shall be
owned by citizens of the Phil.
(11) Corporations engaged in the recruitment and
placement of workers, locally or overseas- at least
75% of the authorized and voting capital stock is
owned and controlled by Filipino citizens.
(12) Corporations engaged in the operation of a private
detective, watchman or security guard agencies-
must be 100% Filipino owned.
(13) Under the flag law- in the purchase of articles for
the Government, preference shall be given to
materials and supplies produced, made, or
manufactured in the Phil., and to domestic entities.
Domestic entities- any citizen of the Phil. or any
corporate body or commercial company at least 75%
of the capital of which is owned by citizens of the
Phil.
Section 13. Amount of capital stock to be subscribed and
paid for the purposes of incorporation. - At least twenty-five
percent (25%) of the authorized capital stock as stated in
the articles of incorporation must be subscribed at the time
of incorporation, and at least twenty-five (25%) per cent of
the total subscription must be paid upon subscription, the
balance to be payable on a date or dates fixed in the
contract of subscription without need of call, or in the
absence of a fixed date or dates, upon call for payment by
the board of directors: Provided, however, That in no case
shall the paid-up capital be less than five Thousand
(P5,000.00) pesos. (n)
Minimum subscription and paid-up capital
(1) Pre-incorporation- Sec. 13 requires that atleast 25% of
the amount of the authorized capital stocks has been
actually subscribed and that at least 25% of such
subscription.
(a) The commission has the power to require that the
authorized capital stock to be not less than a certain
amount such that the 25% paid-up capitalwill be
more than 5K. this requirements are mandatory.
Accordingly, if they are not complied with, no stock
corporation can be lawfully incorporated even if a
certificate of incorporation has been by SEC.
(b) The policy of the Commission is to require full
payment of subscription by foreigners as it will be
difficult to compel them to pay their unpaid
subscriptions when they are outside the country
unless they can give sufficient security to guarantee
full payment.
 (c) The number of shares subscribed, the amount
subscribed, and the amount paid by each
stockholder must be stated in the AOI.
(d) Special law may require a higher paid-up capital.
(2) Post incorporation- the minimum 25% subscription and
25% paid-up capital is required not only during the
incorporation period but also in case of increase of the
authorized capital stock.
(a) The requirement is designed to give assurance to the
investing public dealing with the corporation that it
is financially and actually able to operate and
undertake to do business and meet its obligation as
they arise from the start of its operations.
(b) The call by the board of directors for the payment of
the balance of subscriptions is required only when
there is no fixed date for payment in the contract of
subscription.
(c) It is not required for purposes of incorporation that
each and every subscriber shall pay 25% of his
subscription. The paid up requirement is met as long
as 25% of the total subscription is paid although
some subscribers have paid less than 25% or even
have not paid any amount.
(d) It would seem that the minimum25% paid up
requirement applies only to par value shares
because a subscriber to no par value shares must
pay in full his subscription. (sec.6 par.2).
Computation of the 25% subscription requirement
(1) Where the capital stock is consist only of par value
shares, the minimum subscription should be 25% of
the amount of the authorized capital stock or 25% of
the aggregate value of all the shares of stock the
corporation is authorized to issue.
(2) Where the capital stock consists only of no par
value shares, requirement shall be computed on the
basis of the entire number of authorized shares.
Corporations whose shares have no par value have
no authorized capital stock.
(3) Where the capital stock is divided into par value
shares and no par value shares, the requirement as
to par value shares is as indicated above and for no
par value shares, the 25% is based on the number of
said no par value shares.
Subscription of corporations
(1) Domestic Corporations- they may subscribe initially to
the capital stock of another proposed corporation but
their subscriptions cannot be taken into consideration in
the computation of the 25% subscription and 25% paid
up capital requirement of the law.
(2) Foreign corporations- such corporations, whether
resident and nonresident, may subscribe to the stocks of
domestic corporations as long as they are authorized by
their charters to hold shares in other corporations. Their
subscriptions shall not also be counted in the
21
computation of the minimum subscription and payment
requirements.
It is the policy of the SEC to require corporations to pay
their subscriptions in full. This is based upon the fact that
while a corporation has an unlimited capacity to contract
obligations, it has only a limited capacity to pay.
Section 14. Contents of the articles of incorporation. - All
corporations organized under this code shall file with the
Securities and Exchange Commission articles of
incorporation in any of the official languages duly signed
and acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise
prescribed by this Code or by special law:
1. The name of the corporation;
2. The specific purpose or purposes for which the
corporation is being incorporated. Where a corporation has
more than one stated purpose, the articles of incorporation
shall state which is the primary purpose and which is/are
the secondary purpose or purposes: Provided, That a non-
stock corporation may not include a purpose which would
change or contradict its nature as such;
3. The place where the principal office of the corporation is
to be located, which must be within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the
incorporators;
6. The number of directors or trustees, which shall not be
less than five (5) nor more than fifteen (15);
7. The names, nationalities and residences of persons who
shall act as directors or trustees until the first regular
directors or trustees are duly elected and qualified in
accordance with this Code;
8. If it be a stock corporation, the amount of its authorized
capital stock in lawful money of the Philippines, the number
of shares into which it is divided, and in case the share are
par value shares, the par value of each, the names,
nationalities and residences of the original subscribers, and
the amount subscribed and paid by each on his subscription,
and if some or all of the shares are without par value, such
fact must be stated;
9. If it be a non-stock corporation, the amount of its capital,
the names, nationalities and residences of the contributors
and the amount contributed by each; and
10. Such other matters as are not inconsistent with law and
which the incorporators may deem necessary and
convenient.
The Securities and Exchange Commission shall not accept
the articles of incorporation of any stock corporation unless
accompanied by a sworn statement of the Treasurer elected
by the subscribers showing that at least twenty-five (25%)
percent of the authorized capital stock of the corporation SIXTH: That the number of directors or trustees of the
has been subscribed, and at least twenty-five (25%) of the corporation shall be _______; and the names, nationalities
total subscription has been fully paid to him in actual cash and residences of the first directors or trustees of the
and/or in property the fair valuation of which is equal to at corporation are as follows:
least twenty-five (25%) percent of the said subscription,
such paid-up capital being not less than five thousand NAME NATIONALITY RESIDENCE
(P5,000.00) pesos.
___________________ ___________________
Section 15. Forms of Articles of Incorporation. - Unless ___________________
otherwise prescribed by special law, articles of
___________________ ___________________
incorporation of all domestic corporations shall comply
___________________
substantially with the following form:
___________________ ___________________
ARTICLES OF INCORPORATION OF
___________________
__________________________
___________________ ___________________
(Name of Corporation) ___________________

KNOW ALL MEN BY THESE PRESENTS: ___________________ ___________________

The undersigned incorporators, all of legal age and a
majority of whom are residents of the Philippines, have this
day voluntarily agreed to form a (stock) (non-stock)
corporation under the laws of the Republic of the
Philippines;
AND WE HEREBY CERTIFY:
FIRST: That the name of said corporation shall be
"_____________________, INC. or CORPORATION";
SECOND: That the purpose or purposes for which such
corporation is incorporated are: (If there is more than one
purpose, indicate primary and secondary purposes);
THIRD: That the principal office of the corporation is located
in the City/Municipality of ________________________,
Province of _______________________, Philippines;
FOURTH: That the term for which said corporation is to exist
is _____________ years from and after the date of issuance
of the certificate of incorporation;
___________________
SEVENTH: That the authorized capital stock of the
corporation is ______________________ (P___________)
PESOS in lawful money of the Philippines, divided into
__________ shares with the par value of
____________________ (P_____________) Pesos per share.
(In case all the share are without par value):
That the capital stock of the corporation is ______________
shares without par value. (In case some shares have par
value and some are without par value): That the capital
stock of said corporation consists of _____________ shares
of which ______________ shares are of the par value of
_________________ (P____________) PESOS each, and of
which _________________ shares are without par value.
EIGHTH: That at least twenty five (25%) per cent of the
authorized capital stock above stated has been subscribed
as follows:
Name of Subscriber Nationality No of Shares Amount

FIFTH: That the names, nationalities and residences of the Subscribed Subscribed
incorporators of the corporation are as follows:
_________________ __________ ____________
NAME NATIONALITY RESIDENCE ____________

___________________ ___________________ _________________ __________ ____________

___________________ ____________

___________________ ___________________ _________________ __________ ____________

___________________ ____________

___________________ ___________________ _________________ __________ ____________

___________________ ____________

___________________ ___________________ _________________ __________ ____________

___________________ ____________

___________________ ___________________ NINTH: That the above-named subscribers have paid at least
___________________ twenty-five (25%) percent of the total subscription as
follows:

