CORPORATION CODE

ACCOUNTANCY INTENSIVE REVIEW

SUMMER 2015
WHAT IS CORPORATION?

• It is an artificial being created by operation of law, having the

right of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence
ATTRIBUTES OF A CORPORATION
• 1. It is an artificial being
• 2. It is created by operation of law
• 3. It has the right of succession
• 4. It has the powers, attributes, and properties expressly
authorized by law or incident to its existence.
• Classification of powers
• A. Express
• B. Incidental
• C. Implied
ADVANTAGES AND DISADVANTAGES OF A
CORPORATION
• Advantages:
• 1.) The opportunity of any number of persons to unite in a single enterprise in anonymity to
cooperate in furnishing large amounts of capital necessary to finance the gigantic enterprises
of modern times;
• 2.) The capacity to hold property, to contract, to sue and be sued as a legal unit or distinct
entity.
• 3.) The exemption of the stockholders from personal liability in excess of their investment in
the corporation.
• 4.) The continuity of corporate existence, regardless of the death and changes in its
membership
• 5.) The facility of transferring the stockholders' interest or investment in the corporation
• 6.) There is a greater source of capital
• Disadvantages:
• 1.) The corporation is relatively complicated in formation and management. It entails relatively high
cost of formation and operation and there is greater degree of governmental control and
supervision than in other forms of business organization
• 2.) There is lack of personal element in view of the transferability of shares and the vesting of
management powers in the board of directors
• 3.) Minority stockholders have very little voice over the conduct of the business of the corporation
• 4.) The limited liability of the corporation has often been abused and it provides inadequate
protection and compensation for victims of the business ventures;
• 5.) The corporation is subjected to heavier taxation because the profits of the corporation which are
already subjected to corporate income tax are again subjected to income tax when declared and
distributed as dividends to stockholders
• 6.) A corporation cannot engage in business other than the business specified in the Articles of
Incorporation
THREE STEPS IN THE CORPORATE
FORMATION
• 1.) Promotion - is the process by which a corporation is brought into existence. It includes the
offer to form a corporation and the procurement of subscriptions for its authorized capital
stock.
• 2.) Incorporation - the process of of acquiring legal personality beginning from the drafting of
its AOI up to its approval by SEC. A corporation may be formed by not less than 5 nor more
than 15 incorporators who are:
• A. All must be natural persons
• B. All must be capacitated
• C. Majority are residents of the Philippines
• D. All must be subscribers of at least one share of stock.
No minimum capital stock required, except if provided by special laws, as long as the paid-
up capital should not be less P5,000. 25% of the authorized capital stock must be
subscribed and 25% of the subscribed must be paid-up but in no case it will be less than
P5,000.00.
CORPORATE BY-LAWS

