CORPO NOTES
Section 1 – Corporation Code of the Philippines
Section 2 –
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.
Veil of corporate entity – a corporation has a personality distinct and
separate that of its members.
Doctrine of piercing the veil of corporate entity – the legal fiction is
disregarded for purposes of convenience and to subserve the ends of
justice. The effect is that liability will attach personally or directly to the
officers or stockholders.
This is applicable in instances where a corporation is a mere alter ego or
instrumentality. Three elements must be present to “pierce the corporate
veil”:
1. control not mere majority or complete stock control, but
complete dominion, not only of finances but of policy and
business in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate
mind, will or existene of its own (control test)
2. such control must have been used by the defendant to commit
fraud or wrong
3. the aforesaid control and breach of duty must proximately cause
the injury or unjust loss complained
G.R.: A corporation cannot enter into a partnership since in a partnership
the corporation would be bound by the acts of the persons not its agents, or
officers. The identity of the corporation is lost.
However, it can enter into a joint venture agreement provided that it is in
line with the business authorized by its charter.
Section 3 – Classess of corporations
Stock and non-stock
Corporation aggregate
Corporation sole
GOCC – private corporations of which the government is the majority
stockholders
Quasi-corporation – private corporation which have accepted from the state
the grant of franchise organized for profit and provide convenience for the
general public.
Public corporations – subject to governmental visitation and control
Section 4 – corporations created by special law or charters
This is subject to the constitutional limitation that such corporation shall be
owned or controlled by the government. They are placed under the Civil
Service, and SEC has no power over it.
The government acts merely as a corporator and it does not make it a
public corporation.
Section 17 – Grounds when AOI or amendment may be rejected or
disapproved:
(1) substantially not in accordance with the form prescribed
(2) purpose is unconstitutional, illegal, immoral or contrary to
government rules and regulations
(3) the treasurer’s affidavit concerning the capital stock subscribed
or paid up is false
(4) the required percentage of ownership of capital stock to be
owned by citizens of the Philippines has not been complied
nanks, insurance companies, educational institution: need favorable
recommendation from appropriate government agency
foreign corporation: needs license to transact business
*the authority of the SEC to approve/deny is not ministerial but
discretionary. The grounds are not exclusive.
Presidential Decree No. 902-A – another authority for grounds of
suspension or revocation of COR.
Section 18 – corporate name must not be:
(1) identical with another existing corporation
(2) deceptively similar to another existing corporation
(3) confusingly similar to another existing corporation
the test of infringement: whether the similarity is such as to
mislead a person using ordinary care
(4) already protected by law
“barangay”, “maharlika”, “bureau”, “national” are reserved for
government use
(5) deceptive/contraty to existing laws
Doctrines from trademark law:
(1) Priority of adoption – the right to use a name is the one who first
claimed the right to use the name
(2) Doctrine of secondary meaning – a word or phrase originally
incapable of exclusive appropriation might nevertheless have
been used so long and so exclusively by one producer, which is
for more than five years.
Two marks/label that can have secondary meaning in the future -
geographic and descriptive names
Remedy of the claimant corporation is injunction. Affidavit of undertaking
to change corporate name (signed by either the president or another
corporate officer) shall facilitate in the enforcement of a change name.
This does not deprive the erring corporation of the right to use a name
because it may choose another name.
Change name requires amendment of AOI, which SEC shall issue an
Amended COI. Applying Section 16, if no action from SEC within six
months for cause not attributable to the corporation, change of name is
deemed effective upon date of approval by the SEC.
Exception: A corporation may use a name of another corporation which
has been dissolved through expiration of its corporate life
Section 19 – commencement of corporate existence
From the time SEC issued the COI (for corporation aggregate)
Exception: in a religious corporation, the archbishop shall become
corporation sole after mere filing with the SEC of the AOI since a
corporation sole is not issued with a COI (Section 112).
GOCC – a private corporation. No AOI but only a special charter.
In Perez vs Balmaceda, any attempt of organization after the period fixed
will not give it de facto existence. Hence, said corporation can be
collaterally attacked.
However, according to SEC, dissolution is not automatic because of the
last paragraph. The corporation is given a chance to show that the failure to
organize is due to cause beyond its control.