22
Name of Subscriber Amount Subscribed Total Paid-In
_________________ ___________________
_______________
_________________ ___________________
_______________
_________________ ___________________
_______________
_________________ ___________________
_______________
_________________ ___________________
_______________
(Modify Nos. 8 and 9 if shares are with no par value. In case
the corporation is non-stock, Nos. 7, 8 and 9 of the above
articles may be modified accordingly, and it is sufficient if
the articles state the amount of capital or money
contributed or donated by specified persons, stating the
names, nationalities and residences of the contributors or
donors and the respective amount given by each.)
TENTH: That _____________________ has been elected by
the subscribers as Treasurer of the Corporation to act as
such until his successor is duly elected and qualified in
accordance with the by-laws, and that as such Treasurer, he
has been authorized to receive for and in the name and for
the benefit of the corporation, all subscription (or fees) or
contributions or donations paid or given by the subscribers
or members.
ELEVENTH: (Corporations which will engage in any business
or activity reserved for Filipino citizens shall provide the
following):
"No transfer of stock or interest which shall reduce the
ownership of Filipino citizens to less than the required
percentage of the capital stock as provided by existing laws
shall be allowed or permitted to be recorded in the proper
books of the corporation and this restriction shall be
indicated in all stock certificates issued by the corporation."
IN WITNESS WHEREOF, we have hereunto signed these
Articles of Incorporation, this __________ day of
________________, 19 ______ in the City/Municipality of
____________________, Province of
________________________, Republic of the Philippines.
_______________________ _______________________
_______________________ _______________________
________________________________
(Names and signatures of the incorporators)
SIGNED IN THE PRESENCE OF:
_______________________ _______________________
(Notarial Acknowledgment)
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TREASURER'S AFFIDAVIT
REPUBLIC OF THE PHILIPPINES )
CITY/MUNICIPALITY OF ) S.S.
PROVINCE OF )
I, ____________________, being duly sworn, depose and
say:
That I have been elected by the subscribers of the
corporation as Treasurer thereof, to act as such until my
successor has been duly elected and qualified in accordance
with the by-laws of the corporation, and that as such
Treasurer, I hereby certify under oath that at least 25% of
the authorized capital stock of the corporation has been
subscribed and at least 25% of the total subscription has
been paid, and received by me, in cash or property, in the
amount of not less than P5,000.00, in accordance with the
Corporation Code.
____________________
(Signature of Treasurer)
SUBSCRIBED AND SWORN to before me, a Notary Public, for
and in the City/Municipality of ___________________
Province of _____________________, this _______ day of
___________, 19 _____; by __________________ with Res.
Cert. No. ___________ issued at _______________________
on ____________, 19 ______
NOTARY PUBLIC
My commission expires on
_________, 19 _____
Doc. No. _________;
Page No. _________;
Book No. ________;
Series of 19____ (7a)
Articles of incorporation
(1) AOI- is the document prepared by the persons
establishing a corporation and filed with the SEC
containing the matters required by the code.
(2) One that defines the charter of the corporation and the
contractual relationships between the State and the
corporation, the stockholders and the State, and
between the corporation and the stockholders.
Contents and form of AOI
(1) Sec 14 enumerates the matters (mandatory provisions)
that must be stated in the AOI of domestic corporations,
except as otherwise prescribed by the Code or by special
law.
 (a) The incorporators may include such other matters as
are not inconsistent with law and which they may
deem necessary and convenient, such as the classes
of shares which the corporation may issue,
provisions on preemptive right etc.
(b) The contents of the AOI may be held valid as an
agreement between the parties thereto, even
though the validity of such may be subject to
question.
(c) SEC shall not accept the AOI of any stock corporation
unless accompanied by a sworn statement of the
treasurer elected by the subscribers showing
compliance with the requirement as to the minimum
amount of the subscribed and paid-up capital stock.
(d) The AOI may provide other matters or items as long
as they are not contrary to any provision of the Code
or special law.
(e) Under the Corporation Code, there is no general
requirement of the Phil. citizenship, there are some areas
of business and industry where ownership is reserved,
wholly or partially, in favor of Filipino citizens by virtue of
the Constitution and special laws. In order to safeguard
the interest of transferees of stock who may not be
aware of the citizenship requirement and in order to
secure compliance with the limitation on alien
ownership, Sec. 15 (11) requires the AOI to provide the
restriction stated. Such restriction serves as notice to all
persons who may be dealing with the stock of the
corporation, and is intended to deter the issue or
transfer of shares in favor of aliens in violation thereof.
(2) Sec. 15 provides the form of the AOI of all domestic
corporations, unless otherwise prescribed by special law.
(a) It must include the affidavit of the treasurer of the
corporation concerning the amount of capital stock
subscribed and paid. The matter required to be
stated by Sec. 14(8) is the actual “amount subscribed
and paid” by each subscriber on his subscription.
The SEC may reject the AOI or any amendment
thereto if the same is not substantially in accordance
with the forms prescribed above, or the treasurer’s
affidavit is false.
(b) The AOI must be written in any of the official
languages. It is, therefore, a public instrument.
Filing of the AOI
(1) Actual filing or registration with SEC required. – the
mere recording of the AOI without the intention or
the fact of allowing the same to remain in the office
of the SEC is not a sufficient filing to complete the
organization of the corporation or vest it with
corporate powers.
(2) Rule where corporation created by special law- a
corporation created by special law or charter does
not have to file with the SEC its AOI and by-laws
since the grantee of such a special charter draws its
life not from compliance with a general law, but
from a direct act of congress.
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(3) Rule with a respect to a joint venture- The
Commission has ruled that 2 or more corporations
may enter into a joint venture through a contract if
the nature of the venture is in line with the business
authorized by their charters. The contract need not
be registered with it, provided that the joint venture
will not result in the formation of a new partnership
or corporation.
However, if the parties to the agreement want the
joint venture to be treated as a separate entity or
have a separate personality because they intend to
secure for the joint venture project a TIN of its own
from the BIR, registration with the SEC is necessary
in order to have a legal personality to obtain a
separate TIN.
Power of SEC to reject articles of incorporation
(1) Compliance with statute- if AOI substantially comply
with the statute, the Commission has no discretion,
but may be compelled by mandamus to file them.
The duty of the SEC to file and record incorporation
papers exist only when they are in the form in
compliance with the statute. Furthermore, it should
refuse to file for record incorporation papers not
complying with the statute.
(2) Truthfulness of matters stated- generally, the officer
concerned has no discretionary power to look beyond
the face of the incorporation papers and to determine
from matters outside of such papers whether or not
to file papers. He cannot consider extraneous
matters. Ordinarily, if the association has complied
with all the pre-requisite requirements, and its
purpose is a lawful and authorized one, conditions
cannot be imposed on granting the certificate.
(3) Lawfulness of object or purpose- simply because the
duty of the commission happen to be ministerial, it
does not necessarily follow that it has no authority to
pass upon the lawfulness of the object or purpose of
the as expressed in the AOI.
Name of the corporation
(1) Importance- the corporation acquires juridical
personality under the name stated in the certificate of
incorporation. A corporation has the power of
succession by its corporate name. By its name, a
corporation is authorized to transact business.
The name of a corporation is peculiarly essential to its
existence and to its identity.
(2) Nature- a corporate name is regarded as of the nature of
a trademark even though composed of individual names,
and its simulation may be restrained. After a adoption, it
follows the corporation.
A corporation’s right to use its corporate and trade name
is a property right, a right in rem which it may assert and
protect against the whole world in the same manner as it
may protect its tangible property against trespass or
 conversion. It cannot be impaired or defeated by
subsequent appropriation by another corporation in the
same field.
(3) Part of name- it is customary to use as a part of name
the word corporation or incorporated or an abbreviation
of either of them to distinguish it from partnership and
other business organizations. But the character of a
corporation is not necessarily controlled by its name.
Purpose or purposes of the corporation
Purpose clause- clause in the articles of incorporation which
states the specific or purposes for which the corporation is
being incorporated.
(1) The statement of the purpose or purposes operates as an
authorization to the management to enter into contracts
and transactions which may be considered as included
within or incidental to the attainment of said purposes.
(2) Where the purpose clause of AOI embodies a variety of
different purposes, the corporation maybe allowed to
have separate “modus operandi” for each of the stated
corporate purposes.
(3) There is no legal need to repeat in AOI the powers
granted by the law upon the corporation.
(4) A non- stock corporation may not include a purpose
which would change or contradict the nature as such.
Sec. 88 enumerates the allowable purposes for which a
non-stock corporation may be organized.
Purposes must be lawful
(1) Effect in case unlawful- a corporation the primary object
of which is without statutory authority can have no
lawful existence, even though some of its declared
purposes are lawful. “that the purpose or purposes of
the corporation are patently unconstitutional, illegal, or
immoral or contrary to government rules and
regulations” is one of the grounds for the rejection or
disapproval by the SEC of the AOI. (sec.27 (2)
(a) A corporation was held incorporated for an illegal
purpose, where the object of the incorporators is to
organize a pueblo or barrio in a municipality into a
separate corporation
(b) Helping promote and enhance the incorporation of
the Phil. As an American State.
But the purpose to conduct a study, survey, research
and subsequently publish or disseminate the results
thereof as a corporation is not objectionable.
(2) Where powers merely unauthorized by law- in
authorizing the formation of corporations for “ any lawful
purpose”, the word “unlawful” as applied in this
connection, is not used by the Code exclusively in the
sense of Malum in se or malum prohibitum. It is also
used to designate powers which corporations are not
authorized to exercise, or contracts which they are not
authorized to make, or acts which they are not
authorized to do—in other words, such acts, powers, and
contracts as are ultra vires.
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Thus, a corporation cannot be formed for the practice of
law, medicine, or other learned profession in the absence
of express authority in the corporation law.
The law, however, permits the formation of a
partnership for the exercise of a profession for in such
case, it is the individual partner and not the partnership
firm who exercises the profession and is responsible for
his acts as such.
(3) Determination of question of lawfulness- general rule,
the question as to whether the purposes for which a
given corporation has been formed are lawful as to be
determined by the description of those purposes as
stated in the AOI.
(a) A corporation is not illegal unless it is shown that the
end it has in view is illegal, or the means by which it
proposes to attain that end are illegal;
(b) If, as expressed on the face of the instrument of
incorporation, the purpose for which the
corporation is formed is not necessarily unlawful, it
will be presumed that it was for a purpose for which
a corporation might lawfully be formed; and this
presumption holds in case of a foreign corporation.
(c) Where the object of a corporation as expressed in
the AOI is not illegal, the fact that such corporation
afterwards entered upon illegal projects does not
make it an illegal corporation and such illegal acts
cannot be urged as a defense, in an action to recover
unpaid subscription to the capital stock.
(4) Inquiry into purposes other than those stated- the
best proof of the purpose of the corporation is its
AOI and by laws. The AOI must state the primary and
secondary purposes of the corporation, while the by-
laws outline the administrative organization of the
corporation which in turn, is supposed to ensure or
facilitate the accomplishment of said purposes. If the
corporate purpose as stated in the AOI is lawful,
then the SEC has no authority to inquire whether the
corporation has purposes other than those stated,
and mandamus will lie to compel it to issue the
certificate of incorporation.
Purposes must be stated with sufficient clarity
(1) May be stated in broad terms- the purpose or purposes
stated in the AOI need not set out with particularity the
multitude of activities in which the corporation may
engage. The effect of broad purposes or object is to
confer wide discretionary upon the directors and
management of the corporation as to the kinds of
business in which it may engage.
It is, therefore important that the corporation’s purpose
be specified in the AOI with sufficient clarity to define
with certainty the scope of its business.
(2) May not be indefinitely stated- while the purposes may
not be stated in broad and general terms, they should
 not be so stated indefinitely; otherwise, the AOI may be
rejected.
It is not also sufficient to state that the purpose is to
carry on any business which may be deemed profitable.
Such all-embracing proviso cannot be stretched to
include purposes not incidental, implied or necessary for
the furtherance of the purposes stated in the AOI.
Primary purpose must be stated
The purpose of which the corporation is organized, where it
has more than one stated purpose, shall state which is the
primary or main purpose and which is/are the secondary or
subsidiary purpose or purposes. The main purpose must be
specified. The law allows the corporation to have secondary
purposes because the primary purpose may turn out to be
profitable, and in such case, all it has to do is invest its fund in
any such purposes instead of organizing a new corporation.
Evidently, a corporation may have only one primary purpose.
Under Sec.42, a corporation is prohibited from investing its
funds, “for any purpose other than the primary purpose for
which it was organized” unless it is approved by both its
board of directors or trustees and its stockholders or
members.
Purpose must be capable of being lawfully combined
Although Sec. 10 allows the formation of corporations “for
any lawful purpose or purposes,” the purposes, where there
are more than one, must be capable of being lawfully
combined.
Subject to the limitation mentioned, the secondary purposes
may not be allied to each other or to the primary purpose
provided they are contrary to law. But a non-stock
corporation, including educational and religious corporations,
may not include a purpose which would change or contradict
its nature as such although it may be organized for any
combination of purposes mentioned in Sec.88.
Reasons for statement of purpose or purposes
(1) Person who intends to invest his money in the business
corporation will know where and in what kind of
business or activity his money will be invested;
(2) The directors and the officers of the corporation will
know within what scope of business they are authorized
to act; and lastly;
(3) A third persons who has dealings with the corporation
may know by perusal of the articles whether the
transaction or dealing he has with the corporation is
within the authority of the corporation or not.
The main reason for stating the purpose of the corporation is
to determine whether the acts performed by the corporation
are authorized or beyond its powers. Thus, the purpose
clause of the AOI indicate the extent as well as the limitations
of the powers which a corporation may exercise.
Effect where primary/secondary purpose unauthorized
26
(1) If the primary purpose stated in the AOI is unauthorized,
the corporation has no legal existence even though other
secondary lawful purposes are included.
(2) If, on the other hand, a principal lawful purpose is
specified, but the articles of certificate assumes for the
corporation the existence of powers which it is not
permitted to exercise, then this additional and
