The Corporation Code was expressly repealed by Republic Act No.

11232, otherwise known as the

“Revised Corporation Code of the Philippines”. (published in the Manila Bulletin and the Business Mirror
on February 23, 2019)

The Corporation Code of the Philippines – Batas Pambansa Blg. 68

Effect of Repeal of the Corporation Code – a corporation lawfully existing and doing business in the
Philippines affected by the new requirements of this Code shall be given a period of NOT MORE THAN 2
years from the effectivity of this Act within which to comply.

With the passage of the RCCP, therefore, all existing corporations now have perpetual term unless they
choose to have a fixed term.

General Banking Law and the New Central Bank Act – are the primary laws on banks.

Insurance Code of the Philippines applies to insurance corporations as primary statute.

Section 2. Corporation defined. A corporation is an artificial being created by operation of law, having
the right of succession and the powers, attributes and properties expressly authorized by law or
incident to its existence.

Attributes of a Corporation

1. An artificial being;
2. Created by operation of law;
3. Has the right of succession; and
4. Has the powers, attributes and properties expressly authorized by law or incident to its
existence;

Juridical personality – separate juridical entity; has rights and obligations under existing laws.

Concession Theory – (“Fiat Theory”, “Government Paternity Theory”, “Franchise Theory”) – a

corporation is an artificial being created by operation of law. It owes its life to the State and its birth is
purely dependent on the State’s will.

Franchises – a corporation is granted by the State the right to exist by virtue of a primary franchise. A
franchise is a special privilege conferred by governmental authority, and which does not belong to
citizens of the country generally as a matter of common right.

1. Corporate or general franchise – the franchise to exist as a corporation

>the primary franchise of a corporation, that is, the right to exist as such, is vested in the
individuals who compose the corporation itself, and cannot be conveyed in the absence of
legislative authority to do so;

2. Special or secondary franchise – refers to certain rights and privileges conferred upon existing
corporations
>vested in the corporation and may ordinarily be conveyed or mortgaged under a general power
granted to a corporation to dispose of its property.
The Constitution provides that only government-owned and controlled corporations are the private
corporations that may be created by special law.

Contract Theory – “incorporation is deemed to involve contracts among the members, between the
members and the corporation, and between the members or the corporation and the State. Thus,
because of the contract between the State and the corporation, the corporation is entitled to the right
against impairment of contracts. The State cannot likewise take the life of the corporation without due
process.

Incorporation is a contract among those who compose the corporation and their contract is governed
and evidenced by the Articles of Incorporation.

Perpetual succession – that continuous existence which enables a corporation to manage its affairs, and
hold property without the necessity of perpetual conveyances, for purposes of transmitting it.

Death of a shareholder or transfer of his shares will not affect the continued existence of the
corporation.

Doctrine of Separate Personality – a corporation has a personality separate and distinct from its
members. It has a personality separate and distinct from the persons composing it as well as from that
of any other entity to which it may be related. Hence, corporations have separate properties, rights and
obligations.

Separate Properties – because of the separate personality of the corporation, the properties of the
corporation are not the properties of its shareholders, members or officers.

A stockholder cannot sell, transfer, mortgage or encumber the properties of the corporation without
proper authority.

A shareholder has no right to file in his own name an action to quiet title of the properties of the
corporation because of the separate nature of the personality of the shareholder and the corporation.

Properties belonging to a corporation cannot be attached to satisfy the debt of a stockholder. The
stockholder only has an indirect interest in the assets and business of the corporation.

Nature of Stockholder’s Interest in Corporate Properties – indirect, contingent and INCHOATE.

The interest of the shareholder on a particular property becomes actual, direct and existing ONLY UPON
LIQUIDATION OF THE ASSETS OF THE CORPORATION and the same property is assigned to the
shareholder concerned.

The interest of each stockholder consists in the right to a proportionate part of the profits whenever
dividends are declared by the corporation.

Separate Obligations – the obligations of the corporation are not the obligations of its shareholders and
members and officers and vice versa.

The obligations incurred by the corporate officers, or other persons acting as corporate agents, are the
direct accountabilities of the corporation they represent and not theirs.
They may, however, be liable in the instances mentioned in Section 30 of the Revised Corporation Code:
(Liability of Directors, Trustees or Officers)

The corporation cannot likewise be made to answer for the personal obligations of the stockholders,
members, directors or officers.

LIMITED LIABILITY RULE

“A stockholder is personally liable for the financial obligations of the corporation to the extent of his
UNPAID SUBSCRIPTION. While stockholders are generally not liable, the stockholders may be liable if
they have not or have not fully paid the subscription price.

Reason for the Limited Liability Rule – for small and/or closely held companies, limited liability may be
the principal reason for the investor to use the corporation as a vehicle in pursuing business.

Remedy: The stockholders who are sought to be made liable for their unpaid subscription should be
impleaded. If the stockholders are not impleaded as defendants, a separate action should be filed
against them to enforce any judgment obligation.

Separate Acts: The acts of the stockholders do not bind the corporation unless they are properly
authorized. Similarly, the acts of officers and directors in their personal capacity cannot be imputed to
the corporation. Their powers and duties pertain to them respectively and not to each other.

A stockholder is also not an agent of the corporation and he becomes an agent only if he was duly
appointed as such.

Doctrine of Piercing the Veil of Corporate Fiction

Basic in corporate law is the principle that a corporation has a separate personality distinct from its
stockholders and from other corporations to which it may be connected. However, under the doctrine
of piercing the veil of corporate entity, the corporation’s separate juridical personality may be
disregarded when there is an abuse of the corporate form . Whenever the doctrine applies, the
principal and the conduit will be treated as one; the controlled corporation will be deemed to have, “so
to speak, no separate mind, will or existence of its own, and is but a conduit for its principal.

Piercing the Veil in OPC – the doctrine of piercing the veil of corporate fiction applies with equal force to
a One Person Corporation. The limited liability rule applies to a One Person Corporation provided that
the sole shareholder claiming limited liability has the “burden of affirmatively showing that the
corporation was adequately financed.”

Theory of Enterprise Entity – an influential alternative account of the Doctrine of Piercing the Veil of
Corporate Fiction.
Classification of Doctrine of Piercing the Veil of Corporate Fiction

1. Cases where public convenience may be defeated, as when the corporate fiction is used as a
vehicle for the evasion of an existing obligation;
2. Fraud cases, or when the corporate entity is used to justify a wrong, protect fraud, or defend a
crime;
3. Alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business
conduit of a person; or where the corporation is so organized and controlled and its affairs are
so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation; where a corporation is a dummy, is unreal, or a sham and serves no business
purpose and is intended only as a blind, the corporate form may be ignored for the law cannot
countenance a form that is bald and a mischievous fiction.

KINDS

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”.
2. Reverse piercing action – makes the corporation liable for the debt of the shareholders.

Alter Ego – if there is such unity of interest and ownership that the separate personalities of the
corporation and the individual no longer exist.

Totality of Circumstances Test –

Group of Companies – refers to corporations that are financially related to one another as parent
corporations, subsidiaries, and affiliates. A “group of companies” has no personality separate and
distinct from each of the component corporations.

Piercing the veil of corporate fiction is a judicial prerogative, ONLY THE COURT can apply this doctrine.

ARTIFICIAL BEING

Because a corporation’s existence is only by fiction of law, it can only exercise its rights and powers
through its directors, officers and agents, who are natural persons.

The Board shall exercise the corporate powers of the corporation.

Attribution of Knowledge – notice to the Board of Directors should also be deemed notice to the
corporation.

“Knowledge of facts acquired or possessed by an officer or agent of the corporation in the course of his
employment, and in relation to matters within the scope of his authority, is notice to the corporation,
whether he communicates such knowledge or not since a corporation cannot see, or know, anything
except through its officers.”
NATIONALITY AND CITIZENSHIP

Two principal tests to determine if a corporation is foreign or domestic:

1. Aggregate Test/Control Test – requires looking into the nationality, domicile, or residence of
the individuals who control the corporation;
2. Entity Test/Place of Incorporation Test/Incorporation Test – looks to the nation where the
corporation was incorporated.

