Reverse piercing – doctrine whereby the courts disregard the corporation as an entity separate from one

of its shareholders but reverse piercing is when a creditor of that shareholder attempts to hold the
corporation liable for the debts of that shareholder. This allows the court to use the owner’s personal
assets to satisfy the corporation’s liability and debt to the shareholders creditors.

8. Corporation “As a Person” before the Law

a. Constitutional Rights ( due process, equal protection against unreasonable searches and
seizures) BUT A CORPORATION CANNOT INVOKE THE RIGHT AGAINST SELF-INCRIMINATION.

- due process – is universal in its application to all persons and covers private corporations within
the scope of the guaranty insofar as their property is concerned.

- unreasonable searches and seizure – protected by the constitutional guarantee against

unreasonable searches and seizures but the officers have no right to assail the legality of the seizures
regardless of the amount of shares of stock or of interest they have in the corporation

- not entitled to the privilege against self-incrimination – right against self-incrimination cannot
be applied to juridical persons; an individual may refuse to answer incriminating questions, a corporation
cannot do the same.

b. liability for torts – a corporation can be held liable for torts committed by its officers for
corporate purpose; tort consists in the violation of a right given or the omission of a duty imposed by
law; TORT IS A BREACH OF A LEGAL DUTY; civil liability or quasi-delict

c. liability for crimes – since a corporation is a creation of legal fiction, It cannot be held liable for
a crime committed by its officers, since it does not have the essential element of malice; a corporation
cannot be arrested nor imprisoned, hence, it cannot be penalized for a crime punishable by
imprisonment.

d. non-entitlement to moral damages – since a corporation is creation of fiction, it does not have
feeling, emotions or senses which cannot experience physical suffering or mental anguish therefore it is
not entitled to moral damages. Except when the corporation seeks damages on besmirched reputation.

e. practice of profession – corporations cannot engage in the practice of profession since they
lack the moral and technical competence required by the professional regulating authorities. “ it does
not mean that a company who sells eyeglasses hires optometrists, is in fact, already engaged in the
practice of profession, its different with a company composed of optometrists and had their signboard as
the good eye opthalmogy center- that is the practice of profession.

9. Classifications of Corporation

a. Stock Corporation – one which created or organized for profit. Which has capital stock divided into
shares and is authorized to distribute to the holders of such shares dividends or allotments of the
surplus profits. Board of Directors. Engage in business, earn profits,
b. Non-Stock Corporation – one which created but not organized for profit. Usually organized for charity
purpose where its income is not distributed as dividends to members, trustees or officers. Board of
Trustees.

c. Corporation de Jure – a corporation organized in accordance with the law.

d. De Facto Corporation – a corporation where there exists a flaw in its incorporation but is organized
and functions in ‘good faith’, absent the, directly or indirectly, omission of its by-laws, it cannot be
inquired by any private party but only the State can with the quo warranto proceedings.

* Requisites of de facto corporation

- organized under the corporation code

- bona fide compliance with formalities of law

- user of corporate powers

- Issued SEC certificate of incorporation

e. Corporation by Estoppel – all persons who assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or
arising as a result thereof. ‘estoppel’ – a legal principle denying a person from contradicting a right
previously asserted.

Stock and transfer book – is the book which records the names and addresses of all stockholders
arranged alphabetically, stock payments, sale or transfer of stock made, dates thereof and other
important details for each of the stockholders.

f. public corporation – one formed or organized for the government of a portion of the State. Its purpose
is for the general good and welfare like the GOCCs, GFIs, Public Health Insurance, Gaming Authority
among others. A Gocc may not be influenced by the State even it created the same, a gocc has its own
charter, personality distinct and separate from that of the government. (PUP v. CA)

g. private corporation – one formed under the generic law or the corporation code. It is for private
purpose, aim and end.

II. Articles of Incorporation – not more than 15 may organize or form a corporation for any lawful
purpose.

1. Nature of Articles of Incorporation – is like a contract between the corporation and the
government stating its purpose for creating such corporation, its objectives, the contract
between the corporation and the stockholders, corporation to the public, their due benefit.
Sec. 13 (2) of the code states that the AOI indicate purpose or purposes for which it is being
incorporated. That for a non-stock corporation, it will not include a purpose which would change
or contradict its nature.
2. Corporate name – name of the corporation shall not be identical or deceptively or confusingly
similar to any existing corporation or to any other name already protected by law or is patently
 deceptive, confusing or contrary to law. (sec 17 new code) contempt for the officers who
disregard SEC order against the use of violative corporate name
3. Purpose clause – ‘articles’ must state expressly its primary purpose for creating such
organization, distinguished from its secondary and other purposes.
4. Principal place of business – where the principal office is located as duly-registered
5. Corporate term – the term for which the corporation is to exist IF IT HAS NOT ELECTED
PERPETUAL EXISTENCE. A corporate term and its juridical personality shall only commence from
the date SEC issue a certificate of incorporation. Provided;
- Submission of annual financial statements audited by an independent, (600k less financial
statement shall be under oath),
- General Information Sheet
- Director or trustee compensation report
- Director or trustee appraisal of performance report

The commission may place the corporation delinquent if failed to submit 3 times in 5 years.