unauthorized assumption may be treated as a surplusage
and the corporation regarded as entitled to exercise the
lawful powers only.
Effect where corporation engages in its secondary instead of
its primary purpose
Where the corporation actually engages in one of its
secondary purposes instead of its primary purpose, the same
may be classified in accordance with said secondary purpose.
Thus, a corporation organized for the primary purpose of
engaging in mining and whose secondary purpose is
agriculture is a mining corporation.
Place where principal office of corporation located
(1) City or municipality within the Phil. – the AOI must state
the “place where the principal office of the corporation is
to be established or located, which place must be within
Phil. The purpose of the requirement is to fix the
residence of a corporation in a definite place, instead of
allowing it to be ambulatory for effective regulation and
supervision of the corporation.
(2) Place where its books and records are ordinarily kept
and meetings held- the “place of the principal office”
does not necessarily mean the place where the business
of the corporation is transacted but the place where its
books and records are ordinarily kept and its officers
usually meet for the purpose of managing the affairs and
transacting the business of the corporation.
The principal office may be located at one place and the
place of business at another.
(3) Residence at the place where the principal office is
located- a corporation is in a metaphysical sense a
resident of the place where its principal office is located
as stated in its AOI filed with the SEC. The place where
the principal office of the corporation is located
determines its residence and the venue in an action by or
against it.
(4) Change of address- in case of change of address
involving a change of city or municipality, an amended
AOI stating the new address must be filed with the SEC. if
the new address is located within the same city or
municipality, no corporate document is required to be
filed with the SEC except a notice regarding the change
of address.
Incorporating directors or trustees
The incorporating directors or trustees are those chosen by
the incorporators and named in the AOI. Trustees refers to
members of the board of a non-stock corporation.
(1) Matters to be specified in AOI- must specify the name,
nationality, and residence of the incorporators and must
show that at least a majority of the incorporators are
residents of the Phil.
The statement of the nationalities of the incorporators will
enable the SEC to determine prima facie compliance with
constitutional or legal requirements regarding ownership by
Filipino citizens of certain percentage of the capital stock of
certain corporations. It is also necessary that the AOI specify
the names, nationalities, and residences of the persons who
will be the first directors or trustees of the corporation.
(2) Number- the number of the incorporating directors or
trustees is determined by the incorporators but such
number shall not be less than 5 or more than 15 in
number as may be fixed in their AOI or by-laws.
There is an irreconcilable conflict between the 2 provisions.
Being the subsequent provision, Sec.29 must prevail on the
theory that it is the latest expression of the legislative will.
(3) Term of office- the incorporating directors or trustees
shall hold office until their successors are duly elected
and qualified. They are intended to be replaced by the
regularly elected directors or trustees who shall hold
office for 1 year, when the corporation is organized by
the adoption of by-laws at the first meeting of
stockholders or members.
(4) Subscribers to stock- Sec. 23 (2), every director must
own at least 1 share of the capital stock of the
corporation of which he is director. This requirement
applies to the directors elected after incorporation, as
well as to incorporating directors who must “be a
subscriber to at least 1 share of the capital stock of the
corporation”. It follows that in a stock corporation, there
must be at least 5 stockholders.
Capital stock/capital and subscribers/contributors
(1) Stock corporations- the AOI of a stock corporation under
Sec.14(8) must state the following:
(a) The amount of its authorized capital stock in pesos;
(b) The number of shares in which it is divided;
(c) The par value in pesos of each share;
(d) The names, nationalities, and residences of the
original subscribers;
(e) The amount of capital stock subscribed and paid by
each on his subscription; and
(f) If some or all of the shares are without par value,
such fact.
(2) Non stock corporations- if the corporation is a non-stock
corporation, the AOI must state:
(a) The amount of its capital or money contributed or
donated by specified persons;
(b) The names, nationalities, residences of the donors or
contributors; and
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(c) The respective amount contributed by each.
Where shares with par value
Where the shares issued by a corporation have only one par
value, the authorized capital stock would be the number of
shares multiplied by par value. If a corporation is authorized
to issue different classes of shares with different par values,
the authorized capital stock would be the total of the
products of the number of shares in each class multiplied by
the par value of such class of shares.
Where shares without par value
In case where the capital stock consist of shares without par
value, the AOI need only state such fact, together with the
number of shares into which said capital stock is divided.
If the shares have par value, the amount of the authorized
capital stock in pesos is specified in the articles, but if they
have no par value, no amount of capital stock is specified in
the articles which need not only state the number of shares
into which said capital stock is divided.
Where shares with par value and without par value
the AOI must state such fact, the number of shares into which
the capital stock is divided, the number of shares with par
value and their par value, and the number of shares without
par value.
Where business of corporation reserved for Filipino citizens
Corporations which will engage in any business or activity
reserved for Filipino citizens shall provide in their AOI the
restriction against the “transfer of stock or interest which will
reduce the ownership of Filipino citizens to less than the
required percentage of the capital stock as provided by
existing laws”.
If the required percentage of ownership has not been
complied with, the AOI will not be accepted by the SEC. in
determining the nationality of corporations with foreign
equity, the Commission has adopted the “control test” rule.
Acknowledgement, signature, and verification
In order to become a corporation de jure, the provisions
requiring the incorporation papers to be acknowledged as
well as signed must be complied with. Each of the signatories
must acknowledge his signature to the articles and there is no
corporation de jure unless acknowledged by the minimum
number required by law. However, unless otherwise provided
by the statute, the acknowledgement of the signatures of the
incorporators is not a part of the AOI.
The purpose of the law in requiring acknowledgement under
oath is to secure the Statute and all concerned against the
possibility of any fictitious names being subscribed to the
articles, and to furnish proof of the geniuses of the
signatures.
Section 16. Amendment of Articles of Incorporation. - Unless
otherwise prescribed by this Code or by special law, and for
legitimate purposes, any provision or matter stated in the
articles of incorporation may be amended by a majority
vote of the board of directors or trustees and the vote or
written assent of the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock, without
prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code, or the vote or
written assent of at least two-thirds (2/3) of the members if
it be a non-stock corporation.
The original and amended articles together shall contain all
provisions required by law to be set out in the articles of
incorporation. Such articles, as amended shall be indicated
by underscoring the change or changes made, and a copy
thereof duly certified under oath by the corporate secretary
and a majority of the directors or trustees stating the fact
that said amendment or amendments have been duly
approved by the required vote of the stockholders or
members, shall be submitted to the Securities and Exchange
Commission.
The amendments shall take effect upon their approval by
the Securities and Exchange Commission or from the date of
filing with the said Commission if not acted upon within six
(6) months from the date of filing for a cause not
attributable to the corporation.
Meaning of corporate charter
Charter- an instrument or authority from the sovereign
power bestowing the right or privilege to be and act as
corporation.
With regard to corporations, the term is correctly used in its
limited sense only with reference to special incorporation by
act of legislature. In the case of a corporation organized
under a general law, however, the corporation’s charter is
not limited to its AOI.
Distinguished from franchise
Corporate or primary Corporate charter
franchise
Is the right and privilege itself Applies to the instrument
of being a corporation bestowing such right and
privilege.
Components of corporate charter
A charter represents the complete grant of authority; hence,
the complete charter of a corporation does not rest only
upon one instrument.
(1) As to corporation formed under the general
incorporation law, the charter consists of:
(a) The law under which it is organized (B.P. Blg. 68)
(b) Articles of incorporation
(c) By-laws; and
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(d) All applicable provisions of the Constitution and the
general laws of the State in force at the time the
corporation is incorporated which are as much a part
of its charter ass though expressly written therein.
(2) As to corporations created by special laws, the charter
consists of:
(a) The special law which create the corporation;
(b) Executive Orders of the President; rules and
regulations applicable to such corporations; and
(c) All laws applicable thereto, including the
Corporation Code provisions of which apply
suppletorily.
Nature of Corporate Charter
A corporate charter is described as a contract of a 3-fold
nature, that is, a contract between the State and the
corporation, a contract between the corporation and its
stockholders (or members), and a contract between the
stockholders inter se.
(1) A contract between the State and the Corporation- it is
commonly said that the corporations are created by the
act of the sovereign. But it is not to be understood from
this that the Legislature can bring a private corporation
into existence of its own accord, and without the consent
of the members who compose it. The charter of a private
corporation has been regarded as a contract between
the corporation and the State.
The consideration for the grant of powers and privileges by
the State is found in the liabilities and duties which the
incorporators assume by accepting the terms specified in the
charter.
(a) Acceptance of the original charter-
1) If persons apply to the legislature for a charter,
this is sufficient evidence of consent on their
part and when the charter is granted, no
acceptance of it by them, other than will be
implied from their previous application, need be
shown. Indeed, they may be considered as
having made an offer, and the State as having
accepted it.
2) If, however, without such application, the
legislature offers a charter, either to particular
persons by a special act, or to persons or a class
of persons generally by a general law, an
acceptance must be shown. Until acceptance,
the offer of a charter, either by a general or a
special law, can have no effect whatever.
An act of the Legislature authorizing persons to
become a corporate body by complying with
certain terms and conditions is, until accepted
by the persons authorized, nothing but an offer
on the part of the State, which may be
withdrawn by it at any time; and it is withdrawn,
so as to be no longer open for acceptance, by a
repeal of the act by the Legislature, or by the
 adoption of a constitutional provisions
rendering such an act void.
(b) Acceptance of amendment to existing charter- the
rule that a charter must be accepted before it can
have any effect applies to acts amending existing
charter under a right reserved to the State when the
charter was granted; for though the State may
reserve the right to amend the charter of a private
corporation, it cannot compel the members to
accept the charter as amended, any more than it
could compel them to accept the original charter. If
they do not choose to adopt the amendment, they
may give up their charter altogether.
The acceptance of an amendment, like the
acceptance of an original charter, may be implied
from the conduct of the corporation or its members
and it will be constructively presumed if the powers
conferred by the amendatory act are exercised.
(2) A contract between the corporation and the
stockholders-
It is generally held that a corporate charter constitutes a
contract between the corporation and its stockholders.
Stockholders are presumed to have entered into such
contract with knowledge of the provisions thereof, are
bound thereby, and their rights as stockholders are
defined and limited by the charter.
The AOI or the corporate charter being considered a
contract, the corporation is bound to observe all the
provisions thereof.
(3) A contract between stockholders inter se-
The charter of the corporation constitutes a contract also
between the stockholders which is entitled to protection
as against attempted action by the corporation, though
authorized by law and the majority of the stockholders,
insofar as the interests of dissenting stockholders are
concerned. Thus, there is a contractual obligation on the
corporation with respect to its stockholders and on the
stockholders with respect to each other than no
fundamental, radical, or material changes on the
purposes of the corporation shall be made, at least in the
absence of express or implied consent of the
stockholders.
Reserved power of state to amend corporate charter
(1) Constitutional and statutory authority-
The certificate of incorporation is a contract primarily
between the State and the corporation. Hence, it can be
amended only by or under constitutional or statutory
authority.
(a) The constitutional authority of Congress to change
or amend the charter of a private corporation for the
operation of a public utility is expressly reserved by
Sec11, art XII of the Consti.
(b) The statutory authority of the Congress to alter or
amend the corporate charter is impliedly reserved
by Sec. 145 of the Code subject to the limitation
29
therein provided with respect to vested rights that
have accrued at the time of the enactment of the
amendatory law and the prohibition of the
Constitution against laws impairing the obligation of
contracts.
(c) Under the reserved power to repeal the corporate
charter, the legislature may terminate corporate
existence.
(2) Exercise of power-
The reservation of the power is an incident of the
contract between the state and the incorporators. The
dissolution of corporation without a cause is void as
impairing the obligation of a contract between the
incorporators and the State.
NOTE: with respect to the franchise of public utility, the
only limitation is that the power can be exercised only “
when the common good requires”.
Power of stockholders or members to amend articles of
incorporation
(1) Power expressly granted- the authority of stockholders
or members to amend the AOI which forms part of the
corporate charter is conferred by Secs. 16. 37 and 38.
Sec. 37 refers to the extension or shortening of the
corporate term; Sec. 38, to increase or decrease of the
capital stock; and Sec 16, to amendments in general. The
power to amend is also expressly granted by Sec 36 (4).
The amendment must also be approved by a majority of
the board of directors or trustees.
(2) Matters not subject to amendment-
Certain provisions or matters stated in the AOI cannot be
amended.
(a) The portion of the AOI stating the names of the
incorporators and the first set of directors/trustees,
place and the date of the execution of the articles
and the original subscriptions of the incorporators.
(b) The names, etc. of the subscribers, the treasurer of
the corporation elected by the subscribers and the
witnesses cannot be amended except to correct
mistakes.
Necessity of stockholders’ or members’ meeting for
amendment
(1) The amendment nay also be effected by the “written
assent” of the stockholders representing at least 2/3 of
the outstanding capital stock of the corporation or 2/3 of
its members, meaning that such action need not be
taken at a meeting and upon a vote. Even holders of non-
voting shares or non-voting members, as the case may
be, are entitled to vote on the amendment.
(2) If the amendment consists in extending or shortening the
corporate term or increasing or decreasing the capital
stock, a meeting of the stockholders or members is
necessary.
(3) In a close corporation, if the amendment of the AOI
refers to any of the matters mentioned in Sec. 103, the
same shall not be valid or effective unless approved by
the required vote of the stockholders at a meeting duly
cancelled for the purpose.
2. That the purpose or purposes of the corporation are
patently unconstitutional, illegal, immoral, or contrary to
government rules and regulations;

