UNIVERSITY OF SAN CARLOS o However, forming a corporation under the old

SCHOOL OF LAW & GOVERNANCE law required 5 incorporators, and

Business Organization II businessmen may not be comfortable with
Revised Corporation Code doing business with five other persons. So
Reviewer what they did before was they incorporated a
corporation together with family members.
Atty. Eugenio Espedido Sometimes, they did it with their drivers,
gardeners and laundrywomen, etc. The SEC
EH403 SY 2019-2020 realized that we are just fooling ourselves,
CORPO COMMITTEE: that incorporators can sometimes be had in
Gaviola, Keeshia Earl circumvention of the law. That is why they
Li, Jinnelyn now allow the OPC.
Tagaloguin, Elmar However, note that 80-90% of the Code remains the
Torres, Chezka Bianca same with the Old Code.

SOURCES TYPES OF BUSINESS ORGANIZATIONS

Discussion of Atty. E. | Herbosa | Prior Year Notes | UP Law
Notes 2019 | San Beda MemAid 2019 (1) Sole Proprietorships
A form of business organization with only one proprietary
Disclaimer: The authors do not guarantee the absolute owner. It is when a person personally or a single individual
correctness, completeness or accuracy of this reviewer. Please conducts business under his own name or under a business
be vigilant in cross-referring with your own notes as well. Note name.
as well that we have arranged Atty. E.’s discussion to align with
the codal provisions, and thus this reviewer does not completely (2) Partnerships
follow the flow of his class discussions. Thank you! By a contract of partnership, two or more persons bind
themselves to contribute money, property or industry to a
Also, kindly note that the portions of these reviewers marked common fund, with the intention of dividing the profits
with double asterisks (**) were not discussed by Atty. E., but for among themselves. Two or more persons may also form a
purposes of the mock bar and/or better understanding, the partnership for the exercise of a profession.
authors thought to include such notes in this reviewer.
(3) Corporation
R.A. No. 11232 An artificial being created by operation of law, having the
An Act Providing for the Revised Corporation Code of the right of succession and the powers, attributes and
Philippines properties expressly authorized by law or incident to its
existence.
TITLE I. GENERAL PROVISIONS, DEFINITIONS AND
CLASSIFICATIONS
SOLE
PART CORPO
SEC. 1. TITLE OF THE CODE PROPRIETOR
-NERSHIP -RATION
-SHIP
Section 1. Title of the Code. This Code shall be known as the
“Revised Corporation Code of the Philippines”. Starts upon Created by Created by
selling mere operation of
INTRODUCTION Commence agree- law
-ment ment of
The Revised Corporation Code of the Philippines (RCC) was the parties
signed into law by Pres. Rodrigo Duterte on 20 February 2019,
and became effective on 23 February 2019, following its Sole At least 2 New Law:
publication in 2 newspapers of general circulation. proprietor persons One Person
Corporation
In its repealing clause, the Revised Corporation Code is allowed
No. of
expressly repealed the 1980 Corporation Code, which had no
Incorpo-
amendments for almost 39 years. Old Law: At
rators
least 5
Notes: incorpora-
From 149 sections, the RCC now has 188 sections. tors
Being a special law, it is a combination of substantive
and procedural law. No juridical Execution From the
The most important innovation is the introduction of the personality of the date of
OPC, or one-person corporation. This is a very new contract issuance of
concept. We have abandoned the old concept of at Commence
the
least 5 incorporators being required to make a -ment of
Certificate of
corporation. Juridical
Incorpora-
o There is a new concept because many Personality
tion by the
investors refrain from investing much into SEC
businesses, because when they invest into
sole proprietorships, their liability is unlimited.
Page 1 of 25 | EH403 2019-2020 Corporation Law
 Liable up to Liable Stockholder (5) Easier management – management is centralized in
the extent of personally s are liable the Board of Directors
personal and subsi- only to the
properties diarily for extent of DISADVANTAGES OF A CORPORATION
partnershi their
p debts to investments (1) Higher Income Tax Liability (May be taxed twice)
3rd as Corporate Income Tax and Income Tax to
persons represented Stockholders
by the
shares Illustration. When the corporation acquires income, it
Liability subscribed will be subject to corporate income tax. When it is
by them distributed to the shareholder as cash dividends, it will
also be an income of the shareholder and such are
Important: taxable income of the shareholder.
Veil of
Corporate (2) Less Participation in the Management. Participation of
Fiction stockholders in a corporation is indirect.
applies
only to a Indirect – means the management of the corporation is
Corpo- entrusted to the Board of Directors. The only
ration participation of stockholders in the management is in
Managed by Absence Power to do the election of the Board of Directors.
the sole of any business is
proprietor agree- vested in the (3) No delectus personae – investing with people you do
ment, Board of not know; there is no personal touch; no delectus
Manage- every Directors personae
ment partner is (BOT) or
an agent Board of (4) Dissolution – dissolution is granted by the State, unlike
of the Trustees in a Partnership which can be dissolved anytime.
partner- Dissolution of a Corporation requires consent of the
ship State because it is imbued with public interest.
Transferrable Needs Does not
though asset consent of need prior (5) Greater degree of government control and supervision
Transfer- sale all partners consent of
ability of (based on the stock- (6) Difficulty in meeting requirements – high cost of
Interest delectus holders formation and operations
personae)
SEC. 2. CORPORATION DEFINED
No right of succession There is
Right of right of Section 2. Corporation Defined. A corporation is an artificial
Succession succession being created by operation of law, having the right of
succession, and the powers, attributes, and properties expressly
authorized by law or incidental to its existence.
What is the basic distinction between the three?
A: The veil of corporation fiction only exists in a corporation, and This course is actually called Business Organizations II.
not in a sole proprietorship or a partnership. But what will we be studying in this course?
A: We will be studying about private corporations, as
Atty. E.: A Corporation, such as a One Person Corporation distinguished from public corporations.
(OPC) enjoys the veil of corporate fiction and a limited liability
whereas a Sole Proprietorship’s liability may not be limited at all. Private corporations are different from public corporations in that
the latter are created and governed by special charters.
One of the requirements of an OPC to exist is to declare how
much capital he intends so that his liability will be based on that What is a public corporation?
capital. He must prove that he has separated that capital from A: It is one created by the State either by general or special act
his personal funds. The amount declared as capital for the for purposes of administration of local government or rendering
Corporation has been separated from the personal funds. services in the public interest.
Unless he can do that, he might be liable as a Sole Proprietor.

ADVANTAGES OF A CORPORATION

(1) More capitalization

(2) Limited liability – veil of corporate fiction applies
(3) Right of succession – upon the death of a stockholder,
the heir becomes the new stockholder which provides
stability for the business to continue
(4) Transferability of interest – does not require the
consent of other stockholders
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 PRIVATE CORPORATION VS. PUBLIC CORPORATION 5. Government-Owned and Controlled Corporations
Private corporations created by the Congress through
PRIVATE CORPORATION PUBLIC CORPORATION a special charter and the majority of its shareholdings
Formed for a private Formed or organized to are owned by the government.
purpose, benefit or end. govern a portion of the
State. A GOCC has a personality of its own, separate and
distinct from that of the government.
Examples:
1. Municipalities Examples:
2. Provinces (1) Development Bank of the Philippines
3. Autonomous Regions (2) Philippine Ports Authority
such as the ARMM and (3) Philippine Amusement and Gaming
the CAR Corporation
(4) Land Bank of the Philippines
What about Region 7? (5) Manila International Airport Authority
A: It is not a public corporation because its purpose is for
geographical determination and there is no election of Regional **NOTES:
Representatives. Its only purpose is for the clustering of the 1. The test to determine whether a GOCC or private
provinces forming part of that region. corporation: if a corporation is created by its own
charter for the exercise of a public function, then
How about ARMM and CAR? GOCC; if by incorporation under the general
A: These are autonomous regions that have their own corporation law, then private corporation (Baluyot vs.
governors and boards. These are public corporations. Holganza, 2000)

How do we define private corporations? What about the Department of Education?

A: They are corporations that are established for a private A: It is not a public corporation. It is an instrumentality of the
purpose or benefit. government under the Executive Branch.

What do you think about PAGCOR? What is a government instrumentality?