Section 20 – de facto corporations
De jure – created in strict/substantial compliance with statutory
requirements. Its existence cannot be attacked even in direct proceeding.
De facto – exists as a corporation but without legal right as against the
State. There must be:
(1) valid law which a corporation might be incorporated
(2) bona fide attempt to organize under such law
mere intent is not sufficient
(3) exercise in good faith of corporate powers
after discovery of the irregularity, a corporation must
immediately act to correct it.
Examples of de facto:
-AOI fails to state all maters required
-corporation name resembles that of preexisting one
-residency requirement of incorporators not met
-insufficient/defective form of the acknowledgment
Remedy so that the revocation from SEC will not be final and executory:
Petition to lift the order of revocation
TITLE III
Section 23 – BOD/BOT
Authority of BOD/BOT:
(1) exercise corporate powers
(2) control of all business and all property
Qualification – must be member or stockholder (of at least one share in his
own name).
BOD/BOT shall hold office for one year and until their successors are
elected and qualified.
A director who ceases to be the owner of a share ceases to be a director.
Majority of BOD/BOT must be residents of the Philippines.

Rationale of de facto corpo: eliminate quibbling over irregularities Tri-level structure:

De facto Local Coporation De facto Foreign Corporation

Must be issued with COI Must be issued with COI
Must have a license to operate in
the Philippines

A de facto corporation does not give rise to de facto officers

Direct attack is one initiated by the state through its SolGen by quo
warranto proceedings.

Collateral attack is when the existence is questioned incidental to a

proceeding. This is based on public policy – avoid endless confusion
Exception: when the issue is a violation of a public policy e.g. a foreign
corporation doing business in the Philippines without a license.

However, a direct or collateral attack when the issue is failure to comply

with conditions precedent for either a de facto or de jure corporation.

De facto corpo is:

-taxable
-able to enter into contracts, which shall be considered as valid
-liable to third persons. The members/stockholders shall not be liable as
partners

If a corporation is not a de facto, de jure nor by estoppel, the stockholders

are liable individually

Section 21 – corporation by estoppel

Rationale: based on principles of equity especially in favor of third persons
Persons who assumed to act as a corporation knowing it to be without
authority to do so. They are liable as general partners for all debts,
liabilities and damages resultine thereof.
They cannot use as a defense the lack of corporate personality (ostensible
corporation).
G.R. under American rule: active members of ostensible corporation are
liable. The inactive members are liable as well to the extent of their unpaid
subscription.
SC ruling: inactive member take no part except subscribing shares. They
shall not be liable. (Pioneer Insurance & Surety Corp. vs CA)
However, in order for the corporation to start doing business, it must be
organized (Section 22)
Doctrine of centralized management –
Implied is the business judgment rule - even the courts cannot change the
decision of the officers of the corporation
Hold over principle (applied in administrative law) – an officer is not given
a new term but is only allowed in order to continue the business
Doctrine of Minimum Qualification – at least one share
Can be fulfilled at the time of assumption of office

Section 22 – nonuse of corporate charter and continuous inoperation Elected as _____ (section 24) – personal presence, proxy, voting trust
These are conditions subsequent – to be complied with after acquiring agreement
corporate existence.

(1) failure to formally organize and commence business within two

years from date of incorporation

effect: cease of corporate power and be deemed dissolved

(2) if a corporation has commenced business, but subsequently

becomes continuously inoperative for a period of at least five
years from the time that it stopped

effect: shall be a ground for suspension or revocation of COI

Section 38 –

No appraisal right because:

(a) a stockholder is aware that eventually a corporation may increase
or decrease
(b) a stockholder may always sell his stock
(c) if there is decrease, why appraise?

Notes Debenture Bond

Short term Short term Long term
secured unsecured

Corporate bond – refers to the obligation

Indenture – refers to the document
Debenture – bonds that are not contemplated under Section 38

Section 39 –
All issues or dispostions – refer to both original unissued shares and new
issues as a result of the increase in capital stock

The right of pre-emption is statutory while the right of first refusal is

contractual in nature.

