Section 2. Corporation Defined. - A corporation is an artificial being created assets. (I/AME v. Litton Co., G.R. No.
. (I/AME v. Litton Co., G.R. No. 191525,  Even if there is a statement of capital stock, the corporation is still NOT
by operation of law, having the right of succession and the powers,
attributes, and properties expressly authorized by law or incidental to its
existence.
 An Artificial Being (“Capacity to Contract and Transact Business”) A
corporation exists by fiction of law. Hence, it can act only through its
directors, officers, and employees.
 Created by Operation of Law (“Creature of the Law”) Mere consent of
the parties is not sufficient. The State must give its consent either
through a special law (in case of government corporations) or a general
law (i.e., Corporation Code in case of private corporations).
 Has the Right of Succession (“Strong Juridical Personality”) A
corporation has the capacity for continuous existence despite changes
in stockholders/members or by any transfer of shares by a stockholder
to a 3rd person.
 Has the Powers, Attributes, and Properties Expressly Authorized by Law
or Incident to Its Existence (“A Creature of Limited Powers”) As a mere
creature of law, it can exercise only such powers as the law may choose
to grant it, either expressly or impliedly.
CORPORATE JURIDICAL PERSONALITY
DOCTRINE OF SEPARATE PERSONALITY. A corporation has personality
separate and distinct from that of its stockholders and members and is not
affected by the personal rights, obligations, and transactions of the latter.
 The property of the corporation is not the property of its stockholders
or members and may not be sold by them without express
authorization from the Board of Directors (Woodchild Holdings, Inc. vs.
Roxas Electric and Construction Co. 436 SCRA 235, 2004)
 Stockholders have no claim on corporate property as owners, but mere
expectancy or inchoate right to the same upon dissolution of the
corporation after all corporate creditors have been paid. Such right is
limited only to their equity interest (doctrine of limited liability).
Although a stockholder’s interest in the corporation may be attached
by his personal creditor, corporate property cannot be used to satisfy
his claim (Wise & Co. vs. Man Sun Lung, 1940)
Liability for Torts As a separate juridical personality, a corporation can be
held liable for torts committed by its officers for corporate purpose (PNB vs.
CA, 1978).
 “Corporate tort” consists in the violation of a right given or the
omission of a duty imposed by law; a breach of legal duty.
 The failure of the corporate employer to comply with the law-imposed
duty under the Labor Code to grant separation pay to employees in
case of cessation of operations constitutes tort and its stockholder who
was actively engaged in the management or operation of the business
should be personally liable. (Sergio F. Naguiat vs. NLRC, 269 SCRA 564,
1997)
Recovery of Moral Damages General Rule: Moral damages cannot be
awarded in favor of corporations because they do not have feelings and
mental state. They may not even claim moral damages for besmirched
reputation (NAPOCOR vs. Philipp Brothers Oceanic, G.R. No. 126204.
November 20, 2001). EXCEPTIONS:
 A corporation can recover moral damages under Art. 2219 (7) if it was
the victim of defamation (Filipinas Broadcasting Network vs. Ago
Medical and Educational Center 448 SCRA 413, 2005)
 A corporation with a good reputation, if besmirched, is allowed to
recover moral damages upon proof of existence of factual basis of
damage (actual injury) and its causal relation (Crystal vs. BPI, 2008).
Constitutional Rights. A corporation is a person, in proper cases, within the
due process and equal protection clauses of the Constitution. Just like a
natural person it cannot be deprived of its life and property without due
process of law. A corporation is also a person under the equal protection
clause. Its properties cannot also be taken for public use without just
compensation.
 The rights of the corporation are clearly limited because it is an
artificial being and a mere creature of law. As such a corporation
cannot exercise Constitutional rights that are not consistent with its
nature as a mere artificial being or rights that are not available because
the corporation's life is just a concession of the State. Thus, a
corporation cannot claim that it is entitled to the same level protection
of the due process clause for the protection of "liberty" that is being
enjoyed by natural persons. Even the right to exist that is included in
the term "liberty" is not the same as the right enjoyed by natural
persons because the life of a corporation is a mere concession of the
State.
 A corporation is entitled to the right against unreasonable searches and
seizure. A corporation is, after all, but an association of individuals
under an assumed name and with a distinct legal personality. In
organizing itself as a collective body, it waives no constitutional
immunities appropriate to such body.
Liability for Crimes Since a corporation is a mere legal fiction, it cannot be
proceeded against criminally because it cannot commit a crime in which
personal violence or malicious intent is required. Criminal action is limited to
the corporate agents guilty of an act amounting to a crime and never against
the corporation itself (West Coast Life Insurance Co. vs. Hurd [1914], Time
Inc. vs. Reyes [1971])
 General Rule: Corporations cannot commit felonies punishable under
the RPC for it is incapable of the requisite intent to commit these
crimes. Also, crimes are personal in nature requiring personal
performance of overt acts. Finally, a corporation cannot be arrested
and imprisoned; hence, cannot be penalized for a crime punishable by
imprisonment
 Exceptions: If the crime is committed by a corporation, the directors,
officers, employees or other officers thereof responsible for the offense
shall be charged and penalized for the crime, precisely because of the
nature of the crime and the penalty therefore. A corporation cannot be
arrested and imprisoned; hence, cannot be penalized for a crime
punishable by imprisonment. However a corporation may be charged
and prosecuted for a crime if the imposable penalty is fine (Ching vs.
Secretary of Justice, GR NO. 164317, February 6, 2006)
DOCTRINE OF PIERCING THE CORPORATE VEIL This doctrine means that the
court may disregard the separate and distinct personality of the corporation
from its members or stockholders and treat the corporation as a mere
collection of individuals or an aggregation of persons undertaking business
as a group especially when the corporate legal entity is used as a cloak for
fraud or illegality. (Kukan Internatl. Vs. Reyes, September 29, 2010).
a. Grounds for Application of Doctrine
i. If done to defraud the government of taxes due it.
ii. If done to evade payment of civil liability.
iii. If done by a corporation which is merely a conduit or alter
ego of another corporation.
iv. If done to evade compliance with contractual obligations.
v. If done to evade compliance with financial obligation to its
employees.
b. Test in Determining Applicability General Rule: The mere fact that a
corporation owns all or substantially all of the stocks of another
corporation is NOT sufficient to justify their being treated as one entity.
 Exception: The subsidiary is a mere instrumentality of the
parent corporation.
c. Kinds. Piercing Cases can either be Traditional Veil Piercing cases or
Reverse Veil Piercing Cases.
1. In 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. In Reverse piercing action, the plaintiff seeks to reach the
assets of a corporation to satisfy claims against a corporate
insider. "Reverse-piercing flows in the opposite direction (of
traditional corporate veil-piercing) and makes the
corporation liable for the debt of the shareholders." (i)
There are two (2) types of Reverse Piercing: Outsider
reverse piercing and Insider reverse piercing.
a. "Outsider reverse piercing occurs when a party.
with a claim against an individual or corporation
attempts to be repaid with assets of a corporation
owned or substantially controlled by the defendant.
b. In contrast, in insider reverse piercing, the
controlling members will attempt to ignore the
corporate fiction in order to take advantage of a
benefit available to the corporation, such as an
interest in a lawsuit or protection of personal
deemed to refer only to stocks with voting rights. The shares or series of
December 13, 2017)
Instrumentality Rule, or what is referred by the Supreme Court as the
"Three-Pronged Control Test," has gained wide acceptance as the primary
test in the application the doctrine of piercing the veil of corporate fiction.
The Instrumentality Rule calls for the application of the test consisting of the
three requisites enumerated hereunder. In the application of this rule, courts
are called upon to apply the "Three-Pronged Control Test," that is, to
determine the presence of three factors, namely
i. Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;
ii. Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of
plaintiffs legal right; and
iii. The aforesaid control and breach of duty must proximately cause
the injury or unjust loss complained of.
The absence of any of these elements will prevent the application of the
doctrine of "piercing the corporate veil."
NATIONALITY OF CORPORATIONS Serves as a legal basis for subjecting the
enterprise or its activities to the laws, the economic and fiscal powers, and
various social and financial policies of the state to which it is supposed to
belong.
Place of Incorporation - Principal doctrine on the test of the nationality of a
corporate identity in the Philippines
 A corporation is a national of the country under whose laws has
been organized and registered
Wartime Control Test. The place of incorporation b di regarded in times of
war. Courts will look into the nationality of the controlling stockholders in
wartime. If the controlling stockholders are citizens of the enemy state then
the corporation will also be deemed a public enemy corporation.