A: It is an artificial being.
Does it have the right of succession?
A: It has.
The Philippine Airlines before was a private corporation.
And it was government-owned. Now, it has been privatized.
Meaning, the shares of stock of the government were sold
to private persons. PAGCOR is a private corporation.
Therefore, we have demonstrated the fact that private
corporations may be?
A: They can be private or government-controlled.
A: It is not a private or a public corporation, but an
instrumentality of the government performing functions of a
particular branch of the government.
If the employees of a GOCC are illegally dismissed, where
do they go?
A: It depends on what is written on their special charter. They
are not covered under the Revised Corporation Code, and they
are also not covered in the Labor Code. Moreover, many of them
are covered by the Civil Service Rules even if they are private
corporations.
CONSEQUENCES OF BEING A CORPORATION

TYPES OF CORPORATIONS What are the consequences of a corporation existing as an

1. Public corporations
Created to govern a portion of the State. Its purpose is
for the general good and welfare (Sec. 3, Act 1456).
2. Private corporations
Created for some private purpose, benefit, aim or end.
It may either be stock nor non-stock, government-
owned or controlled, or quasi-public.
artificial being?
A:
(1) It has a separate and distinct personality from its
members or shareholders, thus incurs separate liability
(2) It enjoys rights separate from the stockholders
(3) Properties of the corporation are separate from the
properties of the stockholders.
RIGHTS OF A CORPORATION

3. Publicly-listed corporations What rights does a corporation have?

Private corporations whose stocks are listed in the PSE A:
(Philippine Stock Exchange). (1) Constitutional rights
(2) Civil rights
Examples: (3) Economic rights
(1) San Miguel Corporation
(2) Philippine Long Distance Telephone Company Note: A corporation does not have political rights.
(3) SM Prime Holdings, Inc.
Civil and Economic Rights:
4. Quasi-public corporations (1) Right to sue or be sued
Private corporations performing public functions. (2) Right to own and dispose of properties
(Example: VECO) (3) Right to enter into contracts
(4) Right to non-impairment of contracts
Page 3 of 25 | EH403 2019-2020 Corporation Law
Constitutional Rights:
(1) Right to due process and equal protection of the law
Section I, Article III of the Constitution
“No person shall be deprived of life, liberty or property
without due process of law, nor shall any person be
denied the equal protection of the law.”
(2) Right against unreasonable searches and seizure
(3) Right against non-impairment of contracts
(4) Right against self-incrimination
Note: An artificial being has a separate set of rights from
that of natural persons. Artificial persons enjoy certain rights
that persons also enjoy, but not all rights.
What rights can a corporation not exercise?
A:
(1) Political rights – for example, the right to vote and be
voted for
(2) Right to life – granted only personality in accordance to
law
(3) Right to liberty – a corporation is not a corporal being
(it has no physical existence) which can be detained
unlike a natural person. A corporation cannot move,
and therefore it is impractical to send the corporation
to jail.
CRIMINAL LIABILITY OF A CORPORATION
GEN: A corporation cannot be held criminally liable under the
Revised Penal Code.
Rationale: Crimes under the RPC have the element of intent
which corporations are not capable of, as it has no mind of its
own. As a creature of the law, its intention cannot be determined.
It can also not be sent to jail because it has no corporal or
physical existence.
XPNs:
(1) When the crime is punishable by a special law;
Atty. E.: The special law must specify that it imposes
penalties on the officers of the corporation. To be able
to punish the officers, the law should specifically
provide that in case the corporation becomes liable, the
officers shall be directly punishable for the commission
of the act or violation, and that they will suffer the
penalty of imprisonment. Otherwise, they cannot be
held liable.
(2) When the penalty imposed is a fine;
A corporation can be made criminally liable by being
made to pay a fine. Fines are not civil obligations, but
are penalties.
(3) When the corporation violates the Anti-Money
Laundering Act (AMLA)
Penalties in the AMLA include:
a. Suspension
b. Revocation of license
c. Fine
LIABILITY OF CORPORATIONS IN CASE OF DEBT
Stockholders cannot be held personally liable because their
liability is limited to the extent of their investments. It is unlike
Partnership where the partners can be held personally liable.
Reason: In a corporation, there is a veil of corporate fiction. The
main difference between the two is that, while both partnership
and corporation are juridical persons, the veil of corporate entity
applies only to corporations.
Illustration.
A corporation incurred debts and its assets are not
sufficient to pay its debts. Can the creditors demand
payment from its stockholders?
A: Generally, no. If the assets are not enough, it will be
considered as losses on the part of the creditor.
Atty. E: In case the corporation incurs debts and their assets are
no longer sufficient, the creditors may organize themselves and
discuss the matter with the corporation. To aid the creditors for
whatever is due to them, they could agree to pursue
rehabilitation.
In a rehabilitation, the assets of the corporation will be gathered.
It will not be enough so the court will apply a receiver who will
determine how the creditors will be paid.
The receiver’s job is to settles as much as possible – keep the
business of the Corporation going, such as appoint some
managers, so that the business will continue, earn income, and
such profits will be now distributed to the creditors. However,
this may not be a one-time payment. They will now program the
payment. In this manner, the creditors will be protected.
VEIL OF CORPORATE FICTION
A corporation has a separate and distinct personality from its
shareholders, officers, and directors. Once said corporate fiction
is created, the veil hides the stockholders such that when a
corporation incurs liability, the stockholders are shielded from
liability. In so far as the law is concerned, we are only dealing
with the corporation.
Otherwise, without the veil, would you still like to be a
stockholder?
Atty. E: There is no point. In other words, that veil is the
protection of the stockholders.
Can the veil of corporate fiction be enjoyed by a
partnership?
A: No. While a corporation and a partnership are both juridical
persons, the veil of corporate fiction only applies to corporations.
When can there be piercing of the veil of corporate fiction?
A: When the corporate veil: (Memory Aid: PDFJ)
1. Defeats public convenience;
2. Is used to perpetuate fraud;
3. Is used to defend a crime;
4. Is used to justify a wrong.
Illustration.
Corporation A defrauds its creditors by transferring its
assets to Corporation B
Corporation A has five (5) stockholders. Corporation A incurred
debts and has already received a demand letter. Corporation A
Page 4 of 25 | EH403 2019-2020 Corporation Law
is now anticipating that the creditor might proceed against their
assets.
Corporation A now created Corporation B and made it appear
that the assets of Corporation A were already sold to
Corporation B.
When the sheriff came to attach the property of Corporation A,
the sheriff was shown a document that the assets are sold to
Corporation B. Do you think that the sheriff can go after
Corporation B?
A: Normally, the sheriff might be hesitant. The sheriff will not
want to violate the rights of Corporation B.
Atty. E: But lawyers have a way of pursuing Corporation B. They
can proceed to Corporation B by proving that the assets were
actually owned by Corporation A through establishing that the
stockholders of Corporation A are the same stockholders of
Corporation B.
Show that the assets were only transferred to defraud the
creditors. So this is an instance when the corporate veil may be
lifted.
RELATIONSHIPS OF A CORPORATION
When we organize or form a corporation, we will establish
various relationships. Relationships are necessary.
Relationships formed by a corporation
(1) Relationship between Corporation and the
Shareholders
Which is why it is necessary to execute the Articles of
Incorporation. It manages the relationship between the
corporation and the shareholders.
(2) Relationship among Shareholders themselves
The articles and the law provide the regulation and
monitors this relationship
(3) Relationship between the Corporation and the
State
A corporation is created by the State. It is the state that
granted the privilege; thus, it can also be withdrawn by
the state. Therefore, you must be compliant with the
provisions of the law. Any violation will cause the
suspension or eventual revocation.
(4) Relationship between the Corporation and the
Public
The public here includes the clients.
In forming a corporation, your objective is to gather friends and
people in order to get funds or ask for investments.
Atty. E.: In forming a corporation, the main purpose is
fundraising. Because when you do not have money or
investments, it will be difficult to run a business.
The easiest option is to borrow. But if you do not have financial
assets, do you think the bank will lend to you? What will the bank
require? Financial statements. The FS however will show that
you have zero assets. No bank will lend to you. Because if the
manager lends to you without collateral, he will lose his job. If
you do not pay your debt, you might even be sent to jail because
you defrauded the bank.
On the other hand, if you form a corporation, even if you do not
earn profits, can the investors demand payment from you? Are
you obliged to return their money?
A: No. By contributing money, they have exposed themselves
to risk. In business, you do not guarantee profits.
On the other hand, if you borrowed money from the bank and
you cannot return it, there will be interest to be paid,
compounded interest, and the bank may foreclose your
property.
DIFFERENCE BETWEEN A LENDER & AN INVESTOR
LENDER INVESTOR
No risk presumed Takes the risk because
there is no guarantee of
success or profits in
business.
Note: When you invest, you share opportunities. You share risks
as well.
What is the difference between an investor and a lender?
A: The investor takes a risk.
Atty. E: Nobody can guarantee success. But more or less, if
there is hard work and perseverance, success follows.
RELATIONSHIP BETWEEN A CORPORATION & THE
SHAREHOLDERS
The relationship between the corporation and the stockholders
is well established in the Articles of Incorporation (AOI). The AOI
is considered as the contract or agreement of the Corporation
and the Stockholders. Since this is their agreement, the AOI
binds their relationship and regulates their relationship.
Illustration.
A Funeral Parlor is turned into a Hospital
The primary purpose of the corporation is to maintain,
operate, run and manage a funeral parlor. May the
corporation maintain, operate and manage a hospital
instead?
A: It cannot, because their agreement is to engage in a funeral
business.
What can the stockholder do?
A: Even if the Board of Directors (BOD) want to have a hospital,
they cannot immediately do so if the Articles of Incorporation is
not amended. The stockholders must ratify it, and there should
be an amendment of the Articles of Incorporation
The moment the corporation intends to pursue another
business, the stockholder may ask for an amendment of the
Articles of Incorporation to reflect such changes. Otherwise, the
contract will be violated.
Note: Amending the Articles of Incorporation is basically
amending the contract between the shareholders and the
corporation.
RELATIONSHIP AMONG SHAREHOLDERS THEMSELVES
This is still an agreement among themselves. This can be found
in their by-laws.
Page 5 of 25 | EH403 2019-2020 Corporation Law
Content of the By-Laws of the Corporation
(1) How many boards and officers will be elected Transferability Needs consent of Without prior
(2) Term of office of Interest all partners consent of other
(3) Functions and Powers (based on stockholders
(4) Manner of election delectus
(5) When will the stockholders and/or board meet personarum)
(6) Definition of various types of shares
(7) Etc. Term of Any period of Perpetual
Existence time Old law: 50 years
RELATIONSHIP BETWEEN THE CORPORATION AND and extendible for
STATE another 50 years
A corporation is a creation of the law. In other words, it is a Firm Name For limited May adopt any
privilege granted by the State. The term extended or granted by
partnership, name as long as it
the state is subject to the condition that the corporation will
requires LTD in is not the same or
comply with the reportorial requirements and behave within the its name similar to other
bounds of the law. Otherwise, the State may revoke or cancel registered firm
the license. It may also suspend and/or charge a fine.
name
PARTNERSHIP VS CORPORATION
Dissolution May be dissolved Dissolved only with
anytime by the consent of the
PARTNERSHIP CORPORATION
will of any or all State
Manner of Created by mere Created by law or partners
Creation agreement of the by operation of law
parties Governing Laws Civil Code Governed by a
general law which
No. of At least 2 One Person is the Revised
Incorporators persons Corporation Corporation Code
Old law: at least 5 or a special charter
incorporators
Why is management in a corporation better?
Commencement Moment of From the date of A:
of Juridical execution of the the issuance of the 1. There are fewer members, and as a result, it is easier
Personality contract Certificate of to convene and communicate, while in a partnership,
Incorporation by “everyone talks”.
the SEC 2. Management is vested on persons with expertise.

