PART 2 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68) 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. (Sec, 2 B.P. 68) Attributes of a Corporation Artificial being Created by operation of law Has the right of succession Has the powers, attributes and properties expressly authorized by law or incident to its existence, eS Corporation as an artificial being As ani artificial being, a corporation is possessed of a personality separate and distinct from that of a stockholder. Under Art: 46 of the Civil Code, it is a juridical person who may acquire and possess property of all kinds, as well as incur obligations and-bring civil or criminal action, in conformity with the laws and regulations of its organization. Doctrine of separate entity explained. A corporation has a personality separate and distinct from that, of each shareholder. This has been generally considered as the privilege or attribute most characteristic of theCorporation. It means that the stockholders of a corporation are not the same as the corporation itself. (A. Agbayani Commercial Law Volume i : Se Consequences of the doctrine of legal entity: . Corporate Property is owned by the corporation as a distinct legal fiction, and the shareholders have only an indirect interest in the assets and business. Shareholders cannot maintain actions in their own name and right, to recover possession of property belonging to the.corporation, or to recover damages for its injury. The right of action is in the corporation, and must be brought in the corporate name by its authorized agents. 3. The right to objéct to the admission in evidence of documents, papers and things illegally seized from the offices and premises of the corporation belongs exclusively to the corporation and may not be invoked by the corporate officers or stockholders in the proceeding against them. (Ballantine 288 - 292; Flectcher 103 - 132; Stonehill et. al. vs. Diokno et. al. L-19550) 4. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. (Sunio vs. NLRC, 127 SCRA 390) ‘5. A. Piercing the veil of corporate fiction In applying the doctrine of piercing the veil of corporate fiction, the following requisites must be established: (1) control, not merely.majority or complete stock control; (2) such contro] must have been used by the defendant to commit fraud or wrong, to perpetuate the violation ofa statutory or other POSitive legal duty, or dishonest acts in contravention of plaintiff's legal rights; and (3) the aforesaid control and breach of duty must proximately caused the injury or unjust loss complained of. (Velarde vs. Lopez, Inc., G.R. No. 153886, January 14, 2004) Piercing the veil of corporate fiction is warranted, however, only in cases when the separate legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, such that in the case of two corporations, the law will regard the corporations as merged into one. The rationale behind piercing a corporation’s identity is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. (Francisco Motors Corporation vs. Court of. Appeals, 309 SCRA 72) B. Disregard of legal fiction or piercing the veil of corporate entity. When valid grounds exist, the legal fiction that a corporation is an entity separate and distinct from its members or stockholders may be disregarded. In such cases, the corporation willbe considered a mere association of persons. The members or stockholders of the corporation will be considered the same as the corporation. This is referred to by some courts as“piercing the veil of corporate entity”, or disregarding the fiction of corporate entity or “looking at the substance rather than the form . Before the doctrine of separate entity may be disregarded, the wrong doing must be clearly and convincingly established. It cannot be pr: d. io vs ieee presumed. (Del Rosario vs. NLRC, When piercing the veil of Corporate entity not available: a. When it is resorted to, to justify under a theory of co- ownership the continued use and possession by stockholders of a corporation ; b. When the corporation employed fraud in the foreclosure proceedings c:, When the personal obligations of an individual are sought to be enforced against the corporation. A corporation is created by operation of law. A corporation is created and organized under a general law and is considered a legal body with rights and powers. It is not created by agreement of persons. Corporation has.a right of succession. The corporation shall continue to exist for the period stated in the Articles of Incorporation, and the death of any stockholder or director shall not dissolve the corporation. The corporate life of a corporation shall continue until the term expires or unless sooner dissolved for other causes or its term extended in accordance with law.By succession is not meant that the corporation is immortal, It simply means that a corporation has a continuity of existencg independent of that of its members or shareholders. This continued existence of a corporation is, however, limited to the period stated in its Articles of Incorporation or in the act creating it. Subject only to this limitation, the death o, withdrawal of the members or stockholders of a corporation does not affect its corporate existence. (Campus Rueda Co. vs, Pacific commercial Co. 44 Phil. 916) Where piercing of the veil corporate entity is allowed. a. Defeat of public conveniénce b. Justify wrong, protect fraud or defend crime c. When used as a mere alter ego. Tests of nationality or citizenship of a corporation 1. Incorporation test — As a general rule, a corporation is a citizen of the state or country by or under the laws of which it was created and exists without regard to the citizenship of its stockholders or members. (18 C.J.S. 388) 2. Control test — The nationality of a private corporation is determined by the character or citizenship of its controlling stockholders. (Filipinas Compania de Seguiros vs. Cristers, Huenefeld & Co., 83 Phil. 54) . 