 Although the corporation may be organized under the laws of the
Philippines, but if the controlling stockholders are enemies, then
the veil of corporate fiction will be pierced and the nationality of
the corporation will be based on the citizenship of the majority
stockholders in times of war.
Grandfather Rule It is a method of determining the nationality of a
corporation which in turn is owned in part by another corporation by
breaking down the equity structure of the shareholder corporation.
Section 3. Classes of Corporations. - Corporations formed or organized under
this Code may be stock or nonstock corporations. Stock corporations are
those which have 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. All other corporations are
nonstock corporations.
CLASSES OF CORPORATION IN RELATION TO STATE
Public Corporations
 Formed or organized for the government of the portion of the state
(e.g., barangay, municipality, city, and province).
 Created for political purposes connected with the public good in the
administration of the civil government
 Note: Ownership of the government of the majority of the shares of a
corporation does not qualify such entity as a public corporation
(National Coal Co., vs. CIR, 46 Phil 583, 1924)
Private – by private persons alone or with the State.
 A corporation is created by operation of law under the Corporation
Code.
 Mainly governed by the Corporation Code.
 A government-owned or –controlled corporation when organized
under the Corporation Code is still a private corporation. But being a
governmentowned or –controlled corporation makes it liable for laws
and provisions applicable to the Government of its entities and subject
to the control of the Government (Cervantes vs. Auditor General, 91
Phil 359, 1952)
On GOCCs
 Created under a special law or charter
 Treated as private corporations not as public corporations
Quasi-Public Corporations
 A cross between private corporations and public corporations.
 Usually cover school districts, water districts and the like (Villanueva, p.
75)
AS TO LEGAL STATUS:
De Jure Corporation A corporation organized in accordance with the
requirements of law.
 Every corporation is deemed de jure until proven otherwise.
De Facto Corporation (Sec. 20)
 A corporation claiming in good faith to be a corporation under the
Corporation Code.
 Corporation where there exists a flaw in its incorporation, it falls short
of the requirements of law.
 It is the result of an attempt to incorporate under an existing law
coupled with the exercise of corporate powers.
 Under the Sec. 66 of the Rules of Court, inquiry must be done by the
Solicitor General in a quo warranto proceeding - the main issue is the
right to exist as a corporation.
 A de facto corporation will incur the same obligation, have the same
powers and rights as a de jure corporation.
 Elements:
o A valid law under which incorporated;
o Attempt in good faith to incorporate of “colorable
compliance;”
o Assumption of corporate powers; and
o Issuance of certificate of incorporation. (Arnold Hall vs.
Piccio, 86 Phil 634, 1950)
DE JURE DE FACTO
Created in strict or substantial Actually exists for all practical
conformity with the statutory purposes as a corporation but
requirements for incorporation which has no legal right to
corporate existence as against
the State
Right to exist cannot be Right to exercise powers
successfully attacked even in a cannot be inquired into
direct proceeding by the State collaterally in any private suit.
But such inquiry may be made
by the State in a proper court
proceeding.
Corporation by Estoppel - All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners
for all debts, liabilities and damages incurred or arising as a result thereof.
 Where a group of persons misrepresent themselves as a corporation
(ostensible corporation), they are subsequently estopped from claiming
lack of corporate life in order to avoid liability.
 A third party who assumes an obligation to an ostensible corporation
cannot resist performance by alleging the ostensible corporation’s lack
of personality.
Corporation by Prescription
The Roman Catholic Church is a corporation by prescription, with
acknowledged juridical personality inasmuch as it is an institution which
antedated by almost a thousand years any other personality in Europe
(Barlin vs. Ramirez, 7 Phil. 41, 1906).
AS TO EXISTENCE OF STOCKS:
Stock Corporation - One which has a capital stock divided into shares and is
authorized to distribute to the holders such shares, dividends or allotments
of the surplus profits (i.e., retained earnings on the basis of the shares held
 It is organized for profit.
 The governing body is usually the Board of Directors (except in certain
instances, e.g. close corporations)
a stock corporation if dividends are not supposed to be declared, that
is, there is no distribution of retained earnings (CIR vs. Club Filipino de
Cebu, 1962).
Non-Stock Corporation (See Sec. 87-88) - A corporation where no part of its
income is distributable as dividends to members, trustees or officers.
 Corporation that does not issue stocks and does not distribute
dividends to their members.
 Not organized for profit.
 Profit obtained as incident to operation had to be used for the
furtherance of the purpose/s for which the corporation was organized.
 The governing body is usually the Board of Trustees.
AS TO NUMBER OF MEMBERS:
Aggregate – a corporation which consists of many persons united to form a
body politic and corporate (Quimson, p. 156)
One-person corporation – a corporation with a single stockholder, provided
that, only a natural person, trust, or an estate may form a One-person
corporation (Sec. 116, RCC)
Section 4. Corporations Create by Special Laws or Charters. - Corporations
created by special laws or charters shall be governed primarily by the
provisions of the special law or charter creating them or applicable to them,
supplemented by the provisions of this Code, insofar as they are applicable.
Creation Through Special Law. Section 16, Article XII of the 1987
Constitution explicitly prohibits the creation or establishment of private
corporations through special laws except GOCC’s. The purpose of
constitutional provision is to ban private corporations created by special
charters, which historically gave certain individuals, families or groups
certain privileges denied to other citizens.
 Private corporations that can be created through special law are as
follows:
1. The private corporation must be government-owned or
controlled;
2. The creation of the corporation through special law must be in
the interest of common good; and
3. The creation must meet the test of economic viability.
 The test of economic viability applies only to GOCCs that perform
economic or commercial activities, and need to compete in the market
place.
 The above-enumerated requirements pertain to private corporations;
the requirements do not apply to public corporations.
 The employees of GOCCs created by special law or charter are subject
to civil service laws. The Labor Code covers the employees of GOCCs
that are created under the Corporation Code (or now, the RCCP).
Section 5. Corporators and Incorporators, Stockholders and Members. -
Corporators are those who compose a corporation, whether as stockholders
or shareholders in a stock corporation or as a members in a nonstock
corporations. Incorporators are those stockholders or members mentioned
in the articles of incorporation as originally forming and composing the
corporation and who are signatories thereof.
CAPITAL STRUCTURE This refers to the aggregate of the securities or
instruments which represent relatively long-term investment issued by the
corporation.
lncorporators. – stockholders or members mentioned in the Articles of
Incorporation as originally forming and composing the corporation and who
are signatories thereof.
 There is only one set of incorporators.
 The incorporators appearing as such in the Articles of Incorporation will
remain to be incorporators up to the termination of the life of the
corporation.
 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.
 Required Numbers and Qualifications of Incorporators
1. Any person, partnership, association, or corporation, singly or
jointly with others but not more than fifteen (15) in number, may
organize a corporation for lawful purpose or purposes. (Sec. 10,
RCC) Exception: Incorporated cooperatives are allowed to be
incorporators in rural banks. (Rural Bank Act of 1992)
2. For the purpose of forming a new domestic corporation under the
RCC, two or more persons, but not more than 15, may organize
themselves and form a corporation. EXCEPTIONS:
a. Educational Institution Trustees of educational
institutions organized as nonstock corporations shall
not be less than five (5) nor more than fifteen (15):
Provided, That the number of trustees shall be in
multiples of five (5) (Sec. 106, RCC)
b. Close Operations - shall be held of record by not more
than 20 specified persons (Sec. 96, RCC
3. A natural person incorporator must be of legal age. (Sec. 10, RCC)
4. Each incorporator of a stock corporation must own or subscribe
to at least one (1) share of the capital stock (Sec. 10, RCC)
 Individual licensed professionals and associations or partnerships
organized for the purpose of practicing a profession may only organize
a corporation if allowed by a special law. (Sec. 10, RCC)
SUBSCRIPTION REQUIREMENTS
General Rule: Stock corporations shall not be required to have a minimum
capital stock. (Sec. 12, RCC); EXCEPTION:
 As otherwise provided specifically provided by special law.
 After Incorporation, in case of an increase of capital stock, at least 25%
of the increase in capital stock must be subscribed and at least 25% of
the amount subscribed must be paid in cash or in property, the
valuation of which is equivalent to at least 25% of the subscription.
(Sec. 37(f), RCC)
Shareholders. The 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.
