CORPORATIONS with the Bureau of Trade Regulation and
Consumer Protection of the Department
Types of business arrangements:
1. Sole Proprietorship
2. Partnership
3. Joint Account or Cuentas en
Participacion;
4. Business Trust
5. Joint Venture;
6. Cooperative; and
7. Corporation
Sole Proprietorship – A person personally
conducts business under his name or a
business name.
 It has no personality separate and
distinct from the proprietor.
 It does not possess a juridical
personality and has no legal personality
to file or defend an action in court. (Anita
Mangila vs. CA, GRN 125027, August
12, 2002)
Business name (Act No. 3883)
 Refers to any name that is different from
the true name of an individual which is
used or signed in connection with
her/his business on any written or
printed receipts including receipts for
business taxes, duties and fees and
withdrawal or delivery receipts; any
written or printed evidence of any
agreement or business transaction; and
any billboard conspicuously exhibited in
plain view in or at the place of her/his
business or elsewhere, announcing
her/his business.
 A proprietor is required to register his
business name other than his true name
of Trade and Industry. (Section 1, Act
No. 3883)
- The requirement also includes firm
name or style.
- If not registered, he cannot:
1. Use or sign the business name in
connection with his business on
any written or printed receipts or
any evidence of agreement or
other documents;
2. He cannot exhibit the business
name or sign thereof in plain
view.
 Juridical persons need not register
names that are registered with the SEC.
- If they are using different names for
their business, they must register the
same.
 Prohibited names/Not registrable
business names:
1. The name or the nature of business
itself is illegal, offensive, scandalous,
or contrary to propriety;
2. Names which are identical or
resemble a BN already registered
with the DTI, the SEC, Cooperative
Development Authority, Intellectual
Property Office, Food and Drug
Administration, Department of Labor
and Employment or any other
government office authorized by law
to register names, as likely to cause
confusion or mistake in the minds of
the public taking into consideration
the following:
i. Nature of the business;
ii. Product/service handled;
iii. Location/place of business;
 iv. Dominant word;
v. Use of descriptive words; and
vi. Spelling, sound and/or meaning;
3. Name composed of purely generic
or geographic words;
4. Names which by law or regulation
cannot be appropriated;
5. Names words, or terms or
expressions used to designate or
distinguish or suggestive of quality of
any class of goods, articles,
merchandise, or service;
6. The names or abbreviation of names
used by the government in its
governmental functions;
7. The names or abbreviation of names
of any nation, inter-governmental or
international organization; and
8. Names which are deceptive,
misleading or which misrepresent
the nature of the business (DTI
Department Order No. 10-01 as
amended)
 There must be a separate registration of
a BN for a branch or satellite office. The
BN of the branch or satellite office
should be the same as the registered
BN for the main office.
Merchants (Code of Commerce) – As to
individuals, they are those who having capacity
to engage in commerce habitually devote
themselves to it. (Art. 1, Code of Commerce).
 Corporations and partnerships
(organizations for business) are also
merchants from the time they are
registered with the SEC.
 Qualifications of merchants:
1. At least 18 years of age;
2. Must have free disposition of his
property;
3. Must habitually involve themselves in
commerce.
 Habituality – repetition and continuation
of commercial acts in such manner that
they are related to each other by reason
of the commercial purpose or end
which they tend to have, which is the
exchange or circulation of products.
However, it may be shown by a single
act of commerce if he manifests the
intention to engage habitually in
commerce.
- When presumed? The moment a
person who intends to engage in
commerce announces through
circulars, newspapers, handbills,
posters exhibited to the public, or in
any other manner whatsoever (like
text messages or email) an
establishment which has for its
object some commercial acts.
Disqualification to engage in commerce (Code
of Commerce)
 Absolute disqualifications
1. Those serving the penalty of civil
interdiction;
2. Those judicially declared insolvent
until they would have obtained a
discharge;
3. Those who are absolutely
disqualified under special laws (Art.
13, Code of Commerce)
 Judges are disqualified from engaging in
commerce within their jurisdiction. (Rule
5.02 of the Code of Judicial Conduct)
 Disqualifications under the Constitution:
 a. Senators and Congressmen (Art.VI, common to all partnership name
Sec. 14, Constitution) participants can be
adopted in joint
accounts (Art. 241,
b. The President, Vice President, Code of Commerce)
Members of the Cabinet, and their
Deputies or Assistants (Art. VII, Sec. Only the ostensible General partners are
13, Constitution) partner in a joint all managers in the
account manages and partnership
transacts business in
c. Members of the Constitutional his own name and
Commission (Art. IX, Sec. 2, under his individual
Constitution) liability. (Art. 241,
Code of Commerce)
d. President, Vice President, Members
Only the ostensible All general partners
of the Cabinet, Congress, Supreme partner – the person may be liable even up
Court and the Constitutional carrying on the joint to the extent of their
Commission, Ombudsman during business – can be personal properties
their tenure (Art. XI, Sec. 16, sued by and is liable to and may therefore be
Constitution) persons transacting sued by third persons.
with the joint account.

e. Practice of Profession – Foreigners

are disqualified, unless the law Business Trusts – a legal relation whereby one
provides otherwise (Art. XII, Sec. 14, person, called the trustor, conveys a property
Constitution) to another for the benefit of a person called the
beneficiary.
Joint accounts (Cuentas En Participacion)
 The person in whom confidence is
 Concept – An arrangement whereby reposed as regards the property is
merchants may interest themselves in called the trustee (Art. 1440, Civil Code)
the transaction of other merchants,
contributing thereto the amount of Joint Venture – an association of persons or
capital they may agree upon, and companies jointly undertaking some
participating in the favorable and commercial enterprise; generally all contribute
unfavorable results thereof in the assets and share risks. It requires a community
proportion they may determine (Art. 239, interest in the performance of the subject, a
Code of Commerce) right to direct and govern the policy connected
therewith, and duty, which may be altered by
 Commonly called an accidental agreement to share both in profit and losses.
partnership; and there is no indication to (Kilosbayan, Inc. vs. Guingona, 232 SCRA 110
the public that there is an existing (1994)).
arrangement because only the
ostensible partner is conducting  It is actually a form of partnership and
business. should thus be governed by the laws on
partnership (Aurbach vs. Sanitary
 Partnership vs. Joint Accounts Wares Manufacturing Corp., 180 SCR
Joint Accounts Partnership
130 (1989))
No juridical personality Has a personality
separate and distinct  Corporations can enter into joint venture
from the partners. agreements
No commercial name Can adopt a
  Joint Ventures may result in a formation it is a One Person Corporation (Sec.
of joint venture corporation. It must 130)
comply with the applicable
nationalization laws. (JG Summit vs.  Consequences of Separate Personality:
CA, GRN 124293, November 20, 2000)
1. Property. A corporation is entitled
 Cooperative – is an autonomous and to own properties in its own name
duly registered association of persons and its properties are not the
with a common bond of interest, who properties of its stockholders,
have voluntarily joined together to directors and officers (Wise v.
achieve their social, economic, and Man Sung Lung, 69 Phil. 309).
cultural need and aspirations by making
equitable contributions to the capital  The properties of its
required, patronizing their products and stockholders, directors and
services and accepting a fair share of officers are not the properties
the risks and benefits of the undertaking of the corporation.
in accordance with universally accepted
cooperative principles. (Art. 3, RA No.  The interest of the
9520). stockholders over the
properties of the corporation
REVISED CORPORATION CODE is merely inchoate (Saw v.
OF THE PHILIPPINES CA, 195 SCRA 740 [1991])
(R.A. NO. 11232)
2. Obligations. A corporation can
Corporation – an artificial being created by incur obligations and its
operation of law, having the right of succession obligations are not the obligations
and the powers, attributes and properties of its stockholders, directors and
expressly authorized by law or incident to its officers (Vasquez vs. De Borja,
existence. (Sec. 2) 74 Phil. 560)

Attributes of a corporation:  The obligations of the

stockholders, directors and
1. It is an artificial being with separate and officers are not the obligations
distinct personality; of the corporation.