3. Center of Management test or Business domicile test - A corporation has the nationality of the state where it has its business domicile. :Residential and jurisdictional requirement of a corporation. A corporation is, for jurisdictional purposes, a resident of the place where its principal office or place of business is situated. (1 Fletcher 54). A corporation.can have no legal existence out of the boundaries of the sovereignty by which it is created. It exists only in contemplation of law, and by force of the law; and where that law ceases to operate, and is no longer obligatory, the corporation can have no existence. Hence, it cannot, through its agents, enter into contracts outside the jurisdiction in which it was created, without the sanction, express or implied, of the laws of the sovereignty where such contracts are entered into. (Bank of Augusta vs. Earle, 13 Pet. 519) 10. Corporation and partnership compared a. Similarities 1. With the exception of a corporation sole, both are composed of a group.of persons. 2. Both are artificial persons. 3. Both are devoid of physical bodily existence and as such can only act through their respective agents. 4. Both have juridical personalities separate and distinct from the members or stockholders. (Arts. 1768, 1767, 1803, 1818, C.C.)b. Distinctions 1. A partnership is created by mere agreement of the partners; while a corporation cannot be created by mere agreement of the parties but requires authority from the sovereign power, express or implied. (18 C.J.S. 404, Art. 1767 N.C.C.) f 2.. A partnership cannot be formed by one person; while a corporation sole is formed by one person. 3. A partnership may by agreement of the partners do any lawful act; while a corporation can exercise only the powers expressly granted it by thedaw or incident to its existence. (1 Fletcher 20; Sec. 2, Batas Pambansa Blg. 68) 4. Ina partnership all the general partners are liable with their separate property for partnership debts; while the members of a corporation are not so liable. (Art. 1816, N.C.C.; 18 C.J.S. 390) 5. A partnership may be dissolved by the partners at any time; while a corporation cannot be dissolved without the consent and authority of the state. (Art. 1830, N.C.C,; 1 Fletcher 18-19) 6. A partnership can be formed for an indefinite period, while a corporation shall exist for aperiod not exceeding 50 years which may be extended for periods not exceeding 50 years in any one instance. (Art. 1785, os 340 Am. Jur, 139; Sec. 11, Batas Pambansa Blg. 8 :7, Inapartnership a partner cannot transfer his interest to another without the consent of the other partners; while a stockholder in a corporation can transfer his shares to another without the consent of the other stockholders. (Art. 1813, N.C:C.; 18 C.J.S. 918) 8. Apartnership begins from the moment of the execution of the contract of partnership; while a corporation begins to have corporate existence and its juridical personality acquired from the date of the issuance of the certificate of incorporation by the SEC. (Art. 1784, N.C.C.; Sec, 19, Batas Pambansa Blg. 68) 9. .A partnership has no right of succession; while a corporation has a right of succession. (Art. 1830, N.C.C.; Sec. 2, Batas Pambansa Blg. 68) 10. In a-partnership all the general partners are, unless otherwise agreed, agents of the firm; while a corporation acts through its Board of Directors. (Art. 1803,N.C.C.; Sec. 23, Batas Pambansa Blg. 68) 11, Advantages of.a corporation Capacity to act as a Icgal entity. Continuity of life. The liability of the stockholders for the debts of the corporation is limited to their fully paid investment in the corporation. There: is better management as the best service may be extracted from the bigger membership of a corporation. There is more unified form of control which is reposed in the Board of Directors.6.. Transferability of shares even without the Consent of the 7. other stockholders. , There is a greater source of capital 12. Disadvantages of a corporation 1. 2. Be 9. A corporation is subject to greater governmental contro}, Frequent and varied Teports are required of corporations, A corporation may not engage in any other business other than the business specified in the Articles of. Incorporation, Minority stockholders may be at the mercy of majority stockholders. - A corporation cannot transact business in another state unless it obtains a license for that purpose. It involves double taxation. Outstanding stock cannot be more than the authorized capital stock. . Credit of corporation is limited on account of limited liability of stockholders, There is a greatest possibility of abuse of power. 13. Different kinds of corporation a. Aggregate and sole 1. Corporation aggregate — one which is or may be composed of more than one member (18 C.L.S. 393), such as the San Miguel Corporatizs, 2. Corporation sole — one which is composed of a single member and his successors in office. (18 C.J.S. 393) Thus, for the administration of the temporalities of any religious denomination, society, or church, and the management of the estate and properties thereof, it shallbe lawful for the bishop, chief priest, or presiding elder of any such religious denomination, society, or church to become a corporation sole, unless inconsistent with the rules, regulations or discipline of his religious denomination, society, or church. or forbidden by competent authority thereof. (Sec. 110) b. Ecclesiastical and lay i - Ecclesiastical corporation — one created to secure the public worship of'God (1 Bouvier’s Law Dict. 683), such as the Roman‘Catholic Church. 