Place of Incorporation Test – the sovereignty by which a corporation was created, under whose laws it
was organized, determines its national character, and the fact that some of its incorporators were
residents and citizens of a foreign country does not change this rule.

CONTROL TEST AND GRANDFATHER RULE

Control Test – “shares belonging to corporations or partnerships at least 60% of the capital of which is
owned by Filipino Citizens shall be considered as of Philippine nationality.

-is still the prevailing mode of determining whether or not a corporation is a Filipino corporation,

When in the mind of the Court there is doubt, based on the attendant facts and circumstances of the
case, in the 60-40 Filipino equity ownership in the corporation, then it may apply the “Grandfather
Rule”.

The court ruled that the Grandfather Rule is a supplement to the Control Test so that the Constitutional
requirement can be given effect.

Grandfather Rule – is a method of determining the nationality of a corporation, which in turn is owned
by another corporation by breaking down the equity structure of the shareholders of the corporation
that owns the other.

>it adheres with the rule that ‘beneficial ownership’ of corporations engaged in nationalized activities
must reside in the hands of Filipino citizens.

A resort to the Grandfather Rule is necessary if doubt exists as to the locus of the beneficial ownership
and control.

A corporation has no nationality in a Corporation Sole.

RESIDENCE

A corporation has no residence in the same sense in which the term is applied to a natural person. This
is precisely why it was ruled that for practical purposes, a corporation is in metaphysical sense a
RESIDENT OF THE PLACE WHERE ITS PRINCIPAL OFFICE IS LOCATED as stated in the Articles of
Incorporation.

Tort liability – a corporation is civilly liable in the same manner as a natural person for torts

Doctrine of Corporate Responsibility –

Right to Moral Damages – the award of moral damages cannot be granted in favor of a corporation
because, being an artificial person and having existence only in legal contemplation, it has no feelings,
no emotions and no senses.

A corporation is incapable of fright, anxiety, shock, humiliation, and physical or mental suffering.

The only exception to this rule is when the corporation has a reputation that is debased, resulting in its
humiliation in the business realm. (It is believed that the better rule is to disallow award of moral
damages to juridical entities like corporations even for besmirched reputation and defamation. This rule
is consistent with the very nature of moral damages.)

Constitutional Right

A corporation is a person, in proper cases, within the due process and equal protection clauses of the
Constitution.

A corporation is entitled to the right against unreasonable searches and seizure.

Criminal liability – corporations are now criminally liable under the RCCP.

The RCCP now provides that if the offender is a corporation, the penalty may, at the discretion of the
court, be imposed upon such corporation and/or upon its directors, trustees, stockholders, members,
officers or employees responsible for the violation of the provisions of the RCCP or indispensable to its
commission.

While a corporation cannot be imprisoned, it may be fined, its charter may be revoked by the State or
other sanctions may be imposed by law.

Offenses MALA IN SE – where intent is indispensable cannot be committed by a corporation because the
existence or presence of criminal intent assumes the existence of a will which only a natural person may
have.

Offenses MALA PROHIBITA which may be committed by committing the act prohibited, may be
committed by a corporation.

Corporations are still not criminally liable under the RPC. Corporations cannot be made criminally liable
for a felony because INTENT IS REQUIRED IN FELONIES.

For violation of special laws, in the absence of an express provision making the corporation criminally
liable, corporations cannot also be held criminally liable because the present criminal law system
requires the performance of OVERT ACTS.

The responsible officer who actually performed the act must of necessity be the one to assume criminal
liability.

Before a stockholder may be held criminally liable for acts committed by the corporation, it must be
shown that he/she had knowledge of the criminal act committed in the name of the corporation and
that he/she took part in the same or gave his/her consent to its commission, whether by action or by
inaction.
4th attribute of the corporation – THEORY OF SPECIAL OR LIMITED CAPACITIES

The fourth attribute of the corporation, that is, that it has the powers, attributes and properties
expressly authorized by law or incident to its existence, refers to what is known as the Theory of Special
Capacities.

CLASSES OF CORPORATIONS

1. Stock – those which have capital stock divided into shares and an authority to distribute to the
holders of such shares, dividends or allotments of surplus profits on the basis of the shares held.
2. Non-stock –

Corporation sole – a corporation consisting of only one person or member. It is one formed by the chief
archbishop, bishop, priest, minister, rabbi, or other presiding elder of a religious denomination, sect or
church for the purpose of administering and managing, as trustee, the affairs, property and
temporalities of such religious denomination, sect or church.

Corporation by estoppel – a 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. It cannot be permitted to deny its
existence in an action under said contract.

Going public – when a corporation decides to list its shares in the stock exchange. These include
corporations that will make initial public offering of its shares.

Going private – when it would restrict the shareholders to a certain group

Government-Owned or Controlled Corporations – may either be (1) with original charter or created by
special law, or (2) incorporated under a general law

CORPORATORS AND INCORPORATORS

Corporators are those who compose a corporation, whether as stockholders or shareholders in a stock
corporation or as members in a nonstock corporation.

Incorporators are those stockholders or members mentioned in the articles of incorporation as

originally forming and composing the corporation and who are signatories thereof.

Components of the corporation

1. Shareholders or members
2. Directors or trustees
3. Officers
The Articles of Incorporation cannot be amended to change the names of the incorporators because the
fact that the persons named therein are incorporators is an ACCOMPLISHED FACT or deed that can no
longer be undone.

Shareholders – are the holders of shares in a corporation with interest over the management (control),
income (dividends) and assets (share upon liquidation) of the corporation.

The shareholders participate in controlling the affairs of the corporation by exercising their right to vote.
They can elect the directors who will actually govern the corporation and they can also vote in
important matters that are still reserved to them by the RCCP.

TWO-THIRDS (2/3) REQUIREMENT – the shareholders vote on or approve FUNDAMENTAL STRUCTURAL

CHANGES in the corporation and certain major decisions. Concurrence of the stockholders representing
2/3 of the outstanding capital is necessary in the exercise of the following powers:

1. Extend or shorten corporate term

2. Increase or decrease capital stock
3. Incur, create or increase bonded indebtedness
4. Deny pre-emptive right after incorporation
5. Sell, lease, exchange, mortgage, pledge, or otherwise dispose of ALL OR SUBSTANTIALLY ALL OF
CORPORATE ASSETS
6. Invest in another corporation, business, or for any purpose other than the primary purpose for
which it was organized, like the secondary purpose.
7. Declare stock dividends
8. Enter into management contract
9. Amend the Articles of Incorporation
10. Merge or consolidate with another corporation or other corporations
11. Voluntarily dissolve the corporation where creditors are affected

MAJORITY with Board Approval

1. Enter into a management contract under circumstances not covered by either of the two
instances stated above
2. Adopt, amend or repeal the By-laws
3. Voluntary dissolution where no creditor is affected

Share – unit into which the proprietary interests in a corporation are divided.

Capital stock – consists of all classes of shares issued to stockholders, that is,

1. Common shares
2. Preferred shares.

The classes and number of shares, which a corporation shall issue, are first determined by the
incorporators in the Articles of Incorporation filed in the SEC. After the corporation comes into
existence, the Board of Directors and the stockholders may alter them by amending the Articles of
Incorporation.
Doctrine of Equality of Shares – “all stocks issued by the corporation are presumed to be equal with the
same privileges and liabilities, provided that the AOI is silent on such differences.”
CLASSIFICATION OF SHARES

1. Common / Preferred
a. Preferred shares may be
i. Cumulative / non-cumulative
ii. Participating / non-participating
iii. Preferred as to dividends
iv. Preferred as to assets upon distribution
2. Voting / Non-voting
3. Par value or no-par value
4. Treasury shares
5. Redeemable shares
6. Founder’s shares

Common shares – is a basic class of stock ordinarily and usually issued without extraordinary rights or
privileges and entitles the shareholder to a pro rata division of profits.