Powers May exercise Exercise power Basic Distinction

power authorized only expressly The veil of corporate fiction only applies to corporations, and is
by the partners granted by law or not to sole proprietorships or partnerships.
implied from those
granted or incident Atty. E.: A corporation, such as a One Person Corporation
to its existence (OPC) enjoys the veil of corporate fiction and a limited liability,
whereas a sole proprietorship’s liability may not be limited at all.
Management Absence of any Power to do
agreement, every business is vested One of the requirements for an OPC to exist is to declare how
partner is an in the Board of much capital he intends so that his liability will be based on that
agent of the Directors or Board capital. He must prove that he has separated that capital from
partnership of Trustees his personal funds, that the amount declared as capital for the
corporation has been separated from the personal funds. Unless
Effect of Partner can sue a Suit against the he can do that, he will be liable as a sole proprietor.
Mismanagement co-partner member of the
BOD or BOT must ADVANTAGES OF A CORPORATION
be in the name of
the corporation (1) More capitalization
(2) Limited liability (the veil of corporate fiction applies to
Rights of No right of Has right of corporations)
Succession succession succession (3) Right of succession (upon the death of a stockholder,
the heir becomes the new stockholder which provides
Extent of Liable personally Stockholders are stability for the business to continue)
Liability to 3rd and subsidiarily liable only to the (4) Transferability of interest – does not require the
Persons for partnership extent of their consent of the other stockholders
debts to 3rd investments as (5) Easier management – management is centralized in
persons represented by the the Board of Directors
shares subscribed
by them

Page 6 of 25 | EH403 2019-2020 Corporation Law

 DISADVANTAGES OF A CORPORATION debts to 3rd investments as
persons represented by the
(1) Higher income tax liability shares subscribed
The profits of the corporation is taxed twice: by them
corporate income tax and income tax on the
stockholders for the dividends Transferability Needs consent of Without prior
of Interest all partners consent of other
Illustration. When the corporation acquires (based on stockholders
income, it will be subjected to corporate income delectus
tax. When it is distributed to the shareholder as personarum)
cash dividends, it will also be an income of the
shareholder and such are taxable income of the
shareholder. Atty. E.: The life of the corporation begins in the issuance of the
Certificate of Incorporation issued by the SEC.
(2) Less participation in the management of the business
Shareholders only have an indirect participation in CONTENTS OF THE
the management of the corporation ARTICLES OF INCORPORATION
o “Indirect” – means that the management of
the corporation is entrusted to the Board of (1) Name of the Corporation
Directors. The only participation of the (2) Purpose
stockholders in the management is the (a) Primary Purpose – main business
election of the Board of Directors. Example: Operate and establish the best funeral
parlor of all time and name it “Libing Things”
(3) No delectus personae (b) Secondary purpose – may refer to incidental or
A shareholder will be investing in the business with related products or activities
people he doesn’t know; there is no personal (3) Nature of the business
touch; there is delectus personae. (4) Term – perpetual term; you could exist for as long as
you wish. If you want to stop, just dissolve it along the
(4) Dissolution way
Dissolution is granted by the State, unlike in a (5) Address – Purpose: In order that the SEC will know
partnership which can be dissolved anytime. The where to send notices or serve you summons
dissolution of a corporation requires the consent of (6) Names of the Stockholders
the State because it is embued with public interest. (7) Names of the Incorporators
Note: Incorporators may now be juridical persons so
(5) Greater degree of government control and supervision long as they present appropriate authority. (Old law:
only natural persons)
(6) Difficulty of organization (8) Capital Structure of the Corporation
Organizing a corporation requires a high cost of
formation and operations CAPITAL STRUCTURE

Summary of Differences between a Partnership and Three levels of capital structure:

Corporation (Note: Only these were highlighted during
recitation) (1) Authorized Capital Stock (ACS) – the maximum amount
that a corporation intends to invest on a business
PARTNERSHIP CORPORATION
Manner of Created by mere Created by law or (2) Subscribed Capital Stock (SCS) – the number of shares
Creation agreement of the by operation of law a stockholder intends to invest in the corporation which he
parties commits himself to pay – it is the committed investment
of the stockholder
Commencement Moment of From the date of
of Juridical execution of the the issuance of the (3) Paid-Up Capital – stock actually paid for by the
Personality contract Certificate of stockholders; it is the initial amount that the stockholders
Incorporation by are obliged to pay. This is the initial amount that shall be
the SEC used in starting the corporation.