Limitations of power of corporation to amend 3. That the Treasurer's Affidavit concerning the amount of
capital stock subscribed and/or paid is false;
(1) When it will be contrary to any provision or requirement
prescribed by the Code or by special law, or change any 4. That the percentage of ownership of the capital stock to
provision in the AOI stating an accomplished act; be owned by citizens of the Philippines has not been
(2) Must be for legitimate purpose; complied with as required by existing laws or the
(3) Must be approved by the required vote of the board of Constitution.
directors or trustees and the stockholders or members;
No articles of incorporation or amendment to articles of
(4) The original and the amended articles together must
incorporation of banks, banking and quasi-banking
contain all provisions required by law to be set out in the
institutions, building and loan associations, trust companies
AOI;
and other financial intermediaries, insurance companies,
(5) Articles, as amended, must be indicated by the
public utilities, educational institutions, and other
underscoring the change or changes made, and a copy
corporations governed by special laws shall be accepted or
thereof duly certified under oath by the corporate
approved by the Commission unless accompanied by a
secretary and a majority of the directors or trustees
favorable recommendation of the appropriate government
stating that the amendment or amendments have been
agency to the effect that such articles or amendment is in
duly approved by the required vote of the stockholders
accordance with law. (n)
or members must be submitted to the SEC. filling fees
must be paid; Grounds for rejection of AOI or amendment thereto
(6) The amendments shall take effect only upon their
approval by the SEC. Sec. 17 enumerate the grounds. The grounds are not
(7) If the corporation is governed by special laws, the exclusive.
amendments must be accompanied by a favorable
(1) The SEC is required to give the incorporators reasonable
recommendation of the appropriate government agency
time within which to correct or modify the objectionable
to the effect that such amendments are in accordance
portions of the AOI or amendment when the same is
with law.
rejected or disapproved for non-compliance with the
(8) In the case of a foreign corporations authorized to
requirements of the Code.
transact business in the Phil, they are merely required to
(2) Any decision of the Commission rejecting the AOI or
file, within 60 days after the amendment to the AOI
disapproving any amendment thereto is appealable by
becomes effective, with the SEC and in proper cases,
petition for review in accordance with the pertinent
with the appropriate government agency, a duly
provisions of the rules of court.
authenticated copy of the AOI for record purposes. The
(3) In case of corporations governed by special laws, the AOI
filing thereof, however, shall not of itself enlarge or alter
or amendment shall not be accepted or approved by the
the purposes for which such corporation is authorized
SEC unless accompanied by a favorable recommendation
under its license to transact business in the Phil.
of the appropriate government agency.
(9) Such portion of the AOI which states an established or
(4) Before a foreign corporation can lawfully transact
accomplished fact at the time of incorporation cannot be
business in the Phil it must first secure a license in
changed or amended.
accordance with the code and a certificate of authority
Section 17. Grounds when articles of incorporation or from the appropriate government authority.
amendment may be rejected or disapproved. - The (5) The SEC shall not also accept the AOI of any stock
Securities and Exchange Commission may reject the articles corporations unless accompanied by a sworn statement
of incorporation or disapprove any amendment thereto if of the treasurer elected by the subscribers showing the
the same is not in compliance with the requirements of this amount of the capital stock subscribed and paid.
Code: Provided, That the Commission shall give the (6) The action of the commission in approving or rejecting
incorporators a reasonable time within which to correct or the AOI or any amendment thereto is not a ministerial
modify the objectionable portions of the articles or function but involves the exercise of discretionary power.
amendment. The following are grounds for such rejection or
Suspension or revocation of certificate of registration of
disapproval:
corporations