Preferred shares – those that entitle the shareholder to some priority on dividends and/or asset
distribution.

Preferred shares are often excluded from any control, that is, deprived of the right to vote in the
election of directors and on other matters.

Why do preferred stocks not entitled to voting rights? – on the theory that the preferred shareholders
are merely investors in the corporation for income in the same manner as shareholders.

Dividends are, thus, payable only when there are profits earned by the corporation and as a general
rule, even if there are existing profits, the board of directors has the discretion to determine whether or
not dividends are to be declared.

Preferred shares as to assets – gives the holder thereof preference in the distribution of the assets of
the corporation in case of liquidation;

Preferred shares as to dividends – entitles the holder thereof to receive dividends on said share to the
extent agreed upon before any dividends at all are paid to the holders of common stock.

Watered stock – issuance of stock in excess of the authorized capital stock of the corporation.

Preferred shares cannot be No-par value

Under the present law, all shareholders regardless of the classification, other than holders of preferred
or redeemable shares are entitled to vote.
HOLDERS OF NON-VOTING SHARES MAY STILL VOTE ON THE FOLLOWING MATTERS:

1. Amendment of the articles of incorporation

2. Adoption and amendment of by-laws
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the
corporate property;
4. Incurring, creating or increasing bonded indebtedness
5. Increase or decrease of authorized capital stock
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code;
8. Dissolution of the corporation

Escrow shares – result by virtue of a transaction to place shares in escrow until the happening of an
event or fulfillment of a specified condition like

Founder’s shares – shares that are given to those who helped organize the corporation. This may be a
form of reward to the “founders”.

After the expiration of the five-year period, founder’s shares shall have equal rights with the holders of
common shares.

Redeemable shares – are shares of stocks issued by a corporation which said corporation can purchase
or take up from their holders as expressly provided for in the AOI and certificate of stock representing
said shares.

Effect of redemption

Redemption is repurchase or reacquisition of stock by a corporation which issued the stock in exchange
for property, whether or not the acquired share is cancelled, retired or held in the treasury. Essentially,
the corporation gets back some of its stock, distributes cash or property to the shareholder in payment
of the stock and continues in business as before.

The redeemed shares shall be considered deduction to equity if there is no provision in the AOI that
provides that the same shares are not retired. In a sense, redemption is a repurchase of the shares for
cancellation.

Treasury Shares – are shares of stock that have been issued and fully paid for, but subsequently
reacquired by the issuing corporation by purchase, redemption, and donation or through some other
lawful means.

Treasury shares are currently owned by the corporation and not its shareholders.
INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

Effect if not Incorporated – it is only through incorporation and registration with Securities and Exchange
Commission (SEC) that private corporations can acquire juridical personality under the RCCP.

The life of the corporation will not commence if the SEC will not issue a Certificate of Incorporation.

By-Laws – by laws can be filed with the SEC after incorporation.

Incorporators – are those stockholders or members mentioned in the Articles of Incorporation as

originally forming and composing the corporation and who are signatories thereof.

Basic qualifications of Incorporators are: (N-N15-L-O)

1. Must be a natural or juridical entity;

2. Must not be more than 15 incorporators;
3. If the incorporator is a natural person, he or she must be of legal age; and
4. Each incorporator of a stock corporation must own or be a subscriber to at least one share of
the capital stock.

One Person Corporation – 1 incorporator

Not OPC – at least two incorporators but not more than 15

Incorporators may either be

1. Natural persons or corporations

2. Partnerships and
3. Associations

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 AS A CORPORATION
UNLESS OTHERWISE PROVIDED UNDER SPECIAL LAWS.

Under the RCCP, corporations can now be incorporators not only of rural banks, but also of other types
of banks, like commercial banks and universal banks, provided that they are allowed to do so by the
Monetary Board of the Bangko Sentral ng Pilipinas.

Incapacitated persons cannot be incorporators.

Philippine Residence Not Required

No Citizenship Requirement

Accomplished Fact – an incorporator remains to be an incorporator even if he will later cease to be a

corporator or shareholder. Thus, one will still be an incorporator even if he/she/it already transferred all
his/her/its shares to another. Being an incorporator is an accomplished fact.

Corporations with certificates of incorporation issued PRIOR to the effectivity of this Code, and which
continue to exist – shall have perpetual existence – unless it ELECTS to retain its specific corporate term,
pursuant to its Articles of Incorporation – wherein the corporation shall notify the SEC, upon a vote of its
stockholders representing a majority of its outstanding capital stock/.
A corporate term for a specified period may be extended or shortened by amending the articles of
incorporation;

The Articles of Incorporation of new corporations can specify a fixed term – the incorporators can
choose not to have a perpetual term and specify a fixed term in the Articles of Incorporation.

Extension of Term – if the corporation has a fixed term, the extension of term must be made within the
time and in the manner prescribed by the RCCP. Otherwise, the term will expire and the corporation’s
personality will cease.

Extension cannot be sought after the expiration of the term. The steps necessary to effect the extension
must be taken, during the life of the corporation.

No extension of the corporate term for a specific period may be made earlier than 3 years prior to the
original or subsequent expiry dates unless there are justifiable reasons for an earlier extension as may
be determined by the SEC.

Doctrine of Relations

Revival of Corporate Existence – a corporation whose term has expired may apply for a revival of its
corporate existence, together with all the rights and privileges under its certificate of incorporation and
subject to all of its duties, debts and liabilities existing prior to its revival. Upon approval of the SEC, the
corporation shall be deemed revived and a certificate of revival of corporate existence shall be issued,
giving it perpetual existence,

Minimum Capital Stock Not Required of Stock Corporations – stock corporations shall not be required
to have a minimum capital stock, except as otherwise specifically provided by special law.

There is no required minimum subscribed capital and paid-up capital under the RCCP.

No. of directors – not more than 15

No. of trustees – may be more than 15

Articles of Incorporation – has been described as a document that defines the charter of the
corporation stating its name, purpose or purposes, its capital stock, as well as the description of its
governing board and other stipulations.

The AOI constitutes the constitution of a corporation.

Article of Incorporation must contain “substantially” the matters indicated therein.

NAME – the name of the corporation need not reflect the purpose of the corporation. The purpose of
the name is for identification and not to give an indication of its purpose.
Purpose Clause – is important in order to assure that persons who invest in corporate entities would be
aware of the business the corporation is designed to engage in.

Primary Purpose – must be only ONE; other purposes not allied or incidental to the Primary Purpose
should be classified as Secondary Purpose.

>determines the classification of a corporation. However, where the corporation actually engages in one
of its secondary purposes, it may also be classified in accordance with the secondary purposes.

Secondary Purpose – may be several

General Limitations:

1. A corporation cannot be incorporated for the purpose of practicing a profession. Corporations

cannot possess human personal qualifications for the practice of profession.
2. It cannot be organized for two or more incompatible purposes.

Principal Office – SEC rules require the location of the principal office to be specifically identified.

>if the corporation has moved to another location within the SAME CITY or MUNICIPALITY, the
corporation is not required to file an amended Articles of Incorporation. Instead, it must declare its new
or current specific address in the General Information Sheet within 15 days from the transfer to its new
location.

The Ninth clause of the Articles of Incorporation must state the name of the Treasurer who has been
elected by the subscribers to act as such until after the successor is duly elected and qualified in
accordance with the By-laws.

Effect if Sole Proprietorship is Organized

In such case, it is required that there is a Deed of Assignment that must specify the liabilities of the sole
proprietorship that are being assumed by the new corporation. The corporation would not be liable if
there is no assumption of obligation.