Management Absence of any Power to do Note: You do not have to pay the subscription immediately.
agreement, every business is vested The balance or may be due or payable later.
partner is an in the Board of
agent of the Directors or Board When will the balance be due?
partnership of Trustees A: It depends on the Board. The Board may indicate the date
when the balance will be due or will simply announce or make a
Rights of No right of Has right of call on the balance.
Succession succession succession
How is it paid?
Extent of Liable personally Stockholders are A: The paid-up capital may either be done in cash or property
Liability to 3rd and subsidiarily liable only to the equivalent to the amount you intend to pay.
Persons for partnership extent of their
Page 7 of 25 | EH403 2019-2020 Corporation Law
If payment is through property, how will the equivalent of
the property be determined?
A:
(1) The value will be determined through an appraisal.
(a) The SEC will send an appraiser OR
(b) You will be required to submit an appraisal report of
your property done by a duly accredited appraiser,
together with the Articles of Incorporation, to the SEC.
(2) The SEC personnel will verify WON the paid-up capital has
been deposited to the bank in addition to the certified bank
deposit, which shall accompany the Articles of
Incorporation.
(3) The treasurer’s affidavit will indicate that at least 25% of the
subscribed capital has been paid, OR under the present
code, there will be now a verification. (Does not necessarily
by the treasurer but some other officers of the corporation,
indicating among others that at least 25% of the
subscriptions have been paid and that it was made with
cash or properties.
APPLICATION WITH THE SEC
Atty. E.: More or less these are the contents of an Article of
Incorporation. You may submit this to the SEC.
(1) Verification – The SEC will go over your Article of
Incorporation and verify the name. Before you submit your
Articles of Incorporation, you have to confirm or verify the
name that you intend to use.
Otherwise if the SEC discovers that somebody is already
using the same name, SEC might deny or return to you
your papers and come up with another name.
To save time, they require you to give 3 alternative names.
SEC is free to choose from those 3 alternative names.
(2) Issuance of the Certificate of Incorporation – If all the
requisites are in order, the SEC will issue the Certificate of
Incorporation.
That is the official document that will give the birth of your
corporation. Once you receive this, all the stockholders will
be convened and we will have the first stockholders
meeting.
STEPS AFTER THE BIRTH OF THE CORPORATION
(1) Organization meeting of the stockholders
The main agenda is the election of the Board.
(2) Meeting of the Board of Directors, Election of Officers
Once the Board of Directors are elected, they could adjourn
the stockholders meeting and the directors themselves will
now hold its first Board Meeting.
In that meeting, they will elect the officers based on the
ballots (President, Chairman, Vice President, Secretary,
Treasurer). If they may want to, they will select the COO
(child of the owner).
RIGHT OF SUCCESSION
If a stockholder or a member dies, withdraws, is insolvent, or
suffers incapacity, the corporation will still continue and not be
dissolved.
When all the stockholders die, the heirs will become
stockholders. The rights, as well as the interests of the deceased
stockholders will now be transferred to the heirs at the moment
of death because succession starts at the moment of the death
of the deceased person.
POWERS, ATTRIBUTES, PROPERTIES
These rights may be determined in the Articles of Incorporation,
the Corporation Code, and the By-Laws. These are the sources
of rights and obligations of the stockholders.
Illustration 1. Transportation Company
+ Big building for Garage
If you are a transportation company, you are managing,
operating, and maintaining a fleet of buses. What do you
think your powers could be?
A: Demand fare. You have the power to pursue and engage in
the business of transportation
Your neighbors are complaining because your business is
transportation, but you also own a big building. Do you
think you can maintain a big building as a garage?
A: Yes, it is allowed. Maintaining a big building is incidental to
the business.
Illustration 2. Cement Factory + Electricity
You are operating a cement factory. It requires a big volume
of power, so much that the services of VECO may not be
enough, prompting you now to maintain your own power
plant.
You now have your own power plant within the cement
factory. You have officers and employees residing within
your cement factory. Because you have extra power for
your cement factory, you started selling this extra power to
your EEs inside the compound.
If you are VECO, do you have a reason to complain?
A: The best approach would be to ask the EEs who they would
want to provide electricity for them. They will definitely side with
the cement factory because the rates are subsidized.
The corporation may argue that it is not doing business per se
but only providing assistance to their EEs – extending facilities
to their EEs.
Important: So long as you can justify that the act is incidental to
the main purpose, you are allowed to execute such power.
Illustration 3. USC + Dance lessons after class
After class hours, the entire school will be vacated. The
best way to succeed is to maximize the use of assets. Thus,
the priests hired dancing instructors and offered dancing
lessons to interested matrons and engaged the services of
macho dancing instructors. At least they can earn some
more for two (2) hours.
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Can they engage in maintaining and operating a dancing
school?
A: No, because this is not incidental. Offering academic courses
is the principal purpose of USC. Thus, the dancing school is
beyond its purpose.
Illustration 4. Mining Company + Postal Service
There was a mining company in the mountain and to travel
from the mining site from the big city was very difficult. So
the EEs communicated with their families through mail (no
cellphones at this time). The mails were carried by the
company facilities and delivered to the city. The EEs
requested that their mails could be coursed through the
company parcels.
The company agreed for it is for the benefit of the EEs
provided that the EEs will make payment – a subsidized
mailing payment.
LBC complained because the mining company is now
engaged in delivering parcels and mails. There is now a
competition between the company engaged in mining and
the company carrying parcels.
What do you think?
A: SC said that it is still incidental because at that time,
transportation was very difficult, no more cellphones or any
other mode of communication.
Illustration 5. Railroad Company + Buying Tracts of Land
A railroad company was buying tracts of land where they
could install their railings.
Somebody complained that they cannot expropriate since
the company’s power is merely to engage in railroad
business. They argued that the company cannot compel
owners to sell their land to the company because only the
government has the power to do so.
SC Ruling: The buying of the lands is for the furtherance of the
business of the railroad. It is incidental to being a railroad
company.
Atty. E.: These are some of the several illustrations of primary
powers and incidental powers.
EFFECT OF INCOMPLETE
INCORPORATION PAPERS
Rule: Failure to acquire or comply with the requirements for an
issuance of a Certificate of Incorporation does not justify
making it into a partnership.
Atty: Espedido: If the papers are not in order, the SEC will not
issue a Certificate of Incorporation. The incorporators will have
to make the necessary corrections.
If the incorporators will not comply, the SEC will have to deny
the issuance of a Certificate of Incorporation.
The incorporators cannot engage in business as a corporation.
They also cannot argue that they are now a partnership because
the intention is not to pursue a partnership but to organize a
corporation.
SEC. 3. CLASSES OF CORPORATIONS
Section 3. Classes of Corporations. Corporations formed or
organized under this Code may be stock or nonstock
corporations. Stock corporations are those 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 the basis of the shares held. All other corporations are
nonstock corporations.
VARIOUS TYPES OF CORPORATIONS
(A) AS TO PURPOSE
(1) Public Corporation
created to govern a portion of a State
(2) Private Corporation – created for private ends
(a) Publicly listed – private corporations that are publicly
listed in the Philippine Stock Exchange which means
their shares can be bought and sold on the PSE
Examples: San Miguel Corporation,
Ayala Land Corporation
(b) Quasi-Public Corporations – private corporations
performing public functions
Example: VECO providing electricity
(c) Government Owned and Controlled Corporations
(GOCC) – created by Congress through a special
charter for which the government is the majority
stockholder
Examples: PAGCOR, Landbank of the
Philippines, SSS, GSIS
(B) UNDER THE REVISED CORPORATION CODE
(1) Stock Corporation
Those 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 the basis of the shares held.
It has capital stocks divided into shares and distributed
to the holders.
A stock corporation is also considered as a
corporation for profit.
Purpose of dividing shares: Determine the share in
the profits.
(2) Non-Stock Corporation
All other corporations; they do not issue shares and
do not distribute profits to its members.
However, they still own profits for expenditures and to
improve their facilities. They cannot distribute the
profits to its members. They have to plough this back
to the corporation for the benefit of the members in
terms of improvement of facilities.
(C) AS TO NUMBER OF CORPORATORS
(1) Corporation Sole – one member or corporator; for purely
religious purposes
(2) One Person Corporation – one member or corporator
also but not limited to purely religious purposes
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(3) Corporation Aggregate – consisting of more than one
corporator or member
Basis why the State is liberal in the establishment of
religious corporations as a corporation sole: Constitutional
right to Freedom of Religion and Separation of Powers
between the Church and the State.
Atty. E.: Any attempt of preventing anyone from exercising his
religion, from establishing his own church, can be considered as
a violation to his freedom of religion. Thus, the State would just
want to know where you are located and the funds that the
church has earned.
Notes:
Corporation sole – one formed for the purpose of
administering and managing, as trustee, the affairs,
property and temporalities of any religions
denomination, sect, or church, by the chief archbishop,
bishop, priest, rabbi, or other presiding elder of such
religious denomination, sect or church.