Section 6. Classification of Shares. - The classification of shares, their
corresponding rights, priviledges, restrictions, and their stated par value, if
any, must be indicated in the articles of incorporations. Each share shall be
equal in all respects to every other share, except as otherwise provided in
the articles of incorporation. Each share shall be equal in all respects to
every other share, except as otherwise provided in the articles of
incorporation and in the certificate of stock. The share stock corporations
may be divided into classes or series of shares, or both. No share may be
deprived of voting rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code: Provided, That
there shall be a class or series of shares with complete voting rights. Holders
of nonvoting shares shall nevertheless be entitled to vote on the following
matters;
(a) Amendment of the articles of incorporation;
(b) Adoption and amendment of bylaws;
(c) Sale, lease, echange, mortgage, pledge, or other disposition of all or
substantially all of the corporate property;
(d) Incurring, creating, or increasing bonded indebtedness;
(e) Increase or decrease of authorized capital stock;
(f) Merger or consolidation of the corporation with another corporation or
other corporations;
(g) Investment of corporate funds in another corporation or business in
accordance with this Code; and
(h) Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote
required under this Code to approve a particular corporate act shall be
shares may or may not have a par value: Provided, That banks, trust,
insurance, and preneed companies, public utilities, building and loan
associations, and other corporations authorized to obtain or access funds
from the public whether publicly listed or not, shall not be permitted to issue
no-par value shares of stock. Preferred shares of stock issued by a
corporation may be given preference in the distribution of dividends and in
the distribution of corporate assets in case of liquidation, or such other
preferences: Provided, That preferred shares of stock may be issued only
with a stated par value. The board of directors, where authorized in the
articles of incorporation, may fix the terms and conditions of preferred
shares of stock or any series thereof: Provided, further, That such terms and
conditions shall be effective upon filing of a certificate thereof with the
Securities and Exchange Commission, hereinafter referred to as the
"Commission". Shares of capital stock issued without par value shall be
deemed fully paid and nonassessable and the holder of such shares shall not
be liable to the corporation or to its creditors in respect thereto: Provided,
That no-par value shares must be issued for a consideration of at least Five
pesos (₱5.00) per share: Provided, further, That the entire consideration
received by the corporation for its no-par value shares shall be treated as
capital and shall not be available for distribution as dividends. A corporation
may further classify its shares for the purpose of ensuring compliance with
constitutional or legal requirements
Preferred Shares v Common Shares
COMMON SHARES PREFERREED SHARES
Also called ordinary shares Shares which are entitled the
and they share in profits pro- holders thereof to certain
rata. It is a basic class of stock preference over the holders
ordinarily and usually issued of common stock. The
without extraordinary rights preference may be;
and privileges. (1) As to asset;
(2) As to dividends; or
(3) As may be determined by
the board of directors when
Outstanding common shares
so authorized to do so. (Sec.
are granted all the ordinary
6, RCC)
rights granted to a share
under the law and subject to
the ordinary limitations
provided under the law. Preferred shareholders are
(Commission of Internal often excluded from any
Revenue vs. Court of Appeals, control, that's, deprived of
G.R. No. 108576, January 20, the right to vote in the
1999) election of directors and on
other matters, on the theory
that the preferred
shareholders are merely
General Rule: Common shares
investors in the corporation
are ALWAYS voting shares.
for income in the same
(Sec. 6, RCC)
manner as shareholders
Exception: Delinquent shares
(Sec. 70, RCC)
Section 7. Founders' Shares. - Founders' shares may be given certain rights
and privileges not enjoyed by the owners of other stock. Where the exclusive
right to vote and be voted for in the election of directors is granted, it must
be for a limited period not to exceed five (5) years from the date of
incorporation: Provided, That such exclusive right shall not be allowed if its
exercise will violate Commonwealth Act No. 108, otherwise known as the
"Anti-Dummy Law"; Republic Act No. 7042, otherwise known as the "Foreign
Investments Act of 1991"; and otherwise known as "Foreign Investments Act
of 1991"; and other pertinent laws.
Founders' shares are shares that are given to those who helped organize the
corporation. This may be a form of reward to the founders.
Shares classified as such in the Articles of Incorporation, which are given
certain rights and privileges not enjoyed by the owners of other stocks.
These may be given special preference in voting rights and dividend
payments.
 exclusive right to vote and be voted for of the founders’ share should
expire after five years from the approval of the SEC.
 The five-year limitation refers only to the exclusive right to vote and be
voted for in the election of directors, a right normally enjoyed by
holders of common shares, the class of shares which are supposed to
have complete voting rights. After the expiration of the five-year
period, founders' shares shall have equal rights with the holders of
common shares
Section 8. Redeemable Shares. - Redeemable shares may be issued by the
corporation when expressly provided in the articles of incorporation. They
are shares which may be purchased by the corporation. They are shares
which may be purchased by the corporation from the holders of such shares
upon the expiration of a fixed period, regardless of the existence of
unrestricted retained earnings in the books of the corporation, and upon
such other terms and conditions stated in the articles of incorporation and
the certificate of stock representing the shares, subject to rules and
regulations issued by the Commission.
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 articles of incorporation and certificates of stock representing said
shares.
 Redeemable shares are usually preferred shares.
 Rationale. Although the investment of a shareholder is usually locked-
in and cannot be returned to the shareholder until liquidation, the
redemption feature of shares was envisaged to effectively eliminate the
market volatility risks on the side of the share owners.
 Special Rules on Redeemable Shares
1. May be issued by the corporation only when it is expressly
authorized by the AOI
2. The terms and conditions affecting said shares must be stated
both in the AOI and in the certificates of stocks representing such
shares
3. May be deprived of voting rights in the AOI unless otherwise
provided (Sec. 6 and 8, RCC)
 Limitations
1. Redeemable shares may be issued only when expressly provided
for in the AOI (Sec. 8, RCC).
2. The terms and conditions affecting said shares must be stated
both in the AOI and in the certificate of stock (Sec. 8, RCC).
3. Redeemable shares may be deprived of voting rights in the AOI.
(Sec. 6, RCC)
4. The corporation is required to maintain a sinking fund to answer
for redemption price if the corporation is required to redeem.
(SEC OGC Opinion No. 07-03)
5. The redeemable shares are deemed retired upon redemption,
unless otherwise provided in the AOI (i.e., if the AOI allows for
reissuance of such shares) (SEC Rules Governing Redeemable and
Treasury Shares, 26 April 1982)
6. Unrestricted retained earnings are NOT necessary before shares
can be redeemed, but there must be sufficient assets to pay the
creditors and to answer for operations. (Republic Planters Banks
v. Agana, G.R. No. 51765, March 3, 1997)
7. Redemption cannot be made if such redemption will result in
insolvency or inability of the corporation to meet its obligations.
(SEC Opinion, 24 Aug 1987)
Section 9. Treasury Shares. - Treasury shares are shares of stock which have
been issued and fully paid for, but subsequently reacquired by the issuing
corporation through purchase, redemption, donation, or some other lawful
means. Such shares may again be disposed of for a reasonable price fixed by
the board of directors.
Treasury shares are issued shares but being in the treasury, they do not have
the status of outstanding shares.478 However, they still represent paid-for-
interest in the property of the corporation.
 Shares may be reacquired without impairing the corporate trust fund.
Reacquisition of shares is allowed, provided the corporation will use
 assets up to the extent of its unrestricted retained earnings. (SEC Rules
Governing Redeemable and Treasury Shares, Sec 3, par [1][a]
 Limitation on Treasury Shares
1. They may be re-issued or sold again as long as it is for a
reasonable price fixed by the BOD.
2. Cannot participate in dividends.
3. It has no voting right as long as such shares remain in the
Treasury. (Sec. 56, RCC)
4. It cannot be represented during stockholder’s meetings.
5. The amount of URE equivalent to the cost of treasury shares
being held shall be restricted from being declared and issued as
dividends.
 Shares, once re-acquired, become Treasury Shares. They are not
canceled or retired but retain their status as issued and subscribed
shares which may be resold or re-disposed by the board of directors at
reasonable prices
Section 10. Number and Qualifications of Incorporators. - Any person,
partnership, association or corporation, singly or jointly with others but not
more than fifteen (15) in number, may organize a corporation for any lawful
purpose or purposes: Provided, That 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
are natural persons must be of legal age. Each incorporator of a stock
corporation must own or be a subscriber to at least one (1) share of the
capital stock. A corporation with a single stockholder is considered a One
Person Corporation as described in Title XIII, Chapter III of this Code.
Incorporation. Incorporation means the performance of conditions, acts,
deeds, and writings by incorporators, and the official acts, certification, or
records, which give the corporation its existence. Incorporation is a mere
grant
requirements and procedures for the grant thereof must be complied with.
PROMOTER A person who brings about or causes to bring about the
formation and organization of a corporation by bringing together the
incorporators or the persons interested in the enterprise, procuring
subscriptions or capital to the corporation and setting in motion the
machinery which leads to the incorporation of the corporation itself.