6. Incorporators – at least 5 but not more than 15, natural persons may be incorporators of a
corporation, incorporators must own at least 1 share of stock in a stock corporation. Name,
nationalities and residence of the incorporators must be provided for in the ‘articles’.
- A nominee vested with rights of a shareholder is entitled to vote and be voted. But the
corporation only deal with the registered shareholder.
7. Capital stock required – at least 25% of the total authorized stock capital must be subscribed,
25% must be paid-up. No minimum capital is required except if provided by law, so long as the
paid-up capital should not be less than 5,000
8. Incorporating Board of Directors – the names, nationalities and residences of the persons who
shall act as directors or trustees until the regular board members are duly elected which cannot
be less than 5 not more than 15. A corporation can be an incorporator of another corporation.
- Concept of ‘capital’ – refers to the value of the property or assets of a corporation. The
capital subscribed is the total amount of the capital that persons have agreed to take and
pay for. it can be more than. IN FINE, it is the amount that the corporation receives, inclusive
of the premiums, if any, in consideration of the original.
- ‘outstanding capital stock’ – total shares of stock issued to subscribers or stockholders
whether or not fully or partially paid. This is where the quorum based, of the totality of
shares which have been subscribed and issued, whether it be founder’s share or common
shares.
9. Amendment of Articles of Incorporation – (a) majority vote of the board; and (b) vote in a
meeting or mere written assent of 2/3 of the ‘outstanding capital stock’ or by the members if
non-stock corporation. Once approved, dissenting stockholders may exercise their right of
appraisal, BUT only if the amended item in the ‘articles’ diminished their substantial rights
previously granted or the amendment have created new set of shares with priority rights.

Will take effect once approved by SEC within 6months from filing, if no action was taken,
automatic amendment is deemed effective.
A. When other agency certification required: certificate of authority is required for the
following: (1) insurance companies – Insurance Commission; (2) banks, loan assoc., finance
 corp. – Monetary Board; (3) educational institutions – Secretary of Education or CHED; (4)
public utilities – LTFRB, Civil Aeronautics Board, NTC, etc.
B. Grounds when articles of incorporation or amendment may be rejected or disapproved: (1)
non -compliance with the form prescribed; (b) purpose is illegal or immoral; (c) treasurer’s
affidavit is false; or (d) non-compliance with percentage requirement of ownership required
by the constitution. The SEC then will notify the incorporators about the grounds for
rejection and be given opportunity to make appropriate modifications.
10. Effects of non-use of corporate charter and continuous inoperation of corporation; Two
Situations Contemplated Under Section 22: (a) Non-Use of Corporate charter for 5 Years -
When corporation does not formally organize and commence the transaction of its business or
the construction of its works within two years from the date of its incorporation, its corporate
powers cease and the corporation shall be deemed dissolved (automatic). "Formal organization"
may consist in the election of new board directors or trustees and corporate officers.
"Commencement of business" may take the form of contracting for lease or sale of properties to
be used as business site of the corporation and other preparatory acts geared towards
fulfillment of the purpose for which the corporation was established. (b) continuous Inoperation
for 5 years - when the corporation has commenced the transaction of its business but
subsequently becomes continuously inoperative for a period of at least five years. The same shall
be a ground for the suspension or revocation of its corporate franchise or certificate of
incorporation (need to be heard ).

NOTE: The last paragraph provides for non-application of the effects of non-use or inactivity for
reasons beyond the control of the corporation as when the mineral lands to be developed by the
corporation as per its purpose, are the object of court litigation and a court injunction against
the corporate activities has been issued. The obiter expressed in the case of Perez v. Balmaceda,
(40 OG, No. 9, p. 114), that forfeiture was automatic, has been repealed by Sec.

III. BY-LAWS

1. Nature of By-Laws – by-laws are the set regulations of a corporation, they contain the basic rules
for the conduct of the corporation’s business and affairs. It may contain provision for managing
the business and regulating its affairs that is not inconsistent with the corporation code. BUT
these are subordinate to the AOI as well as to the Corporation Code (Loyola Grand Villas
Homeowners Assoc v. CA); regulations, ordinances, rules or laws adopted by an association or
corporation or the like for its internal governance BUT accdg to SC, to submit a separate
document denominated as by-laws would be undue technicality if not redundancy. Especially if
these were all provided in the AOI.

Purpose of by-laws is to regulate the conduct and define the duties of the members towards the
corporation and among themselves. They are self-imposed and have no status as public law.

ARE BY-LAWS NECESSARY? The simple answer would be, if the incorporators deemed it necessary, so
it must be, but the corporation code in sec. 44 has already granted that corporations shall possess or
exercise corporate powers in accordance with the code and the articles of incorporation it has duly-
submitted and approved by the Commission. Therefore, By-Laws might be an incidental power of the
corporation provided however, that it shall be approved by majority of the ‘outstanding capital stock’
or at least majority of the members in a non-stock corporation, sign the same and keep in the
principal address of the corporation, submit within 1-month after the receipt of certificate of
incorporation by SEC.