(D) AS TO WHETHER IT IS OPEN OR CLOSE
(1) Open Corporation
open to any person who may wish to become
shareholders. Most of these are publicly listed.
(2) Close Corporation
limited to selected persons or members of a family.
This qualification is contained in the Articles of
Incorporation (AOI) and the Stock Certificate. The stock
certificate indicates that these holders shall not be allowed
to dispose the shares UNLESS he offers it to the existing
holders first.
IOW, it cannot be an absolute prohibition. Otherwise, it
will violate the right of an owner which includes the right to
own, right to possess, and right to dispose.
Relative Prohibition – you are required to offer this to
existing stockholders. Only when there are no
existing stockholders that would buy that you can
sell it to others.
Atty. E: Disqualifications on the sale of shares of a close
corporation can be found in the articles of incorporation, or in the
certificates of stock.
For example, in the Stock Certificate, you may place a
qualification that “The holder of these shares cannot sell these
shares UNLESS the existing holders exercise their right of first
refusal xxx”
Note:
Close corporation – one whose articles of
incorporation provide that:
1. All issued stock, exclusive of treasury shares, shall
be held by persons not exceeding 20;
2. All issued stock shall be subject to one or more
specified restrictions on transfer; and
3. The corporation shall not list in any stock
exchange or make any public offering of its stock
of any class.
Notwithstanding the foregoing, a corporation shall not
be deemed a close corporation when at least 2/3 of its
voting stock or voting rights is owned or controlled by
another corporation which is not a close corporation.
(E) AS TO LEGAL OR CORPORATE EXISTENCE
(1) De jure corporation
corporation existing in fact or in law
(2) De facto corporation
existing in fact but not in law
(F) WHETHER IT IS FOR A RELIGIONS PURPOSE OR NOT
(1) Ecclesiastical Corporation
for religious purposes
(2) Lay Corporation
purpose other than religion
**Other types of religious/charitable corporations:
(3) Corporation Sole
incorporated by one person
a corporation formed for the purpose of administering
and managing, as trustee, the affairs, properties and
temporalities of any religious denomination, sect or
church, by the chief archbishop, bishop, priest, rabbi or
other presiding elder of such religious denomination,
sect or church.
A corporation sole has no nationality but for the
purpose of applying nationalization laws, nationality is
determined not by the nationality of its presiding elder,
but by the nationality of the its members constituting
the sect in the Philippines.
o Thus, the Roman Catholic Church can
acquire lands in the Philippines even if it is
headed by the Pope (Roman Catholic
Apostolic, et. al. vs. Register of Deeds of
Davao City, G.R. No. L-8451)
(4) Corporation Aggregate (Religious Society)
A religious organization incorporated by more than one
person
(5) Eleemosynary Corporation
One organized for a charitable purpose
(G) AS TO FORMATION
(1) Domestic Corporation
a corporation formed, organized or existing under the
laws of the Philippines.
(2) Foreign Corporation
formed under any laws other than those of the
Philippines
(H) AS TO THEIR RELATION TO ANOTHER
CORPORATION
(1) Parent Corporation
corporation which holds ownership of various
corporations, thereby having control over such
corporations. It has the capacity to elect or control other
corporations.
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 ** A holding company is a parent corporation which has
no other business aside from the holding of the shares
of its subsidiaries, which it controls
(2) Subsidiary Corporation
owned and controlled by the holding or parent
corporation. The holding corporation elects the Board
of Directors (BOD) for the subsidiary.
(3) Affiliated Corporation
those related to the parent corporation or subsidiary
corporation
**NOTES:
What is the difference between an affiliate and a
subsidiary?
A: The difference lies in the level of ownership of the parent
company in a certain corporation.
The terms “affiliate” and “associate” corporation are used
synonymously to describe a company whose parent only
possesses a minority stake in the ownership of the
company.
On the other hand, a subsidiary is a business whose parent
holds a majority stake or is a majority shareholder of 50%
or more of all shares. Some subsidiaries are even wholly
owned, meaning the parent corporation owns 100% of the
subsidiary.
(4) Sister Company
fellow subsidiary with respect to another subsidiary;
both owned by the parent corporation
Although performing other activities, these activities are
very much related or part of the other companies (e.g.
they are part of the supply chain perhaps). Thus, if the
owner of the company creates another corporation related
to the other corporation, then it can be considered sister
companies.
Illustration.
Trucking Company
(Logistics
Company)
Warehouse
Warehouse Sales Force
Company
Management (Marketing Arm)
(Leasing)
A trucking company is engaged in hauling products. The owner
noted that the products are brought to various warehouses that
are owned by other people. Thus, the owner of the logistics
company decided to construct a warehouse.
The owner of the trucking company also convinced the producer
and the manufacturer that he can assign someone to monitor
the products. Thus, a third business was made – Warehouse
Management. The owner also created another one as a
marketing arm, thus a Sales Force company.
Summary: So the Trucking Company here is the parent
corporation, and it owns the subsidiaries: (1) Warehouse
Company for leasing, a (2) Warehouse Management and a (3)
Sales Force Company. These various businesses, in relation to
each other, are called sister companies and would constitute a
complete chain – they are related to each other.
Another example: Aboitiz Company as the owner of Union Bank,
VECO, real estate, and many other activities. So these are the
subsidiaries of Aboitiz – the more generic term would be
affiliates.
SEC. 4. CORPORATIONS CREATED BY SPECIAL LAWS
OR CHARTERS
Section 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 or applicable to them, supplemented by the
provisions of this Code, insofar as they are applicable.
SEC. 5. CORPORATORS AND INCORPORATORS,
STOCKHOLDERS AND MEMBERS
Section 5. Corporators and Incorporators, Stockholders
and Members. – Corporators are those who compose a
corporation, whether as stockholders or shareholders in a stock
corporation, or members in a nonstock corporation.
Incorporators are those stockholders mentioned in the articles
of incorporation as originally forming and composing the
corporation and who are signatories thereof.
PARTIES INVOLVED IN THE ORGANIZATION OF A
CORPORATION
Who are the persons involved in the organization of a
corporation?
A: They are:
(1) Incorporators
(2) Corporators
(3) Board of Directors/Trustees
(4) Promoters
(5) Underwriters
(6) Founders
INCORPORATORS
Incorporators are the organizers of the corporation upon its
inception. They are mentioned in the AOI as originally forming
and composing the corporation, and who are signatories
thereof.
Under the New Code, juridical persons can now be
incorporators.
Under the Old Code, only natural persons can be incorporators.
CORPORATORS
Corporators are those who fund the corporation. These refer to
the stockholders, investors, and incorporators themselves. They
are people who have interest over the corporation.
Stockholders – in a stock corporation
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 Members – in a non-stock corporation
BOARD OF DIRECTORS OR TRUSTEES
The Board of Directors or Board of Trustees are the group of
people who manage the corporation.
PROMOTERS
The promoters promote the corporation itself. They convince the
people to invest. They tell the people that they are organizing
such corporation. However, they are not committed to buy the
shares, and are purely salesmen.
**NOTES:
Promoters are persons who, acting alone, or with others, take
initiative in founding and organizing the business or enterprise
of the issuer and received consideration thereof (Sec. 3.10, RA
8799, The Securities Regulation Code)
LIABILITY OF THE PROMOTER
GEN: The promoter binds himself personally and assumes the
responsibility of looking to the proposed corporation for
reimbursement.
XPNs:
1. Express or implied agreement to the contrary
2. Novation, not merely adoption or ratification, of the
contract
LIABILITY OF THE CORPORATION FOR THE PROMOTER’S
ACTS
GEN: A corporation is not bound by the contract. A corporation,
until organized, has no life and no legal existence. It could not
have had an agent (the promoter) who could legally bind it.
XPNs: A corporation may be bound by the contract if it makes
the contract its own by:
1. Adoption or ratification of the entire contract after
corporation
2. Acceptance of the benefits under the contract with
knowledge of the terms thereof
3. Performance of its obligation under the contract
Note: The contract must of course be one which is within the
powers of the corporation to enter.
UNDERWRITERS
Underwriters are mostly banking companies.
As distinguished from promoters who have no commitment
since they simply promote, underwriters have commitment such
that they guarantee the sale of stocks and if these were not sold,
they will be the ones who will buy the shares. The underwriters
therefore assume liability.
Example: The underwriters commit that 60% of the stocks will
be bought. If they cannot sell such committed shares, they will
guarantee that they will buy such stocks themselves.
What are roadshows?
A: Roadshows are usually done by big corporations. If you want
to promote the formation of a corporation, you may conduct a
roadshow. You go around the country or the world and do a
roadshow.
You tell them about the corporation and the business, and
convince them to join – usually accompanied by the
underwriters who help convince.
**NOTES:
An underwriter is any party that evaluates and
assumes another party’s risk for a fee. The fee is often
a commission, premium, spread, or interest.
Underwriting services are provided by some large
financial institutions, such as banks, or insurance or
investment houses, whereby they guarantee payment
in case of damage or financial loss and accept the
financial risk for liability arising from such guarantee.
An underwriting arrangement may be created in a
number of situations including insurance, issues of
security in a public offering, and bank lending, among
others.
FOUNDERS
The founders are those who came about the idea – they are the
think tanks of the corporation.
As a matter of fact, they are given privilege. They are entitled to
an exclusive right to vote and be voted for, but limited for 5 years
only from date of inception of the Corporation.
What is the purpose of having the exclusive right to vote
and be voted for?