 Under the Securities Regulation Code, a promoter is defined as a
person who, acting alone or with others, takes initiative in founding
and organizing the business or enterprise of the issuer and receives
consideration therefor.
 LIABILITY OF PROMOTER Contracts entered into by the promoter may,
in certain cases, bind a corporation. The general rule, however, is that
the acts of the promoter are not binding on the corporation that will be
organized.
 LIABILITY OF CORPORATION FOR PROMOTER’S CONTRACTS As a
general rule, a corporation should have a full and complete
organization and existence as an entity before it can enter into any kind
of contract or transact any business. This is subject to the exception
that a contract made by the promoters of the corporation on its own
behalf may be adopted, accepted or ratified by the corporation when
organized. (Rizal Light & Ice Co. Inc. vs Municipality of Morong, Rizal,
G.R. No. L-20993, September 28, 1968)
 SUBSCRIPTION CONTRACT This is any contract for the acquisition of
unissued stock in an existing corporation or a corporation still to be
formed notwithstanding the fact that the parties refer to it as a
purchase or some other contract. (Sec. 59, RCC)
 PRE-INCORPORATION SUBSCRIPTION AGREEMENTS Pre-incorporation
subscription refers to subscription of shares in a corporation still to be
formed.
Incorporators are' those stockholders or members mentioned in the Articles
of Incorporation as originally forming and composing the corporation and
who are signatories thereof.13 The basic qualifications of incorporators
under Section 10 may be enumerated as follows:
1. The incorporator must be a natural or juridical entity;
2. There 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.
Section 11. Corporate Term. - A corporation shall have perpetual existence
unless its articles of incorporation provides otherwise. Corporations with
certificates of incorporation issued prior to the effectivity of this Code and
which continue to exist shall have perpetual existence, unless the
corporation, upon a vote of its stockholders representing a majority of its
articles of incorporation: Provided, That any change in the corporate right of
dissenting stockholders in accordance with the provisions of this Code. A
corporate term for a specific period may be extended or shortened by
amending the articles of incorporation: Provided, That no extension may be
made earlier than three (3) years prior to the original or subsequent expiry
date(s) unless there are justifiable reasons for an earlier extension as may be
determined by the Commission: Provided, further, That such extension of
the corporate term shall take effect only on the day following the original or
subsequent expiry date(s). A corporation whose term has expired may apply
for 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 by the
Commission, the corporation shall be deemed revived and a certificate of
revival of corporate existence shall be issued, giving it perpetual existence,
unless its application for revival provides otherwise. No application for
revival of certificate of incorporation of banks, banking and quasi-banking
institutions, preneed, insurance and trust companies, non-stock savings and
loan associations (NSSLAs), pawnshops, corporations engaged in money
service business, and other financial intermediaries shall be approved by the
Commission unless accompanied by a favorable recommendation of the
appropriate government agency.
Basic Rules. Section 11 makes it clear that:
a. As a general rule, the corporate term is perpetual;
b. 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;
c. Corporations duly incorporated prior to the effective date of the RCCP
and still existing shall also automatically have perpetual term;
d. If existing corporations do not want a perpetual term, they must notify
the SEC that they want to maintain their fixed term;
e. A corporation with a fixed term may be dissolved by shortening its
term;
f. Corporations with fixed terms may extend their term; and
g. No extension can be made earlier than three (3) years prior to the
original or subsequent expiry date
 Perpetual Term of Existing Corporation. Corporations with certificates
of incorporation issued prior to the effectivity of the RCCP, and which
continue to exist, shall have perpetual existence.
 Option to have a Fixed Term. Even under the RCCP ' new corporations
may opt to have a fixed term by indicating such term in their Articles of
Incorporation. The choice to have a fixed term is now therefore given
to the corporation. When a new corporation indicates a fixed corporate
term in its Articles of Incorporation, or when an existing corporation
opts to retain its existing fixed term with notice to the SEC, the specific
period may still be extended or shortened by amending the Articles of
Incorporation
 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 by the SEC, the corporation shall be deemed revived and a
certificate of revival of corporate existence shall be issued, giving it
perpetual existence, unless its application for revival provides
otherwise.
Section 12. Minimum Capital Stock Not Required of Stock Corporations. -
Stock corporations shall not be required to have minimum capital stock,
except as otherwise specially provided by special law.
Minimum Authorized Capital. Section 12 provides that there is no minimum
authorized capital under the RCCP.
 Authorized Capital Stock is the amount fixed in the articles of
incorporation to be subscribed and paid by the stockholders of the
corporation.
 Subscribed Capital is that portion of the authorized capital stock that is
covered by subscription agreements whether fully paid or not.
 Paid Up Capital is the portion of the authorized capital that is
subscribed and paid;
 Paid-In Capital is the amount of outstanding capital stock and
additional paid-in capital (APIC) or premium paid over the par value of
the shares. APIC is any additional contribution by shareholders over the
par value of shares.
 Outstanding Capital Stock refers to the total shares of stock issued to
subscribers or stockholders, whether or not fully or partially paid
except treasury shares so long as there is a binding subscription
agreement.
 Capital includes properties and assets of the corporation that are used
for its business or operation.
 Stated Capital is the sum of the par value of all issued par value shares,
the entire amount received for no-par or other corporate action from
surplus to stated capital.
Section 13. Contents of the Articles of Incorporation. - All corporations shall
file with the Commission articles of incorporation in any of the official
languages, duly signed and acknowledged or authenticated, in such form and
manner as may be allowed by the Commission, containing substantially the
following matters, except as otherwise prescribed by this Code or by special
law:
(a) The name of corporation;
(b) The specific purpose or purposes for which the corporation is being
formed. Where a corporation has more than one stated purpose, the articles
of incorporation shall indicate the primary purpose and the secondary
purpose or purposes: Provided, That a nonstock corporation may not include
a purpose which would change or contradict its nature as such;
(c) The place where the principal office of the corporation is to be located,
which must be within the Philippines;
(d) The term for which the corporation is to exist, if the corporation has not
elected perpetual existence;
(e) The names, nationalities, and residence addresses of the incorporators;
(f) The number of directors, which shall not be more than fifteen (15) or the
number of trustees which may be more than fifteen (15);
(g) The names, nationalities, and residence addresses of persons who shall
act as directors or trustees until the first regular directors or trustees are
duly elected and qualified in accordance with this Code;
(h) If it be a stock corporation, the amount of its authorized capital stock,
number of shares into which it is divided, the par value of each, names,
nationalities, and subscribers, amount subscribed and paid by each on the
subscription, and a statement that some or all of the shares are without par
value, if applicable;
(i) If it be a nonstock corporation, the amount of its capital, the names,
nationalities, and residence addresses of the contributors, and amount
contributed by each; and
(j) Such other matters consistent with law and which the incorporators may
deem necessary and convenient.
An arbitration agreement may be provided in the articles of incorporation
pursuant to Section 181 of this Code. The Articles of incorporation and
applications for amendments thereto may be filed with the Commission in
the form of an electronic document, in accordance with the Commission's
rule and regulations on electronic filing.
Substantial Compliance. The Articles of Incorporation must comply with the
form prescribed by Articles 13 and 14 of the RCCP. However, substantial
compliance may not affect the de Jure existence of the corporation. Section
13 provides that the Articles of Incorporation must contain "substantially"
the matters indicated therein.
The RCCP recognizes that special laws and the Code itself may require strict
compliance with certain provisions. Thus, a company name and a purpose
clause in the Articles of Incorporation are indispensable. Special laws may
likewise impose additional provis10ns for strict compliance such as minimum
capitalization requirements.
Name. Section 18 of Corporation Code expressly prohibits the use of a
corporate name which is "identical or deceptively or confusingly similar to
that of any existing corporation or to any other name already protected by
law or is patently deceptive, confusing or contrary to existing laws." The
policy behind the foregoing prohibition is to avoid fraud upon the public that
will occasion to deal with the entity concerned, the evasion of legal
obligations and duties, and the reduction of difficulties of administration and
supervision over corporations.
 Guidelines in Use of Corporate Names: To fall within the prohibition of
the SEC's Revised Guidelines in the Approval of Corporate and
Partnership Names, two requisites must be proven to wit:
o The complainant corporation acquired a prior right over the use
of such corporate name; and
o The proposed name is either: • identical • deceptively or
confusingly similar to that of any existing corporation or to any
other name already protected by law • patently deceptive,
confusing or contrary to existing laws.
 As regards the first requisite, it has been held that the right to the
exclusive use of a corporate name with freedom from infringement by
similarity is determined by priority of adoption.