Activities where the foreign equity is limited to 40% by the Constitution

1. Exploration, development and utilization of natural resources;

2. Operation of public utilities
3. Educational institutions
4. Facility operators of a BOT Project requiring a public utility franchise

Mass Media – the Philippine Constitution reserves ownership of mass media corporations to Filipinos.

Real Estate Companies – only corporations at least 60% of the outstanding capital stock of which
belongs to Filipinos can own land.
AMENDMENT OF ARTICLES OF INCORPORATION

1. Must be for legitimate purposes and must not be contrary to other provisions of the RCC and
special laws.
2. Must be approved by a majority vote of the board of directors or trustees;
3. There must be a vote or written assent of the stockholders representing at least 2/3 of the
outstanding capital stock, or in case of a non-stock corporation, the vote or written assent of at
least 2/3 of the members;

Express and Implied approval – the amendments shall take effect upon their approval by the SEC.
However, express approval is not indispensable; the amendments shall take effect from the date of filing
with the said Commission if not acted upon within 6 months from the date of filing for a cause not
attributable to the corporation.

**There can be no amendment of the Articles of Incorporation of a non-stock corporation to CONVERT

IT INTO A STOCK CORPORATION with the members as shareholders. This procedure will in effect allow
the distribution of the assets of the non-stock corporation in favor of the members.

GROUNDS WHEN AOI OR AMENDMENT MAY BE DISAPPROVED

1. If it is not substantially in accordance with the form prescribed in the RCCP;

2. Illegal or immoral purposes

CORPORATE NAME

A corporation cannot use a name that belongs to another even as a trade name.

What must be proved by oppositor? A corporation seeking to prevent another corporation from using
its name must prove that:

1. The corporation has acquired a PRIOR RIGHT over the use of such corporate name; and
2. That
a. The name is not distinguishable from that already reserved or registered for the use of
another corporation;
b. The name is already protected by law;
c. The use of the name is contrary to existing law, rules and regulations

The jurisdiction of the SEC is not merely confined to adjudicative functions. By express mandate, the SEC
has absolute jurisdiction, supervision and control over all corporations.

Distinguishability Test – the present test

Prior Right – a corporation that is incorporated and adopts a corporate name earlier acquires a prior
right over the use of the corporate name.

DOMINANCY TEST – there will be infringement if the mark contains the dominant feature of the mark of
a trademark belonging to another.
Doctrine of Secondary Meaning – a word or phrase, which is originally incapable of exclusive
appropriation because the word or phase is geographic or otherwise descriptive, might nevertheless
have been used for so long exclusively by one producer with reference to an article and the purchasing
public has considered the word or phrase as associated to his product.

Priority of Adoption Rule – the corporation that first adopts a corporation name has the right thereto
and a subsequent corporation cannot use the same name.

A company may have more than one business or trade name.

Business or trade name which is different from the corporate or partnership name shall be indicated in
the AOI or Partnership.

Revocation, Dissolution and Expiration of Term

The rules provide that the name of a corporation or partnership that has been dissolved or whose
registration has been revoked shall not be used by another corporation or partnership UNLESS
APPROVED BY THE SEC. However, only expired corporations may apply for re-registration using the
same corporate name.

Under the present rules, “the name of a corporation or partnership that has been dissolved or whose
registration has been revoked shall not be used by another corporation, within FIVE YEARS from the
approval of dissolution or FIVE YEARS from the date of revocation.

A mere change in the name of a corporation, either by the legislature or by the corporators or
stockholders under legislative authority, does not affect the identity of the corporation, nor in any way
affect the rights, privileges, or obligations previously acquired or incurred by it.

A change in corporate name does not make a new corporation, whether affected by a special act or
under a general law.

Registration, Incorporation, and Commencement of Corporate Existence

Corporate name must be:

1. Distinguishable from a name already reserved or registered for the use of another corporation
2. Not protected by law
3. Not contrary to law, rules and regulations

The issuance of the certificate of incorporation by the SEC marks the commencement of the corporate
term of corporations incorporated under the RCCP.

A certificate of incorporation from the SEC is not necessary if the corporation is created through special
law.

RCCP makes irrevocable pre-incorporation subscription agreement for a period of six months. It should
be noted that a subscription agreement is a contract between the corporation and the subscriber.
Hence, the law makes the pre-incorporation subscription agreement binding even if one of the parties –
the corporation – is still legally non-existent.
PROMOTERS

Promoters are persons who, acting alone or with others, take initiative in founding and organizing the
business or enterprise and receives compensation therefore.

Contracts entered into by the promoter may, in certain cases, bind a corporation.

Promotional Activities include:

1. Discovery
2. Investigation
3. Assembly

Discovery – consists of finding the business opportunity to be developed

Investigation – entails an analysis of the proposed business to determine whether or not it is

economically feasible.

Assembly – includes the bringing together of the necessary personnel, property and money to set the
business in motion as well as the secondary details of setting up the corporation itself.

Promoters could not act as agents for a projected corporation since that which has no legal existence
could have no agent. A corporation, until organized, has no life and therefore no faculties.

De Facto Corporations

Requisites:

1. Valid law under which the organization is organized;

2. Attempt in good faith to incorporate; and
3. Assumption of corporate powers

To be a de facto corporation, it must be possible to be a corporation de jure.

If the law under which the corporation is organized is void, there is no resulting de facto corporation.

The filing of AOI and the issuance of the Certificate of Incorporation by the SEC are essential for the
existence of a d facto corporation.

A corporation must have exercised its franchise to be a corporation by doing business under it. There
must be some corporate act or acts in attempted execution of the powers conferred by the AOI or by
the special charter granted by the legislature.

Distinguished from De Jure Corporations

A de jure corporation has a right to corporate existence even against the State.

In the case of a de facto corporation, it has a right to corporate existence even against the State if the
attack is collateral but not if the attack is direct.

xxx
The personality of a de facto corporation is subject to attack by the State in a proper proceeding. A de
facto corporation enjoys the attributes of a corporation until the State questions its existence.

Effect of Non-filing of By-laws

The filing of the by-laws with the SEC is not a mandatory provision that affects the existence of the
corporation from the very beginning. The filing of the by-laws is a condition subsequent. Non-
compliance with conditions subsequent to incorporation may not affect the existence of a corporation;
it is however a ground for revocation of the certificate of incorporation.

Estoppel

When a third person has entered into a contract with an association which represented itself to be a
corporation, the association will be estopped from denying its corporate capacity in a suit against it by
such third person.

Those who assume to act as a corporation knowing it to be without authority to do so shall be liable as
general partners. Therefore, they are liable even beyond their investment; in other words, their
personal properties may be made to answer for what is purportedly a corporate debt of the non-
existent corporation.

It is an elementary principle of law that a person who acts as an agent without authority or without
principal is himself regarded as the principal, possessed of all the right and subject to all the liabilities of
a principal.

An unincorporated association, which represented itself to be a corporation, will be estopped from

denying its corporate capacity in a suit against it by a third person who relied in good faith on such
representation. It cannot allege lack of personality to be sued to evade its responsibility for a contract it
entered into and by virtue of which it received advantages and benefits.

The doctrine of corporation by estoppel is founded on principles of equity and is designed to prevent
injustice and unfairness. It applies when a non-existent corporation enters into contracts or dealings
with third persons.

When a non-existent corporation enters into contracts or dealings with third persons it cannot allege
lack of personality to be sued to evade its responsibility for a contract it entered into and by virtue of
which it received advantages and benefits.

Section 21. Effects of Non-use of Corporate Charter

If a corporation does not formally organize and 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 5-year period.

However, if a corporation has commenced its business but subsequently becomes inoperative for a
period of at least 5 consecutive years, the Commission may, after due notice and hearing, place the
corporation under DELINQUENT STATUS.

A delinquent corporation shall have a period of two (2) years to resume operations and comply with all
requirements that the Commission shall prescribe.
Failure to submit reports – a corporation may also be placed under delinquent status if it fails to comply
with the reportorial requirements three (3) times, consecutively or intermittently within a period of five
(5) years.