A: To ensure that the corporation will eventually succeed
because they are the ones who envisioned the Corporation.
They have the idea of how the business shall proceed.
Thus, the laws provide that for a period of 5 years or less –
they have the right to vote and be voted upon. NO ONE ELSE
have the right to nominate and elect. This is used to guide the
infant corporation.
The certificate of the founders’ shares defines the privilege that
the holders of this share shall have.
SEC. 6. CLASSIFICATION OF SHARES
Section 6. Classification of Shares. – The classification of
shares, their corresponding privileges, or restrictions, and their
stated par value, if any, must be indicated in the articles of
incorporation. Each share shall be equal in all respects to every
other share, except as otherwise provided in the articles of
incorporation and in the certificate of stock.
The shares in stock corporations may divided into classes or
series of shares, or both. 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, That there shall always be a class or series of shares
with complete voting rights.
Holders of nonvoting shares shall nevertheless be entitled to
vote on the following matters:
(a) Amendment of the articles of incorporation;
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(b) Adoption and amendment of bylaws;
(c) Sale, lease, exchange, mortgage, pledge, or other
disposition of all or substantially all of the corporate
property;
(d) Incurring, creating, or increasing bonded indebtedness;
(e) Increase or decrease of authorized capital stock;
(f) Merger or consolidation of the corporation with another
corporation or other corporations;
(g) Investment of corporate funds in another corporation or
business in accordance with this Code; and
(h) Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the
vote required under this Code to approve a particular corporate
act shall be deemed to refer only to stocks with voting rights.
The shares or series of shares may or may not have a par value:
Provided, That banks, trust, insurance, and preneed companies,
public utilities, building and loan associations, and other
corporations authorized to obtain or access funds from the
public whether publicly listed or not, shall not be permitted to
issue no-par value shares of stock.
Preferred shares of stock issued by a corporation may be given
preference in the distribution of dividends and in the distribution
of corporate assets in case of liquidation, or such other
preferences: Provided, That preferred shares of stock may be
issued only with a stated par value. The board of directors,
where authorized in the articles of incorporation, may fix the
terms and conditions of preferred shares of stock or any series
thereof: Provided, further, That such terms and conditions shall
be effective upon filing of a certificate thereof with the Securities
and Exchange Commission, hereinafter referred to as the
"Commission".
Shares of capital stock issued without par value shall be deemed
fully paid and nonassessable and the holder of such shares shall
not be liable to the corporation or to its creditors in respect
thereto: Provided, That no-par value shares must be issued for
a consideration of at least Five pesos (₱5.00) 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 further classify its shares for the purpose of
ensuring compliance with constitutional or legal requirements.
SEC. 7. FOUNDERS’ SHARES
Section 7. Founders’ Shares. – Founders’ shares may be
given certain rights and privileges not enjoyed by the owners of
other stock. Where the exclusive right to vote and be voted for
in the election of directors is granted, it must be for a limited
period not to exceed five (5) years from the date of incorporation:
Provided, That such exclusive right shall not be allowed if its
exercise will violate Commonwealth Act No. 108, otherwise
known as the "Anti-Dummy Law"; Republic Act No. 7042,
otherwise known as the "Foreign Investments Act of 1991"; and
otherwise known as "Foreign Investments Act of 1991"; and
other pertinent laws.
SEC. 8. REDEEMABLE SHARES
Section 8. Redeemable Shares. - Redeemable shares may be
issued by the corporation when expressly provided in the
articles of incorporation. They are shares which may be
purchased by the corporation. They are shares which may be
purchased by the corporation from the holders of such shares
upon the expiration of a fixed period, regardless of the existence
of unrestricted retained earnings in the books of the corporation,
and upon such other terms and conditions stated in the articles
of incorporation and the certificate of stock representing the
shares, subject to rules and regulations issued by the
Commission.
SEC. 9. TREASURY SHARES
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 through
purchase, redemption, donation, or some other lawful means.
Such shares may again be disposed of for a reasonable price
fixed by the board of directors.
What are “shares”?
A: Shares represent the interest or the investment of a
stockholder in a corporation.
**NOTES:
The terms “share” or “stock” may be used
interchangeably to refer to shares of stock in a
corporation.
A share of stock is a unit of division of the capital stock
of a corporation. The stock represents:
1. The right interest or right of the stockholder in the
management of the corporation through the
exercise of his voting rights;
2. The interest or right of the stockholder in the
earnings of the corporation in the form of the
dividends to be distributed; and
3. The interest or right of the stockholder in the
residual assets of the corporation upon its
dissolution.
A stockholder may own a share even if he is not holding
a certificate of stock
How do we classify shares?
A: Shares are classified as:
(1) Common shares
(2) Preferred shares
(3) Par value shares
(4) No-par value shares
(5) Founder’s shares
(6) Redeemable shares
(7) Treasury shares
(8) Convertible shares
(9) Voting shares
(10) Non-voting shares
(11) Shares in escrow
DOCTRINE OF EQUALITY OF SHARES
Each share shall be equal in all respects to every other share,
except as otherwise provided in the AOI and stated in the
certificate of stock.
**OTHER IMPORTANT PRINCIPLES TO REMEMBER
(1) Authorized Capital Stock
Refers to the amount of capital stock as specified in the
AOI. Additional shares may not be issued unless the AOI is
amended by the vote of the stockholders. However,
unissued authorized shares may be issued at a later date
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 without amendment of the AOI or approval of the (3) Such other preferences as may be stated in
shareholders. the AOI which do not violate the Code.
Unless the right to vote is clearly withheld, a preferred
(2) Subscribed Capital Stock stockholder would have such right as it is incident to
It is the amount of capital stock subscribed (purchased), stock ownership.
whether fully paid or not. It connotes an original subscription Limitations:
contract for the acquisition by a subscriber of unissued 1. Preferred shares can only be issued with par value
shares in a corporation and would, therefore, preclude the 2. Preferred shares must be stated in the AOI and in
acquisition of shares by reason of subsequent transfer from the COS.
a stockholder or resale of treasury shares. 3. The BOD may fix the terms and conditions only
when so authorized by the AOI, and such terms
(3) Outstanding Capital Stock and conditions shall be effective upon the filing of
It is the portion of the capital stock which is issued and held a certificate with the SEC.
by persons other than the corporation itself.
**PREFERENCE AS TO DIVIDENDS
(4) Paid-up Capital Stock
The portion of the subscribed/outstanding capital stock that Participating vs. Non-participating
has been fully paid. Those which, after getting their fixed
dividend preference, share with the
(5) Unissued Capital Stock Participating
common stocks with the rest of the
That portion of the capital stock that is not issued or dividends.
subscribed. It cannot vote, and draws no dividends. Those which, after getting their fixed
Non- dividend preference, have no more
(6) Legal Capital participating right to share in the remaining
It is the amount equal to the aggregate part value and/or dividends with the common stocks.
issued value of the outstanding capital stock. When par Unless otherwise provided, preferred shares are deemed
value shares are issued above par, the share premium or non-participating.
excess is not considered as a part of the legal capital.
Cumulative vs. Non-cumulative
In the case of no-par value shares, the entire consideration Regardless of lack of profits in any
received forms part of the legal capital, and shall not be given year, and lack of declaration of
available for distribution as dividends. dividends, the arrears (amount of
dividends undeclared or unpaid) have
(7) Shareholder’s Equity (Subscribed Capital) Cumulative
to be paid to the preferred stocks in a
That portion of the capital of the corporation that is subsequent year (once profits are
composed of all the investments that the subscribers put in made), before any dividends can be
(meaning, for stock corporations issuing par value shares paid to the common stocks.
at a price above par, the share premium is included). It is Entitlement to receipt of dividends
also known as the subscribed capital of the corporation. Non-cumulative essentially depends on the declaration
of said dividends.
COMMON VS. PREFERRED SHARES Unless otherwise stipulated, preferred stocks are deemed
cumulative.
COMMON SHARES
KINDS OF PREFERRED SHARES AS TO DIVIDENDS
Entitle the holders to a pro rata share in the profits of
the corporation without preference over the other
(a) Preferred participating shares
stockholders.
(b) Preferred cumulative shares
They are given voting rights
**The most common type of shares, which enjoy no
PREFERRED PARTICIPATING SHARES
preference, but the owners thereof are entitled to
management of the corporation (via the exclusive right
Preferred shareholders already earned premium for their
to vote), and to equal pro-rata division of profits after
preferred shares and they still participate in the distribution of
preference. It represents a residual ownership interest
the common shares. They take both – they have preference and
in the corporation.
they also participate.
PREFERRED SHARES
Who can issue preferred shares?
A: Every corporation can issue preferred shares.
Shares having certain rights and privileges not
available to holders of common shares.
CUMULATIVE PREFERRED SHARES
**NOTES:
Shares which entitle the holder not only to the payment of
Stocks which are given preference by the issuing
current dividends but also to dividends in arrears.
corporation in:
(1) Distribution of dividends;
Illustration. Corporation has cumulative preferred shares.
(2) Distribution of the assets of the corporation in
Year 1 – the corporation has not declared dividends
case of liquidation; or
Year 2 – the corporation decided to declare dividends