• The rules and regulations adopted by the stockholders or members for the internal
government of the corporation.
• It may be filed at the SEC before or after the incorporation.If before, it must be signed by ALL
the incorporators but if filed after, MAJORITY of the outstanding capital stock or members
must approve and sign the said by-laws.
• If filed after,it must be adopted within ONE MONTH from the receipt of official notice of the
issuance of certificate of incorporation by the SEC.
• Adoption,amendment or repeal of the by-laws may be delegated to the board of directors or
trustees by a vote of 2/3 OCS or members if non-stock. For the revocation of authority
delegated to the board, majority vote of the outstanding capital or member is necessary.
DIFFERENT KINDS OF CORPORATION
• Corporate aggregate - one which is composed of more than one stockholder or member.
• Corporation sole - one which is composed of a single member
• Ecclessiastical corporation - one established for public worship of God.
• Lay corporation - one established for temporal purposes and is composed of laymen
• Stock corporation - one which has a capital stock divided into shares and authorized to distribute
dividends to its stockholders.
• Non-stock corporation - is one in which there is no such stock.
• De jure corporation - one created in strict or compliance with the law.
• De facto corporation - is one defectively created or incorporated under existing law, with a certificate of
incorporation and actually exercising its corporate powers.
• Eleemosynary corporation - is one created for charitable purposes.
• Civil corporation - is one established for business transactions.
• Public corporations - one formed or organized for the government of a portion of the State.
• Private corporation - is one organized, wholly or in part for purposes of private emolument.
• Domestic corporation - in relation to a particular country,it is one which is incorporated or existing
under the laws of the country.
• Foreign corporation - under the Corporation Code, it is one which is incorporated or existing under the
laws of another country which allows Filipino citizens and corporations to engage in business in their
territory.
• Open corporation - is one where the public may become stockholders or members.
• Close corporation - one whose stockholders are limited to a few persons not exceeding twenty and
whose shares of stocks are not open for subscription to the public.
• Parent or holding corporation - one related to another corporation and has the power to elect a
majority of the directors of such corporation, directly or indirectly.
• Subsidiary corporation - one related to another corporation that a majority of its directors can be
elected by such corporation, directly or indirectly.
• Wasting assets corporation - is one the sole purpose of which is to invest its capital in a specific property
and to consume that property or extract its value for profit.
•
• Affiliated corporation - is one related to another by owning or being owned by common management or
by a long term lease of its properties or other control device.
• Government owned corporation - is one which is wholly owned by the government.
• Government controlled corporation - is one in which the government is the majority stockholder.
• Corporation by prescription - one where the corporate powers have been exercised by a body of men for
such a long period of time as to raise a presumption of the grant of an ancient charter to their
predecessors.
• Corporation by estoppel - is one, which is not really a corporation but represented itself to the public as
real corporation, and which cannot be allowed to deny such representation for the protection of
innocent third persons.
• Quasi-public corporation - is a private corporation with a franchise or contract granted by the State for
the performance of public duties.
• Quasi corporation - one which is not a corporation in the full sense but which is invested by law with
some of the attributes of a corporation, as the capacity to sue and be sued as a corporate body, to have a
right of succession, or to make particular contracts or hold particular properties or rights as a corporate
body.
• Trading corporation - one engaged in the business of buying and selling.
TESTS OF CORPORATE NATIONALITY OR
CITIZENSHIP

• 1.) Incorporation test - a corporation is a citizen of the country

under whose laws it has been incorporated.
• 2.) Control test - the nationality of a corporation is determined
by the citizenship of its controlling stockholders, and
• 3.) Domicile test - a corporation is a national or subject to the
jurisdiction of the place where its principal office or center of
management is located.
BOARD OF DIRECTORS, TRUSTEES AND
OTHER OFFICERS
• Being an artificial being, a corporation can only act thru its agents. All powers must be exercised
and property controlled by the Board of Directors(stock corp.) or Board of Trustees(non-stock
corp.).Some of the powers may be delegated to the Executive Committee composed of at least 3
directors/members to facilitate the solution of problems and to its officers for the day-to-day
transactions.
• However, there are corporate actions that cannot be entrusted to the executive committee such
as:
1.) approval of any action which requires stockholders' approval
2.) filling of vacancies in the board
3.) amendment or repeal of any resolution of the board, which by its express terms, is not so
amendable or repealable.
It doesn't mean,however, that the stockholders have no voice at all in the management of the
corporation. There are specific matters regarding the management of the corporation which requires
the approval of at least the MAJORITY or 2/3 of the outstanding capital stock or members:
 Actions Votes Required
1.) The removal, increase or reduction of directors 2/3 OCS
2.) Increase or reduction of capital stock and increasing bonded 2/3 OCS
indebtedness
3.) Amendment of the AOI 2/3 OCS or members
4.) A. Amendment, repeal or adoption of new by-laws Majority OCS or members
B. Delegation of the above power to the Board 2/3 OCS or members
C. Revocation of such power Majority OCS or members
5.) Entering into management contract Majority OCS or members
But: If more than 1/3 of the stockholders or majority of the
board are the same in either the managing or managed
corporation. 2/3 OCS or members

6.) Investment of corporate funds in other business. 2/3 OCS or members

7.) Sale of all or substantially all of the corporate assets. 2/3 OCS or members
8.) Authorization of the dissolution of the corporation 2/3 OCS or members
9.) Declaration of stock dividends 2/3 OCS
10.) Merger or Consolidation 2/3 OCS
11.) Issuance of shares in exchange for property needed for 2/3 OCS or members
corporate purposes or in payment of previously contracted
debt
A. NUMBER AND QUALIFICATIONS OF
DIRECTORS OR TRUSTEES
• Minimum number of directors or trustees required is 5 but the maximum depends on whether stock
(15) or non-stock (may be more than 15)
• Majority of the members of the board must be residents of the Philippines.
• A director or trustee must be:
• 1.) must be an owner of at least one share of stock or a member of a non-stock corporation
• 2.) must not have been convicted by final judgment of an offense carrying a penalty of
imprisonment exceeding 6 years or of a violation of the Corporation Code within five years prior to
his election