2. It is created by operation of law;  Limited Liability Rule – a

stockholder is personally
3. It has the right of succession; and liable for the financial
obligations of the corporation
4. It has powers, attributes and properties to the extent of his unpaid
expressly authorized by law or incident subscription. They may be
to its existence. liable if they have not or have
not fully paid the subscription
A corporation is a being; it has separate judicial price if the corporation is
personality (Sec. 2). insolvent or it cannot comply
with its obligations. (Donnina
 The personality of a corporation is C. Halley vs. Printwell, Inc.,
separate and distinct from its GRN 157549, May 30, 2011)
stockholders, members, directors,
trustees and officers. This is true even if
  The unpaid subscription are
assets of the corporation in
the form of “receivables” that
can be made to answer for
corporate obligations.
 The limited liability Rule
applies to a One Person
Corporation. However, a sole
shareholder claiming limited
liability has the burden of
affirmatively showing that the
corporation was adequately
financed. (Sec. 130)
3. Rights. Rights belonging to the
corporation cannot be invoked by
the stockholders (or directors and
officers) even if the latter owns
substantial majority of the shares
in that corporation and rights of
the stockholders, directors and
officers cannot be invoked by the
corporation. (Stonehill vs. Diokno,
GRN 19550, June 1967)
national of the country where it
was incorporated (Place of
Incorporation Test; Sec. 140)
 Public Enemy: War-time
Control Test - In times of war,
the nationality of a corporation
is determined by the
nationality of the controlling
stockholders.
 Investment purposes: Control
Test – The Foreign
Investment Act of 1991 (RA
No. 7042 as amended) gives
the definition of a “Philippine
National”
(1) A corporation organized
under Philippine laws of
which 60% of the capital
stock outstanding and
entitled to vote is owned
and held by Filipino
citizens;

4. Constitutional rights. (2) A corporation organized

Corporations are entitled to abroad and registered as
certain constitutional rights. doing business in the
However, it is not entitled to Philippines under the
certain constitutional rights not general law on
only because it is an artificial corporations of which
being but also because it is a 100% of the capital stocks
mere creature of law. entitled to vote belong to
Filipinos.
5. Torts. A corporation is liable for
tort (PNB vs. Ca, 83 SCRA 237 (3) Philippine National under
(1978)) the Foreign Investment
Act: When a corporation
 It is liable when the act was and is non-Filipino
committed by the officer or stockholders own stocks in
agent under express direction a SEC-registered
or authority from the enterprise at least 60% of
stockholders or members the capital stock
acting as a body or generally outstanding and entitled to
from the directors as the vote of each of both
governing body (Ibid.). corporation must be
owned and held by
6. Nationality. Generally, the citizens of the Philippines
corporation is considered a and at least 60% of the
 members of the Board of
Directors of each of both
corporations must be
citizens of the Philippines,
in order that the
corporation shall be
considered a Philippine
National (Sec. 3[a], RA
No. 7042 as amended by
RA No. 8179).
(4) A corporation organized in
another country and
registered to do business
in the Philippines of which
100% of the outstanding
capital stock entitled to
vote is wholly owned by
Filipinos is also a is doubt as to the real
Philippine National for
investment purposes (Sec.
3(a), RA No. 7042 as
amended)
7. Grandfather Rule – the method of
attributing the shareholdings of a
given corporate shareholder to
the second or even the
subsequent tier of ownership to
determine the ultimate ownership
in a corporation.
 Consistent with the rule that
the “beneficial ownership” of
corporations engaged in
nationalized activities must
reside in the hands of Filipino
citizens.
 The percentage of shares
held by the second
corporation in the first is
multiplied by the latter’s own
Filipino equity, and the
product of these percentages
is determined to be the
ultimate Filipino ownership of
the subsidiary corporation.
The CONTROL TEST is the
primary test.
 The Grandfather rule applies
if:
(1) The Filipino equity is less
than 60% of the
outstanding capital of a
corporation that owns
shares in a partly
nationalized enterprise –
at least 60% must be
owned by Philippine
nationals; or
(2) There is an attempt to
circumvent the
nationalization
requirement or when there
owners, as in the case
where there is layering
(Narra Nickel Mining and
Development Corp. vs.
Redmont Consolidated
Mines Corp., Ibid.)
8. A CORPORATION SOLE has no
nationality (Roman Catholic
Apostolic Administration of
Davao, Inc. vs. LRC, GRN L-
8451, December 20, 1957)
9. Nationalization Laws: SEC Test:
The Voting Control Test and
Beneficial Ownership Test should
both be applied – full beneficial
ownership of the stocks, coupled
with voting rights is essential.
 According to the SEC, the
requirement of 60% Filipino
ownership must be applied to
BOTH (a) total number of
outstanding shares of stock
entitled to vote in the election
of directors; AND (b) the total
number of outstanding shares
of stock, whether or not
entitled to vote in the election
of Directors. (Sec. 2, SEC-MC
 No. 8; Roy III vs. Herbosa,
GRN 207246, November 22,
2016)
10. Nationality of Non-Stock
Corporation: A non-stock
corporation is considered a
Philippine National if:
(1) All its members are Filipino
Citizens; or
(2) At least 60% of its members
entitled to vote are citizens of
the Philippines; or
(3) At least 60% of its members’
total number of votes as
broadened in the By-laws are
held by citizens of the
Philippines; or
(4) All the members of a foreign
non-stock corporation
licensed to do business by the
SEC are citizens of the
Philippines (SEC Memo. Cir.
No. 10, Series of 2016)
 A corporation exists by fiction of law
only; hence, it is subject to limitations
that are inherent because of its nature.
- It can act only through its directors,
officers, and employees.
- Generally, corporations cannot be
criminally liable because there is no
law making them criminally liable.
 Corporations are incapable of
intent;
 Under the Revised Penal
Code and special laws,
crimes are personal in nature.
 The penalty of imprisonment
cannot be imposed.
- If the crime is committed by a
corporation or other juridical entity,
the directors, officers, employees, or
other officers thereof responsible for
the offense shall be charged and
penalized for the crime.
 A law may be passed to
specifically provide that a
corporation is criminally liable.
 There can be a criminal
statute under which a
corporation may be charged
and prosecuted for a crime if
the imposable penalty is a
fine. Even if the statute
prescribes both fine and
imprisonment as penalty, a
corporation may be
prosecuted and, if found
guilty, may be fined. (Ching
vs. Secretary of Justice, GRN
164317, February 6, 2006)
 Criminal liability under RCCP:
If the offender is a
corporation, the penalty may,
at the discretion of the court,
be imposed upon such
corporation responsible for
the violation of the provisions
of the RCCP or indispensable
to its commission (Sec. 171)
 Accordingly, the penalty of
payment of fine can be
imposed on the corporation
itself under the RCCP.
- Moral damages cannot be awarded
in favor of corporations because they
do not have feelings and mental
state. They may not even claim
moral damages for besmirch
reputation.
 In the case of Filipino
Broadcasting Network, Inc.
vs. Ago Medical Education
 Center (GRN 121994,
January 17, 2005) the
Supreme Court held that a
corporation can recover moral
damages under Article 2219
(7) if it was the victim of
defamation.
 Doctrine of piercing the veil of corporate
entity – The doctrine stems from the
theory/attribute that a corporation is a
legal entity distinct from the persons
composing it.
- But when the veil of corporate fiction
is used as a shield to perpetuate
fraud, to defeat public convenience,
justify wrong or defend crime, this
fiction shall be disregarded and the
individuals composing it will be
treated identically. This is a judicial
function. (Cruz vs. Dalisay, A.M. No.
R-181-P, July 31,1987)
- The doctrine applies to both stock
and non-stock corporation
(International Academy of
Management Economics vs. Litton
and Company, December `13, 2017)
- It applies to a Once Person
Corporation. (Sec. 130)
- Instrumentality Rule or the Three-
Pronged Control Test: The following
elements must be established to
justify the piercing of the veil of
corporate fiction.
 Control – not mere stock
control, but COMPLETE
DOMINATION –not only of
finances but of policy and
business practice in respect to
the transaction attached and
must have been such that the
corporate entity as to this
transactions had at the time
no separate mind, will or
existence of its own.
 Such control must have been
used by the defendant to
commit a fraud or wrong to
perpetuate the violation of a
statutory or other positive
legal breach of duty, or a
dishonest and an unjust act in
contravention of the plaintiff’s
legal right; and
 The said control and breach
of duty must have proximately
caused the injury or unjust
loss complained of (Concept
Builders, Inc. vs. NLRC, GRN
108734, May 29, 1996)
Kinds of Veil-Piercing Action:
1. Traditional veil-piercing action - “A court
disregards the existence of the
corporate entity so a claimant can reach
the assets of a corporate insider
International Academy of Management
Economics vs. Litton and Company,
December 13, 2017)
2. Reverse piercing action - the plaintiff
seeks to reach the assets of a
corporation to satisfy claims against a
corporate insider.
 It flows in the opposite
direction of traditional
corporate veil-piercing) and
makes the corporation liable
for the debt of the
shareholders.” (Ibid.)
 2 types:
(1) Outsider reverse piercing
– occurs when a party with
a claim against the
individual or corporation
attempt to be repaid with
assets of a corporation
owned or substantially
 controlled by the
defendant.
(2) Insider reverse piercing.-
the controlling members
will attempt to ignore the
corporate fiction in order to
take advantage of a
benefit available to the
corporation such as an
interest in a lawsuit or
protection of personal
assets”
The doctrine is normally invoked to make the
directors, officers and shareholders liable for
the obligation of the corporation.
What are the circumstances or probative
factors that may be considered to justify the
application of the doctrine to make the parent
corporation liable for the obligations of its
subsidiary? Any, a combination of, or all of the
following may be considered as PROBATIVE
FACTORS to show the fact ofcontrol PNB vs.
Ritratto Group, Inc., GRN 142616, July 31,
2001)
1. The parent corporation owns all or most
of the capital stock of the subsidiary
2. The parent and subsidiary corporations
have common directors or officers
3. The parent company finances the
subsidiary;
4. The parent company subscribed to all
the capital stock of the subsidiary or
otherwise causes its incorporation.
5. The subsidiary has grossly inadequate
capital
6. The subsidiary has substantially no
business except with the parent
corporation or no assets except those
conveyed to or by the parent
corporation.
7. The papers of the parent corporation or
in the statements of its officers, the
subsidiary is described as a department
or division of the parent corporation, or
its business or financial responsibility is
referred to as the parent corporation’s
own.
8. The parent corporation uses the
property of the subsidiary as its own.
9. The directors or executives of the
subsidiary do not act independently in
the interest of the subsidiary, but take
their orders form the parent corporation.
10. The formal legal requirement of the
subsidiary are not observed.
The separate personality of a corporation may
be disregarded if such personality is:
1. Used to evade obligations to employees
or used as a pretext to dismiss
employees;
2. Used to evade lawful obligations or a
money judgment;
3. Dominated by officers or stockholders or
other person or entity to the extent that
the corporation is a mere alter ego,
adjunct, or business conduit;
4. Used to defeat public convenience;
5. Used to justify wrong;
6. Used to protect fraud;
7. Used to defend crime;
8. Used to confuse legitimate legal or
judicial issues; or
9. Used to perpetrate deception or
otherwise circumvent the law. (Land
 Bank of the Philippines vs. CA, GRN
127181, September 4, 2001)