 Anent the second requisite, in determining the existence of confusing
similarity in corporate names, the test is whether the similarity is such
as to mislead a person using ordinary case and discrimination and the
Court must look to the record as well as the names themselves. And it
can even cover words that are deemed generic.
 A corporation seeking to prevent another corporation from using its
name under Section 17 must prove that:
1. The corporation has acquired a prior right over the use of such
corporate name; and
2. It is any of cases mentioned under Section 18 of the RCC, that is
a. the name is not distinguishable from the already reserved
or registered for the use of another corporation; or
b. the name is already protected by law; or
c. the use of the name is contrary to existing law, rules and
regulations.
 If the name of a corporation is not distinguishable from a name already
reserved or registered for the use of another corporation or is already
protected by law or is contrary to law, rules and regulations, the SEC
may:
a. Reject the AOI
b. Summarily order the corporation to cease and desist from using
such name;
c. Summarily order the corporation to register a new name and
amend its Articles of Incorporation bearing the new name;
d. Cause the removal of all visible signages, marks, advertisements,
labels, prints and other effects bearing such corporate name
Purpose Clause. The 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 determines the classification of a corporation.
However, where the corporation actually engages in one of its
secondary purposes, it may also be classified m accordance with the
secondary purpose/s
Section 15. Amendment of Articles of Incorporation. - Unless otherwise
prescribed by this Code or by special law, and for legitimate purposes, any
provision or matter stated in the articles of incorporation may be amended
by a majority vote of the board of directors or trustees and the vote or
written assent of the stockholders representing at least two-thirds (2/3) of
the outstanding capital stock, without prejudice to the appraisal right of
dissenting stockholders in accordance with the provisions of this Code. The
articles of incorporation of a nonstock corporation may be amended by the
vote or written assent of majority of the trustees and at least two-thirds
(2/3) of the members. The original and amended articles together shall
contain all provisions required by law to be set out in the articles of
incorporation. Amendments to the articles shall be indicated by
underscoring the change or changes made, and a copy thereof duly certified
under oath by the corporate secretary and a majority of the directors or
trustees, with a statement that the amendments have been duly approved
by the required vote of the stockholders or members, shall be submitted to
the Commission.
Requirements. Section 15 of the RCCP imposes certain quirements for the
amendment of the Articles of Incorporation:
1. The amendment must be for legitimate purposes and must not be
contrary to other provisions of the Revised Corporation Code and
special laws;
2. The amendment 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 two-thirds (2/3) of the outstanding capital stock,
or in case of a non-stock corporation, the vote or written assent of at
least two-thirds (2/3) of the members;
4. The original and amended articles together shall contain ail provisions
required by law to be set out in the Articles of Incorporation. The
amendments to the Articles of Incorporation shall be indicated by
underscoring the change or changes made;
5. A copy of the Amended Articles shall be duly certified under oath by
the corporate secretary and a majority of the directors or trustees,
stating the fact that the amendment or amendments have been duly
approved by the required vote of the stockholders or members. The
Amended Articles with the certification shall be submitted to the
Securities and Exchange Commission (SEC);
6. The amendment must be approved by the SEC.
NON-AMENDABLE ITEMS Matters of accomplished fact cannot be amended,
such as:
a. names and addresses of the incorporators,
b. date and place of incorporation, and
c. the notary public before whom the articles of incorporation was
acknowledged.
Section 19. De facto Corporations. - The due incorporation of any
corporation claiming in good faith to be a corporation under this Code, and
its right to exercise corporate powers, shall not be required into collaterally
in any private suit to which such corporation may be a party. Such inquiry
may be made by the Solicitor General in a quo warranto proceeding.
 Nobody can challenge their existence except the State.
o Should be via quo warranto proceeding.
o This defects can be waived by State if it wants to.
 Non-compliance with directory provisions of law or regulations will not
affect the de jure existence of a corporation.
 Non-compliance with mandatory provisions will affect the de jure
existence. However, only substantial compliance is required, and mere
colorable compliance may result in a de facto corporation.
 Non-compliance with conditions precedent to incorporation may affect
the de jure existence of the corporation.
 Non-compliance with conditions subsequent to incorporation may not
affect the existence of a corporation but may be a ground for
revocation of the certificate of incorporation.
 Condition subsequent to carry on the business will not affect the
corporation's de jure status but non-compliance may be a ground to
revoke the certificate of incorporation.
Section 20. Corporation by Estoppel. - All persons who assume to act as a
corporation knowing it to be without the authority to do so shall be liable as
general partners for all debts, liabilities and damages incurred or arising as a
result thereof: Provided, however, That when any such ostensible
corporation is sued on any transaction entered by its as a corporation or on
any tort committed by it as such, it shall not be allowed to use on any its lack
of corporate personality as a defense. Anyone who assumes an obligation to
an ostensible corporation as such cannot resist performance thereof on the
ground that there was in fact no corporation.
 Estoppel. One who assumes an obligation to an ostensible corporation
as such cannot resist performance thereof on the ground that there
was in fact no corporation
 Lack of corporate personality cannot be used as a defense
 Corporation by Estoppel : No Corporation :: De Facto Corporation :
There is a Corporation
 Those who assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners.
 Creation of By-laws indicates that the corporation is organized already.
 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
Section 21. Effects of Non-Use of Corporate Charter and Continuous
Inoperation. - If a corporation does not formally organize and commence its
business within five (5) year from the date of its incorporation, its certificate
of incorporation shall be deemed revoked as of the day following the end of
the five (5)-year period.
However, if a corporation has commence its business but subsequently
becomes inoperative for a period of at least five (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
prescribed. Upon the compliance by the corporation, the Commission shall
issue an order lifting the delinquent status. Failure to comply with the
requirements and resume operations within the period given by the
Commission shall cause the revocation of the corporation's certificate of
incorporation.
The Commission shall give reasonable notice to, and coordinate with the
appropriate regulatory agency prior to the suspension or revocation of the
certificate of incorporation of companies under their special regulatory
jurisdiction
 May be placed under delinquent status if failed to operate for at least 5
consecutive years
POWERS OF THE CORPORATIONS
Section 35. Corporate Powers and Capacity. - Every corporation incorporated
under this Code has the power and capacity:
(a) To sue and be sued in its corporate name;
(b) To have perpetual existence unless the certificate of incorporation
provides otherwise;
(c) To adopt and use a corporate seal;
(d) To amend its articles of incorporation in accordance with the provisions
of this Code;
(e) To adopt bylaws, not contrary to law, morals or public policy, and to
amend or repeal the same in accordance with this Code;
(f) In case of stock corporations, to issue or sell stocks to subscribers and to
sell treasury stocks in accordance with the provisions of this Code; and to
admit members to the corporation if it be a nonstock corporation;
(g) To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage, and otherwise deal with such real and personal property,
including securities and bonds of other corporations, as the transaction of
the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the constitution;
(h) To enter into a partnership, joint venture, merger, consolidation, or any
other commercial agreement with natural and juridical persons;
(i) To make reasonable donations, including those for the public welfare or
for hospital, charitable, cultural, scientific, civic, or similar purposes:
Provided, That no foreign corporation shall give donations in aid of any
political party or candidate or for purpose s of partisan political activity;
(j) To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers, and employees; and
(k) 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.
The express powers under the RCCP include (1) the general powers under
Section 35, and (2) the specific powers under Sections 9, 15, and 36 to 43 of
the RCCP. The powers expressly provided for in the RCCP are deemed part of
the Articles of Incorporation even if such powers are not enumerated therein
 General Powers. As a rule, the Board exercises the general powers of
the corporation. Generally, approval of a resolution by the Board is
enough for the exercise of such powers. The exercise of general powers
and all regular business transactions is covered by Section 52 of the
RCCP that provides that every decision of at least a majority of the
directors or trustees present at a meeting at which there is a quorum
shall be valid as a corporate act, except for the election of officers
which shall require the vote of a majority of all members of the Board.
 Specific Powers. The specific powers of corporations are provided for in
the RCCP, including the specific requirements and/ or procedure for
their exercise. These include the following powers:
1. To extend or shorten the corporate term under Sections 11 and
36;
2. To amend the Articles of Incorporation under Section 15;27
3. To increase or decrease the capital stock under Section 37;
4. To incur, create or increase bonded indebtedness also under
Section 37;
5. To deny pre-emptive right under Section 38;
6. To sell or dispose of all or substantially all of the assets of the
corporation under Section 39·
7. To acquire its own shares under Section 40;
8. to invest corporate funds in another corporation, business or for
any other purpose under Section 41;
9. To declare dividends under Section 42; and
10. To enter into a management contract under Section 43.
Kinds of Powers. A corporation may exercise (1) express powers, (2) implied
powers, and (3) incidental powers.