(1) Grounds- under PD 902-A, SEC may suspend or revoke,

1. That the articles of incorporation or any amendment
after proper notice and hearing, the franchise or
thereto is not substantially in accordance with the form
certificate of registration of corporations, partnerships,
prescribed herein;

30
 or associations upon any of the grounds provided by law,
including the ff.:
(a) Fraud in procuring its certificate of incorporation;
(b) Serious misinterpretation as to what the corporation
can do or is doing to the great prejudice of, or
damage to, the general public;
(c) Refusal to comply with or defiance of a lawful order
of the Commission restraining he commission of acts
which would amount to a grave violation of its
franchise;
(d) Continuous inoperation for a period of at least 5
years;
(e) Failure to file by laws within the required period; and
(f) Failure to file required reports in appropriate forms
as determined by the Commission within the
prescribed period.
(2) Effectivity- a SEC order of revocation is immediately
effective. Once the revocation order is issued, the subject
corporation’s existence is terminated at that very instant
and is deemed terminated until the particular revocation
order is lifted.
(a) It may not continue to operate its business and issue
shares;
(b) It may sell its assets pursuant to Sec 122 but it may
only purchase property if such purchase will be
consistent with liquidation;
(c) It may sue for purposes of recovering its property.
The capacity of a corporation to institute an
ejectment suit is not affected by the subsequent
suspension and revocation of certificate of
registration.
(3) Lifting of order of revocation- the lifting restores the
corporation to its original status as if there was no
revocation order issued against it, with the capacity to
exercise all the powers of a duly registered corporation
under the Corporation Code.
Section 18. Corporate name. - No corporate name may be
allowed by the Securities and Exchange Commission if the
proposed name is identical or deceptively or confusingly
similar to that of any existing corporation or to any other
name already protected by law or is patently deceptive,
confusing or contrary to existing laws. When a change in the
corporate name is approved, the Commission shall issue an
amended certificate of incorporation under the amended
name. (n)
Limitations upon use of corporate name
(1) Similarity with another trade name-
The incorporators may choose and use any name they
may see fit, provided it is one not identical with or
prejudicially similar to a name which was previously
adopted and which is being used by another existing
corporation or unincorporated association or a natural
person as trade name or is contrary to existing law.
(a) It acquires its name by choice and need not select a
name identical with or similar to one already
appropriated by a senior corporation while an
individual’s name is a thrust upon him.
31
(b) If any corporation could adopt at pleasure the name
of another corporation, the practice would cause
confusion and unfair and fraudulent competitions,
open the door to frauds upon the public, promote
the evasion of legal obligations and duties, and
result in difficulties of administration and
supervision over corporations.
(2) Test of infringement-
The right to exclusive use of a corporate name with
freedom from infringement is determined by priority of
adoption. The test is whether the similarity is such as to
misled a person using ordinary care and discrimination
and the court must look to the record as well as the
names themselves.
It is settled that proof of actual confusion need not be
shown. It suffices that confusion is probably or likely to
occur.
(3) Part of name-
The corporate name shall contain the word
“corporation” or “incorporated”, or the abbreviations
“corp.” or “inc.”, respectively. The corporate name of a
foundation shall use the word “foundation”.
(4) Prohibited use of certain words-
In addition to the limitation provided by Sec.18, special
laws prohibit the use of certain words as part of the
corporate name such as those which imply that a
corporation is engaged in an activity in which it is not
allowed by law to engage in.
(5) Use of generic, geographical, and descriptive terms and
names-
Certain words, terms, or names are regarded by law as
incapable of exclusive appropriation. Of this class are
generic terms and geographical names and terms which
are merely descriptive of the goods, services, places
where made, the character of the business, or the name
of the maker.
(6) Use of trade name of other corporation-
The SEC guidelines, and procedures on the use of
corporate and Partnership names, specifically requires
that:
(a) A corporate name shall not be identical, misleading
or confusingly similar to one already registered by
another corporation with the commission;
(b) The name applied for applied for is similar to the
name of a registered firm, the applicant shall at least
contain one or more distinctive words to proposed
name to remove the similarity or differentiate it
from the registered name.
(7) Use of a person’s full name or surname-
It may be used in a corporate name if he/she is a
stockholder of the corporation and has consented to
such use. If the person is already deceased, the consent
shall be given by his/her estate. The meaning of initials
used in a name shall be stated by the registration the AOI
or in a separate document signed by an incorporator or
director.
(8) Doctrine of secondary meaning-
Originated in the trademark law. Its application is
extended to corporate names since the right to use a
corporate name to the exclusions of others is based upon
the same principle which underlies the right to use a
particular trademark or trade name.
(9) Use of business names different from corporate name-
No law prohibits a company from using a different name
from its corporate name in doing business. A company
may have more than one business name or trade name
provided these are indicated in the AOI, and in the
absence of fraud or deceit and having complied with said
circular, is allowed to use its business names.
(10) Where business of junior corporation different or non-
competing-
The protection to which the prior user of a corporate
name is entitled is not limited to guarding its goods or
business from actual market competition with identical
or similar products of the parties but extends to all cases
in which the use by the junior appropriator of the name
is likely to lead to a confusion of source, as where
prospective purchasers would be misled into thinking
field, or is any way connected with the activities if the
infringer; or when it forestalls the normal potential
expansion of its business.
Remedy of corporation whose name has been adopted by
another
(1) Injunction- the name may be protected by injunction
upon a principle similar to that upon which persons are
protected in the use of trademarks and trade names.
(a) Fraud upon the aggrieved corporation-
May be prevented by the corporation having a prior
right, by a suit for injunction against the new
corporation to prevent the use of the name.
(b) Interference with its business-
General rule is that the right of one corporation to
enjoin the use of the name of a similar name by
another depends upon whether such use has
interfered with the former’s business whatever it
may be and without regard to whether it is
commercial, trading or otherwise.
(2) De-registration- to restrain the wrongful assumption of a
name by a corporation is not to annul the corporation by
depriving it of a name. if restrained from using a name
chosen, it may choose another name. Sec.18 empowers
the SEC to de-register a corporate name deceptively
similar to that already used by an existing corporation
not only for the protection of the complaining
corporation but more so for the protection of the public.
Change of corporate name
(1) Compliance with formalities- a corporation can change
the name originally selected by it after complying with
the formalities prescribed by law, to wit: amendment of
AOI and filing of the amendment with the SEC.
32
(2) Effectivity- it is required that the Commission must issue
an amended certificate of incorporation under the
amended name.
The change of name is deemed effective as of the date of
the Commission’s approval of the amended articles or
from the date of filing with it if not acted upon within 6
months from the date of filing for a cause not
attributable to the corporation.
(3) Effect- has no more effect upon its identity as a
corporation than a change of name of natural person
upon his identity.
Use of changed or abandoned corporate names
(1) Former name of same corporation- the mere fact that
the former name is indicated in the certificate of filing of
amended AOI would militate against anyone using said
name and said previous name cannot be appropriated or
used by any other person for a certain period.
(2) Name(s) of merged or consolidated corporations—in
case the change of the corporate name is due to merger
or consolidation, the corporate name of the merged ;or
consolidated corporations may not be used by another
corporation, without the consent of the surviving
corporation although there is a dissolution of the
absorbed corporation in view if Sec.80 (4).
(3) Name of dissolved corporation or whose registration
has been revoked- it shall not be used by another
corporation within 3 yrs from the approval of the
dissolution or 6 yrs from the date of revocation unless its
use has been allowed at the time of the dissolution or
revocation by the stockholders or members who
represent a majority of the outstanding capital stock or
membership of the corporation.
(4) Name of dissolved corporation acquired by new
corporation- a new corporation which has acquired the
property and name of a dissolved corporation is in the
same position as the original corporation would have
been had it continued to exist and may enjoin the use of
such name by another.
(5) Name of corporation dissolved through expiration of
term- but when the corporate name is abandoned due to
the dissolution of the corporation through expiration of
its corporate life, such corporate name may be used by
another corporation.
Effect of misnomer of a corporation
(1) Contracts. – The general rule is that the mere
misnomer of a corporation in a bond, note, or other
deed or contract does not render the same invalid or
inoperative.
Nor will a grant or conveyance to or by a corporation
be avoided because of a misnomer.
(2) Suit by, or against, corporation. – The corporation
may sue or be sued thereon in its true name with
proper allegation and proof that it is the corporation
 intended; and its identity may be established by
parol evidence.
Generally speaking, a corporation if sued by the
wrong name is bound if duly served.
Section 19. Commencement of corporate existence. - A
private corporation formed or organized under this Code
commences to have corporate existence and juridical
personality and is deemed incorporated from the date the
Securities and Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon the
incorporators, stockholders/members and their successors
shall constitute a body politic and corporate under the name
stated in the articles of incorporation for the period of time
mentioned therein, unless said period is extended or the
corporation is sooner dissolved in accordance with law. (n)
Acquisition of juridical personality
(1) Issuance of certificate of incorporation. – A
corporation commences to have juridical personality
and legal existence only from the moment the
Securities and Exchange Commission issues to the
incorporators a certificate of incorporation under its
official seal.
(a) Such certificate is a final determination of
the corporation’s right and competence to
transact business or enter into contracts in
its name.
(b) It is the certificate of incorporation that not
only gives juridical personality to a
corporation but places it under the
jurisdiction of the Commission.
(c) The issuance of the certificate calls the
corporation into being but it is not really
ready to do business until it is organized.
(2) Filing of articles of incorporation. – In the case of
religious corporations, the Code does not require the
Securities and Exchange Commission to issue a
certificate of incorporation.
(3) Registration of cooperative. – A cooperative
acquires juridical personality upon registration with
the Cooperative Development Authority. It need not
to be registered again with the Securities and
Exchange Commission.
Section 20. De facto corporations. - The due incorporation of
any corporation claiming in good faith to be a corporation
under this Code, and its right to exercise corporate powers,
shall not be inquired into collaterally in any private suit to
which such corporation may be a party. Such inquiry may be
made by the Solicitor General in a quo warranto proceeding.
(n)
De jure corporation/de facto corporation defined.
33
(1) A de jure corporation is one created in strict or
substantial conformity with the mandatory statutory
requirements for incorporation and the right of
which to exist as a corporation cannot be
successfully attacked or questioned by any party
even in a direct proceeding for that purpose by the
State.
(2) A de facto corporation is one which actually exist for
all practical purposes as against the State. It is a
corporation from the fact of its acting as such,
though not in law or right a corporation
It is one which has not complied with all the
requirements necessary to be a de jure corporation
but has complied sufficiently to be accorded
corporate status as against third parties although
not against the State.
Requisites of a de facto corporation.
(1) A valid law under which a corporation with powers
assumed might be incorporated;
(2) A bona fide attempt to organize a corporation under
such law; and
(3) Actual user or exercise in good faith of corporate
powers conferred upon it by law.
Stockholders of a de facto corporation enjoy exemption from
personal liability for corporate obligations as do stockholders
of de jure corporations.
Existence of law.
In order that there can be a de facto corporation, there must
be a law authorizing it to be a corporation de jure for there
cannot be a corporation de facto when there cannot be one
de jure, even though there may have been an assumption of
corporate powers.
Bona fide attempt to incorporate.
(1) Absence of bona fide attempt to incorporate. –
When there has been no attempt in good faith to
create a corporation de jure, there can be no de
facto corporation. Mere intent is not sufficient.
(2) Defects precluding creation of corporation. – the
following are examples of defects which will
preclude the creation of even a de facto corporation:
(a) Absence of articles of incorporation;
(b) Failure to file articles of incorporation with
the Securities and Exchange Commission ;
and
(c) Lack of certificate of incorporation from the
Securities and Exchange Commission.
(3) Defects resulting in creation of de facto
corporation.—the following are examples of defects
which do not preclude the creation of a de facto
corporation:
(a) The articles of incorporation fails to state all
the matters required by the Code to be
stated, or state some of them incorrectly;
 (b) The name of the corporation closely
resembles that of a pre-existing corporation
that it will tend to deceive the public;
(c) The incorporators or a certain number of
them are not residents of the Philippines;