Mere ownership by a single stockholder or by

another corporation of all or nearly all of the
capital stock of the corporation does not justify
the application of the doctrine of piercing the
veil of corporate fiction.

 The general rule will be followed even if

the new corporation was the result of a
“spin-off” of a former division of the
parent company. (San Miguel Corp
Employees Union v. Confessor, 262
SCRA 81 (1996))

Jurisdiction. There is no deprivation of due

process if the conduit corporation was not
impleaded in the main case. Piercing may be
done even at the execution stage.
(International Academy of Management
Economics vs. Litton and Company, December
13, 2017.)

Reference:

Sundiang, Jose R. Sr., et al.; Reviewer on

Commercial La, 2019 Edition; Rex Book Store;
Manila, Philippines; 2019.

Prepared by:
ATTY. MICHELLE G. BERNARDO, OP, LL.M.
ATTY. JESSA G. BERNARDO, OP
Created by Operation of Law
 Concession Theory – a corporation is
an artificial creature without any
existence until it has received the
imprimatur of the State acting according
to law, through the SEC. The life of the
corporation is a concession made by the
State.
 Franchises of Corporation:
- The primary franchise of a Certificate of Incorporation.
corporation – to exist as a
corporation. It is vested “in the
individuals who compose the
corporation and not in the
corporation itself.” JRS Business
Corp. vs. Imperial Insurance, Inc., 11
SCRA 634 (1964))
 It cannot be transferred without
approval of Congress.
- Special or secondary franchises –
certain rights and privileges
conferred upon existing corporations.
 They are vested in the
corporation and may be
conveyed or mortgaged under a
general power granted to a
corporation to dispose of its
property, except such special or
secondary franchises as are
charged with public use.
 They are subject to levy and sale
on execution together with and
including all the property
necessary for the enjoyment
thereof.
 How are they created?
- General law – private corporations
are generally created under the
provisions of the Corporation Code.
This is done by filing the appropriate
Articles of Incorporation (AOI) and
By-Laws (BL) with the SEC (Sec. 18)
 If the SEC finds the documents to
be fully compliant with the
Corporation Code and other
relevant laws/regulations, the
SEC shall issue the Certificate of
Incorporation.
 The life of the corporation starts
from the date of issuance of the
 Sec. 45 indicates that the BL can
also be filed after incorporation.
- Special law – Public corporations are
created through special laws. Private
corporations cannot be created by
special laws.
 Exceptions: GOCC (Sec. 16,
Article XII, Constitution)
 Corporations created by special
laws or charters shall be
governed primarily by the
provisions of the special law or
charter creating them or
applicable to them, supplemented
by the provisions of the RCCP,
insofar as they are applicable.
(Sec. 4)
Right of Succession – capacity to have
continuity of existence despite the changes on
the persons who compose it. Thus, the
personality continues despite the change of
stockholders, members, board members or
officers.
Powers, Attributes, and Properties
 Theory of Special Capacities/Limited
Capacity Doctrine – No corporation,
under the Code, shall possess or
exercise any corporate powers, except
those conferred by law, its AOI, those
implied from express powers and those
 as are necessary or incidental to the
exercise of the powers so conferred.
- The corporation’s capacity is limited
to such express, implied and
incidental powers.
- If the act of the corporation is not
one of those express, implied or
incidental powers, the act is ultra
vires.
Classifications of Corporations:
 Organizers
- Public – by State only
- Private – by private persons alone or
with the State.
 Functions
- Public – government of a portion of
the State
- Private – usually for profit-making
functions.
 Governing laws
- Public – Special Laws and Local
Government Code
- Private – Law on Private
Corporations (the RCCP)
 Legal status:
- De jure – corporation organized in
accordance with requirements of
law.
- De facto – a corporation where there
exists a flaw in its incorporation. The
requisites for its existence are (Sec.
19):
1. The existence of a valid law
under which it may be
incorporated;
2. An attempt in good faith to
incorporate;
3. Use of corporate powers.
 Issuance of certificate of
incorporation by the SEC is a
minimum requirement of good
faith. However, a corporation may
be a de jure corporation even in
the absence of BL.
 If there is substantial compliance,
de jure corporation results; only
colorable compliance results in
de facto corporation.
 The due incorporation and right
to exercise corporate powers of a
de facto corporation cannot be
inquired into collaterally in a
private suit to which the
corporation is a party. Inquiry
shall be only through quo
warranto proceedings filed by the
Solicitor General. (Sec. 19)
 Corporation by estoppel – group of
persons which holds itself out as a
corporation and enters into a contract
with a third person on the strength of
such appearance cannot be permitted to
deny its existence in an action under
said contract (Sec. 20).
- It is not a real corporation.
- Those who assume to act as a
corporation knowing it to be without
authority to do so shall be liable as
general partners (meaning up to their
personal properties) Those who
were not aware of the defect are
liable only up to their investment.
 - A person who contracted with an
officer who signed for the corporation
prior to the corporation’s
incorporation may also be estopped
from saying that the contracting party
is not the corporation. Both the
corporation and the other contracting
party are bound. (Paz vs. New
Environmental Universality, Inc.,
April 20, 2015)
 Corporation by prescription – a
corporation that was not formally
organized as such, but has been duly
recognized by immemorial usage as a
corporation, with rights and duties
maintainable at law. Ex. Roman Catholic
Church.
 Existence of stocks:
- Stock corporation – a corporation in
which capital stock is divided into
shares and is authorized to distribute
to holders of such shares dividends
or allotments of the surplus profits on
the basis of the shares held. (Sec. 3)
- Non-stock corporation – a -
corporation which does not have
capital stock or does not issue
stocks and does not distribute
dividends or allotment of surplus
profits to its members.
 Laws of incorporation
- Domestic – corporation formed,
organized and existing under
Philippine laws.
- Foreign – a corporation formed,
organized or existing under any laws
other than those of the Philippines
and whose laws allow Filipino
citizens and corporations to do
business in its own country or state.
(Sec. 123)
 Number of components:
- Corporation aggregate - a
corporation that is formed by and is
composed of two or more
stockholders or members.
- Corporation sole – a corporation that
is organized and formed by one
person. This applies to religious
corporations where a corporation
sole is allowed for purposes of
administering and managing as
trustee, the affairs, property and
temporalities of any religious
denomination, sect or church Sec.
107 and Sect. 108). The rules on
non-stock corporation suppletorily
apply to a corporation sole.
 One Person Corporation – a corporation
with a single stockholder, who may be a
natural person, a trust, or an estate
(Sec. 116).
- No other person/entity, outside those
mentioned in Sec. 116 may form a
OPC.
It is a stock corporation.
- Submission of BL is not required for
an OPC (Sec. 119)
 Other corporations:
- Close corporation – defined in Sec.
95
 Close corporations are primarily
governed by Title XII,
supplemented by the other
provisions thereof, except as
otherwise provided by Title XII.
- Special corporations – Title XIII
 Educational Corporations -
governed by special laws and by
the general provisions of the
RCCP (Sec. 105)
 Number of May be only 1 At least two (2) persons
organizers person are required.
 Religious corporations – may be Powers More restricted Subject only to what
classified into (Sec. 107) because of its may be agreed upon by
limited personality the partners.
Authority of those Stockholders are Mutual agency. Each
 Corporation Sole - Sec. 108\ who compose not agents of the general partner can
corporation in the represent and bind the
absence of express partnership.
 Religious society – a religious authority
Transfer of interest Corporate shares Interest in the
society or religious order, or are freely partnership cannot be
diocese, synod, or district transferable without transferred without the
the consent of other consent of the other
organization is a religious stockholders partners.
organization or a religious (unless there is a
stipulation)
denomination, sect or church Succession There is a right of No right of succession.
that is incorporated for the succession Death of deceased
general partner
administration of its dissolves the
temporalities or for the partnership.
Capacity to be a A corporation can Can be a
management of its affairs, partner/stockholder now be a partner in stockholder/incorporator
properties, and estate (Sec. (incorporator) a partnership and a
Joint venture. (Sec.
114) 35[h])