 Express Powers. Express powers are the powers expressly provided in
the RCCP, applicable special laws, administrative regulations, and the
Articles of Incorporation of the corporation.4 The express powers
under the RCCP include (1) the general powers under Section 35, and
(2) the specific powers under Sections 9, 15, and 36 to 43 of the RCCP.
The powers expressly provided for in the RCCP are deemed part of the
Articles of Incorporation even if such powers are not enumerated
therein
 Implied Powers. The existence of implied power is recognized under
paragraph (k) of Section 35 of the RCCP. Under paragraph (k) of Section
35 of the RCCP, 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.
o 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.6 The term "implied
powers" has also been defined as one which the law will regard as
existing by implication; such power must be one in a sense
necessary, i.e., needful, suitable and proper to accomplish the
object of the grant - one that is directly and immediately
appropriate for the execution of specific powers; and not one that
has slight, indirect or remote relation to the specific purposes.
o To determine whether an act is within the implied powers of a
corporation, it must be ascertained whether the act in question is
in direct and immediate furtherance of the corporation’s
business, fairly incident to the express powers and reasonably
necessary to their exercise. (University of Mindanao vs. BSP, G.R.
No. 194964-65, January 11, 2016)
 Incidental Powers. Incidental powers are powers that are deemed
conferred on the corporation because they are incidental to the
existence of the corporation. Corporations have incidental powers as a
consequence of the fact that they exist as juridical persons. Incidental
powers include:
o Right to succession,
o Right to have a corporate name,
o Right to make by-laws for its government,
o Right to sue and be sued, and
o Right to acquire and hold properties for the purposes authorized
by the charter.
Power to sue and be sued. One of the incidental powers of a corporation is
the power to sue and be sued. "The power is granted to a duly organized
corporation, unless specifically revoked by another law." The power to sue is
exercised by the corporation through the Board and/or its duly authorized
officers and agents.
 Venue of action – instituted at the place where the principal office of
the corporation is located.
 A corporation is considered a resident of the place where its principal
office is located as stated in its Articles of Incorporation. However,
when it is uncontroverted that the insolvent corporation abandoned
the old principal office, the corporation is considered a resident of the
city where its actual principal office is currently found.
Section 36. Power to Extend or Shorten Corporate Term. - A private
corporation may extend or shorten its term as stated in the articles of
incorporation when approved by a majority vote of the board of directors or
trustees, and ratified at a meeting by the stockholders or members
representing at least two-thirds (2/3) of the outstanding capital stock or of
its members. Written notice of the proposed action and the time and place
of the meeting shall be sent to the stockholders or members at their
respective place of residence as shown in the books of the corporation, and
must be deposited to the addressee in the post office with postage prepaid,
served personally, or when allowed in the bylaws or done with the consent
of the stockholder, sent electronically in accordance with the rules and
regulations of the Commission on the use of electronic data messages. In
case of extension of corporate term, a dissenting stockholder may exercise
the right of appraisal under the conditions provided in this Code.
 Powers are subject to some limitations.
 A corporate term for a specific period may be extended or shortened
by amending the articles of incorporation (Sec. 11, RCC)
 Requirements
a. The actions must be approved by a majority vote of the board of
directors or trustees.
b. The action must be ratified at a meeting by the stockholders
representing at least 2/3 of the outstanding capital stock or by at
least 2/3 of the members in case of non-stock corporations
c. For purposes of such stockholders’/ members’ meeting, written
notice of the proposed action and of the time and place of the
meeting shall be addressed to each stockholder or member at
his/her/its place of residence as shown in the books of the
corporation and deposited to the addressee in the post office
with postage prepaid, or served personally, or sent electronically
d. A copy of the amended Articles of Incorporation shall be
submitted to the SEC for its approval (Sec. 36, RCC)
 Limitation for extension of period: In case of extension, the same
cannot be made earlier than 3 years prior to the original or subsequent
expiry date unless there are justifiable reasons for an earlier extension.
Moreover, the same must be made during the lifetime of the
corporation. (Sec. 11, RCC)
 Shortening period with effect of dissolution
a. The shortening of the corporate term may be designed to have
the effect of dissolving the corporation
b. The dissolution takes effect on the date of the approval of the
Amended Articles of Corporation by the SEC
c. The three-year liquidation period shall likewise be reckoned from
the date of the SEC approval of the Amended Articles of
Incorporation
 Requirements (Sec. 37, RCC). Requirements for the exercise of the
power of increasing and decreasing capital stocks
a. Approval by the majority vote of the board of directors.
b. Ratification by the stockholders holding or representing at least
2/3 of the outstanding capital stock at a meeting duly called for
that purpose.
c. Prior written notice of the proposed increase or decrease of the
capital stock indicating the time and place of meeting addressed
to each stockholder must made either by personal service or
through electronic means recognized in the by-laws and/or SEC’s
rules.
d. A certificate must be signed by a majority of the directors,
countersigned by the chairman and the secretary of the
stockholders meeting.
e. In case of increase in capital stock, 25% of such increase in capital
must be subscribed and at least 25% of the amount must be paid
either in cash or property, accompanied by a sworn statement of
the treasurer of the corporation lawfully holding office at the time
of the filing of the certificate, attesting to such fact.
f. In case of decrease in capital stock, the same must not prejudice
the right of creditors, as such, the consent of the creditors needs
to be secured.
g. Filing of the certificate of increase or decrease and amended
articles with SEC.
h. Approval thereof by the SEC.
 A corporation has no power to release an original subscriber to its
capital stock from the obligation of paying for his shares, without a
 valuable consideration for such release; and as against creditors a Nothing in this section is intended to restrict the power of any corporation, o To pay dissenting or
reduction of the capital stock can take place only in the manner and without the authorization by the stockholders or members, to sell, lease, withdrawing stockholders
under the conditions prescribed by the statute or the charter or the exchange, mortgage, pledge, or otherwise dispose of any of its property and entitled to payment for their
Articles of Incorporation. Moreover, strict compliance with the assets if the same is necessary in the usual and regular course of business of shares – in the exercise of
statutory regulations is necessary. the corporation or if the proceeds of the sale or other disposition of such appraisal right; (Sec. 40(c), RCC)
 Ways to increase capital stock: property and assets shall be appropriated for the conduct of its remaining o To effect a decrease of capital
o By increasing the number of shares and retaining the par value business stock;
o By increasing the par value of existing shares without changing o In close corporations, when
the number of shares (Estate of Ortanez vs. Lee, G.R. No. 184251,  Requisites: A sale of all or substantially all of the there is a deadlock in the
March 9, 2016) properties and assets of the corporation, including its management of the business.
o By increasing the number of shares and increasing the par value goodwill, requires the following: (Sec. 103, RCC)
 Reasons for increasing the capital stock 1. It must be approved by the majority of the o In close corporations, a
o To generate more working capital. directors or trustees; stockholder may compel the
o To issue shares to sell to acquire assets. 2. There must be approval/assent of corporation to purchase his
o To have extra shares to meet the requirement for declaration of stockholders representing 2/3 of shares, for any reason, provided
stock dividend. (Miravide, Bar Review Materials in Commercial outstanding capital stock or two thirds of only that the corporation has
Law, 2002) members in a meeting duly called for the sufficient assets in its books to
 Ways to decrease capital stock: purpose after written notice. cover its debts and liabilities
o By decreasing the number of shares and retaining the par value The sale is void if these requirements are not complied with exclusive of capital stock (Sec.
o By decreasing the par value of existing shares without changing  Directors Approval Only. If the transaction does not 104, RCC)
the number of shares cover all or substantially all of the assets, the decision
o By decreasing the number of shares and decreasing the par value of the Board is sufficient and it is not necessary to get
the approval of the stockholders
 Reasons for decreasing the capital stock
o To reduce or wipe out existing deficit where no creditors would  Meaning of "Substantially All." A sale or other
disposition shall be deemed to cover "substantially all"
thereby be affected.
corporate property and assets if the corporation
o When the capital is more than what is necessary to procreate the
would thereby be rendered incapable of continuing
business or reduction of capital surplus.
the business or accomplishing the purpose for which it
o To write down the value of its fixed assets to reflect their present
was incorporated. The test is not the amount involved
actual value in case where there is a decline in the value of the
but the nature of the transaction.
fixed assets of the corporation. (Ladia and Reyes, The Revised
 Section 39 does not apply in these cases:
Corporation Code of the Philippines, Annotated, 2021, p. 264)
o if the sale of the entire property
 Stock Split A share is divided or converted into two or more shares but
and assets is necessary in the
the amount of the outstanding capital remains the same because the
usual and regular course of
par value is also divided in as many shares.