BOARD OF DIRECTORS/TRUSTEES/OFFICERS

The Board of Directors or Trustees exercises:

1. The corporate power;

2. Conducts all business;
3. Controls all properties of the corporation

It is the Board that exercises almost all the corporate powers in a corporation.

The management of the business of a corporation is generally vested in its Board of Directors, not its
stockholders.

The Board of Directors has the

1. Sole authority to determine policies,

2. Enter into contracts
3. Conduct the ordinary business of the corporation within the scope of its charter

A corporation can act only through its directors and officers.

Acts of Management – Board of Directors / Trustees

Acts of Ownership – Stockholders

Business Judgment Rule – the will of the majority of the Board members controls in corporate affairs,
and contracts intra vires entered into by the board of directors are binding on the corporation and
COURTS WILL NOT INTERFERE unless to a wanton destruction of rights of the minority. Judges are not
business experts; they cannot replace their judgment for the judgment of the directors on business
matters.

“Questions of policy or management are left solely to the honest decision of officers and directors of a
corporation and the courts are without authority to substitute their judgment for the judgment of the
Board of Directors; so long as the BOD acts in good faith its orders are not reviewable by the courts or
the SEC.

If the cause of the losses is merely error in business judgment, not amounting to bad faith or
negligence, directors and/or officers are not liable.

The Board of Directors is authorized to exercise absolute but sound discretion on matters regarding
the operation of the Corporation.
Resolution

The Board must act, not individually or separately, but as a body in a lawful meeting. The actions of the
Board are expressed in RESOLUTIONS passed in its meetings.

A BOARD RESOLUTION authorizing an officer to act is necessary.

MAJORITY OF THE NUMBER OF DIRECTORS OR TRUSTEES as fixed in the Articles of Incorporation shall
constitute a QUORUM for the transaction of corporate business.

The basis for determining the presence of the required majority of directors or trustees in order to
confirm that there is a QUORUM for a meeting is the number of Board members as fixed in the Articles
of Incorporation and not the actual present/available number of members of the Board.

Proof of Resolution – A Secretary’s Certificate – a certificate issued by the Corporate Secretary of the
Corporation – is sufficient proof of the existence of a resolution adopted by the Board.

>the minutes of meeting of the Board of Directors can also establish the existence of a Resolution of the
Board.

>it is the signature of the corporate secretary, as the one who is tasked to prepare and record the
minutes, that gives the minutes of meeting probative value and credibility.

PROXY NOT ALLOWED

Directors or trustees cannot attend or vote by proxy at Board meetings. A director cannot even delegate
his powers as director to another person.

Term

Director – 1 year

Trustees – not exceeding 3 years

Each director and trustee shall hold office until the successor is elected and qualified.

It is well-settled that if a corporation knowingly permits one of its officers, or any other agent, to act
within the scope of an apparent authority, it holds him out to the public as possessing the power to do
those acts;

QUALIFICATIONS FOR DIRECTORS OR TRUSTEES

1. Must own at least one share of the capital stock in his own name or if the corporation is a non-
stock, he must be a member thereof;
2. Must not be disqualified under the RCCP or any applicable special law or rules;
3. Must be of legal age;
4. Must possess other qualifications as may be prescribed in special laws or regulations or in the
by-laws of the corporation;
A director must be a natural person

No residence requirement; No citizen requirement

Disqualification: “A director who ceases to own at least one (1) share of stock or a trustee who ceases
to be a member of the corporation shall cease to be such.”

Any director who ceases to be the owner of at least one share in the capital stock of the corporation of
which he is a director shall thereby cease to be a director. The requirement of owning at least one share
is a continuing requirement.

The hold-over period – that time from the lapse of one year from a member’s election to the Board and
until his successor’s election and qualification – is not part of the director’s original term of office, nor is
it a new term; the hold-over period, however, constitutes part of his tenure.

INDEPENDENT DIRECTORS – at least 2 or such independent directors shall constitute at least 20% of
the members of such board

Required corporations:

1. Any corporation with a class of equity shares listed for trading on an Exchange or
2. Having assets in EXCESS OF P50,000,000.00
3. Having 200 or more holders, at least 200 of which are holding at least 100 shares of a class of its
equity securities

An “independent director” shall mean a person other than an officer or employee of the corporation, its
parent or subsidiaries, or any other individual having a relationship with the corporation, which would
interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

Reason: Said directors bring expertise, independence, broadened experience and perspective to the
corporate decision-making process. They are unhampered by day-to-day involvement and self-interest.

A non-executive director must not have a relationship with the corporation that would materially
interfere with his exercise of independent judgment in carrying out his responsibilities as director in any
covered company.

When: It is during the annual stockholders/members’ meeting that the independent directors are
elected.

Section 23. Election of Directors or Trustees

Each stockholder or member shall have the right to nominate any director or trustee who possesses all
the qualifications and none of the disqualifications set forth in this Code.

Voting through remote communication or in absentia

The stockholders and members may vote in the election of directors either:

1. Personally, by attending the meeting;

2. Through a proxy;
3. Through remote communication or in absentia
Voting through remote communication or in absentia is allowed only when:

1. Authorized by the By-Laws; or

2. Authorized by a majority of the Board of Directors; or
3. In corporations vested with public interest

Plurality of Votes – majority of vote is not necessary for the election of each director or trustee. The
candidate who will receive the highest number of votes shall be declared as duly elected.

QUORUM – it is necessary that there is a quorum and in the absence thereof, the election shall be
considered invalid.

The quorum for election purposes is the stockholders representing a majority of the outstanding capital
stock entitled to vote.

It is not necessary, however, that the candidate stockholder be present during the meeting before he
can be elected as director. A director can be elected in absentia.

Cumulative Voting – a method of concentrating votes devised to give sufficient opportunity to minority
shareholders to secure representation in the board.

The basic effect of cumulative voting is to increase the chances of the minority stockholders to elect a
director; cumulative voting ensures minority representation in the Board.

Election of Incomplete Directors – the stockholders may elect less than the total number of directors
specified in the AOI. An incomplete Board may still function so long as the remaining directors constitute
a quorum.

Failure to hold an election – if the Board or the officer authorized to call a meeting refuses to call an
election of directors, the stockholders may ask for the assistance of the SEC to compel the holding of
such election.

Election Contests – should be filed with the proper RTC

CORPORATE OFFICERS

1. President – must be a director

2. Treasurer – must be a resident
3. Secretary – must be a citizen and resident of the Philippines
4. Such other officers as may be provided in the bylaws
5. If the corporation is vested with public interest, the board shall also elect a COMPLIANCE
OFFICER

The same person may hold two (2) or more positions concurrently, except that no one shall act as
PRESIDENT AND SECRETARY or as PRESIDENT AND TREASURER at the same time.

Corporate officers are elected by the majority of all the members of the Board of Directors or Trustees
and not by a mere majority of the directors or trustees present.
The AOI and By-Laws may create other corporate offices.

Qualifications and Functions – minimum qualifications and duties of the corporate officers are provided
for in the RCCP and the By-Laws.

The PRESIDENT is often given general supervision and control over corporate operations.

The president is presumed to have the authority to act within the domain of the general objectives of
the corporation’s business and within the scope of his or her usual duties.

“that the company had authorized him to act and had recognized, approved and ratified his former and
similar actions”

Chairman – may be concurrently the president and may be designated as the CEO of the corporation.

Secretary – must be a resident and citizen of the Philippines. Other qualifications may be provided for in
the By-Laws. There shall be only ONE CORPORATE SECRETARY.

Treasurer – normally takes care of the funds of the corporation. Ordinarily the custodian of the funds of
the corporation with authority to disburse them in proper cases.

Anti-Dummy Law – foreigners cannot be officers in wholly nationalized and partly nationalized
corporations. Provides that foreigners cannot “intervene in the management, operation, administration
or control of the corporation, whether as an officer, employee or laborer therein, with or without
remuneration.