(d) The acknowledgement of the articles of
incorporation or certificate of incorporation
is insufficient or defective in form, or it was
acknowledged before the wrong officer;
(e) The percentage of Filipino ownership of the
capital stock required for the business is less
than that prescribed by law;
(f) The minimum paid-up capital stock has not
been paid to and received by the corporate
treasurer contrary to his affidavit; and
(g) The failure to submit its by-laws on time.
The above may be considered as inadvertent or minor defects
or errors which can be excused to prevent injustice.
Colorable compliance with the law.
To constitute a corporation de facto, there must be, it is true
a colorable compliance with the statute, but there need not
to be a substantial compliance. A substantial compliance
makes the body a corporation de jure.
User or corporate powers in good faith.
To create a corporation de facto, it is not sufficient to show
the existence of a law under which a corporation might be
formed and an honest attempt to comply with the
requirements thereof, but it is also necessary to show an
actual use or exercise of corporate powers or franchise.
(1) User contemplated. – In substance, user consists in
an enjoyment and exercise of such corporate
franchises and powers as would be given by the law
to an association if the attempted organization had
been perfected.
(2) Duty to correct defect if discovered. – it is essential
that the corporation must act in good faith in
claiming to be a corporation and exercising
corporate powers.
Therefore, if after incorporation, the incorporators
discovered that they have not complied substantially with the
law and still continued transacting business as a corporation,
without doing anything to correct the defect, the privilege of
de facto existence can no longer be invoked.
Basis of de facto doctrine.
The recognition of de facto existence has been found
necessary to promote the security of business transaction
and to eliminate quibbling over irregularities.
(1) A third person dealing with a corporation will rarely
be prejudiced if the company is recognized as a
corporation in spite of minor defects in its
formation.
34
(2) Seldom would it be just to allow a wrongdoer to
quibble over such objections to escape liability for
wrongdoing.
(3) Equally, it would be unjust to allow a claimant
against a supposed company to assert the individual
liability of innocent passive investors on the ground
of flaws in the formal steps of incorporation, when
they have attempted in good faith to comply with
statutory requirements and the objecting party is
not prejudiced.
Questioning validity of corporate existence
Assuming that a de-facto corporation actually exists, its
existence as a corporation cannot be collaterally attacked
either by the State or by the private individuals.
(1) The State must bring a direct proceeding (quo
warranto) against the corporation to oust it from the
exercise of corporate powers usurped by it and to
have it dissolved.
(2) As to individuals dealing with it as a corporation,
there is no essential distinction.
Direct/collateral attack of corporate existence
(1) Direct attack- one whereby the State, in a
proceeding brought for that purpose, attacks the
existence of the association claiming to be a
corporation.
(2) Collateral attack- one whereby corporate existence
is questioned in some incidental proceedings not
provided by law for the express purpose of attacking
the corporate existence.
Rule against collateral attack
(1) Rationale- the general rule against collateral attack
upon corporate existence is based upon the ground,
not of equitable estoppel.
(a) Individual right is not invaded; it is the State’s
right and authority which are invaded and
usurped.
(b) The rule is in the interest of the public and is
essential to the validity of business transactions
with corporations.
(2) When rule not applicable- the rule that collateral
attack on the organic entity or existence of a
corporation will not be permitted, does not apply,
however, when the lack of right or the wrongdoing
of the corporation is in use because in violation of
public policy or of express or implied statutory
requirement, such as denial of its right to enforce
contracts entered into without compliance with
prohibitions of express or implied statutory or public
policy.
Where organization not even a de facto corporation.
If there has been a bona fide attempt to incorporate, under a
law authorizing incorporation, and the law has been so far
complied with as to make the association what is called a
corporation de facto, the only way in which its corporate
existence can be questioned is in a direct proceeding by the
State, brought for that purpose. Private individuals cannot
raise the objection in such a case, either directly or indirectly,
and nobody can raise the objection collaterally.
(1) Direct or collateral attack. – if failure to comply with
conditions precedent prevents the coming into
existence of any corporation either de jure or de
facto, then, on principle and in reason, the question
may be raised collaterally as well as directly, and by
private individuals as well as by the State, unless
there is something to operate as an estoppel.
When a private individual, therefore, raises the
objection that conditions precedent have not been
complied with, the question, in the absence of
elements of estoppel, is whether or not there is a
corporation de facto. If there is, he cannot object;
otherwise, he can.
(2) Capacity to sue or be sued. – if a party is not either
de jure or de facto, it has no legal capacity to sue or
be sued. And it follows that where the corporate
existence of the plaintiff suing as a corporation is
defined, the burden is on it to prove its corporate
existence either de jure or de facto, or at least to
show an estoppel on the part of the defendant to
deny such existence.
(3) Liability as partners. – if neither a de jure or de facto
corporation results, the incorporators should be held
liable as partners together with stockholders who
subscribed to stocks knowing the failure of the
attempted incorporation of the business.
It is the regular courts who have the jurisdiction and
not the SEC.
(4) Estoppel as a defense- where there is not even a
corporation de facto, a private person may be barred
from raising the objection on the ground that he is
estopped by his conduct, as by having dealt with the
pretended corporation as a corporation, or by having
held it out to the public as a legally constituted
corporation.
Proof of corporate existence
(1) Proof of de jure existence- will depend on the great
extent upon the nature of the proceeding in which
the question is raised and the circumstances of the
particular case. In quo warranto proceedings by
State to test the right of an alleged corporation to
exercise corporate powers, corporate existence de
jure must be shown. It must be made to appear that
there is a valid law creating or authorizing such a
corporation, that there was a valid organization
under it and a substantial compliance with all
conditions precedent.
(2) Proof of de facto existence- if the question of
corporate existence is raised collaterally, it is
sufficient if a de facto existence be shown. In order
to prove de facto corporate existence, to show the
35
law under which the alleged corporation might have
been formed, a colorable bona fide compliance with
that law, and an assumption or user of corporate
powers.
(3) Proof of facts operating as an estoppel- it is not
necessary to prove even a de facto corporate
existence. All that is necessary is to show the facts
that will operate as an estoppel.
Powers and liabilities of a de facto corporation
(1) In general- it is deemed to have a substantial legal
existence and ordinarily, in its relation with all
persons except the State, has the same powers and
is subject to the same liabilities, duties and
responsibilities, as corporation de jure, and is bound
by all such acts as it might rightfully perform if it
were a corporation de jure.
So long as the State acquiesces in its existence and
its exercise of corporate functions, it is under the
protection of the same law and governed by the
same legal principles as de jure corporations, and
may legally do and perform every act and thing
which the same entity could do or perform were it a
de jure corporation.
(2) Liability to taxation- de facto is subject to taxation
in the same manner to je jure.
(3) Binding effects of the contract- similarly, a transfer
of property to or by a corporation de facto is valid
and binding against all persons except the State;
bonds, deeds, and mortgage executed by such a
corporation are valid, not only as against the
corporation itself, but also against anyone making a
a claim against its assets, whether as a creditor
directly of the corporation or as a creditor of its
creditors or stockholders.
(4) Protecting against unauthorized acts- whether de
facto or de jure, it is entitled to protect itself from
unauthorized acts.
Liabilities of officers and members of a de facto corporation
(1) In general- subject to all the liabilities and penalties
attending to officers and directors duly chosen by a
corporation de jure, including liability under the
criminal law, and their acts are binding when such
acts would be within the power of such officers if the
corporation were one de jure.
(2) Liability as partners to third persons- members
cannot be held liable to third persons who deal with
them in their supposed corporate capacity, merely
on account of technical defect in the formation of
the corporation. On the other hand, where an
attempt to organize a corporation fails by omission
of some substantial step or proceeding required by
the law, its members or stockholders are liable as
partners.
(3) Liability among themselves- in actions among
themselves for advances, commissions, etc. the test
of whether the corporation is de jure or de facto has
 been disregarded. When persons associate together
and do business as a corporation and the latter is
defectively organized, their rights, duties and
liabilities, as between themselves, should be
deermined and governed by the express or implied
terms, conditions, and limitations contemplated by
their agreement. They are not partners unless they
have agreed to be such.
Section 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. (n)
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 third person who relied in good
faith on such representation. It cannot alleged lack of
personality to be sued to evade its responsibility for a
contract it entered into and by virtue of which it received
advantages and benefits.
(1) Principles as to de facto corporation not applicable-
in certain circumstances- de jure or de facto may be
regarded as a corporation. An organization which
has not complied with the conditions precedent to
even de facto existence is not, for any purpose, a
corporation. Nevertheless, the incidents of a
corporate existence may exist as between the
parties by virtue of an estoppel.
(2) Jurisdictional requirements not subject to estoppel-
the doctrine of corporation by estoppel cannot
override jurisdictional requirements. Jurisdiction is
fixed by law and cannot subject to the agreements
of the parties.
(3) Foundation of doctrine- founded on principles of
equity and is designed to prevent injustice and
unfairness.
Where there is no third person involved and the
conflict arises only among those assuming the form
of a corporation who know that it has been
registered, there is no corporation by estoppel.
(4) Reason behind doctrine-
(a) An unincorporated association has no
personality and would be incompetent to act
and appropriate for itself the power and
attributes of a corporation as provided by law;
(b) It cannot create agents, or confer authority on
another act on its behalf;
36
(c) As it is an elementary principle of law that a
person who acts as an agent without authority
or without a principal is himself regarded as the
principal, possessed of all the right and subject
to all the liabilities of a principal, a person acting
or purporting to act on behalf of a corporation
which has no valid existence assumes such
privileges and obligations and becomes
personally liable for contracts entered into of
for other acts performed as such agent.
Corporation by estoppel without de facto existence
1) corporation by estoppel may arise even if no de
facto corporation exists.
2) A corp. by estoppel has no real existence in law.
In it neither de jure nor a de facto corp., but it is
a “mere fiction existing for the particular case,
and vanishing where the element of estoppel is
absent.
3) Even if the ostensible corp. is proven to be
legally non-existent, a party may be estopped to
deny the corporate existence. In order for one
to be estopped to deny the corporate existence
of an organization, he must have contracted or
dealt with it as a corporation.
Note: if not all the associates participated or
consented to the representation, as to them,
the doctrine of estoppel will not apply.
Estoppel of persons dealing with a corporation
The doctrine of estoppel to deny corporate existence applies
to both domestic and foreign corporations.
1) The stockholders or members of a pretended or
ostensible corporation who participated in holding it
out as a corporation are generally estopped or
precluded to deny its existence against creditors for
the purpose of escaping liabilities for the corporate
debts or for the unpaid part of the subscription
stock.
2) So, also are the third persons who deal with such
corporation recognizing it as such and the pretended
corp. itself, estopped from denying its corporate
existence.
3) All persons not stockholders or members who
assume to act as a corporation knowing it to be
without authority to do shall be liable as general
partners for all liabilities arising as a result thereto.
Persons liable as general partners
- The Code makes liable as general partners “all
persons who assume to act as a corporation”, and
they include persons who attempt, but fail, to form a
corporation and who carry on business under the
corporate name. A de facto partnership among them
is created.
Note: only active members of an unsuccessfully attempted
corp., neither de facto or de jure, are liable as partners. On
the other hand, a third party who, knowing an association to
be unincorporated, nonetheless treated it as a corporation
and received benefits from it, may be barred from denying its
corporate existence in a suit brought against the alleged
corporation.
Sec. 22. Effects on non-use of corporate charter and
continuous inoperation of a corporation. - If a corporation
does not formally organize and commence the transaction
of its business or the construction of its works within two (2)
years from the date of its incorporation, its corporate
powers cease and the corporation shall be deemed
dissolved. However, if a corporation has commenced the
transaction of its business but subsequently becomes
continuously inoperative for a period of at least five (5)
years, the same shall be a ground for the suspension or
revocation of its corporate franchise or certificate of
incorporation.
This provision shall not apply if the failure to
organize, commence the transaction of its businesses or the
construction of its works, or to continuously operate is due
to causes beyond the control of the corporation as may be
determined by the Securities and Exchange Commission.
Statutory before and after incorporation
The right of exemption from personal liability resulting from