business of the corporation; or
 Reverse Stock Split The pro-rata combination of all the outstanding
o if the proceeds of the sale or
shares of a specific class into smaller number of shares of that class. A
other disposition of such
reverse stock split may be required to increase the market value per
property and assets will be
share or it may be designated to eliminate minority stockholder. (SEC
appropriated for the conduct of
Opinion No. 05-01 dated January 4, 2005)
its [the corporation's] remaining
 Bond A security representing denominated units of indebtedness
business
issued by a corporation to raise money or capital obliging the issuer to
 Effect on Creditors. The transferee-corporation of all or
pay the maturity value at the end of a specified period.
substantially all of the assets (or even shares) of the
 Bonded Indebtedness Security indebtedness or indebtedness secured
transferor-corporation will not be liable for the debts
by real or personal property that are covered by certificates. They refer
of said transferor-corporation
to negotiable corporate bonds secured by mortgage on property. (SEC
 However, by way of exception, the transferee-
Opinion dated April 29, 1987)
corporation is liable:
Section 38. Power to Deny Preemptive Right. - All stockholders of a stock
o if there· is an express or implied
corporation shall enjoy preemptive right to subscribe to all issues or
assumption of liabilities;
disposition of shares of any class, in proportion to their respective
o the transaction amounts to a
shareholdings, unless such right is denied by the articles of incorporation or
an amendment thereto: Provided, That such preemptive right shall not consolidation or merger;
extend to shares issued in compliance with laws requiring stock offerings or o if the transaction is entered into
minimum stock ownership by the public; or to shares issued in good faith fraudulently in order to escape
with the approval of the stockholders representing two-thirds (2/3) of the liability from debtors or the
outstanding capital stock in exchange for property needed for corporate purchase was in fraud of
purposes or in payment of previously contracted debt. creditors; and
 Denial must be specified in AOI o if the purchaser becomes a
o Shareholders must be made continuation of the seller.
aware that preemptive right is Section 40. Power to Acquire Own Shares. - Provided, That the corporation
not possible has unrestricted retained earnings in its books to cover the shares to be
purchased or acquired, a stock corporation shall have the power to
 Can be denied as long as the denial is expressed
purchased or acquired, a stock corporation shall have the power to purchase
specifically
or acquire its own shares for a legitimate corporate purpose or purposes,
 Preemptive right is the right of shareholders to
including the following cases:
subscribe to all issues or disposition of shares of any
(a) To eliminate fractional shares arising out of stock dividends;
class in proportion to their shareholdings. Preemptive
(b) To collect or compromise an indebtedness to the corporation, arising out
right is also defined as the right granted to the
of unpaid subscription, in a delinquency sale, and to purchase delinquent
stockholders to have the first option to subscribe to
shares sold during said sale; and
any issuance or disposition of shares from the capital
(c) To pay dissenting or withdrawing stockholders entitled to payment for
stock in proportion to the stockholdings of the
their shares under the provisions of this Code.
shareholders
 Requirements
 General rule: Stockholders have the pre-emptive right
o The acquisition is for a
to subscribe to all issues or disposition of shares by
the corporation of any class in proportion to their legitimate corporate purpose or
shareholdings purposes; and
o The corporation has
 Exception:
o Denied by the Articles of unrestricted retained earnings
in its books to cover the shares
Incorporation or amendment
to be purchased or acquired.
thereto;
o Shares are issued in compliance  Requirements for the exercise of the power to acquire
the corporation's own shares:
with laws requiring minimum
o The capital is not impaired;
stock ownership by the public
o Shares issued in good faith in o A legitimate and proper
exchange for property for corporate purpose or objective
corporate purposes approved by is advanced;
2/3 of the OUTSTANDING o The corporate affairs warrant it;
CAPITAL STOCK o The transaction is designed and
o Shares in payment of previously carried out in good faith; (5)
contracted debts approved by There is no intention and there
2/3 of OUTSTANDING CAPITAL is no resulting undue advantage
STOCK to favored stockholders at the
 Rationale. The foundation or underlying basis of this expense of the remainder;
right is to maintain the relative and proportionate o The creditors are not
voting strength and control of existing shareholders. prejudiced;
 Waiver. A stockholder who neither desires nor intends o The corporation acts in good
to buy any of the stocks being offered may waive such faith and without prejudice to
right. In such event, the shares may be offered to any the rights of creditors and
interested persons acceptable to the corporation stockholders; and
 Transfer. The right to subscribe to new issues and o There must be unrestricted
disposition may be transferred by the shareholder. retained earnings to purchase
Unless there is an express restriction in the Articles of the shares
Incorporation, the pre-emptive right is transferable.
 Not Against Public Policy. The power to deny  Purposes for acquisition of shares
preemptive right is not contrary to public policy. It was o To eliminate fractional shares
explained that "there is no inequity, there is no arising out of stock dividends;
unfairness because a shareholder who feels that he o To collect or compromise an
does not desire to invest because he does not have indebtedness to the
the right of pre-emption simply should not invest. corporation, arising out of
unpaid subscription, in a
Section 39. Sale or Other Disposition of Assets. - Subject to the provisions of delinquency sale, and to
Republic Act No. 10667, otherwise known as the "Philippine Competition purchase delinquent shares sold
Act", and other related laws a corporation may, by a majority vote of its during said sale; and
board of directors or trustees, sell, lease, exchange, mortgage, pledge, or o To pay dissenting or
otherwise dispose of its property and assets, upon such terms and withdrawing stockholders
conditions and for such consideration, which may be money, stock, bonds, or entitled to payment for their
other instruments for the payment of money or other property or shares under the provisions of
consideration, as its board of directors or trustees may deem expedient. the RCC
A sale of all or substantially all of the corporation's properties and assets,  Rationale. The general rule is that in the absence of
including its goodwill, must be authorized by the vote of stockholders statutory authority, the corporation cannot acquire its
representing at least two-thirds (2/3) of the outstanding capital stock, or at own shares. The investments of the shareholders are
least two-thirds (2/3) of the members, meeting duly called for the purpose. generally locked-in until the liquidation. The view that
In nonstock corporations where there are no members with voting rights, a corporation cannot buy its own stocks unless there is
the vote of at least a majority of the trustees in office will be sufficient an express grant of such power is based on the
authorization for the corporation to enter into any transaction authorized by following reasons:
this section. o the corporation cannot increase
The determination of whether or not the sale involves all or substantially all or diminish its capital without
of the corporation's properties and assets must be computed based on its the sanction of the legislature;
net asset value, as shown in its latest financial statements. A sale or other o the transaction is a fraud upon
disposition shall be deemed to cover substantially all the corporate property creditors; and
and assets if thereby the corporation would be rendered incapable of o it is foreign to the purposes for
continuing the business or accomplishing the purpose of which it was which the corporation is created
incorporated.  When a corporation may redeem its own share
Written notice of the proposed action and of the time and place for the o To redeem redeemable shares;
meeting shall be addressed to stockholders or members at their places of (Sec. 8, RCC)
residence as shown in the books of the corporation and deposited to the o (b) To acquire treasury shares;
addressee in the post office with postage prepaid, served personally, or (Sec. 9, RCC)
when allowed by the bylaws or done with the consent of the stockholder, o To eliminate fractional shares
sent electronically: Provided, That any dissenting stockholder may exercise arising out of stock dividends.
the right of appraisal under the conditions provided in this Code. (Sec. 40(a), RCC)
After such authorization or approval by the stockholders or members, the o To collect or compromise an
board of directors or trustees may, nevertheless, in its discretion, abandon indebtedness to the corporation
such sale, lease, exchange, mortgage, pledge, or other disposition of arising out of unpaid
property and assets, subject to the rights of third parties under any contract subscription in a delinquency
relating thereto, without further action or approval by the stockholders or sale, and to purchase delinquent
members. shares sold during said sale;
(Sec. 40(b), RCC)
Section 41. Power to Invest Corporate Funds in Another Corporation or other, courts in some
Business or for Any Other Purpose. - Subject to the provisions of this Code, a jurisdictions, although not in all,
private corporation may invest its funds in any other corporation, business, will enforce in favor of the party
or for any purpose other than the primary purpose for which it was who has executed the same on
organized, when approved by a majority of the board of directors or trustees his part against the other party
and ratified by the stockholders representing at least two-thirds (2/3) of the who has received and retained
outstanding capital stock, or by at least two-thirds (2/3) of the outstanding the benefits on the ground that
capital stock, or by at least two-thirds (2/3) of the members in the case of equitable principles and
nonstock corporations at a meeting duly called for the purpose. Notice of the outweighing considerations of
proposed investment and the time place of residence as shown in the books public policy, require that the
of the corporation and deposited to the addressee in the post office with the latter should not be permitted,
postage prepaid. Served personally, or sent electronically in accordance with while retaining the benefits of
the rules and regulations of the Commission on the use of electronic data the contract, to escape liability
message, when allowed by the bylaws or done with the consent of the on the ground that it was ultra
stockholders: Provided, That any dissenting stockholder shall have appraisal vires.