 Corporation going public vs. Corporation Advantages of a corporation:

going private:
1. The capacity to act as a legal unit
- “going-public” – when it decides to
list its shares in the stock exchange. 2. Limitation of, or exemption from,
This includes corporations that will individual liability of shareholders;
make initial public offering of its
shares. 3. Continuity of existence;

- “going private” – when it would 4. Transferability of shares;

restrict the shareholders to a certain
group. In a sense, this also includes 5. Centralized management of board of
close or closely-held corporations. directors (Exception: One person
manages the affairs of a Corporation
 Real Estate Investment Trust (REIT) – a Sole and a OPC); and
stock corporation established in
accordance with the Corporation Code 6. Standardized method of organization,
of the Philippines and the rules and and finance (Salonga, Phil. Law on
regulations promulgated by SEC Private Corporations, 3rd Ed., p. 9)
principally for the purpose of owning
income-generating real estate assets Disadvantages:
(Sec. 3 [cc], RA No. 9856)
1. More complicated in formation and
Corporation vs. Partnership management;
CORPORATION PARTNERSHIP
Manner of Creation Existence By mere agreement 2. Higher cost of formation and operation;
commences only
from the issuance
of a Certificate of 3. Lack of personal element;
Incorporation by the
SEC or in proper
cases, passage of
a special law.
 4. Greater governmental control and
regulation;
5. Management and control are separate
from ownership; and
6. Stockholders have little voice in the
conduct of business (De Leon, the
Corporation Code of the Phil.,
Annotated, 2002 Ed., pp. 48-49)
Components:
1. Incorporators – those stockholders
mentioned in the AOI as originally
forming and composing the corporation,
having signed the AOI and
acknowledged the same before a notary
public.
 They have no powers beyond
those vested in them by the
statute.
 Requirements under Section 10:
(1) Incorporators must not be
more than 15 – one
incorporator is sufficient;
(2) If the incorporator is a
natural person, he or she
must be of legal age;
(3) Each incorporator must be
a stockholder of the stock
corporation to be formed –
the incorporator in a stock
corporation must own or
subscribed to at least 1
share (Sec. 10)
 Incorporators are no longer
limited to natural persons. (Sec.
10)
 Partnership, associations or
corporations must also be duly
organized under existing laws.
 Natural persons who are licensed
to practice a profession, and
partnerships or associations
organized for the purpose of
practicing a profession, shall not
be allowed to organize a
corporation unless otherwise
provided under special laws.
(Sec. 10)
2. Corporators – those who compose a
corporation whether as stockholders or
shareholders in a stock corporation or
as members in a non-stock corporation
(Sec. 5)
 Incorporators cease to be
corporators if they transfer or sell
all their shares, but they remain
to be incorporators.
3. Stockholders and members
 SH – persons who hold or own
shares in a stock corporation
 Members – who compose the
non-stock corporation.
4. Board of Directors or Trustees
 BOD – governing body in a stock
corporation.
 BOT – the governing body in a
non-stock corporation.
 The BOD/BOT exercises the
powers of the corporation.
 The number of directors of a
stock corporation shall not be
more than 15
 The number of trustees may be
more than 15, except for
educational corporations and
religious society (Sec. 13[f], Sec.
106, and Sec. 114)
  In educational corporation and
religious society, under Sec. 106
and 114 of the RCCP, shall have
not less than five (5) nor more
than 15 trustees.
5. Corporate Officers –they are the officers
who are identified as such in the
Corporation Code, the AOI or the BL of
the corporation.
6. Promoter – a self-constituted organizer
who finds an enterprise or venture and
helps to attract investors, forms a
corporation and launches it in business,
all with a view to promoting profits
(Salong, p. 71)
 The corporation is not bound by
the contract entered into by the
promoter before incorporation
unless the contract is ratified.
(Cagayan Fishing Dev. Co, Inc.
vs. Sandiko, 65 Phil. 223)
 The promoter is personally liable
for contracts or agreements with
third persons contracted in behalf
of the future corporation if the
corporation does not ratify the
same or unless the agreement
was expressly made subject to
such approval or ratification.
 The promoter should remit to the
corporation profits that he derived
that properly pertain to the
corporation.
Foreign stockholders
 Can all the stockholders in a corporation
be foreigners? YES.
- EXCEPT: In fully or partially
nationalized corporations.
 Full or partially nationalized
corporations:
- Where no foreign stockholder is
allowed:
(1) Mass Media, except recording
(Art. XVI, Sec. 11, Constitution)
(2) Retail trade enterprises with paid-
up capital of less than US$2.5
Million (Sec. 5, RA 8762).
However, this does not cover a
restaurant within a hotel.
(3) Private security agencies (Sec. 4,
RA No. 5487)
(4) Small-scale mining (Sec. 3, RA
No. 7076)
(5) Utilization of natural resources
(Art. XII, Sec. 2, Constitution)
(6) Cockpits (Sec. 5, P.D. No. 449)
(7) Manufacture, repair, stockpiling
and/or distribution of nuclear
weapons (Art. II, Sec. 8,
Constitution).
(8) Manufacture of firecrackers and
other pyrotechnic devices (Sec.
5, RA No. 7183).
- Up to twenty percent (20%) foreign
equity: Private radio communications
network (RA No. 3846)
- Up to twenty-five percent (25%)
foreign equity
(1) Private recruitment, whether for
local or overseas, employment
(Art. 27, PD No. 442)
(2) Construction and repair of locally
funded works (Sec. 1, CA 541)
(3) Construction of defense-related
structures (Sec. 1, CA 541)
- Up to forty percent (40%) foreign
equity:
 (1) Exploration, development and
utilization of natural resources
(Art. XII, Sec. 2, Constitution)
(2) Realty companies and other
corporations that own private
lands (Art. XII, Sec. 7,
Constitution). Lease is not,
however covered.
(3) Operation and management of
public utilities (Art. XII, Sec. 11,
Constitution)
(4) Culture, production, milling,
processing, trading except retail
of rice and corn and by-products
(Sec. 5, PD NO. 194, Sec. 15,
RA No. 8762)
(5) Adjustment companies (Sec. 323,
PD No. 612)
(6) Sauna and steam bath houses,
massage clinics, and similar
activities (RA No. 7042)
Formation of a corporation:
 The life of a corporation commences
from the issuance of the Certificate of
Incorporation by the SEC upon filing of
the Articles of Incorporation and other
documents (Sec. 18)
 The Articles of Incorporation defines the
contractual relationships between the
State and the corporation, the
stockholders and the State, and
between the corporation and its
stockholders (Lanuza, et al. vs. CA, et
al., GRN 131394, March 28, 2005)
Reference:
Sundiang, Jose R. Sr., et al.; Reviewer on
Commercial La, 2019 Edition; Rex Book Store;
Manila, Philippines; 2019.
Prepared by:
ATTY. MICHELLE G. BERNARDO, OP, LL.M.
ATTY. JESSA G. BERNARDO, OP

(7) Domestic market enterprises with

paid-in capital stock of less than
US$200,000.00. However, the
threshold paid-in capital is
US$100,000.00 if enterprise
involves advanced technology or
they employ at least 50 direct
employees (Sec. 8, RA No.
7042). Thus, a corporation can
be 100% owned by foreigners if it
is engaged entirely in export.