>this applies only to corporations with businesses that are reserved by the Constitution or law to Filipino
citizens or where Filipinos own 60% of the capital.

AUTHORITY OF OFFICERS

The general principles of agency govern the relation between the corporation and its officers or agents
subject to the provisions of the AOI, By-Laws or relevant provisions of law. When authorized, their acts
can bind the corporation. Conversely, when unauthorized, their acts cannot bind it.

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.

The acts of corporate officers within the scope of their authority are binding on the corporation, but
when these officers exceed their authority, their actions cannot bind the corporation, unless the Board
RATIFIES such acts or is estopped from disclaiming them.

Doctrine of Apparent Authority – ”if a corporation knowingly permits its officers or any other agent, to
do acts within the scope of an apparent authority, and holds the officer or agent out to the public as
possessing power to do those acts, the corporation will, as against any one who has in good faith dealt
with the corporation through such agent, be estopped from denying his authority.

Apparent authority is determined ONLY by the acts of the principal and not by the acts of the agent.
There can be no apparent authority of an agent without acts or conduct on the part of the principal;
Disqualification of Directors, Trustees or Officers

Grounds for Disqualification – if within 5 years prior to the election or appointment, the person was

1. Convicted by final judgment;

a. Of an offense punishable by imprisonment for a period exceeding six years;
b. For violating this Code; and
c. For violating R.A. No. 8799, ”The Securities Regulation Code”;
2. Found administratively liable for any offense involving fraudulent acts; and
3. By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct
similar to those enumerated in (1) and (2) above.

The disqualifications are meant to assure that only persons of rectitude can act as directors.

A person who ceases to be a shareholder because he transferred all his shares to another person is
disqualified to be a director.

Removal of Directors or Trustees

Under the RCCP, the authority to remove the directors is a prerogative reposed in the stockholders or
members of the corporation.

Requisites of Removal

1. It must take place either at a regular meeting or special meeting of the stockholders or members
called for the purpose;
2. The call of the special meeting shall be made by the secretary on order of the president or on
the written demand of the stockholders representing or holding at least a majority of the OCS or
of majority of the members entitled to vote;
3. There must be previous notice to the stockholders or members of the intention to remove a
director or trustee at the regular or special meeting;
4. The removal must be by a vote of the stockholders representing 2/3 of the OCS or 2/3 of the
members entitled to vote;
5. A director/trustee who was elected by the minority must be removed only for cause.

Removal without cause – a director who was elected by the majority may actually be removed with or
without cause. The requirement that there must be cause for removal is limited to a director who was
elected by the minority.

Removal of Corporate Officers – since the authority to elect corporate officers rests with the Board,
there is a correlative authority to remove the corporate officers. The removal of corporate officers is a
corporate act.
Vacancies in the Office of Director or Trustee; Emergency Board

The stockholders or members shall replace or elect the director if the vacancy is due to:

1. Removal
2. Expiration of term
3. Other grounds, (e.g., death, resignation, abandonment) where the remaining directors do not
constitute a quorum; or
4. Increase in the number of directors

If the vacancy is due to causes other than those specified above:

1. The Board can fill the vacancy, if the remaining directors constitutes a quorum. Allowing the
remaining directors or trustees to fill up vacancies avoids the expenses and inconveniences
attending the calling of stockholders’ or members’ meeting, especially where there are many of
them.

The Board may still function despite a vacancy provided that there is still a quorum. The power of the
Board of Directors is not suspended by vacancies in the Board unless the number is reduced to below a
quorum.

Compensation (NO SALARY, EXCEPT REASONABLE PER DIEMS)

In the absence of any provision in the bylaws fixing their compensation, the directors or trustees shall
not receive any compensation in their capacity as such, except for reasonable per diems;

The STOCKHOLDERS representing at least a majority of the OCS or majority of the members may grant
directors or trustees with compensation and approve the amount thereof at a regular or special
meeting.

The total compensation of directors shall NOT EXCEED 10% of the net income before income tax of the
corporation during the preceding year.

Liability of Directors, Trustees or Officers

Directors or trustees shall be liable jointly and severally (solidarily) for all damages resulting from: (in
these cases, the liability of the directors/trustees and officers may be solidary with the corporation.

1. Those who willfully and knowingly vote for or assent to patently unlawful acts of the corporation
2. Guilty of gross negligence or bad faith in directing the affairs of the corporation
3. Those who acquire any personal or pecuniary interest in conflict with their duty as
directors/trustees

Management has 3 paramount duties

1. Obedience
2. Diligence
3. Loyalty
As a rule, directors and officers are not personally liable or solidarily liable with the corporation.
Obligations incurred by them, acting as such corporate agents, are not theirs but the direct
accountabilities of the corporation they represent.

Watered Stock – stocks of a corporation issued for less than their par or issued value or stocks issued for
a consideration other than cash, valued in excess of the fair value of such consideration.

Contractual Assumption of Liability – a director or officer is personally liable for the corporation’s debt
if they so contractually agree or stipulate.

Self-dealing directors, trustees, or officers are those who personally contract with the corporation in
which they are directors, trustees or officers. It is discouraged because the directors, trustees and
officers have fiduciary relationship with the corporation, and there can be no real bargaining where the
same person/s is/are acting on both sides of the trade.

A contract of the corporation with one (1) or more of its directors, trustees, officers or their spouses and
relatives within the fourth civil degree of consanguinity or affinity is voidable, at the option of such
corporation, unless…

Status of contract: Generally Voidable – the contract between the corporation and the self-dealing
director, trustee or officer is voidable at the option of the corporation. It is not required that there is
intent to defraud or that the contract results in corporate losses. The self-dealing contract is still
generally voidable despite the absence of fraud.

Contracts Between Corporation with Interlocking Directors

Interlocking directorship by itself is not prohibited under the Corporation Code and the RCCP.

A contract between two or more corporations having interlocking directors shall not be invalidated on
that ground alone, except in case of fraud or where the contract is not fair and reasonable.

There is interlocking directorship when one (or some or all) of the directors in one corporation is/are
also a director/s in another corporation.

Individuals who act in a dual capacity as directors of two corporations, one of whom is parent and the
other subsidiary, owe the same duty of good management to both corporations.

Substantial interest – if the stockholdings of the interlocking director in the corporation exceed 20% of
the OCS.

Nominal Interest – if his equity is 20% or less of the OCS.

Doctrine of Corporate Opportunity – where a director, by virtue of such office, acquires a business
opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such
corporation, the director must account for and refund to the latter all such profits, unless the act has
been ratified by a vote of the stockholders owning or representing at least 2/3 of the OCS.

This applies when there is presented to a corporate director:

1. Business opportunity which the corporation is financially able to exploit;

2. From its nature, the business opportunity is in line with the corporation’s business;
3. The corporation has an interest or a reasonable expectancy in the business opportunity; and
4. By taking the business opportunity as his own , the director will thereby be placed in a position
inimical to his duties to the corporation.

By embracing the opportunity, the self-interest of the officer or director will be brought into conflict
with that of his corporation. Hence, the law does not permit him to seize the opportunity even if he will
use his own funds in the venture. However, no criminal liability attaches to the offending director.

This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director
taking advantage of an opportunity for his own personal profit when the interest of the corporation
justly calls for protection.

Trustees and Officers not covered – ONLY DIRECTORS as the persons who are covered by the Doctrine
of Corporate Opportunity. Trustees are not included because non-stock corporations are not supposed
to be engaged in business as a main purpose.

POWERS OF CORPORATIONS

KINDS OF POWER

1. Express
2. Implied
3. Incidental

Express Powers

1. General Powers (Sec. 35)

2. Specific Powers (Sec. 9, 15, 36-43)

Implied Powers

“A corporation is empowered to exercise such other powers as may be essential or necessary to carry
out its purpose or purposes as stated in the Articles of Incorporation”.