incorporation , being entirely statutory, can be acquired only
on the terms specified by a statute.
Mandatory and directory provisions explained
-non-compliance of mandatory provisions will prevent the
creation of a de jure corp. but departure with directory
provisions will not have this consequence.
-mandatory provisions could either be conditions precedent
or conditions subsequent.
Conditions precedent- are those conditions non-compliance
with will prevent the legal existence of a corporation.
Examples:
1) filing of the articles of incorporation with the SEC;
2) issuance of the cert. of incorp. By the SEC;
3)minimum no. of 5 incorporators;
4) legal requirements that 25% of the authorized capital stock
must be subscribed and 25% thereof paid.
Conditions subsequent- are conditions to be complied with
after acquiring corporate existence in order that a
corporation may legally continue as such. Non-compliance
may not affect corporate existence, but it can be a ground to
forfeit its charter.
Formal organization and commencement of business
-a corp. achieves its legal existence from the date SEC issues
the cert. of incorp. under its official seal, but formal
organization brings a corporation to life.
1) Acts constituting formal organization- it is the
process of structuring the corp. so that it can carry
out the purposes for which it has been incorporated.
2) Acts constituting commencement of business- when
it has performed preparatory acts geared toward the
fulfillment of the purposes for which it was
established (e.g. entering into contracts or
negotiation).
TITLE III
BOARD OF DIRECTORS/TRUSTEES/OFFICERS
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Sec. 23. The board of directors or trustees. - Unless
otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations
controlled and held by the board of directors or trustees to
be elected from among the holders of stocks, or where
there is no stock, from among the members of the
corporation, who shall hold office for one (1) year until their
successors are elected and qualified.
Every director must own at least one (1) share of
the capital stock of the corporation of which he is a director,
which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at
least one (1) share of the capital stock of the corporation of
which he is a director shall thereby cease to be a director.
Trustees of non-stock corporations must be members
thereof. a majority of the directors or trustees of all
corporations organized under this Code must be residents of
the Philippines.
Structure of corporate organization:
1) Binding effects of acts or contracts- action proposed
to be taken by by a corp. involves 2 basis questions;
1st- in order to bind a corporation, who within the
organization must act on its behalf?
2nd- what is the result if the statutory requirements are not
complied with and proper parties do not act?
2)tri-level structure- standard operating procedure.
1st- at the base are shareholders whose vote is required to
elect BoD.
2nd- directors who constitute the policy making body.
3rd- officers who execute the policies.
Corporate powers exercised by board of directors
1) Governing body of the corporation- corp. can only
act thru its BoD in case of stock corp., and board of
trustees in case of non-stock corp.
2) Binding effect of stockholders’ action- the
stockholders or member elect the BoD to oversee
the management and operation of a corp. they are
not agents of the corporation and cannot bind it
through their acts.
3) Extent of judicial review- as long as the directors act
honestly, and their acts or contracts do not disregard
the rights of the minority, the courts will not
interfere. They are not liable for losses if the cause is
merely error in business judgment, not amounting to
bad faith or negligence.
Business judgment rule-
GR: Courts will not interfere in the decisions made by the
BOD as regards the internal affairs of the corporation
exception: Unless such contracts are so unconscionable and
oppressive as to amount to a wanton destruction of rights of
the minority.
Nature of power of the board of directors or trustees
1) Their powers are original and undelegated. The
stockholders or members do not confer, nor revoke
those powers. They are derivative only in the sense
 of being received from the state in the act of
incorporation.
2) Other view is the DELEGATION THEORY- which
holds that the directors are the officers and agents
of the corporation, representing the interest of that
abstract legal entity and those who own shares of
stock and as such, they can bind the corporation
provided that they act within the scope of their
authority.
Limitations on the powers of the board of directors or
trustees
1) Limitations or restrictions imposed by the
constitution, statutes, art. of incorporation, or by-
laws of the corp.
2) It cannot perform constituent acts, that is acts
involving the fundamental or major changes in the
corp. (i.e. amend the Art. of incorp.) which require
the approval or ratification of the stockholders or
members.
3) It cannot exercised powers not possessed by the
corp.
Powers exercised by the Board of directors or trustees as a
board
-The BoD or trustees must act together as a body in a lawful
meeting, not individually or separately, in order to bind the
corp. for their acts. There must be quorum.
Reasons for the rule:
1) A meeting is necessary in order that any action may
be deliberately adopted, after opportunity for
discussion and interchange of views; and
2) As agents of the corporation managing its affairs,
directors or trustees have power to act other than as
a board.
Unlike its officers, directors are not agents of the
corp. per se and they have no power acting individually
to bind the corp.
Exceptions to the rule: where there are extraordinary
situations or conditions to justify the act of the
stockholders or corporate officers as to make a board
action as nothing more than a mere of formality.
Powers of directors or trustees to delegate authority
GR: The directors or trustees have the power to delegate
authority.
- In the absence of authority from the BoD, no
persons, not even its officers, can validly bind a corp.
Exceptions:
1) Discretionary powers exclusively vested or especially
delegated to the BoD.
2) They cannot delegate entire supervision and control
of the corporation.
3) Special powers vested to them.
Term of office of directors or trustees
1) One year- term expires 1 year after election to the
office and after their successors are elected and
qualified, as expressly provided by this Code.
2) Hold-over: upon failure of a quorum at any meeting
of the stockholders or members called for an
election, the directorate naturally holds over and
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continues to function until another directorate is
chosen and qualified.
3) Modification of term- unlike in the case of non-stock
corporation and educational corporations, stock
corporations are not authorized to divide the
members of its BoD into groups with each group
having a different term of office. Their term of office
being fixed by law.
Number of directors or trustees to be elected
1) Stock corporation- must not be less than 5 nor more
than 15.
2) Ordinary non-stock corp.- may be more than 15 but
must not be less than 5.
3) Trustees of non-stock educational institution- not
less than 5, nor more than 15.
4) Corporation sole-none. One member or corporator
only.
5) Trustees of religious societies- not less than 5, nor
more than 15.
Note: Election of less than the number required does not
invalidate the title of those elected as long they constitute a
quorum.
Qualifications of directors or trustees
1) stock corporation-
a) every director must own atleast 1 share of the
capital stock;
b) the share of stock held by the director must be
registered in his name on the books of the corp.;
c) every director must continuously own at least 1
share of stock during his term, otherwise he
shall be automatically cease to be director; and
d) a majority of the directors must be resident of
the Philippines.
2) Non-stock corp- must be members of goos standing
thereof and like in stock corp, a majority of them
must be residents of the Philippines.
Natural persons contemplated by law
- Only natural persons can be elected as directors or
trustees and they must be elected from among the
stockholders or members.
Citizenship requirement: there no citizenship requirement
demanded of the members of the BoD under the code.
However, under the Constitution, aliens may not be elected
as directors or officers of a corporations engaged in business
or industries which are totally or partially nationalized.
Stock ownership requirement
1) Holder of legal title- the general rule is that the
person who holds the legal title to the stock as
shown by the books of the corporation is qualified
although some other person may be the beneficial
owner of the stock recorded in his name.
2) Voting trustee- considered as the legal owner of the
shares transferred to him by virtue of a voting trust
agreement and, therefore, eligible to office of
director.
3) Transferee of qualifying shares- eligible to office of
director.
4) Pledge/pledgor of shares- pledgee is not qualified to
be a director because he holds the shares as a
 security and not as a owner. While, a director is not
disqualified when he merely pledged his share.
5) Subscriber of shares in escrow- not eligible because
the holders in not an owner.
6) Transferee of shares he previously sold- a director
who makes a valid transfer of his shares and
subsequently reacquires the same will not entitle
him to his former position.
7) Transferee at the time of assumption of office-
qualified even if not the legal owner of the stock at
the time of election.
8) Co-owners of shares- as co-owners of the shares,
the husband and wife shall be considered as 1
stockholder. Hence, either of them and not both of
them may be voted as director.
Reason for the requirement of stock ownership: a man with
financial interest at stake will devote more attention to the
business.
Additional qualifications in the by-laws
1) The qualifications may be prescribed in the by-laws, but it
should not be in conflict with the requirements under the
corporation law.
2) additional qualifications cannot be enforced unless
approved by the stockholders or members and contained in
the by-laws of the corporation.
Effect of want of eligibility:
Votes cast for the person who is not eligible as a
director cannot elect him.
It does not follow, however, that ineligibility of a
person who has been elected as an officer will invalidate his
acts as such. Persons dealing with a corp are not required to
ascertain their qualifications. Therefore, their acts are valid in
so far as 3rd persons are concerned.
Sec. 24. Election of directors or trustees. - At all elections of
directors or trustees, there must be present, either in
person or by representative authorized to act by written
proxy, the owners of a majority of the outstanding capital
stock, or if there be no capital stock, a majority of the
members entitled to vote. The election must be by ballot if
requested by any voting stockholder or member. In stock
corporations, every stockholder entitled to vote shall have
the right to vote in person or by proxy the number of shares
of stock standing, at the time fixed in the by-laws, in his own
name on the stock books of the corporation, or where the
by-laws are silent, at the time of the election; and said
stockholder may vote such number of shares for as many
persons as there are directors to be elected or he may
cumulate said shares and give one candidate as many votes
as the number of directors to be elected multiplied by the
number of his shares shall equal, or he may distribute them
on the same principle among as many candidates as he shall
see fit: Provided, That the total number of votes cast by him
shall not exceed the number of shares owned by him as
shown in the books of the corporation multiplied by the
whole number of directors to be elected: Provided,
however, That no delinquent stock shall be voted. Unless
otherwise provided in the articles of incorporation or in the
by-laws, members of corporations which have no capital
stock may cast as many votes as there are trustees to be
elected but may not cast more than one vote for one
candidate. Candidates receiving the highest number of votes
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shall be declared elected. Any meeting of the stockholders
or members called for an election may adjourn from day to
day or from time to time but not sine die or indefinitely if,
for any reason, no election is held, or if there not present or
represented by proxy, at the meeting, the owners of a
majority of the outstanding capital stock, or if there be no
capital stock, a majority of the members entitled to vote.
Election of directors or trustees
The following are the limitations or conditions on the
election of directors/ trustees:
1.) At a meeting of stockholders or members called for the
election of directors or trustees, there must be present either
in person or by representative authorized to act by written
proxy, the owners of the majority of the outstanding capital
stock or majority of the members entitled to vote.
2.) The election must be by ballot if requested;
3.) A stockholder cannot be deprived in the articles of
incorporation or in the by‐laws of his statutory right to use
any of the methods of voting in the election of directors;
4.) No delinquent stock shall be voted;
5.) The candidates receiving the highest number of votes shall
be declared elected.
6.) the meeting may be adjourned if there is failure to hold an
election, but it cannot be adjourned sine die or indefinitely.
7.) The requisite notice must be given.
Note: mere designation of directors or trustees without
election will not be sufficient. They must be elected. Their
election must be held substantially once in each year.
Postponement is only allowed if there is a justifiable cause.
Methods of voting
1) Straight voting- every stockholder may vote such
number of shares for as many persons as there are
directors to be elected.
2) Cumulative voting for one candidate- a stockholder
is allowed to concentrate his votes and give one
candidate as many votes as the number of directors
to be elected multiplied by the number of his shares
shall equal.
3) Cumulative voting by distribution- a stockholder
may cumulate his shares by multiplying also the
number of his shares by the number of directors to
be elected and distribute the same among as many
candidates as he shall see fit. (please read the
illustrations in the book.)
Right of the stockholder to use cumulative voting
Cumulative voting is a statutory right, hence, a corp.
is without power to deprive the stockholders of its use or
even restrict the right to vote in only 1 way or method.
Situations of cumulative voting
1) Cases growing out conspicuous management or
board failures.
2) Situations grounded in conflicts of important
business interests among stockholders, or between
stockholders and management.
3) Where the stockholders became convinced on rather
general grounds that the BoD was unrepresentative
of, and generally insensitive to, stockholders’
interest.
4) Instances involving clashes of strong personalities.
5) Struggles for control of the corp. in which
representation through cumulative voting was an
intermediate objective; and
 6) Cases of “anglers”- opposition leaders who have
selfish interests.