- Up to sixty percent (60%) foreign

equity

(1) Financing companies (Sec. 6, RA

No. 5980, as amended by RA No.
8556)

(2) Investment houses (Sec. 5, PD

No. 129, as amended by RA No.
8366).
ARTICLES OF INCORPORATION
Contents prescribed in Sections 13 and 14:
1. Name of corporation which must include
the term “Inc,” “Corporation,” or “OPC”
(in the case of a One Person
Corporation);
2. Purpose/s indicating the primary and
secondary purposes;
3. Place of principal office;
4. Term of corporate existence, if the
corporation does not opt for perpetual
existence;
5. Names, nationalities, and residential
addresses of incorporators;
6. Number of directors or trustees;
7. Names, nationalities, and residences of
the first directors/trustees;
8. In a stock corporation, amount of
authorized capital stock (ACS) and
number of shares into which the ACS is
divided;
9. In a stock corporation, a statement that
all or some of the shares are with par
value indicating the par value per share
and the number of shares with such par
value, and shares without par value (if
any);
10. In a stock corporation, if all the shares
are without par value, the capital stock
and a statement that the shares are
without par value;
11. In a stock corporation, name of
subscriber/s, their nationality/ies,
number of shares subscribed, amounts
subscribed and amounts paid by
subscribers;
12. In a non-stock corporation, the amount
of capital or money contributed or
donated, the persons who contributed or
donated, their nationalities and
residence addresses;
13. Name of treasurer elected by
subscribers and the certification of the
treasurer that the information set forth in
the seventh (on the ACS and number of
shares into which the ACS is divided)
and eight (number of shares subscribed
and details of subscriptions) clauses of
Article , and that the paid-up portion of
the subscription in cash and/or property
for the benefit and credit of the
corporation has been duly received;
(NOTE: there is no more Treasurer’s
affidavit and the certification of the
treasurer is incorporation in the Articles
but the Treasurer must sign the Articles
of Incorporation.)
14. If the corporation engages in a
nationalized industry, a statement that
no transfer of stock will be allowed and
recorded in the corporate books if it will
reduce the stock ownership of Filipinos
to a percentage below the required legal
minimum; and
15. Arbitration agreement – this covers
disputes between the corporation, its
stockholders or members which arise
from the implementation of the AOI or
BL or from Intra-corporate relations;
however, criminal offenses or interest of
third parties is non-arbitrable Sec. 181)
(NOTE: Inclusion of arbitration
agreement in the AOI is optional.)
Documents that should be filed with the SEC
for the purpose of securing a certificate of
incorporation of a stock corporation.
1. Reservation of the corporate name
(Sec. 18)
 2. AOI and BL (Sec. 18) (NOTE: The BL abbreviations, different tenses,
can, however, be filed and after spacing, or number of the same
incorporation as provided in Section 45. word or phrase (Ibid.)

3. Certificate of authority or favorable  Priority of adoption rule: The first to

recommendation from proper adopt the name has better right. (De La
government agency for the incorporation Salle Montessori International of
of banks, banking and quasi-banking Malolos, Inc. vs. De La Salle Brothers,
institutions, preneed, insurance and Inc., February 7, 2018).
trust companies, non-stock savings and
loan associaitons (NSSLAs),  A corporation which seeks to prevent
pawnshops and other financial another from using its name must
intermediaries (Sec. 16) show that it (a) acquire prior right to
use the name and (b) the name falls
4. Cover sheet. under any of the three
mentioned.(Industrial Retractories
Corp. of the Phils. v. Refractories
NOTE: A bank certificate4 is not longer
Corp. of the Phils., G.R. No. 122174,
required under present rules. The
October 2, 2002)
contents of the undertaking to charge
the corporate name and the Treasurer’s
Power of SEC:
Affidavit that were previously required
are now incorporated in the AOI.
 If a name cannot be used by a
corporation, the SEC can:
Distinguishable test:
a. Reject the AOI
1. No corporate name shall be allowed by
the SEC if:
b. Summarily order the corporation to
cease and desist from using such
(i) It is not DISTINGUISHABLE from
name;
that already reserved or
registered for the use of another
corporation; c. Summarily order the corporation to
register a new name and amend its
(ii) It is already protected by law; or AOI bearing the new name;

(iii) Its use is contrary to existing law, d. Cause the removal of all visible
rules and regulations (Sec. 17) signages, marks, advertisements,
labels, prints and other effects
bearing such corporate name (Sec.
2. The corporate name is not
17)
distinguishable even if it contains one or
more of the following:
 Failure on the part of the corporation
(i) The word “corporation,” “company,” to comply with the order of the SEC
“incorporated,” “limited.” “limited (b, c and d) may result in:
liability,” or any abbreviation of such
words; and a. Holding the corporation or its
responsible directors and officers
(ii) Punctuations, articles, conjunctions, in contempt; and/or
contradictions, prepositions,
 b. Holding them (corporation and
directors/officers)
administratively, civilly and/or
criminally liable; and/or (c)
revocation of the registration.
(Sec. 17)
Importance/significance of the principal place
of business stated in the AOI? It may
determine the venue of court cases involving
the corporations.
 It may determine if service of summons
and notices was properly made (Sy v.
Tyson Enterprises, Inc., 119 SCRA 367
[1982])
 Note:
 The Third clause of the AOI on the
principal office of the corporation
must indicate the City or Municipality
and Province (Sec. 14)
 Indicating “Metro Manila” as principal
office is no longer allowed and the
specific address must be specified.
(SEC Mem. Circ. No. 3, Series of
2006)
 There is no need to amend the AOI if
the corporation will transfer its
principal office within the same
municipality or city; what is required
is submission of an amended
General Information Sheet (GIS)
within 15 days from the transfer;
 There is a need to amend the AOI if
the principal office will be transferred
to a different city or municipality
(SEC Mem. Circ. No. 6, Series of
2016)
Maximum term of a corporation: A corporation
shall have perpetual existence unless its OI
provides otherwise (Secs. 11, 13[d] and 14)
 Corporations with certificates of
incorporation issued prior to the
effectivity of the RCCP, and which
continue to exist, shall have perpetual
existence, unless the corporation, upon
a vote of its stockholders representing a
majority of its outstanding capital stock,
notifies the SEC that it elects to retain its
specific corporate term pursuant to its
AOI (Sec. 11)
 If a corporate term is stipulated or if
existing corporations opt to retain their
existing terms, the specific period may
be extended or shortened by amending
the AOI. (Ibid.)
 NO EXTENSION may be made earlier
than 3 years prior to the original or
subsequent expiry dates(s) unless there
are justifiable reasons for an earlier
extension as may be determined by the
SEC. (Ibid.)
 Extension shall take effect only on
the day following the original or
subsequent expiry date(s). However,
the 3-year requirement does not
apply to shortening of corporate
term.
No extension can be made after the expiration
of the term.
 Remedy: Revival. (Sec. 11)
 Upon approval by the SEC, the
corporation shall be deemed revived
and a certificate of revival of
corporate existence shall be issued,
giving it perpetual existence, unless
its application for revival provides
otherwise.
 No application for revival of
Certificate of Incorporation of banks,
banking and quasi-banking
institutions, preneed, insurance and
trust companies, non-stock savings
 and loan associations, pawnshops,
corporations engages in money
service business, and other financial
intermediaries shall be approved by
the Sec unless accompanied by a
favorable recommendation of the
appropriate government agency.
Authorized Capital Stock – the amount fixed in
the AOI to be subscribed and paid by the
stockholders of the corporation.(SEC Opinion,
August 11, 1997)
Subscribed Capital – that portion of the
authorized capital stock that is covered by
subscription agreements whether fully paid or
not.
Paid-up capital – the portion of the authorized
capital stock that has been subscribed and
actually paid (MSCI-NACUSIP Local Chapter
vs. National Wage and Productivity
Commission, 260 SCRA 173 [1997])
Outstanding Capital Stock – the total shares of
stock issued to subscribers or stockholders,
under binding subscription contracts, whether
fully or partially paid except treasury shares so
long as there is a binding subscription
agreement (Sec. 173)
Capital – properties and assets of the
corporation that are used for its business or
operation.
No minimum authorized capital stock is
required under the RCCP (Sec. 12)
 No minimum subscribed capital
 No minimum paid-up capital.
 25% subscribed and 25% paid-up
requirement applies only to increase in
capital stock (Sec. 37)
 Special laws provide for minimum
capital requirements for certain
corporations, like banks and insurance
corporations.
 Under the 11th Foreign Investment
Negative List, corporations can be
organized for the practice of a number
of profession (EO NO. 65 dated October
29, 2018).
AMENDMENT OF AOI
Procedure (Sec. 15) – Amendment requires
the majority vote of directors or trustees, and
the vote or written assent of the stockholders
representing at least 2/3 of outstanding capital
stock or 2/3 of members of non-stock
corporations. This includes extension and
shortening of corporate term.
 Upon approval by the SEC, or from date
of filing with the SEC if the amendments
are impliedly approved by the SEC –
that is, if not acted upon by the Sec
within six (6) months from date of filing,
provided that the cause for the delay
cannot be attributed to the corporation.
(Sec. 15)
 The passage of statutes amending or
repealing the RCCP (or any part
thereof) or special laws may result in the
amendment of the AOI or even the
dissolution of the corporation, provided
that no vested right or remedy or liability
is removed or impaired. (Sec. 184)
 Amendment of Name: Changing the
corporate name does not result in the
extinguishment of the corporation. The
personality continues (Zuellig Freight
and Cargo Systems vs. NLRC, GRN
157900, July 22, 2013)
 Accomplished Fact Rule: there are
entries in the AOI that cannot be
amended because they are
accomplished facts.
CANCELLATION/SUSPENSION OF SEC OF
CERTIFICATE OF REGISTRATION (Sec.
6[L], PD No. 902-A:
1. Fraud in procuring registration;
2. Serious misrepresentation as to
objectives of corporation;
3. Refusal to comply with lawful order of
SEC including the order to:
(i) Cease and desist from using
the corporate name (Sec. 17)
(ii) Cause the removal of all
visible signages, marks,
advertisements, labels, prints
and other effects bearing such
corporate name (Sec. 17);
4. Failure to commence its business within
five (5) years from the date of
incorporation (Sec. 21)
5. Failure to resume operation and comply
with requirements within two (2) years
from the time the corporation is placed
under delinquent status for continued
non-operation (Sec. 21)
6. Failure to file by-laws within required
period;
7. Failure to file reports;
8. Refusal or obstruction without justifiable
cause the exercise of the SEC’s
visitorial powers (Sec. 178); and
9. Other similar grounds.
NON-USE OF CORPORATE CHARTER:
Organization, commencement of business and
continued operation are conditions subsequent
imposed on corporations.
IT MUST ORGANIZE AND COMMENCE
BUSINESS (Sec. 21)
When the corporation (i) does not formally
organize, and (ii) commence its business within
5 years from the date of its incorporation, its
Certificate of Incorporation shall be deemed
revoked as of the day following the end of the
five-year period (Sec. 21).
Requirement to organize:
1. Adoption, filing by the corporation and
approval by the SEC of the corporate BL
after incorporation;
2. Election of the BOD/BOT and of officers;
3. Establishment of the principal office; and
4. Providing for the subscription and
payment of the capital stock;
5. Taking such steps as are necessary to
endow the legal entity with capacity to
transact the legitimate business for
which it was created (Rules on
Suspension/Revocation of the
Certificate of Registration of
Corporation, SMD Series of 1992)
When shall the corporation be considered to
have commenced the transaction of its
business? When it has performed preparatory
acts geared towards the fulfillment of the
purposes for which it was established, such as
but not limited to the following:
1. Entering into contracts or negotiation for
lease or sale of properties to be used as
business or factory site;
2. Making plans for and the construction of
the factory;
3. Taking steps to expedite the
construction of the company’s working
equipment. (Ibid.)
DELINQUENT STATUS FOR NON-
OPERATION
If a corporation commenced its business but
subsequently becomes inoperative for a period
of at least 5 consecutive years, the SEC may,
upon notice and hearing, place the corporation
under delinquent status. (Sec. 21)
A delinquent corporation shall have a period of
2 years to resume operations and comply with
all requirements that the SEC shall prescribe.
 Upon compliance, the SEC shall issue
an order lifting the delinquent status.
 Failure to comply with the requirements
and resume operations within the period
given by the SEC shall cause the
revocation of the corporation’s certificate
of incorporation. (Sec. 21)
 A corporation may also be placed under
delinquent status if it fails to comply with
the reportorial requirements 2 times,
consecutively or intermittently within a
period of 5 years (Sec. 177)
BY-LAWS – relatively permanent and
continuing rules of action adopted by the
corporation for its own government and that of
the individual composing it and those having
the direction, management and control of its
affairs, in whole or in part, in the management
and control of its affairs and activities (China
Banking Corporation vs. CA, 270 SCRA 503
[1997])
REQUISITES OF VALID BL
a. It must be consistent with the
Corporation Code, other pertinent laws
and regulations (Sec. 22 and 24;
Fleishcher vs. Botica Nolasco, 47 Phil
583)
b. It must be consistent with the AOI. In
case of conflict, the AOI prevails (Loyola
Grand Villas Homeowners [South]
Asso., Inc. vs. CA, 276 SCRA 681
[1997])
c. It must be reasonable and not arbitrary
or oppressive.
d. It must not disturb vested rights, impair
contract or property rights of
stockholders or members or create
obligations unknown to law (Thomson
vs. CA, 298 SCRA 280 [1998])
e. In the case of any bank, banking
institution building and loan association,
trust company, insurance company,
public utility, educational institution, or
other special corporations governed by
special laws, the BL or any amendment
thereto shall not be accepted by the
SEC unless accompanied by a
certificate of the appropriate government
agency to the effect that such BL or
amendments are in accordance with law
(Sec. 45)
ADOPTION AND AMENDMENT
Original BL:
 It may accompany the AOI and SEC will
approve it together with the Articles. In
this case, the BL must be approved and
signed by all incorporators (Sec. 45)
 For the adoption of by-laws after
incorporation, the BL must be:
1. Approved by stockholders
constituting at least a majority of the
members in case of nonstick
corporations and
2. A copy (signed by the approving
stockholders or members, certified
by majority of directors or trustees,
and countersigned by the corporate
secretary) must be filed with and
approved by the SEC and attached
to the original AOI. (Sec. 45)