Exceptions:
(1) i.e. General Banking Act, Insurance requirement, BOI
requirement
(2) exchange of shares – property needed for corporate purposes
(3) payment of previously contracted debt. “debt-equity conversion”

remedy to enforce this right if deprived by the corporation without a

provision of denial under the AOI.

Section 40 –

Three corporate activities which impact on the operation of the

corporation:
1. Sales of corporate assets (not done in the usual course of
business unlike a real estate developer who sells housing units)
2. Sale of the corporate business either through merger or
consolidation
3. Sale or acquisition of substantial shares

Bulk sales law – only applies to merchandising business. Does not include
company with manufacturing or equipment concerns.
1. Principle of indivisibility of the Subscription contract

Delinquency – failure to pay subscription on due date.

In case of delinquency:
B – balance of subscription
A–
C – cost of advertisement
E – expenses of sale

Delinquency sale
1. one entire obligation

if subscription is partially paid, transfer of shares to another requires

consent of the stockholder because it will novate the original contract

however, if it is fully paid, consent of the stockholders are not needed

based on the principle of free transferability

2. principle of free transferability of sale

3. True value rule -

only absolute transfers are recorded in the stock certificates (stock and
transfer book)

intra-corporate dispute based on two tests: (jurisdiction relies on RTC and

no longer the Commission. Based on RA 8799)
-relationship test
a. corporation vs stockholder
b. stockholder vs stockholder
c. stockholder vs BOD
stockholder vs SEC (this is not intracorporate)

-nature of controversy test

a. controversy related to the operation of the business
based on the business judgment rule (BJRI)
b. election dispute
c. rights and restrictions of shares of stock
d. right to inspection of corporate books

three basic rights of stockholders:

a. right to participate in the management and control of the
corporation
b. proprietary right
c. remedial right (curative)

representative suit – injury caused to the stockholders

derivative suit – injury caused to the corporation

jurisdiction of SRC on five topics:

-exempt securities and exempt transactions
-prohibition on fraud, manipulation and insider training
-tender-offer rule
-margin trading
-SRO self-regulating organizations

delinquent shareholders –
cannot enter into VTA, except when they are only a trustee
their right is only to receive shares of the dividends. However, if it is in
cash, it may be used to defray the unpaid subscription.
Financial Rehabilitation:

Solvency Act
Grandfather Rule applies when:
Management committee: 1. it involves nationalized or party-nationalized activities
-paralyzation 2. there are corporate stockholders instead of, or not only,
-dissipation/wastage of corp. individual stockholders
3. there is doubt of the nationality of the corporation

PARAMETER STOCK NON-STOCK NCBA

purpose profit Non-profit 1. Fiscal policy
membership transferrable Non-transferrable -revenue generation (BIR, BC, all gover
Voting Cumulative allowed When expressly
allowed in by-laws
Voting for 2/3 votes of Majority
fundamental changes stockholders Investment House – underwrites securities
representing at least
2/3 of the outstanding Universal Banks
capital stock Commercial Banks
BOD BOT Thrift Banks
Dividend Allowed to distribute Not allowed unless Rural Banks
profits are gained Cooperative Banks
provided that it is for Islamic Banks
the furtherance of the
purpose Demand deposit – without interest
Conversion Can be converted to Can’t be converted to Savings account – with passbook
non-stock by stock by mere Time deposit –
amendment of AOI amendment of AOI. It
even without has to undergo
dissolution dissolution.
Manner of voting by a stockholder or member:
Meeting by the At the principal office May be outside the
-directly, or
members principal office but
-indirectly through a representative:
within the Philippines
-by means of proxy
Nationality
-by a trustee under a VTA
requirement
-by executors, administrators, or other legal representatives
Incorporators Maximum of 15 Can exceed 15
appointed by the court (sec. 55)
Voting by proxy allowed
Meeting by the Board
Right to vote Class shares Corporate control devices:
Officers Voted by the BOD Voted by the members  1) voting agreements entered into by a group of shareholder to
Distribution of Assets In case of dissolution assure their voting control (shareholder pooling agreements).
Dissolution Needs approval of the Needs approval of the  2) voting trusts
BOD BOT  3) pyramiding - the use of holding companies or a series of
Approval of plan of Submitted to all holding companies to hold controlling shares of their subsidiaries
distribution (akin to members and requires  4) classificaiotion of common shares into voting and nonvoting,
dissolution) approval of 2/3 votes with the voting power vested in a small class of "management
of all members stock"
Board members in Not necessarily Multiples of five  5) management contracts, often with a parent or affiliated
educational multiples of five (section 108)
corporation
corporation
 6) classification of directors, with staggered elections of only
some of the directors each year.
 7) irrevocable proxies
 8) class voting