2. Lay corporation — one established for temporal purposes and is comprised of laymen (18 C.J.S. 393), such as the Delta Motor Corporation. ie c. Stock ana Non-stock 1; Stock corporations — those which have a capital stock divided into shares and are authorized to distribute, to, the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held, such as the Philippine School of Business Administration. Non-stock corporation —one in which there is no such stock, but the membership therein is otherwise represented (18 C.J.S..399), such as the Manila Lions Club. oond. Dejure and De facto 1. De jure corporation — one created in strict or substantia} conformity to the governing corporation statutes, ang whose right to exist and act as such cannot be successfully attacked in a direct proceeding for that purpose by the state. (8 Fletcher 62) 2. De facto corporation — one so defectively created as not to be a de jure corporation, but nevertheless the result of a bona fide attempt to incorporate under existing statutory authority, coupled with the exercise of corporate powers. (8 Fletcher 69) e. Eleemosynary and civil 1. Eleemosynary corporation — those which are created for purposes of charities, such as hospitals, schools, and the like. (1 Bouvier’s Law Dict. 683) 2. Civil corporations — those which are created to facilitate the transaction of business (1 Bouvier’s Law Dict. 688), such as the Atlas Consolidated Mining and Development Corporation. f. Public and Private 1. Public Corporation — those formed or organized for the government of a.pottion of the state, such as the City of Manila. 2. Prir_ te Corporations —those which are created wholly or in p.tt, for purposes of private emolument (1 Ruvicr’s Law Dict. 683), such as the Amon Trading Corporation.Domestic and Foreign 1 Domestic corporation — a domestic corporation with respect to a particular state or country is one created by or existing under the laws of that state or country. (18 C:.S. 399) Foreign corporation — one created by or existing under the laws of some other state or country. (18 C.J.S. 399) . Open and Close 1. Open corporation — one in which the general public m ay become stockholders or members thereof. " Close corporation — one in which the stockholders or members are limited to a few persons such a members of a family. Parent and Subsidiary Parent or holding corporation — one which is so related to another corporation that it has the power either directly or indirectly through another corporation, to eléct’a majority of the directors of such other corporation. Subsidiary corporation — one which. is so related to another that a majority of its directors can be elected directly or indirectly, by such other corporation. Wasting assets corporation — one the sole purpose of which is to invest its capital in a specific property and afterward to consume that property or extract its value at a profit, such as mining property, oil or gas well. (Ballantine, p. S875 fk. Affiliated corporation — one related to another by owning or being owned by common management or bya long-term lease of its properties or other control device. An affiliation exists between a holding or parent company and its subsidiary, or between two corporations owned or controlled by a third. (Kohler, Dictionary for Accountants, p. 26). Government owned or controlled corporations — those organized by the government or corporations of which the government is the ‘majority stockholder, such as the Philippine National Railways, Metro Manila Transit Corporation, National Power Corporation, etc. .. Corporation by prescription — one where corporate powers have been exercised by a body of men for such a length of time as to raise a presumption of the grant of an ancient charter to their predecessors (18 C.J.S. 406), such as the Roman Catholic Church. . Corporation by estoppel — one, which really is not a corporation, but which has Tepresented itself to the public as a real corporation, and which cannot now be permitted to deny such representation: (Brown ys. Atlanta, 39 S.E. 71) Quasi-public corporations — private corporations which have accepted ‘from the State the grant of a franchise or Contract involving the performance of public duties (1 Fletcher 217), such as the Manila Electric Company.p. Quasi corporations ~ associations and-government or political institutions or officers which are not corporations in the full sense, but which are invested by Jaw with some of the attributes of a corporation, as the capacity to sue or to be sued asa corporate body, to have a continued existence unaffected by death or disability of members, or to make particular contracts or hold particular property or rights as a corporate body (18 C.J.S. 399), such as the board of accountancy. q. Trading corporation — A corporation engaged in the business of buying and selling. r. Tramp corporation — A corporation organized in one state without any intention of doing business in that state, but instead it will carry its business operations in other states. (Kinds of corporation were taken from the book of B: Paulino, Law on Business Organization) 14. Effect of ownership of stock by government The-fact that the government happens to be a stockholder of a corporation does not make it a public corporation. Thus, the following corporations: Philippine National Railways, Metro Manila Transit Corporation, National Power Corporation, National Coal Company, although owned or controlled by the government, are private corporations. As private corporations they have no greater powers, rights, or privileges than any other cozporation which might be organized for the same purpose under the Corporation Law: (National Coal Co. vs. Collector of Internal Revenue, 46 Phil. 583).