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In this case, if the stipulated dividend is not paid in Year 1, it
shall be added to the dividend which shall be due in Year 2 and
the accumulated dividends must be paid to the holder of said
preferred share before any dividend may be paid to the holders
of common stock.
Even if the Corporation has profits, is it obliged to give
dividends?
A: No.
Who cannot issue no-par value shares?
A: Corporations who have access to public funds, such as:
(1) Banks;
(2) Trusts;
(3) Insurance and pre-need companies;
(4) Public utilities;
(5) Building and loan associations; and
(6) Other corporations authorized to obtain funds from the
public (whether publicly-listed or not)

If the Corporation does not declare dividends for a long **Note: Building and loan associations are organizations with
time, what does the BIR assess? the object of accumulating money from their members. The
A: The BIR will assess the corporation for Improperly money is then collected in periodical payments into the treasury
Accumulated Earnings Tax (IAET). thereof, to be invested, from time to time, in loans to the
members upon real estate for home purposes.
PAR VALUE VS. NON-PAR VALUE SHARES
DISTINCTION BETWEEN PAR-VALUE AND NO-PAR VALUE
PAR VALUE SHARES SHARES

Par value is the minimum issue price of a share of stock which If the assets of the corporation have all been exhausted and
must be stated in the AOI and in the Certificate of Stock (COS). there are still creditors, can the creditors go after the
If the incorporators agreed to the price, that is the price at which shareholders?
the shares will be sold to the public.
Non-Par Value Par-Value
Who can issue par value shares? No – the creditors cannot go Yes – the creditors can go
A: Any stock corporation is free to issue par value shares as after such holders. The non- after the shareholders.
indicated in its AOI. par value shares are
deemed fully paid. The subscribers are liable
**NOTES: to corporate creditors for
These are shares with a stated value set out in the AOI. their unpaid subscriptions
This remains the same regardless of the profitability of
the corporation (in comparison, the market or fair value
of a share of stock fluctuates depending on the Can a corporation lower the par value of shares?
company’s profitability). This gives rise to financial A: No. This is because the value of the par value is stated in the
stability and is the reason why banks, trust AOI, and changing it will mislead the public.
corporations, insurance companies and building and
loan associations must always be organized with par The practice of selling shares for a price lower than its par value
value shares. is called watering down of stocks, and these shares are known
as “watered stocks”.
NO-PAR VALUE SHARES
WATERED STOCKS
These are shares without a stated value.
These are stocks sold or issued at a price less than the stocks’
You still have to pay for these shares, but its value is not stated par value. The value of these shares is diluted, in that the public
in the AOI and in the COS. There is no fixed value stated in the is not apprised of the real value of the corporation.
Articles of Incorporation but issued for a consideration not less
than five (5) pesos per share. Illustration.
A corporation has 100Mn authorized capital shares, each with a
**NOTES: par value of P1.00.
A no-par share does not purport to represent any
stated proportionate interest in the capital stock Normally, the public would expect that the corporation has
measured by value, but only an aliquot part of the authorized capital in the amount of P100,000,000 (100Mn
whole number of such shares of the issuing corporation shares x P1.00 par value).
(Agbayani)
No-par value shares cannot have an issue price of less Now let’s say that the corporation initially issued 99.5Mn shares
than P5.00 per share for P1.00, and issued the remaining 500k shares for P0.50 only.
Once issued, they shall be deemed fully paid and non-
assessable, and the holders of such shares shall not How much is now the authorized capital of the corporation?
be liable to the corporation or to its creditors in respect A: Still P100,000,000.
thereto.
The entire consideration received by the corporation But how much capital actually came in?
shall be treated as capital, and shall not be available A: Only P99,750,000.
for distribution as dividends.
The AOI must state the fact that the corporation issues Computation:
no-par value shares and the number of such shares 99,500,000 shares X P1.00 = P99,500,000
No-par shares cannot be issued as preferred stocks 500,000 shares X P0.50 = + 250,000
Total P99,750,000
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What is the effect?
A: The corporation is misleading the public. It is not fair to the
public, and does not anymore reflect the actual capital structure
of the corporation
FOUNDER’S SHARES
**These are shares, classified as such in the AOI, which are
given certain rights and privileges not enjoyed by the owners of
other stocks.
Where exclusive right to vote and be voted for in the election of
directors is granted, such right must be for a limited period not
to exceed 5 years subject to the approval of the SEC. The 5-
year period shall commence from the date of approval by the
SEC.
What is the purpose for granting founders the exclusive
right to vote and be voted for?
A: To ensure that the corporation will eventually succeed
because they are the ones who envisioned the Corporation.
They have the idea of how the business shall proceed.
Thus, the laws provide that for a period of 5 years or less – they
have the right to vote and be voted upon. NO ONE ELSE have
the right to nominate and elect. This is used to guide the infant
corporation.
The certificate of the founders’ shares defines the privilege that
the holders of this share shall have.
What is the rule regarding founders’ rights and privileges?
A: They must be clearly expressed in the corporate charter, to
provide adequate information to third parties dealing with the
corporation.
What are some examples of special rights or privileges that
may be given to founder’s shares that are not given to
common shares?
A: These include:
1) Preference in the payment of dividends and/or
distribution of assets in case of liquidation
2) Right to convert the shares into other shares
3) Right to cumulative dividends
What is the purpose of the founder’s shares?
A: It may be given to encourage organizers and promoters to
make large investments in the proposed corporation.
Exclusive right to vote to be voted for
Note: If the exclusive right to vote and be voted for in the
election of directors is granted, such right must be limited for a
period not exceeding five (5) years.
The limit is non-extendible.
The limitation is designed to prevent possible abuse of the
Board. A lifetime term of the Board absolutely deprives
other stockholders/members of the opportunity to
participate in the management of the corporation.
What happens after the five-year limit is over?
Founders shall have equal rights with the holders of common
shares.
REDEEMABLE SHARES
These are shares which permit the issuing corporation to
redeem or purchase its shares.
Redeemable shares 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.
These shares may be issued by the corporation when
expressly provided in the articles of incorporation.
They are shares which may be purchased by the
corporation from the holders of such shares upon the
expiration of a fixed period, regardless of the existence of
unrestricted retained earnings in the books of the
corporation, and upon such other terms and conditions
stated in the articles of incorporation and the certificate of
stock representing the shares, subject to rules and
regulations issued by the Commission.
What is the purpose of redeemable shares?
A: They are issued for the purpose of attracting capital.
**LIMITATIONS:
(1) Redeemable shares may be issued only when
expressly provided for in the AOI.
(2) The terms and conditions affecting said shares must
be stated both in the AOI and in the COS.
(3) Redeemable shares may be deprived of voting rights
in the AOI.
(4) The corporation is required to maintain a sinking fund
to answer for redemption price if the corporation is
required to redeem.
(5) The redeemable shares are deemed retired upon
redemption unless otherwise provided in the AOI.
(6) Unrestricted RE is not necessary before shares can be
redeemed, but there must be sufficient assets to pay
the creditors and to answer for operations (Republic
Planters Banks vs. Agana, G.R. No. 51765, 1997)
(7) Redemption cannot be made if such redemption will
result in insolvency or inability of the corporation to
meet its obligations.
Atty. E.; instead of borrowing from banks, the corporation is
borrowing money from the public.
There are many ways of acquiring funds from the corporation:
1. Borrow from the banks
2. Borrow from the public
You have heard that bonds are floated, this is just the
corporation issuing bonds to the public, telling the public that if
you buy these bonds, we will buy this back from you in 5 years
with interest or premium. Or, redeemable shares, this is an
option to raise more money with the public.
We distinguish redeemable shares from the bank, in that banks
are lenders and redeemable shareholders are investors.
What is the difference?
A: Redeemable shareholders assume a risk, particularly that the
corporation will become insolvent before the expiration of the
redemption period.
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IOW, as far as the lender is concerned, the moment, the loan And therefore, while before they were outstanding, are they
is due, he may collect. If the corporation has no cash, what still so?
will the banks do? A: Not anymore. They have been reunited with its parents, it’s
A: (1) Demand payment, or (2) Foreclose on the collateral. now back home, it’s no longer outstanding.