Trustee – legal owner of stock who exercises the voting rights of the trustor
Trustor – beneficial owners; the rights he exercises concurrently with the
PARAMETER OPEN CLOSE trustee are the right of inspection of corporate books, to receive the
May be more than 20 Limited to 20 dividends when they are collected by the trustee and to recover his stock at
Transferability of Restrictions on transfer the expiration of the trust. But he is disqualified from being elected as
shares director unless he retains at least one share in his own name, meaning not
Management With BOD May be lodged to the all shares are covered by the VTA.
shareholders
Appraisal Right Withdrawal right Speculating on stocks of a proposed corporation = financially irresponsible
Pre-emptive right Right of first refusal subscribers. That’s why section 61 makes subscription irrevocable to have
Restrictions Must be stated on AOI Must be stated on enforceable subscriptions.
and certificate of stock AOI, by-laws and
certificate of stock The word “issue” is oftern associated with the issue and delivery of a share
certificate although it does not really depend on this. One can be an owner
of shares even without any certificate issued to him.

No provision in the code that prohibits a corporation from issuing shares

from the unsubscribed portion of its capital stock before the original
ESL subscriptions are fully paid.
Voting by mail – can this provision be put in the by-laws of a stock
corporation remedies when corporation refuses to issue a certificate of stock:
-specific performance of a contract
-petition for mandamus (this can be invoke provided: application for
BPI-TB transfer was denied despite absence of unpaid claims on the shares, action
Banks, public utilities, insurance, trusts, buildings and loans association for damages is inadequate (see p. 551)
-sue for damages when specific performance cannot be granted
-rescind contract of subscription and recover the consideration paid
Section 96
MOSBI PEP
Corporation cannot over-issue shares in excess of the maximum number
authorized in its AOI for they are do not exist and thus considered void.
The corporation may cancel them and held answerable for restitution to the
affected subscribers/owners.
A corporation cannot refuse transfer for indebtedness other than unpaid
subscriptions. The right thing to do is put a lien on the shares.
The limitation against transferring of stock certificates is when there is
unpaid claim against the shares. However, if we talk about only the right to
subscribe, it can be transferred with the consent of the corporation, and in
which case, there is already novation of the subscription contract. (I do not
see how this is different from the former)
Restrictions on transfer of stock certificates like qualifying the transferees
are illegal. However, the provision on right of first refusal is valid.
Limitations concerning citizenship is allowed.
For the rights of the stockholders, check p. 561 – 562.
Actions by stockholders:
1. derivative actions – brought by one or more stockholder in the
name and on behalf of the corporation to redress wrongs
committed against it or to protect corporate rights, whenever the
officials of the corporation refuse to sue, or are the ones to be
sued
2. individual actions – action brought by a stockholder against the
corporation for direct violation of his contractual rights as such
individual stockholder
3. representative actions – suit brought by a stockholder in behalf of
himself and all other stockholders who are similarly situated
exhaustion of intra-corporate remedies seems no longer applicable as pre-
requisite in initiating a derivative suit pursuant to the new rules of
procedure in SEC
prohibition to issue watered stock refers only to original issue of stocks and
does not include subsequent transfer/sale such as treasury stocks given as
bonus or sold less than the par or issued value provided it is reasonable.
There are two schools of thought regarding liability of subsequent
transferee for the payment of the deficiency from the issued watered
stocks.
Liens must be provided for in the AOI and not just in the by-laws pursuant
to Section 6.
Under Sec. 67, delinquent stocks are subject to sale at public action. What
is considered delinquent is not only the unpaid balance but the whole
subscription based on the doctrine that a subscription is one, indivisible
whole contract.
Call (under Section 67) vs Installment