Implied powers include all powers that are reasonably necessary or proper for the execution of the
powers expressly granted and are not expressly or impliedly excluded.
Incidental Powers – incidental powers are powers that are deemed conferred on the corporation
because they are incidental to the existence of the corporation. It includes:

1. Right to succession
2. Right to have a corporate name
3. Right to make by-laws for its government
4. Right to sue and be sued
5. Right to acquire and hold properties for the purposes authorized by the charter

Test to determine if Power is implied

Only such powers as are reasonably necessary to enable corporations to carry out the express powers
granted and the purposes of the creation are implied.

Powers merely convenient or useful are not implied if they are not essential, having in view the nature
and object of the corporation.

The test to be applied is: WHETHER THE ACT IN QUESTION IS IN DIRECT AND IMMEDIATE
FURTHERANCE OF THE CORPORATION’S BUSINESS

There should be a specification of the corporation’s intended purpose with sufficient clarity and
elucidation in the Articles of Incorporation in order to define with more certainty the scope of its
business.

Stretching the Purpose Clause – under which it is legal to stretch the meaning of the purpose clause to
cover new and unexpected situations. There is no more need to amend the Articles of Incorporation to
accommodate the new situations.

The purpose clause can be reasonably stretched or construed to cover matter or objects that could not
have been explicitly mentioned at the time of incorporation but is closely related to the expressed
corporate purpose or impliedly included therein.

GENERAL POWERS

As a rule, the Board exercises the general powers of the corporation.

Power to sue and be sued. Generally, corporations are required to attach a copy of the Board
Resolution authorizing the filing of the complaint or petition.

If no power of attorney, secretary’s certificate or Board Resolution is attached to the petition or

complaint, the pleading is not properly verified and should be treated as an unsigned pleading.

Power to adopt By-Laws

A corporation’s life may start even without the By-Laws. The By-Laws may be filed after incorporation.
By-Laws are meant to regulate the manner of conducting the internal affairs of the corporation.

To enter into merger or consolidation

Merger occurs when one corporation absorbs another constituent corporation.

There is Consolidation when two or more corporations form a new single corporation.

To enter into a Partnership and Joint Venture

RCCP expressly provides that corporations can now enter into a contract of partnership, joint venture
and other commercial agreements with natural and juridical persons.

However, as a general rule, a corporation cannot become a member of a partnership in the absence of
express authorization by statute or charter.

The limitation was based on public policy since in a partnership, the corporation would be bound by the
acts of persons who are not its duly appointed and authorized agents and officers, which would be
entirely inconsistent with the policy of the law that the corporation shall manage its own affairs
separately and exclusively.

“No foreign corporation shall give donations in aid of any political party or candidate or for purposes
of partisan political activity.”

Such donation is prohibited whether or not the conveyance is covered by a formal deed of donation.

By implication, domestic corporations are now allowed to make contributions to candidates and for
partisan political activities.

To enter into profession

It is also well to note that the corporate practice of any profession must never be sanctioned. It was
explained that “the public policy behind such ruling is universal, and is based on the notion that ethics of
any profession is based upon individual responsibility, personal accountability and independence,
which are all lost where one verily acts as a mere agent, or alter ego, of unlicensed persons or
corporations.

SPECIFIC POWERS

Power to extend or shorten corporate term

Power to Increase or Decrease Capital Stock; Incur, Create or Increase Bonded Indebtedness

The exercise of the power to increase or decrease the authorized capital stock of the corporation
involves the amendment of the Articles of Incorporation.

Increase in the capital stock of the corporation is necessary when additional funds are required for its
operation and the corporation opts to raise funds through additional investments.

The increase or decrease in the capital stock shall require prior approval of the SEC.

Bonded Indebtedness – applies only in cases where a corporation will incur, create or increase bonded
indebtedness. The requirement of Sec. 37 do not apply to decrease of bonded indebtedness.
Power to Deny Preemptive Right

Preemptive right – the right granted to the stockholders to have the first option to subscribe to any
issuance or disposition of shares from the capital stock in proportion to the stockholdings of the
shareholders.

Rationale: the underlying basis of this right is to maintain the relative and proportionate voting strength
and control of existing shareholders.

That the shareholder’s equity is fixed and should not be diluted by the issuance of additional shares that
effect his right to vote, to dividends, and to the distribution of assets upon liquidation, without first
giving him the opportunity to subscribe to such shares in proportion to his shareholding.

All stockholders whose names appear in the stock and transfer book at the time of the meeting
approving the issuance of shares are entitled to preemptive right.

The preemptive right covers all issues and disposition.

The preemptive right is not available when shares are issued in exchange for shares in another
corporation if the same is the result of a merger to which the corporation are parties.

Waiver – a stockholder who neither desires nor intends to buy any of the stocks being offered may
waive such right. In such event, the shares may be offered to any interested persons acceptable to the
corporation.

The right to waive preemptive right is a personal right.

Preemptive right may be restricted or denied under the Articles of Incorporation, and subject to certain
exceptions and limitations.

Sale or Other Disposition of Assets

A sale of all or substantially of the properties and assets of the corporation, including its goodwill
requires the following:

1. Must be approved by the majority of the directors or trustees

2. Must have the approval/assent of stockholders representing 2/3 of outstanding capital stock or
2/3 members in a meeting duly called for the purpose after written notice.

If the transaction does not cover all or substantially all of the assets, the decision of the Board is
sufficient and it is not necessary to get the approval of the stockholders.

Substantially All – a sale or other disposition shall be deemed to cover “substantially all” corporate
property and assets if the corporation would thereby be rendered incapable of continuing the business
or accomplishing the purpose for which it was incorporated.

>The test is not the amount involved but the nature of the transaction.
It does not apply in these cases:

1. If the sale of the entire property and assets is necessary in the usual and regular course of
business of the corporation; or
2. If the proceeds of the sale or other disposition of such property and assets will be appropriated
for the conduct of its remaining business.

The power to dispose corporate assets may be exercised where a just and reasonable cause exists,
provided the transaction is:

1. Not in fraud of the rights of creditors

2. Made for adequate consideration and
3. For the best interest of the corporation

It has to be emphasized that a transfer of all the properties and franchise of the corporation does not
necessarily dissolve the corporation or terminate the corporate existence.

The transferee-corporation of all or substantially all of the assets of the transferor-corporation will not
be liable for the debts of said transferor-corporation.

The Nell Doctrine

However, by way of exception, the transferee-corporation is liable:

1. There is an express or implied assumption of liabilities;

2. The transaction amounts to a consolidation or merger;
3. If the transaction is entered into fraudulently in order to escape liability from debtors or the
purchase was in fraud of creditors; and
4. The purchaser becomes a continuation of the seller

Edward J. Nell Co. vs. Pacific Farms, Inc.

Assumption of liabilities may be embodied in the agreement between the transferor-corporation and
the transferee-corporation.

Merger or consolidation – there is really no sale in case of merger or consolidation or their equivalent.
The properties are not sold but “are deemed automatically transferred to and vested in the surviving
corporation without further act or deed.”

Anticipation of Insolvency – page 480, RCCP Aquino

Business-Enterprise Transfer Rule – the buyer is liable if he is a mere continuation of the seller.

Requisites:

1. Transferor corporation sells all or substantially all of its assets to another entity; and
2. The transferee corporation continues the business of the transferor corporation.

Fraud is not necessary in a business-enterprise transfer before the buyer can be made liable;
Effect on Employees of Corporate Acquisitions

Dismissal of employees in good faith is justified if the corporate entity sells all or substantially all of its
assets.

In asset sales, the rule is that the seller in good faith is authorized to dismiss the affected employees, but
is liable for payment of separation pay under the law. The buyer in good faith, on the other hand, is not
obliged to absorb the employees affected by the sale, nor is it liable for the payment of their claims.