‘15. Effect of public nature or character of corporate 16. 17. undertaking. The mere fact that the undertaking of the corporation is one which the state itself might enter as part of its public works, does not make the corporation’a public’one. Education is a public or governmental function. Article II, section 17 of the Philippine Constitution of 1986 provides that “the State shall* give priority to education, science and technology, arts, culture, and sports to foster patriotism and nationalism, accelerate social progress, and promote total human liberation and development. Thus, U.P., P.U.P., P.N.C. and the Philippine Science High School are public corporations. But still many colleges and universities are private corporations, such as PSBA, U.E., FE.U., N.U., N.C.B.A., and the University of Manila. (B. Paulino, Law on Business Organization) Test in determining whether corporation is public or private The test for determining whether a corporation is public or private is dependent upon the purpose of its creation. If a corporation is created as an agency or instrumentality of the state for political or public purpose. connected with- the administration of government, then it is a public corporation. If not, the corporation is private although the government is a stockholder or the owner of all its capital stock: : | i, Distinctions between public and private corporation. 1. A public corporation is an agency or instrumentality of the state; while a private corporation is an agency or instrumentality of private persons.18. 2. A-public Corporation is organized for political or public Purpose; while a private Corporation is organized for private - purpose, benefit, aim and end. 3. The officers of public corporations are appointed by the State and are subject to removal by the state; while the officers of ‘private corporations are elected by the stockholders and are subject to removal by the stockholders. Component parts of a Corporation. 1. Incorporators — stockholders or members mentioned in the Articles of Incorporation as originally forming and composing the corporation and who are signatories thereof. (Sec. § B.P. 68) 2. Corporators — those who compose the corporation whether stockholders or members. (Sec. 5 B.P..68) 3. Stockholders — owners of shares in a corporation which has capital stock. ; 4,.. Members — corporators of a corporation which has no capital stock. 5. Promoter — one who alone or with others undertakes to form a corporation and to procure for it the rights, instrumentalities, and capital by which it is to carry out the purposes, set forth in its charter, and to establish it as fully able to do its business. (18 C.J.S. 521) 6. Subscriber — one who has agreed to take stock from the corporation on the original issue of such stock. (Jones vs. Rankin, 140 P. 1120,.19 N.M. 56) +7. Underwriter — one who, under an agr eement,: made before | corporate shares are brought before the public, and in ‘the | event the public will not take them; the underwriter will be | the one to take them. (B. Paulino, Law on Business Organization) é ; 19. No signature, not an incorporator fs It will be noted that the Code adds as a requisite.to being an incorporator. that he bea signatory of the’ Articles of Incorporation. It would seem’therefore that even if a person is mentioned in the arti¢les as a member or stockholder originally forming and composing the corporation, if he is not asignatory of the articles, is not an incorporator. (A. Agbayani,; Commercial eLaws, Volume III) 20. Incorporator distinguished from Corporator The term “corporators” is‘applied to all persons who compose the corporation at any given time, and need not be among those who execute the Articles of Incorporation at the Start of the fosmation and organization. On the other hand, the *term “incorporator’ ” is applied only to those persons mentioned : in the Articles as originally forming the corporation and who hi are signatories of the Articles of Incorporation. Therefore, if you are not a signatory of the Articles of Incorporation you are not considered an incorporator but you may be a corporator. 21. Capital stocks: i 1, Capital stock — the sum total specified by the charter or | Orporation paid in, or to be paid in, for carrying on the business of the corporation. (18 C.J.S. 614)ls Subscribed capital stock — that part of the capital stock subscribed by the subscribers, whether paid or unpaid. - Paid-up capital stock — that part of the subscribed capital stock which has been paid to the corporation. - Capital ~the aggregate of the sum subscribed and paid in, or secured to be paid in, by the shareholders, with the addition of all gains or profits realized in the use and investment of those sums, or, if losses have been incurred, then it is the residue after deducting such losses. (Black’s _ Law Dict.,'p. 169) . Stated capital — the capital with which the corporation issuing shares without par value begins business, increased by any net additions thereto, or diminished by any net. deductions therefrom. (Corinee Realty Co. vs. Becker, 8° S.W. 2nd 970, 320 Mo. 908): . Outstanding capital stock — the total shares of stock issued to subscribers or stockholders, whether or not fully or partially-paid (as long as there is a binding subscription agreement), except treasury shares. (Sec. 137, Batag Pambansa Blg. 68) + . Unissued capital stock — that portion of the capital stock that it is not subscribed or issued to stockholders. . Legal capital —the amount equal to the aggregate par value of all the par value shares and/or issued value of all the no par value shares subscribed by the subscribers. When par value shares are issued for a premium or above: par, the premium or excess is not considered part of the legal capital.