 Amendment may be made by the (1)
stockholders/members together with the
BOD/BOT, or (2) by the BOD/BOT only.
 Amendment or new BL shall only be
effective upon issuance of a certification
by the SEC that the same is in
accordance with the RCCP and other
relevant laws (Sec. 47)
REFERENCE:
Sundiang, Jose R. Sr., et al.; Reviewer on
Commercial La, 2019 Edition; Rex Book Store;
Manila, Philippines; 2019.
Prepared by:
ATTY. MICHELLE G. BERNARDO, OP, LL.M.
ATTY. JESSA G. BERNARDO, OP

- Stockholders/members (at a
regular or special meeting)
together with Board: majority of
the board, plus majority of the
outstanding capital stock or
members may amend or repeal
the BL or adopt new BL.

- By the Board as delegated by 2/3

of outstanding capital stock or 2/3
of members.

 Delegated authority can be revoked

by a majority of the outstanding
capital stock or majority of the
members (Sec. 47)

BINDING EFFECT OF PROVISIONS OF BL

 As to the Corporation and its

components – binding not only upon the
corporation, but also on its stockholders,
members, and those having direction,
management and control of its affairs.

 As to third persons –not binding unless

there is actual knowledge. Third persons
are not even bound to investigate the
contents because they are not bound to
know the BL which are merely
provisions for the government of a
corporation and notice to them will not
be presumed. (China Banking Corp. vs.
CA 270 SCRA 503 [1997]).
POWERS OF A CORPORATION
Kinds
 Express Powers – those expressly
authorized by the RCCP and other laws,
and its Articles of Incorporation or
Charter.
 Implied Powers – those that can be
inferred from or necessary from the
exercise of the express powers.
 Incidental Powers – those that are
incidental to the existence of the
corporation.
- Test to determine if the power is an
implied power: Whether the act in
question is in direct and immediate
furtherance of the corporation’s
business, fairly incident to the
express powers and reasonably
necessary to their exercise
(Montelibano vs. Bacolod-Murcia
Milling, 115 Phil. 18 [1962])
Express Powers under the RCCP
 General Powers (Sec. 35)
1. Sue and be sued in its corporate
name;
2. Right of succession;
3. Adopt and use a corporate seal;
4. Amend AOI;
 Specific Powers (Sec. 36 to Sec. 43)
5. Adopt, amend, or repeal BL;
6. For stock corporations – issue and
sell stocks to subscribers and to sell
treasury stocks; for non-stock
corporations – admit members;
7. Purchase, receive, take or grant,
hold, convey, sell, lease, pledge,
mortgage, and otherwise deal with
real and personal property –
including bonds and securities of
other corporations –as the
transaction of its lawful business
may reasonably and necessarily
require;
8. Enter into partnership, joint venture,
merger, consolidation, or any
commercial agreement with natural
or juridical persons;
9. Make reasonable donations for
public welfare, or for hospital,
charitable, cultural, scientific, civic, or
similar purposes
 Prohibition – Foreign
corporations shall not give
donations in aid of any political
party or candidate or for
purposes of partisan political
activity.
10. Establish pension, retirement, and
other plans for the benefit of
directors, trustees, officers, and
employees; and
11. Exercise other powers essential or
necessary to carry out its purpose/s.
1. Extend or Shorten Corporate Term
(Sec. 36)
 2. Increase or decrease capital stock powers other than those conferred
(Sec. 37) by this Code or by its articles of
incorporation and except as
3. Incur, Create or Increase Bonded necessary or incidental to the
Indebtedness (Sec. 37) exercise of the powers conferred.

4. Deny pre-emptive right (Sec. 38) - Ultra vires act vs. illegal acts: Ultra
vires act – voidable; may be
5. Sell, dispose, lease, encumber enforced by performance,
property and assets (including all or ratification, or estoppel. Illegal acts –
substantially all of corporate void and cannot be validated.
assets)(Sec. 39) (University of Mindanao vs. BSP,
January 11, 2016)
6. Purchase or acquire own shares
(Sec. 40) - Effects:

7. Invest in another corporation, 1. Executed contract – courts will

business or for any other purpose not set aside or interfered with
(Sec. 41) such contracts.