Call – declaration by the BOD for the payment of stock subscription. BOD
makes the call
Assessment – refers to both paid and unpaid subscriptions
Excess payment by stockholders are not refundable since they form part of
the assets of the corporation and allowing otherwise is a violation of
Section 43.
Call can mean resolution or ratification.
Procedure for merger or consolidation:
1. approval plan (by the BOD or BOT)
2. submission to stockholders or members for approval
3. execution of formal contract (articles of merger or consolidation)
4. submission to SEC for approval
5. conduct of hearing by SEC (to afford opportunity to be heard if it
is contrary or inconsistent with laws)
6. issuance by SEC of certificate of merger or consolidation
Corporate combinations:
1. sale of assets – selling company is not necessarily dissolved as
possession is not a requirement for corporate existence. Sec 40
applies. Buying company does not acquire the liabilities of the
selling company if such intention is not expressly or impliedly
agreed. If agreed, buying company is answerable to debts but not
to the contingent or unknown liabilities.
2. lease of assets
3. sale of stock – parent/holding company and subsidiary company
in the foregoing cases, identity of the corporations are retained.
4. merger
5. consolidation
advantages over sales of assets:
1. do away with acquiring the consent for sale of assets
consent of creditors not required since the rights of the creditors
shall not be impaired in consolidation or merger
2. save taxes
3. the transfer of all assets is done by a single operation and not by
separate steps
in merger and consolidation, the absorbed or constituent corporation are
automatically dissolved by operation of law. No winding up since the
surviving or the consolidated corporation assumes the liabilities.
Reorganization – not combination of several companies, but simply
carrying operations
Reincorporation – involves amendment of charter
Bankruptcy – special proceeding for rehabilitation of the corporation
Quai-reorganization – readjustments of balance sheet
Title X
Appraisal Right
Fundamental change in corporate charter requires consent of all
stockholders. Right of appraisal:
-prevents arbitrary minority group from obstructing advantageous
corporate action
-prevents injustice to minority
in a big corporation, the dissatisfied stockholder can simply trade his
stocks.
When available:
-amendment of AOI (16)
-change corporate term (37)
-sale of all or substantially all corporate properties (40)
-merger/consolidation (77)
-invest in another corporation for any other purpose (42)
-105
A non-stock corporation cannot be converted into a stock corporation by
mere amendment of AOI. It must be dissolved first and thereafter the
members may organize as stock corporation.
Title XII – Close Corporation
-all stock, except treasury shares, shall be held by not more than 20 persons
-all issued stocks shall be subject to one or more specified restrictions on
transfer (to prevent changes in the control of the corporation; delectus
personae)
-no stock shall be offered to the public
-no corporation, which is not a close corporation, shall own 2/3 or more of
its voting stock
-it is essentially an incorporated partnership. Small group active in the
management of the business.
AOI may provide that business be managed by stockholders rather than the
BOD.
-shares may be classified into more than one class, and classification of
directors into more than one class also.
Transfer of shares of close corporation always subject to right of first
refusal by the corporation.
Pre-emptive right is absolute to stockholders in a close corporation except
otherwise provided in AOI.
Deadlocks in close corporation – SEC grants appraisal right regardless of
the availability of the unrestricted retained earnings
The Code does not require any religious group to be registered as a
corporation but the status of unregistered religious group is that of an
ordinary organization without juridical or legal personality separate and
distinct from that of its members.
The Roman Catholic Church does not have a nationality
Liquidation of three types:
-by corporation itself (122)
-by duly appointed receiver (119)
-by trustee (122)

hold-over officers are in-charge for the winding up of affairs within three
years of dissolution

receivership does not automatically mean that the corporation has been
dissolved for a receiver can be appointed even when there is no dissolution.