In some instance, the law requires that some or all of the directors must be citizens of the Philippines,
such as in:
1.) Rural banks - All Filipinos 4.) Banks and banking institutions - 2/3 are Filipinos
2.) Private development banks - All Filipinos 5.) Financing corporations - 2/3 are Filipinos
3.) Registered investment companies - All Filipinos 6.) Domestic air carriers - 2/3 are Filipinos
3-FOLD DUTY OF A DIRECTOR (OLD)
• 1.) Duty of Obedience - crimes are violations of this duty
• 2.) Duty of Loyalty - breach of trust is a violation of this duty
• 3.) Duty of Diligence - negligence and reckless imprudence are examples of the violation of
this.

• Under the doctrine of "corporate opportunity",a director who acquires a business

opportunity which should belong to the corporation and thereby obtain profits to the
detriment or prejudice of such corporation, is guilty of disloyalty in which he should give to
the corporation all the profits he obtained from such transaction EVEN IF HE USED HIS OWN
MONEY. However, it may be ratified by the vote of stckholders representing at least 2/3 of the
OCS.
CLASSES OF SUITS

• Derivative suit - A stockholder may file an action, in the name or on behalf of

the corporation to redress a wrong committed against the corporation.
• Representative suit - When a corporation committed wrong against a group of
stockholders, any of them may bring an action in behalf of himself and all
other stockholders who are similarly situated.
• Individual suit - It is an action filed by a stockholder against the corporation
for the redress of a wrong which is a direct violation of his rights as a
stockholder.
ELECTION OF DIRECTORS OR TRUSTEES
• For the election of directors or trustees, the owners of the MAJORITY of the outstanding
capital stock must be present. The stockholders may vote personally or by proxy. It can be
voted by viva voce but if there is a request, it must be voted by ballot.
• Election shall be held annually. The term of office of the directors of stock corporation is one
year or until their successors are elected and qualified. The trustees of non-stock corporation,
which may be more than 15, shall be classified that the term of office of one-third of their
number shall expire every year and subsequent elections of trustees comprising one-third of
the board shall be held annually for a term of three years.
• Every stockholder is entitled to a cumulative system of voting, which may either be:
• 1. straight voting
• 2. cumulative voting by lump-sum
• 3. cumulative voting by distribution
CORPORATE OFFICERS
• Immediately after the election, the elected officers must formally organize by
electing a president, secretary, treasurer and such other officers as may be
provided in the by-laws. THE PRESIDENT MUST BE A DIRECTOR. THE
TREASURER MAY OR MAY NOT BE A DIRECTOR. THE SECRETARY MAY OR MAY
NOT BE A DIRECTOR BUT MUST BE A RESIDENT OF THE PHILIPPINES. TWO OR
MORE POSITIONS MAY BE HELD CONCURRENTLY BY A DIRECTOR, BUT NOT AS
PRESIDENT AND SECRETARY OR PRESIDENT AND TREASURER AT THE SAME
TIME.
• The names, nationalities, and residences of the elected directors or trustees
and officers should be reported to the SEC by the secretary or other officers of
the corporation. If a director, trustee or officer will die or in any manner cease
to hold office,such fact should immediately be reported to the Commission.
FILLING UP OF VACANCIES IN THE BOARD

• Generally, vacancies in the Board may be filled up by the remaining

directors,provided they still constitute the quorum. The following vacancies,however,
may only be filled up by the stockholders/members:
1.) Vacancies caused by the removal of a director or directors;
2.) Vacancies caused by the increase in the number of directors;
3.) Vacancies caused by the expiration of their term; and
4.) Vacancies where the remaining directors do not constitute a quorum.
MEETINGS
• There are four kinds of meetings in a corporation to wit:
• 1. Regular board meeting
• 2. Special board meeting
• 3. Regular stockholders'/members' meeting and
• 4. Special stockholders'/members' meeting