right as provided in this Code: Provided, however, That where the o Contracts, whether wholly
investment by the corporation is reasonably necessary to accomplish its executory or executed on one
primary purpose as stated in the articles of incorporation, the approval of side, apparently authorized, but
the stockholders or members shall not be necessary in fact, ultra vires because they
are made for a purpose not
within the scope of the business
of the corporation, the ultra
vires purpose being unknown to
the other party, are enforceable
Section 42. Power to Declare Dividends. - The board of directors of a stock against the corporation
corporation may declare dividends out of the unrestricted retained earnings
which shall be payable in cash, property, or in stock to all stockholders on the
basis of outstanding stock held by them: Provided, That any cash dividends
due on delinquent stock shall be first be applied to the unpaid balance on th
subscription plus costs and expenses, while stock holders until their unpaid
subscription is fully paid: Provided, further, That no stock dividend shall be
issued without the approval of stockholders representing at least two-thirds
(2/3)of the outstanding capital stock at a regular or special meeting duly
called for the purpose.
Stock corporations are prohibited from restraining surplus profits in excess of
one hundred percent (100%} of their paid-in capital stock, except: (a) when
justified by the definite corporate expansion projects or programs approved
by the board of directors; or (b) when the corporation is prohibited under
any loan agreement with financial institutions or creditors, whether local or
foreign, from declaring dividends without their consent, and such consent
has not yet been secured; or (c) when it can be clearly shown that such
retention is necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve for probable
contingencies.

Section 43. Power to Enter into Management Contract. - No corporation shall

conclude a management contract with another corporation unless such
contract is approved by the board of directors and by the stockholders
owning at least the majority of the outstanding capital stock, or by at least a
majority of the members in the case of a nonstock corporation, or both the
managing and the managed corporation, at a meeting duly called for the
purpose: Provided, That (a) where a stockholder or stockholders
representing the same interest of both the managing and the managed
corporations own or control more than one-third (1/3) of the total
outstanding capital stock entitled to vote of the managing corporation; or (b)
where a majority if the members of the board of directors of the managing
corporation also constitute a majority of the members of the board of
directors of the managed corporation, then the management contract must
be approved by the stockholders of the managed corporation owning at
least two-thirds (2/3) of the total outstanding capital stock entitled to vote,
or by at least two-thirds (2/3) of the members in the case of a nonstock
corporation.
These shall apply to any contract whereby a corporation undertakes to
manage or operate all or substantially all of the called services contracts,
operating agreements or otherwise: Provided, however, That such service
contracts or operating agreements which relate to the exploration,
development exploitation or utilization of natural resources may entered
into such periods as may be provided by the pertinent laws or regulations.
No management contracts shall be entered into for period longer that five
(5) years for any one term.
 Management Contract. A management contract is an
agreement whereby one undertakes to manage or
operate all or substantially all of the business of
another, whether such contracts are called service
contracts, operating agreements or otherwise.217
Management contracts may be necessary to assure
not only technical competence but also continuity in
management policy in the running of the corporation
 The maximum term prescribed under Section 43 of
RCCP is five years. However, it was intended that this
period may be subject to renewal. A period is provided
for to give the stockholders the opportunity to review
the management contract and to decide if the
contract will be continued. "If, on the basis of
experience, there has been some abuse on the part of
the managing corporation," the contract will not be
renewed for another term.

Section 44. Ultra Vires Acts of the Corporations. - No corporation shall

possess or exercise corporate powers other than those conferred by this
Code or by its articles of incorporation and except as necessary or incidental
to the exercise of the powers conferred.
 Any illegal activity is deemed ultra vires act
 Purpose clause tells what the corporation can do and
what the corporation “cannot” do.
 Secondary purpose requires “something else.”
 Decision to engage in secondary purpose must be
ratified by holders representing 2/3 of outstanding
capital stock (Sec. 43)
 An “ultra vires” act is one committed outside the
object for which a corporation is created as defined by
the law of its organization and therefore beyond the
power conferred upon it by law. The term "ultra vires"
is "distinguished from an illegal act for the former is
merely voidable which may be enforced by
performance, ratification, or estoppel, while the latter
is void and cannot be validated.
 Types of Ultra Vires Acts
o Acts done beyond the powers of
the corporation as provided in
the law or its articles of
incorporation.
o Acts entered into on behalf of
the corporation by persons who
have no corporate authority or
exceeded the scope of their
authority.
o Acts or contracts, which are per
se illegal as being contrary to
law
 When can ultra-vires act become binding and
enforceable Ultra-vires act may be enforced by
performance, ratification, or estoppel, as long as there
are no creditors, or the creditors are not injured
thereby, and where the rights of the state or the public
are not involved
 Consequence of ultra vires acts
o If the contract is executed on
both sides, the courts will not
set aside or interfere to deprive
either party of what has been
acquired under them.
o If the contract is executory on
both sides, it will not be
enforced at the suit of either
party, because their
enforcement is not required by
any equitable principles, and
will be contrary to public policy.
o If the contract is executed on
one side, and executory on the
DOCTRINE OF INDIVIDUALITY OF SUBSCRIPTION No certificate of stock shall
be issued to a subscriber until the full amount of his subscription together
with interest and expenses (in case of delinquent shares), if any is due, has
been paid. (Sec. 63, RCC)
All partial payments on one subscription shall be deemed applied
proportionately among the number of shares.
The failure to pay any of the installments due would necessarily affect all
other installments, because the subscription is to be treated as one, whole,
entire and indivisible contract. The default of payment on any of the
installment results in the entire subscription becoming due and demandable.
Pursuant to this doctrine, unpaid subscription cannot be transferred in parts.
It is only upon full payment of the whole subscription contract that the
stockholder can transfer the same to several transferees. (SEC Opinion 16-05
dated March 31, 2015)

DOCTRINE OF EQUALITY OF SHARES Each share shall be equal in all respects

to every other share, except as otherwise provided in the articles of
incorporation and in the certificate of stock. (Sec. 6, RCC)
All stocks issued by the corporation are presumed equal with the same
privileges and liabilities, provided that the Articles of Incorporation is silent
on such differences. (Commissioner of Internal Revenue vs. CA, et al., G.R.
No. 108576, January 20, 1999)

TRUST FUND DOCTRINE The trust fund doctrine provides that subscriptions
to the capital stock of a corporation constitute a fund to which the creditors
have a right to look for the satisfaction of their claims.
In a sense they have to be unimpaired for the protection of creditors. These
cover the entire consideration received for the issuance of no par value
shares or the aggregate amount for the par value shares issued by the
corporation.
It must be noted, however, that the trust fund doctrine is not limited to
stockholders’ subscriptions. The scope of the doctrine 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.
HOW POWERS ARE EXERCISED A corporation exercises its power through the
BOD and/or its duly authorized officers and agents
 By the shareholders By exercising their right to vote in
the following:
o Election or removal of
directors/trustees;
o Management contract;
o Adoption, amendment or repeal
of by-laws;
o Fixing the issued price of no-par
value shares, if Board of
Directors (BOD) is not
authorized by the articles of
incorporation;
o Amendment of articles of
incorporation;
o Ratification of certain acts of
directors;
o Extension or shortening of
corporate term;
o Increase or decrease of capital
stock;
o Incur, create or increase in
bonded indebtedness;
o Denial of pre-emptive right;
o Sale, lease, exchange, mortgage,
pledge or disposal of all or
substantially all of corporate
assets;
o Investment of corporate funds
in another corporation or
business or for any other
purpose other than the primary
purpose
o Issuance of stock dividends;
o Merger or consolidation
 By the Board of Directors The Board of Directors
exercises the powers of the corporation. Generally, the
Board alone, without the concurrence of the
stockholders, cannot overrule the directors in its
exercise of the corporate powers.
 By the officers In some cases, corporate officers like
the President can also bind the corporation. The
authority of such individuals to bind the corporation is
generally derived from Law, Corporate by-laws,
Authorization from the board, either expressly or
impliedly by habit, custom or acquiescence in the
general course of business.