Voting in a non-stock corporation

Members of non-stock corporations may cast as
many votes as there are trustees to be elected but may not
cast more than 1 vote for one candidate.
Note: in the election of trustees of a non-stock corp. separate
voting by zones or regions is not allowed. It is necessary that
at least “a majority of the members entitled to vote” must be
present at the meeting held for that purpose.
However, a segregation of votes for regular and
independent directors is allowed.

Sec. 25. Corporate officers, quorum. - Immediately after

their election, the directors of a corporation must formally
organize by the election of a president, who shall be a
director, a treasurer who may or may not be a director, a
secretary who shall be a resident and citizen of the
Philippines, and such other officers as may be provided for
in the by-laws. Any two (2) or more positions may be held
concurrently by the same person, except that no one shall
act as president and secretary or as president and treasurer
at the same time.

The directors or trustees and officers to be elected shall

perform the duties enjoined on them by law and the by-
laws of the corporation. Unless the articles of incorporation
or the by-laws provide for a greater majority, a majority of
the number of directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for the transaction
of corporate business, and every decision of at least a
majority of the directors or trustees present at a meeting at
which there is a quorum shall be valid as a corporate act,
except for the election of officers which shall require the
vote of a majority of all the members of the board.

Directors or trustees cannot attend or vote by proxy at

board meetings.

Corporate officers
The BoD or trustees formulates the broad policy of
the corporation and directs the conduct of its business
operations. But the task of actual management and carrying
on the details of business operations and corporate policy are
delegate to the officers elected by it and over whom it
exercises supervision.

The corporate officers are:

1. President – Must be a director at the time the assumes
office, not at the time of appointment;
2. Treasurer – May or may not be a director; as a matter of
sound corporate practice, must be a resident.
3. Secretary – Need not be a director unless required by the
by‐laws; must be a resident and citizen of the Philippines; and
4. Such other officers as may be provided in the by‐laws.
Note: the only officers are those elected or
appointed by the board of directors.
On the other hand, Corporate employees are those
whose duties are of a clerical or manual nature.

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