8. Declare dividends (Sec. 42) 2. Executory contracts – no

9. Enter into management contract
(even if it is called a service contract,
operating agreement or otherwise) –
the manager undertakes to manage
or operate all or substantially all of
the business of the corporation.
(Sec. 43)
 Ultra Vires Acts (Sec. 44)
- An ultra vires act is one committed
outside the object for which a
corporation is created as defined by
the law of its organization and
therefore beyond the power
conferred upon it by law Atrium
Management Corporation vs. CA,
GRN 109491, February 28, 2001)
- Section 44: No corporation shall
Exercise of Powers
possess or exercise corporate
enforcement even at the suit of
either party (void and
unenforceable)
3. Part executed and part executory
– principle against unjust
enrichment shall apply.
- If certain procedures or formalities
are prescribed in the AOI or BL and
the same are not complied with, the
resulting act is not ultra vires act of
the corporation.
- Acts not within the powers of the
particular officer is not an ultra vires
act of the corporation but is
sometimes referred to as an ultra
vires act of the officer. The law on
agency applies.
 The BOD/BOT exercises the power of
the corporation. (Sec. 22)
- The stockholders/members cannot
overrule the directors in the latter’s
exercise of the corporate powers.
- The powers are not exercised by the
Board directly if:
1. There is a management contract
(Sec. 43); and
2. The powers of the Board are
delegated by majority vote (of the
Board) to an executive
committee. (Sec. 34)
- Under Section 34, the executive
committee may not act on the
following:
1. Approval of action requiring
concurrence of stockholders;
2. Filling of vacancies in the board;
3. Adoption, amendment or repeal
of BL
4. Amendment or repeal of board
resolutions which by its express
terms cannot be amended or
repealed; and
5. Distribution of cash dividends to
stockholders.
 The executive committee is
composed of at least 3 directors
and may be created by the Board
if the BL so provide (Sec. 34).
 The Board may not by itself
create the executive committee if
there is no provision in the BL.
 The Board, as the governing
body, may create special
committees of temporary or
permanent nature and determine
the members’ term, composition,
compensation, powers and
responsibilities (Sec. 34)
- Corporate officers like the President
can also bind the corporation. The
authority of such individuals to bind
the corporation is generally derived
from:
i. Law;
ii. Corporate by-laws; or
iii. Authorization from the
Board, either expressly or
impliedly by habit, custom
or acquiescence in the
general course of business
(Inter-Asia Investment
Industries, Inc. vs. CA,
GRN 125778, June 10,
2003)
- A corporate officer or agent may
represent and bind the corporation in
transactions with third persons to the
extent that the authority to do so has
been conferred upon him, and these
include:
i. Powers that, in the usual
course of the particular
business, are incidental to
those expressly provided;