STOCKS AND STOCKHOLDERS

A person may become a stockholder in a corporation by voluntarily acquiring a share.

1. By purchase – made only after incorporation

2. Through subscription – can be made before or after incorporation

Trust Fund Doctrine – under the Trust Fund Doctrine, the subscribed capital stock of the corporation is a
trust fund for the payment of debts of the corporation which the creditors have the right to look up to
satisfy their credits. The corporation may not dissipate this and the creditors may sue stockholders
directly for their unpaid subscription.

The capital stock, property and other assets of the corporation are regarded as equity in trust for the
payment of the corporate creditors.

The scope of the doctrine when the corporation is insolvent encompasses not only the capital stock, but
also other property and assets generally regarded in equity as a trust fund for the payment of corporate
debts.

All assets and property belonging to the corporation held in trust for the benefit of creditors that were
distributed or in the possession of the stockholders, regardless of full payment of their subscriptions,
may be reached by the creditor in satisfaction of its claim.

The Trust Fund Doctrine is violated in the following instances:

1. When the corporation releases or condone payment of the unpaid subscription and the
stockholder has no right to demand the refund of his investment;
2. When there is payment of dividends without unrestricted retained earnings;
3. When properties are transferred in fraud of creditors;
4. When properties are disposed or undue preference is given to some creditors even if the
corporation is insolvent;
5. When the capital stock is decreased which has the effect of relieving the stockholders of the
obligation to pay their respective subscription.

The Trust Fund Doctrine provides that subscriptions to the capital stock of a corporation constitute a
fund to which creditors have a right to look for the satisfaction of their claims.

A stockholder cannot, without violating the Trust Fund Doctrine, compel the corporation to return his
investments without the consent of all the stockholders. Neither does he have the right to withdraw
even when all stockholders assent thereto if there is prejudice to creditors.
Fraud Theory - “if shares are issued to shareholders who have not yet paid the subscription price, the
corporate creditors have the right to go after the shareholders in case of insolvency.

Escrow Shares – the corporation may impose the condition that the shares to be issued shall be held in
escrow until actual payment is received by the corporation. Title does not pass to the subscriber until
the performance of the condition.

A holder of escrow shares does not become entitled to the rights pertaining to a stockholder until the
conditions for the release of such shares are fully met.

The unpaid subscription becomes due the moment the corporation is declared insolvent.

Section 61 of the RCCP enumerates the various types of consideration that the law allows to be
exchanged for shares in subscription agreements.

Watered stocks – are stocks that are issued for a consideration less than the par or issued price thereof.

Right of First Refusal – any stockholder who intends to sell his share must first offer the same to the
other stockholder who are given a period of 15 days to purchase the share. The right of first refusal may
also be based purely on contract.

No transfer of the shares of stock shall be valid, except as between the parties, until the transfer is
recorded in the books of the corporation.

Principle of Indivisibility of Subscription – “a subscription is one, entire and indivisible whole contract. It
cannot be divided into portions, so that the stockholder shall not be entitled to a certificate of stock
until he has remitted the full payment of subscription together with any interests and expenses, if any is
due.”

The effect of partial payment on the right to transfer: “If the stockholder has not paid the full amount of
his subscription, he cannot transfer part of it in view of the indivisible nature of the subscription
contract. It is only upon full payment of the whole subscription that a stockholder can transfer the same
to several transferees.

Rights of unpaid shares, nondelinquent

Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a
stockholder.

Pre-incorporation subscriber – becomes a shareholder from the moment the Certificate of

Incorporation is issued. He is a shareholder from the inception of the corporation.

Post-incorporation subscriber – becomes a shareholder from the perfection of the subscription

contract. He is a shareholder the moment he holds the shares by virtue of a subscription contract.

Whether pre or post subscription, the subscriber is entitled to all the rights of a shareholder from the
time he becomes such shareholder. It is not necessary that the subscription price has been fully paid. It
is also not necessary that a certificate of stock is issued.
Right to File an Action

A shareholder has the right to file three types of actions:

1. Derivative actions;
2. Individual actions; and
3. Representative actions

Derivative Actions

These are suits brought by one or more stockholders/members in the name and on behalf of the
corporation to:

1. Redress wrongs committed against it;

2. Protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or
are the ones to be sued, or have control of the corporation.

The general rule is that where a corporation is an injured party, its power to sue is lodged with its Board
of Directors or Trustees. By way of exception, an individual stockholder is permitted to institute a
derivative suit on behalf of the corporation wherein he holds stocks in order to protect or vindicate
corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued, or
hold the control of the corporation.

The suing stockholder is regarded as a nominal party, with the corporation as the real party in interest.
The corporation is an indispensable party who must be impleaded in the derivative action.

A derivative action is proper if the action is principally for damages resulting from alleged
mismanagement of the affairs of the corporation by its directors or officers, if it is alleged that the acts
of mismanagement are detrimental to the interests of the corporation. Thus, the injury complained of
primarily pertains to the corporation so that the suit for relief should be by the corporation.

Reason why individual suits are improper

An individual action is improper in cases where derivative suits can be filed considering that the cause of
action pertains to the corporation.

To allow shareholders to sue separately would conflict with the separate corporate entity principle;

Exhaustion of Intra-corporate Remedies

In order that a stockholder may sue on behalf of the corporation, he must allege with some particularity
in his complaint that he has exhausted his remedies within the corporation by making a sufficient
demand upon the directors or other officers for appropriate relief with the expressed intent to sue if
relief is denied.

The intent behind the rule is to make the derivative suit the final recourse of the stockholders.
Exhaustion of intra-corporate remedy is typically deemed futile when a majority of the directors have
participated or approved the alleged wrongdoing or are otherwise financially interested in the
challenged transaction.

Individual actions – these are actions brought by the shareholder in his own name against the
corporation when a wrong is directly inflicted against him personally and to determine his individual
right. The cause of action pertains to the shareholder and the action is meant directly to protect his
interest.

Representative actions – these are actions brought by the stockholder in behalf of himself and all other
stockholders similarly situated when a wrong is committed against a group of stockholders.

BY-LAWS are the rules and regulations or private laws enacted by the corporation to regulate, govern,
and control its own actions, affairs and concerns and of its stockholders or members and directors and
officers in relation thereto and among themselves in their relation to the corporation.

Every corporation has the inherent power to adopt By-Laws for its internal government and to regulate
the conduct and prescribe the rights and duties of its members.

A corporation is not automatically dissolved if no By-Laws are adopted within the period of 1 month
from receipt of official notice of the issuance by SEC of its certificate of incorporation.

In the absence of charter or statutory provisions to the contrary, By-Laws ARE NOT NECESSARY either to
the existence of a corporation or to the valid exercise of the powers conferred upon it. Hence, even
without the By-Laws, the corporation exists as a juridical entity and can exercise the powers of a
corporation.

The By-Laws may be adopted BEFORE or AFTER incorporation. In all cases, the By-Laws shall be effective
only upon the issuance by the SEC of a certification that the By-Laws are in accordance with the RCCP.

Two ways to amend By-Laws

1. Amendment by the stockholders/members together with the Board, or

2. Amendment by the Board only after due delegation by the stockholders/members

Right to vote of a stockholder

1. Personally
2. Through proxies who vote in their representative capacities
3. Through remote communication or in absentia

Quorum – shall consist of the stockholders representing a majority of the OCS or a majority of the
members in the case of nonstock corporations.

Quorum – means a number of stockholders/members of the corporation, board or committee who must
be present in order to take action. The meeting is void if there is no quorum.
Bases of Quorum (STOCKHOLDERS) – in stock corporations, the presence of a quorum is ascertained and
counted on the basis of the OUTSTANDING CAPITAL STOCK. In non-stock corporations, the voting rights
attach to membership.

The AOI set forth the purpose of the Corporation.

Best proof of purpose – AOI

A sh who holds delinquent shares are entitled to dividends

Piercing the corporate veil – transaction-based