Or if prior to the incorporation, the by-laws were submitted together with the AOI, the same shall be
approved by the Commission together with the AOI.

2. Adoption of by-laws – affirmative votes of the majority representing the ‘outstanding capital
stock’ or at least majority of the members in a non-stock corporation.
3. How by-laws adopted:
(a) By-laws filed together with articles of incorporation –
(i) must be approved and signed by all incorporators; and
(ii) must be submitted to SEC with articles.
(b) Filed with SEC within one (1) month from notice of issuance of certificate of incorporation –

(i) affirmative vote of the stockholders representing at least a majority of the

outstanding capital stock, or at least a majority of the members, in case of a
non-stock corporation; and
(ii) by-laws shall be signed by stockholders or members voting for them. • one copy
kept in office of corporation • another copy sent to SEC: (1) certified by majority
of directors or trustees. (2) countersigned by Secretary of the corporation.
4. Effectivity of By-Laws –
By-laws shall be effective only upon issuance by SEC of a certification that the by-laws are not
inconsistent with the Code.
NOTE: SEC shall not accept for filing by-laws or any amendment thereto 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, unless
accompanied by a certificate of the appropriate government agency to the effect that such by-
laws or amendments are in accordance with law.
5. Contents of BY-Laws - The place of meeting of stockholders is already provided for by law in Sec.
51 (city or municipality where the principal office of the corporation is located); but the place for
meeting of directors or trustees may be provided for in the by-laws; place of meeting of directors
or trustees may be outside the Philippines if so provided for in the by-laws. Other matters may
be included in the by-laws, provided they abide by the following rules:
(a) They are not contrary to law, morals or public policies;
(b) They cannot contravene provisions of the articles of incorporation (even when the matter is
one that should be found in the by-laws); and
(c) The must not be discriminatory, or be unreasonable, because by-laws are meant to regulate
and not restrict rights.
6. Binding effect of by-laws on third party - The purpose of a by-law is to regulate the conduct and
define the duties of the members towards the corporation and among themselves. They are self-
imposed and, although adopted pursuant to statutory authority, have no status as public law.
Therefore, it is the generally accepted rule that third persons are not bound by the by-laws
(ChinaBank v. CA) unless they have knowledge of the same.
 7. Amendment or revision of by-laws –
(a) With stockholders or members approval:
(i) Majority vote of the members of the Board;
(ii) Majority of the outstanding capital stock or majority of the members in case of non-
stock corporation, in a meeting duly called for the purpose.

(b) By the Board of Directors/Trustees:

(i) 2/3 of the outstanding capital stock; or

(ii) 2/3 of the members in a non-stock corp. may delegate to the board the power to
amend or repeal any by-laws or adopt new by-laws. • Such power of the Board may be
revoked by majority vote of the outstanding capital stock or majority of the members in
a non-stock corporation. • The power to adopt the first original by-laws cannot be
delegated to the board of directors or trustees; only the power to adopt new bylaws that
will supplant the old by-laws can be validly delegated. NOTE: In all other respects, the
procedure for adopting the original by-laws shall be the same in amending or repealing
by-laws or adoption of a new set of by-laws. SHALL BE SUBMITTED AND APPROVED BY
THE COMMISSION STATING THAT THE SAME IS IN CONSONANCE WITH THE AOI.

Board of Directors “Doctrine of Centralized Management”

- ALL the corporate powers

- Conduct of business
- Control of corporate properties
Normally through the issuances of board resolutions except when the stockholders need to
concur with the decision of the Board on the amendment of AOI, selling corporate property
and investment to other

The Board acts and decides for and in behalf of the corporation. As long as the Board acts are within the
limits of the law and good faith: duty of obedience, diligence and loyalty

Quasi-delict – simple negligence

Capital stock – authorized capital stock = total amount of shares issued by the corporation to investors /
stockholders

Subscribed capital stock – the amount of shares that are purchased by investors, either fully-paid or not

Paid-up capital stock – stocks already subscribed and paid-up

BUSINESS JUDGMENT RULE – UP TO THE CASE OF DUTY OF DILIGENCE, SANCHEZ V. REPUBLIC

Ong Yong vs. Tiu 401 scra 1 2003

Bernas , et.al. vs. Cinco et.al

Western Institute of Technology vs. Salas 278 scra 216 1997

WQPP Marketing Communications vs. Galera, 616 scra 422 2010

Marc II Marketing Inc. vs. Joson 662 scra 35 2011

Banate vs. Phil. Countryside Rural Bank 625 scra 21 2010

Associated Bank vs. Pronstroller 558 scra 113 2008

Strategic Alliance Dev. Corp vs. Radstock Securities Ltd. 607 scra 413 2009

Filipinas Port Services v. NLRC 117 scra 203 1989

Sanchez v. Republic 603 scra 229 2009