ii. Powers that may be implied
from the powers intentionally
conferred;
iii. Powers added by custom and
usage, as usually pertaining
to the particular officer or
agent; and
iv. Such apparent powers as the
corporation has caused the
person dealing with the officer
or agent to believe that it has
conferred (Inter-Asia
Investment Industries, Inc. vs.
CA, ibid.)
- An officer may also bind the
corporation if he has apparent
authority. Apparent authority is
derived not merely from practice. Its
existence may be ascertained
through:
1. The general manner in which the
corporation holds out an officer or
agent as having the power to act;
or
2. The acquiescence in his acts of a
particular nature, with actual or
constructive knowledge thereof,
within or beyond the scope of his
ordinary powers.
 It requires presentation of
evidence of similar act(s)
executed either in its favor or in
favor of other parties. It is not the
quantity of similar acts which
establishes apparent authority,
but the vesting of a corporate
officer with power to bind the
corporation (Georg vs. Holy
Trinity College, Inc., July 20,
2016)
 In what instances is concurrence (or
ratification) of the
stockholders/members necessary for
the exercise of the powers of the
corporation?
- Approval by majority of the Board
and concurrence (or ratification) of
the stockholders representing at
least 2/3 of the outstanding capital
(or 2/3 of the members whenever
applicable) is necessary in the
exercise of the following powers:
1. To extend or shorten corporate term
(Sec. 36)
2. To increase/decrease corporate
stock (Sec. 37)
3. To incur, create or increase bonded
indebtedness (Sec. 37)
4. To deny pre-emptive right after
incorporation – since the denial is
required to be in the AOI or any
amendment thereto, and approval of
amendments to the AOI requires the
vote or written assent of
stockholders representing 2/3 of the
outstanding capital stock or 2/3 of
the members (Secs. 15 and 38);
5. To sell, dispose, lease encumber all
or substantially all of corporate
assets (Sec. 39)
6. To invest in another corporation,
business other than the primary
purpose like the secondary purpose
(Sec. 41, RCCP)
7. To declare stock dividends (Sec. 42);
and
8. To enter into management contract
(Sec. 43), if:
i. A stockholder or stockholders
representing the same
interest of both the managing
and the managed
corporations own or control
more than 1/3 of the total
outstanding capital entitled to
vote of the managing
corporation; or
ii. A majority of the members of
the board or directors of the
managing corporation also
constitute a majority of the
members of the board of the
managed corporation;
 The 2/3 vote of the total
outstanding stock or of the
members applies to the managed
corporation. (Sec. 43)
9. To amend the AOI (Sec. 15)
10. Voluntary dissolution where creditors
are affected (Sec. 135)
- Approval at a meeting duly called for
the purpose by the stockholders
representing majority of the
outstanding capital, or majority of the
members, is necessary, together
with Board approval, in the following
instances:
1. To enter into a management contract
under circumstances not covered by
either of the two instances stated above
(#8 (i) and (ii))
 The majority vote of the
outstanding capital or of the
members is required for both the
managed and managing
corporation (Sec. 43)
2. To adopt, amend or repeal the BL (Sec.
46 and 48)
3. Voluntary dissolution where no creditor
is affected (Sec. 134)
- Without Board resolution, the
stockholders/members may by:
1. 2/3 of outstanding capital or of
the members – Delegate to the
Board the power to amend the BL
(Sec. 48)
2. Majority of outstanding capital or
of the members – Revoke the
power of the Board to amend the
BL, which was previously
delegated (Sec. 47)
REFERENCE:
Sundiang, Jose R. Sr., et al.; Reviewer on
Commercial La, 2019 Edition; Rex Book Store;
Manila, Philippines; 2019.
Prepared by:
ATTY. MICHELLE G. BERNARDO, OP, LL.M.
ATTY. JESSA G. BERNARDO, OP
Acquisition by the Corporation of its Own
Shares (Sec. 40)
A stock corporation may purchase or acquire
its own shares if the following are complied
with:
1. It has unrestricted retained earnings in
its books to cover the shares to be
purchased/acquired; and
2. There exist/s legitimate corporate
purpose/s for the purchase/acquisition,
including but not limited to the following:
a. To eliminate fractional shares arising
out of stock dividends;
b. To collect or compromise an
indebtedness to the corporation,
arising out of unpaid subscription, in
a delinquency sale, and to purchase
delinquent shares sold during the
sale; and
c. To pay dissenting or withdrawing
stockholders entitled to payment for
their shares under the RCCP.
Dividends
Section 42: Who may declare dividends?
1. The BOD alone – for cash, property
dividends
2. The BOD, with the approval of
stockholders representing not less than
2/3 of Outstanding Capital in a meeting
called for the purpose – for stock
dividends.
Conditions which must be present to declare
dividends:
1. Unrestricted retained earnings.
2. Resolution of the Board, or for stock
dividends, Board approval with the
concurrence of 2/3 of outstanding
capital.
The Board cannot be compelled to declare
dividends every year. Declaration of dividends
is discretionary upon the Board.
 Exception: Stock corporations are
prohibited from retaining surplus profits
in excess of 100% of their paid-in capital
stock.
 Exception to the exception: The board
may still refuse to declare dividends if:
1. Justified by definite corporate
expansion projects/programs
approved by the Board; or
2. The corporation is prohibited under
any loan agreement with any
financial institution or creditor,
whether local or foreign, from
declaring dividends without its/his
consent, and such consent has not
yet been secured; or
3. It can be clearly shown that such
retention is necessary under special
circumstances obtaining in the
corporation.
Dividends can be declared only in favor of
stockholders.
Dividends cannot be declared out of the
capital.
 Exception: Wasting Assets Corporation
– corporations solely or principally
engaged in the exploitation of “wasting
assets” to distribute the net proceeds
derived from exploitation of their
holdings such as mines, oil wells,
patents and leaseholds, without
allowance or deduction for depletion.
  The trust fund doctrine will be violated if
dividends are declared out of capital
EXCEPT only in TWO instances:
1. Liquidating dividends; and
2. Dividends from investments in
wasting asset corp.
What can be included in unrestricted retained
earning? It shall only include accumulated
profits and gains realized out of the normal and
continuous operations of the company after
deducting therefrom distributions of
stockholders and transfers to capital stock or
other accounts, and which is:
1. Not appropriated by its BOD for
corporate expansion projects or
programs;
2. Not covered by a restriction for dividend
declaration under a loan agreement;
and
3. Not required to be retained under
special circumstances obtaining in the
corporation such as when there is a
need for a special reserve for probable
contingencies. (SEC Memo. Cir. (MC)
No. 11, Series of 2008)
 The surplus profits or income must be
bona fide income founded upon actual
earnings or profits.
 “Actual earnings or profits” – shall be the
net income for the year based on the
audited financial statements. (SEC MC
No. 11, Series of 2008)
 The following unrealized items and other
items are not available for dividend
declaration (SEC MC No. 11, Series of
2008):
1. Share/equity in net income of the
associate or joint venture accounted for
equity method as the same is not yet
actually earned or realized. (SEC MC
No. 11, Series of 2008)
2. Unrealized foreign exchange gains,
except those attributable to cash and
cash equivalents, for the time being that
they are not yet actual income prior to
realization of such foreign exchange
gain.
3. Unrealized actuarial gains which is the
result when the company chooses the
option of recognizing actuarial gains or
losses directly to profit or loss
statement.
4. Fair value adjustment or the gains
arising only from market-to-market
valuation which are not yet realized.
5. The amount of recognized deferred tax
asset that reduced the amount of
income tax expenses and increased the
net income and retained earnings, until
realized.
6. Paid-in surplus cannot be declared as
dividend.
 It is the difference between the par
value and the issued value or selling
price of the shares and are not
therefore considered profits earned
in the conduct of the business of the
corporation. They are considered
part of capital.
7. Revaluation surplus or the increase in
the value of assets cannot be
considered earnings of the corporation.
 They are by nature subject to
fluctuations. (SEC Opinions dated
Oct. 2, 1981 and Mar. 19, 1992)
8. Reduction surplus cannot likewise be
included in the amount to be declared
as dividends because they are not
income from operation.
  They arise from the reduction of the
par value of the issued shares of
stocks (SEC Opinion dated Aug. 8,
1991)
 Gains on sale of the corporation’s real
properties can be considered part of the
retained earnings.
- Retained earnings include not only
earning realized from the ordinary
course of business of the corporation
but also those arising from
transaction not associated with but
incidental to or necessary in keeping
the business for which the
corporation was organized.
However, there must be surplus
profits. (SEC Opinion dated May 9,
1990)
 Treasury shares can be distributed by
way of dividends, but only as property
dividends.
- Treasury shares cannot be declared
as stock dividends or cash dividend
because they are not considered
part of earned or surplus profits.
- Treasury shares may be declared as
property dividend to be issued out of
the retained earnings previously
used to support their acquisition
provided that the amount of the said
retained earnings has not been
subsequently impaired by losses
(SEC Opinion dated July 17, 1984)
Stockholders are entitled to dividends pro rata
based on the total number of outstanding
shares held by them and not on the amount
paid for the shares (Sec. 42; SEC Opinion
dated July 16, 1996)
Stockholders at the time of declaration are
entitled to dividends. Dividends are declared
before the transfer of shares belong to the
transferor and those declared after the transfer
belong to the transferee (SEC Opinion dated
July 15, 1994)
The stockholder’s right to be paid dividends
accrues as soon as the declaration is made in
accordance with Sec. 42. From that time, the
stockholder can already demand payment
thereof. (SEC Opinion dated Oct. 10, 1992)
Stock dividends can be declared at a premium
(at value higher than par value) (SEC Opinion
dated October 23, 1992)
Even unpaid subscribers are entitled to
dividends.
Delinquent shareholders are still entitled to
dividends. However,
a. Cash dividends due on delinquent stock
shall first be applied to the unpaid
balance on the subscription plus costs
and expenses; and
b. Stock dividends shall be withheld from
the delinquent stockholders until their
unpaid subscription is fully paid. (Sec.
42)
Sale of all or substantially all properties
(Sec. 39)
Requisites for sale, lease, exchange,
mortgage, pledge or other disposition of all or
substantially all of a corporation’s assets
including goodwill.
1. Approval by a majority vote of the BOD;
2. Approval of stockholders representing
2/3 of outstanding capital or 2/3 of
members;
3. The stockholders’/members’ approval
should be in a meeting duly called for
such purpose;
4. There must be a written notice of the
proposed action and of the time and
 place of the meeting in accordance with
Sec. 39.
5. It must comply with the formalities of the
Bulk Sales Law;
6. It must comply with the requirements of
Philippine Competition Act, and other
related laws;
7. It must not have been disapproved or
abandoned by the BOD after approval
by the SH.
 Sec. 39 states that after the
authorization or approval by the SH
or members, the BOD or BOT may,
nevertheless, in its discretion,
abandon such sale, lease,
exchange, mortgage, pledge, or
other disposition of property and
assets, subject to the rights of third
parties under any contract relating
thereto, without further action or
approval by the SH or members
A sale or other disposition shall be deemed to
cover substantially all corporate property and
assets if thereby the corporation would be
rendered incapable of continuing the business
or accomplishing the purpose for which it was
incorporated.
 The value must be computed on the
basis of the net asset value as shown in
the corporation’s latest financial
statements (Sec. 39)
 No SH’s/members’ approval is
necessary if:
a. Disposition of the corporate property
and assets is necessary in the usual
and regular course of business of the
corporation;
b. If the proceeds of the sale or other
disposition of such property and
assets shall be appropriated for the
conduct of its remaining business.
(Sec. 39; Y-I Leisure Phils. Inc. vs.
Yu, GRN 207161, Sept. 8, 2015)
Under the NELL Doctrine (Nell vs. Pacific
Farms, Inc., 15 SCRA 415 [1965]), the
GENERAL RULE is that the transferee/buyer
of all or substantially all of the assets (or even
shares will not be liable for the debts of the
transferor:
 Exceptions:
1. If there is an express assumption of
liabilities;
2. If there is a consolidation or merger;
3. If the purchase was in fraud of creditors;
and
4. If the purchaser becomes a continuation
of the seller – Business Enterprise
Transfer. This is covered by Sec. 39.
 The transferor transfers both its
assets and business and the
transferor is left with its juridical
existence devoid of its industry or
earning capacity. (Y-I, Leisure Phils.
Inc., supra)
Increase or decrease capital stock incur,
create, increase bonded indebtedness (Sec.
37)
Increase of capital stock may be done to raise
more funds for the corporation or for expansion
purposes.
Ways of increasing the capital stock:
1. By increasing the number of shares and
retaining the par value;
2. By increasing the par value of existing
shares without changing the number of
shares; or
 3. By increasing the number of shares and
increasing the par value.
Ways of decreasing the capital stock:
1. By decreasing the number of shares
and retaining the par value;
The approval/ratification by SHs representing
2/3 of the outstanding capital stock or by 2/3 of
the members is necessary only if the
investment of corporate funds is in another
corporation, business or for any purpose other
than the primary purpose for which the
corporation was organized (Sec. 41)

2. By decreasing the par value of existing
shares without changing the number of
shares; or
3. By decreasing the number of shares
and decreasing the par value.
Where the investment by the corporation is
reasonably necessary to accomplish its
primary purpose as stated in the AOI, the
approval of the SHs or members shall not be
necessary. (Sec. 41)

Aside from the required majority vote of the REFERENCE:

BOD and the 2/3 vote of the outstanding
capital stock, a corporation cannot increase or
decrease its capital stock or incur, create, or
increase its bonded indebtedness without prior
approval of the SEC. The application for
approval with the SEC should be filed within 6
months from the date of approval by the BOD
and the SH.
Sundiang, Jose R. Sr., et al.; Reviewer on
Commercial La, 2019 Edition; Rex Book Store;
Manila, Philippines; 2019.
Prepared by:
ATTY. MICHELLE G. BERNARDO, OP, LL.M.
ATTY. JESSA G. BERNARDO, OP

 The period may be extended for a

justifiable reason. The approval of the
Philippine Competition Commission may
likewise be necessary in some cases
(Sec. 37)

In case of increase of capital stock, 25% of the

increase in capital stock must be subscribed
and at least 25% of the subscription must be
paid either in actual cash or property. (Sec. 37)

Bond – an indebtedness that is covered by

security. It is a security under the Securities
Regulation Code that must be registered with
the SEC (Sec. 37).

A non-stock corp. may incur, create or increase

bonded indebtedness when approved by
majority of its board and 2/3 of its members in
a meeting called for the purpose. (Ibid.)

Investment in another business or corporation

(Sec. 41)