• A. Provisions common to the meetings

• 1.) Both meetings shall be presided by the president, unless otherwise provided in the by-laws
• 2.) There must be a quorum for both meetings( majority of the OCS/members) unless otherwise
provided in the Corporation Code or in the by-laws; and
• 3.) Notice in both meetings may be waived by the stockholders/members or members of the
board.
B. DISTINCTIONS BETWEEN BOARD MEETING
AND STOCKHOLDERS'/MEMBERS MEETING
Stockholders/Members' Meeting Board Meeting
1.) Regular meetings are held annually as provided 1.) Regular meetings are held monthly or as
in the by-laws or on any date in April provided in the by-laws
2.) Generally two-week notice is required for regular 2.) Generally one-day notice is required for regular
meeting meeting
3.) Generally one-week notice is required for special 3.) Generally one-day notice is required for special
meeting meeting
4.) Shall be held in the city (Metro Manila is a city) 4.) May be held any where in or outside the
or municipality where the principal office of the Philippines
corporation is located
5.) Stockholders/members may attend meetings and 5.) Members of the Board cannot attend meetings
vote by proxy by proxy
6.) Cumulative voting is allowed 6.) Individual voting is required
METRO MANILA IS COMPOSED OF: (MC, MA
MA PA QUE SAN CAMANAVA,
LAMAMUPAPAPATA )
• 1.Manila City 10. Valenzuela City
• 2. Mandaluyong City 11. Las Pinas City
• 3. Marikina City 12. Marikina City
• 4. Pasig City 13. Muntinlupa City
• 5. Quezon City 14. Pasig City
• 6. San Juan 15. Pasay City
• 7. Caloocan City 16. Pateros
• 8. Malabon 17. Taguig City
• 9. Navotas
PROXY AND VOTING TRUST
Proxy is a written authority, filed with the corporate secretary before the meeting, given by a
stockholder authorizing a specified person to cast his vote. Generally, it is effective only for the
meeting for which it was intended and in no case shall it be valid and effective for more than
five years at any one time.

Voting trust is one created by an agreement between a group of stockholders and the trustee
whereby the trustee shall exercise the rights of the shareholders, either for a certain of for all
purposes, for a definite term, or for a period contingent upon a certain event or until the
agreement is terminated. It should not last longer than five years,except if a longer period is
stipulated as a condition in a loan agreement. It must be duly notarized. The purpose of voting
trust is to enable the stockholder to dispose of some or all of his shares and still retain control of
the corporation.
SHARES OF STOCKS
• Refers to the rights of the owner in the management, profits and assets of the corporation.
They are evidenced by a certificate of stock, which is the written acknowledgement by the
corporation. They are evidenced by a certificate of stock, which is the written
acknowledgment by the corporation of the shareholder's interest in the corporate property
and franchises.

• Classes of stocks:
• 1.) Common stock
• 2.) Preferrred stock
• 3.) Par value stock
• 4.) No-par value stock
• 5.) Voting stock
• 6.)Non-voting stock - is a class of stock which cannot be voted in a meeting of a corporation
except in some cases provided by law , such as:(AASIIMID)
• A. Amendment of the AOI
• B. Adoption and amendment of by-laws
• C. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the
corporate properties.
• D. Incurring, creating or increasing bonded indebtedness
• E. Increase or decrease of capital stock
• F. Merger or consolidation
• G. Investment of corporate funds in another corporation or business
• H. Dissolution of the corporation
• 7.)Founder's stock
• 8.) Redeemable stock
• 9.) Promotion stock
• 10.) Shares in escrow
• 11.) Treasury stock
• 12.) Watered stock

• Shares of stock shall not be issued in exchange for future services and promissory notes.
No certificate of stock shall be issued until the subscription, together with interest and
expenses, if any is due, has been fully paid.
• Holders of subscribed shares, which are not yet fully paid, have all the rights of a
stockholder, provided that they are not yet declared delinquent.
CALL AND DELINQUENCY SALE

• A call is an official declaration by the board that the sum subscribed, or any specified part
thereof is required to be paid. It is a demand for the payment of the whole or part of the
unpaid subscription made by the board thru a resolution.
• Delinquency sale - In not less than 30 days nor more than 60 days from the date the stocks
become delinquent, the sale of the delinquent stocks may be ordered by the board, which
order shall state the amount due on the subscription plus interest and expenses, the date,
the time and the place of the sale.
• Highest bidder is the one who offers to pay the full amount of the balance on the
subscription, together with accrued interest, cost of advertisement and expenses of sale for
the smallest number of shares or fraction of a share.
CORPORATE BOOKS AND RECORDS

• The following books and records shall be kept and carefully preserved by every corporation at
its principal office:
• 1. a record of all business transactions
• 2. minutes of all its regular and special meetings of the board and the stockholders
• 3. stock and transfer book
MERGER AND CONSOLIDATION

• Merger is the absorption by one corporation of the properties and franchises of another
corporation or corporations whose stock it has acquired and which the absorbed corporation
or corporations ceases to exist and the absorbing corporation alone survives.