Can the corporations say: please do not get our capital? However, may it still be entitled to dividends?
A: They cannot. A: No. Because if they are allowed to be entitled to dividends, it
would create a situation where the corporation would be paying
Bank says not our problem, our problem is to collect, if we itself.
cannot collect, we get properties.
However, because these are issued shares, would it have
On the other hand, when we talk about redeemable shares? the right to vote?
A: If the corporation is insolvent, the shareholder cannot A: No, because otherwise, the current board would just use
demand redemption. these to vote for themselves, because the board acts on behalf
of the corporation – manage the properties of the corporation,
So we can only demand when? since these are properties, they will use these properties to cast
A: When we have profits, then we pay. votes in their favor pertaining to these shares. So this will allow
incumbent directors to perpetuate themselves in office.
Can it be obliged to pay?
A: Yes. That was your promise. To buy back the shares with a BORROWING REDEEMABLE
premium of course. FROM A BANK SHARE
Dealing with Dealing with investors
So here’s the investor, here’s the lender. So that if the Party
lenders/creditors
investor now demands for the reacquisition of his shares involved
because the due date has arrived, can the corporation say Compel payment Demand payment on
that they will use their profits for another purpose? upon maturity the date of
A: No. date without any redemption
conditions.
This is what the law calls what? Condition: The
A: Unrestricted retained earnings. In so far as the investor can compel
creditor is to redeem only when
Can the corporation even refuse by saying we do not have concerned, once it there are profits. The
unrestricted RE? is due and corporation is obliged
A: No. demandable, the to buy back the
creditor will compel shares with a
Atty. E.: Restricted or not, if you have surplus, pay. The When
the corporation to premium.
corporation has to pay, so long as there is surplus, unrestricted demandable
pay.
or not. NOTE: Regardless
whether it is restricted
The only situation where the corporation can refuse to pay is or not, as long as
when the corporation is insolvent, otherwise, the corporation will there is surplus, it is
be touching their capital and will be violating the trust fund obliged to pay.
doctrine.
Exception:
IOW, clearly, what is the difference between the investor Corporation is
and the lender? insolvent
A: The investor takes a risk.
No assumption of The investor takes the
What is that risk? risks; risk because the
A: The corporation will not redeem the shares if the corporation corporation may or
becomes insolvent. Assumption Lender can collect may not have retained
of Risk upon arrival of the earnings
However, since he is an investor, does he enjoy anything? due date without
A: Rights to dividends during the period while he is still the any conditions
holder (before the redemption period comes), if dividends are
declared. Not entitled to During the period
dividends; only while he is still the
On the other hand, if there are such dividends declared, can paid for the holder (before the
the lender also collect on such dividends? balance + interest period comes), he is
A: No, he cannot. Distribution
an investor. Thus,
of dividends
when dividends are
So, once reacquired, what happens? declared, he is
A: The redeemable shares become treasury shares. entitled to such.

So-called treasury shares, because they are now in the

custody of the treasurer. So what happens to these shares?
A: They become part of the capital.
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 TREASURY SHARES
What are treasury shares?
A: These are stocks and were fully paid, but were reacquired by
the corporation through:
1) Purchase,
2) Donation,
3) Sale, and
4) Other lawful means.
Nature of Treasury Shares
Treasury shares are part of capital. When these shares were
bought or reacquired, surplus money will be used and not capital
money. Otherwise, we will be violating the Trust Fund Doctrine.
Being part of capital, the treasury shares can be sold again. As
to how much, it is the Board that will decide.
Special Features of Treasury Shares
(1) Once reacquired, it shall form part of its capital as a
corporate asset.
(2) They can only be reacquired if there are unrestricted
retained earnings.
(3) It is not entitled to dividends because in effect, the
corporation is paying itself, which is absurd. Otherwise,
it will involve double sale for the same shares.
(4) It is not entitled to the right to vote because the
corporation is not a stockholder. If allowed and the
BOD exercises such right as representative of the
corporation, it can be subject to abuses.
If they are were voting shares when issued, now
that they are back, who may vote?
Answer: NO ONE. Treasury shares have no voting
rights.
If the law were to give them voting rights, since these
treasury shares are owned by the corporation, the BOD
necessarily will act on behalf of the corporation. If they
were given voting rights, the BOD will definitely vote for
them all the time.
(5) They can only be reacquired if there are unrestricted
retained earnings.
Unrestricted retained earnings – assets
less liabilities; not allocated for anything;
absolutely free; no restrictions or
appropriations.
GEN: When it comes to treasury shares, the
corporation is not always free to buy back the
shares. It requires that there should be
unrestricted retained earnings, otherwise, the
corporation will violate the Trust Fund Doctrine
because if they were to buy it back without
unrestricted retained earnings, the creditors
cannot go after the corporation to satisfy unpaid
debts because there is no more capital to speak
of.
XPN: Redeemable Shares – which can be issued
regardless of WON there are unrestricted retained
earnings
Reason: It is issued to gain more capital and the
public is aware that these are just redeemable
shares.
(6) It can be resold by the corporation
(7) It is not considered as outstanding shares because it
is back to the corporation – it is in already
**NOTES:
Such shares may be disposed of again for a reasonable
price fixed by the BOD.
Treasury shares have no voting right as long as such
shares remain in the Treasury.
Pre-emptive right of stockholders in close corporations shall
extend to reissuance of treasury shares unless otherwise
provided in the AOI.
Generally, is the corporation authorized to buy back all of
its shares?
A: No.
Why not?
A: It would violate the trust fund doctrine. Such that when you
keep expending funds to buy back all the shares, it would
disadvantage creditors, because it will reach a point where the
capital will used up.
THE TRUST FUND DOCTRINE
The Trust Fund Doctrine means that the capital stock, properties
and other assets of a corporation are regarded as equity in trust
for the payment of corporate creditors.
Stated simply, the trust fund doctrine states that all funds
received by the corporation in payment of the shares of stock
shall be held in trust for the corporate creditors and other
stockholders of the corporation. Under such doctrine, no fund
shall be used to buy back the issued shares of the stock except
only in instances specifically allowed by the Code. (Boman
Environmental Development Corporation vs. CA, G.R. No.
77860, 1988)
By way of exception, however?
A: If it is specifically provided for in the AOI, such as redeemable
shares.
CONVERTIBLE SHARES
A type of preferred stock that the holder can exchange for a
predetermined number of common shares at a specified time.
VOTING VS. NON-VOTING SHARES
GEN: No share may be deprived of voting rights.
XPNs:
1. Preferred non-voting shares;
2. Redeemable shares;
3. Shares as provided by the Code (treasury shares)
There shall always be a class/series of shares which have
complete voting rights.
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VOTING SHARES SHARES IN ESCROW

Shares that are provided with voting rights on any issue on the
corporation. The voter can participate in any meeting and on any
issue that may be raised during the meeting.
Reason: A shareholder is a part-owner of the corporation. Since
the shareholder cannot interfere with the management, he can
only exercise his ownership by voting on certain issues. As part-
owner, he has the right to protect his ownership. Hence, entitles
him to vote.
Issued or committed to a particular shareholder, but deposited
with a 3rd person or a deposit account pending the fulfilment by
that 3rd person for which it was reserved of the conditions
expressly provided in the certificate of stocks
Share is subject to an agreement; share is deposited with a 3rd
person to be kept by the depositary until the performance of a
certain condition

NON-VOTING SHARES

Shares that are not provided with voting rights but subject to
exceptions.

Exceptions: Holders of non-voting shares shall nevertheless be

entitled to vote on the following matters:

(1) Amendment of the articles of incorporation

(2) Adoption and amendment of the bylaws
(3) Sale, lease, exchange, mortgage, pledge, or other
disposition of all or substantially all of the corporate
property

Note: In determining whether there is a disposition of

all or substantially all of the corporate property, the
guide is when such sale already affects the operations
of the corporation. When the corporation could no
longer carry out its business, then that will be the point
when it will have to be open for voting, including non-
voting shares.

SC ruled that 80% is considered “substantially all”.

(4) Incurring, creating, or increasing bonded indebtedness

(5) Increase or decrease of authorized 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

Reason why a stockholder with non-voting shares is still

entitled to vote on these issues:
Because the fundamental contract of these parties is the Articles
of Incorporation.

In obligations and contracts, we have learned that if we change

the terms and conditions of the contract, we can novate the
contract. What is necessary in novation is the consent of both
parties. If you need to change anything in the AOI, you need
consent. All parties must be able to participate WON they agree
on the change of the agreement.

RIGHT OF APPRAISAL

For those who dissent the proposed agreement, they could

exercise their right of appraisal. Such right can be exercised by
a stockholder who disagrees with the decision of the Board of
Directors to amend the Articles of Incorporation. The dissenting
stockholder can demand the corporation to buy back his shares
at their fair market value.

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