• Consolidation is a combination of two or more corporations by which the rights, franchises,

privileges and property are united and become the rights, franchises, privileges and property
of a single corporation composed generally of the stockholders of the original corporations.
In consolidation, the original corporations cease to exist and a new one is created.
APPRAISAL RIGHT
• It is the right of a stockholder, who dissented to specified corporate action, to demand for the
appraisal and payment of the fair value of his shares.

• A. The right can be exercised when he dissented to the following actions:

• 1.) Amendment of the AOI, which has the effect of changing or restricting his rights as a
stockholder, or of authorizing preferences in any respect superior to those of outstanding
shares of any class, or of extending or shortening the corporate existence.
• 2.) Sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets
• 3.) Merger or consolidation
• 4.) Investment of corporate funds in another corporation or business or for any other
purpose.
• B. Requisites and procedure for the valid exercise of the appraisal right
• 1.) The stockholder dissented on any of the corporate action mentioned in
the last slide;
• 2.) He sent a written demand on the corporation for the payment of the
fair value of his shares within thirty (30) days from the date the vote was
taken
• 3.) He submitted his certificate of stock to the corporation for annotation
therein that such shares are dissenting shares within (10) days from his
written demand
• 4.) Appraisal of the fair market value of his shares
• 5.) Payment of the fair value of his shares if the corporation has sufficient
unrestricted earnings to cover the amount of the shares
• 6.) He shall surrender his certificate of stock to the corporation upon
payment of the value of his shares.
DISSOLUTION
• Three phases in the dissolution of the corporation:
• 1.) Dissolution means the extinguishment of corporate franchise to be a corporation and the
termination of its corporate existence
• 2 Ways of dissolution:
• 1. Voluntary
• A. By voluntary surrender of its charter upon the affirmative vote of 2/3 OCS or
members, if no creditors affected
• B. Upon petition for any cause to the SEC, if the rights of creditors are affected
• C. By shortening the corporate term by amending the AOI for the purpose.
• 2. Involuntary dissolution is caused by
• A. legislative action
• B. expiration of the corporate term
• C. failure to organize and commence business within two years from the date of
incorporation
• D. happening of some contingency prescribed in its charter or statute.
• E. judgment of dissolution or forfeiture of charter in a quo warranto proceeding instituted by
the State, thru the Office of the Solicitor General

Liquidation or winding-up - is the process of settling all the unfinished corporate business, the
payment of all corporate liabilities and the distribution of its remaining assets. After dissolution
no new business shall be conducted by the corporation. It has a period of three years

Termination is the point in time when the corporate assets have been liquidated, all its
liabilities paid and all its remaining assets distributed in accordance with law.
FOREIGN CORPORATIONS
• One formed, organized or existing under any laws other than those of the Philippines,
and whose laws allow Filipino citizens and corporations to do business in its own
country or state.
• The law requires a foreign corporation to secure a license from the SEC before it can
transact business in our country without the required license from the SEC before it
can transact business in our country without the required license, it cannot sue but it
can be sued in courts.
• Within 60 days from the issuance of the license to do business, such foreign
corporation shall deposit with the SEC, Philippines securities in the actual market
value of at least P100,000.00
• When the gross income of the foreign corporation for a fiscal year exceeds P5,000,000, it is
required to deposit additional securities every six months after each fiscal year equivalent in
actual market value to two percent of the amount exceeding P5,000,000. In the event that
the deposit has decreased by at least 10% of the actual market value at the time of its
deposit, the foreign corporation may be required to deposit additional securities.

• Resident agent is either an individual residing in the Philippines, who must be of good moral
character and of sound financial standing or a domestic corporation lawfully transacting
business in the Philippines, who is designated through a written power of attorney by a
foreign corporation on whom any summons and other legal processes may be served in all
actions or legal proceedings against such corporation.

• End