Incorporation, Formation and

Powers of the Corporation

ATTY. ADRIAN B. CAMPILLA

Share of Stock

interest or right which owner has in the management

of the corporation, and its surplus profits, and, on
dissolution, in all of its assets remaining after the
payment of its debt.

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Doctrine of Equality of Shares

When the articles of incorporation do not provide for

any distinction of the shares of stock, all shares issued
by the corporation are presumed to be equal and enjoy
the same rights and privileges and are also subject to
the same liabilities.

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Capital and Authorized Capital

CAPITAL – actual property or estate of the

corporation whether in money or property.

AUTHORIZED CAPITAL STOCK – total amount in

the Articles of Incorporation, which may be raised by
the corporation for its operations.

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Trust Fund Doctrine

Provides that the Subscribed capital stock of the

corporation is a trust fund for the payment of debts of
the corporation which the creditors have the right to
look up to satisfy their credits. Corporation may not
dissipate this and the creditors may sue stockholders
directly for the unpaid subscription.

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How does one Become a Shareholder?
A Person becomes a shareholder the moment he:

1. Enters into a Subscription Contract with an Existing

Corporation (Meeting of His Offer and Acceptance by the
Juridical Entity)

2. Purchases Treasury Shares from the Corporation

3. Acquires Shares from Existing Shareholders by Sale or any

other contract, or acquires shares by operation of law like
succession

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Subscription Contract

Subscription contract. - Any contract for the acquisition of

unissued stock in an existing corporation or a corporation still
to be formed shall be deemed a subscription within the
meaning of this Title, notwithstanding the fact that the parties
refer to it as a purchase or some other contract. (Sec .59,
RCC)

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Pre- Incorporation Subscription Contract

Subscription of shares of stock of a corporation still to be

formed shall be irrevocable for a period of at least 6 months
from date of subscription, unless:

1. all of the other subscribers consent to the revocation;

2. the incorporation of said corporation fails to materialize with

said period or within a longer period as may be stipulated in
the contract of subscription; provided that no pre-
incorporation subscription may be revoked after the
submission of the articles of incorporation to the SEC
(Sec.60 RCC).

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Post Incorporation Subscription Contract

Entered into after Incorporation. After the

SEC has released your Certificate of
Incorporation

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What is an Underwriting Agreement?

It is an agreement between the Corporation

and the “underwriter” by which the latter
agrees for a certain compensation to take a
stipulated amount of stocks or bonds
specified, if such shares are not taken by those
to whom they are first offered.

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Valid Consideration for Subscription

1. Cash;
2. Property;
3. Labor or services actually rendered to the
corporation;
4. Prior corporate obligations;
5. Amounts transferred from unrestricted retained
earning to stated capital,
6. Outstanding shares in exchange for stocks in the event
of reclassification or conversion.

NOTE: shares of stock shall not be issued in exchange for promissory notes or
future services.

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DOCTRINE OF INDIVIDUALITY OF
SUBSCRIPTION

A subscription is one entire and

indivisible whole contract.

It cannot be divided into portions

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Minimum Capitalization
Stock corporations are still not required to have a minimum capital
stock, unless specifically provided by special law.

Moreover, the RCC removed the requirement that 25% of the

authorized capital stock be subscribed and that 25% of the
subscribed capital stock be paid for purposes of incorporation as
previously mandated under Section 13 of the Corporation Code,
which was deleted in its entirety (Sec. 12).

However, the 25%-25% requirement was retained for any increase

in the authorized capital stock.

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 Corporations Required to have Minimum
Capitalization
1. Domestic Insurance Corporations

2. Private Development Banks

3. Investment Companies – paid up of at least P500 Thousand

4. Savings and Loan Corporations

5. Financing Companies

6. Listed Companies under the Philippine Stock Exchange

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Process of Incorporation in the Philippines
Pre Incorporation
Phase
Subscription Contract- Those to Original
Shareholders/Incorporators

Articles of Incorporation Signed

Passed to the SEC

Certificate of Incorporation then issued

by the SEC

Post Incorporation
Subscription Contract to those interested
to Subscribe from Unissued Shares

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Certificate of Stock

Evidence of holder’s ownership of the stock

and of his right as a shareholder and up to the
extent specified therein

Remember: A stock certificate is only issued

when you have fully paid your subscription.

Subscription is different from Issuance

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 Powers of the Corporation

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Powers…

1. Express – those explicitly listed in the RCC

and the AOI

2. Implied- can be inferred from or necessary

for its existence.

3. Incidental- those that are incident to the

existence of the Corporation

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Powers…

THEORY OF GENERAL CAPACITY – corporation is said to

hold such powers as are not prohibited or withheld from it by
general law (everything is allowed except when prohibited).

THEORY OF SPECIAL CAPACITY – corporation cannot

exercise powers except those expressly or impliedly given
(everything is prohibited except when allowed).

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General Corporate Powers and Capacity
(Sec. 35 of the RCC)
1. To sue and be sued;

2. Of succession;

3. To adopt and use of corporate seal;

4. To amend Articles;

5. To adopt by-laws;

6. For stock corporations – issue and sell stocks to subscribers and

treasury stocks, for non-stock corporations – admit members;

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General Corporate Powers and Capacity
(Sec. 35 of the RCC)
7. Purchase Receive, Take, Grant Hold, Convey Sell, Lease, Pledge
Mortgage and otherwise deal with real and personal property pursuant
to its lawful business.

“Known as the property rights of the Corporation”

PurReTaGraHo CoSeLePleMorO

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Sec. 35 of the RCC ..
8. to enter into partnership, joint venture merger or consolidation;

9. to make reasonable donations for:

a. public welfare;
b. hospital;
c. charitable;
d. cultural;
e. scientific;
f civic; and similar purposes

Prohibitions : No foreign corporation can enter donation to –

i.political party;
ii.candidate; and
iii.partisan political activity.

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 Corporate Powers….
10. to establish;
a. pension
b. retirement
c. and other plans for the benefit of
i. directors;
ii. trustees;
iii. officers;
iv.employees.

11. Other powers essential or necessary to carry out its

purposes

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 Special Powers
1.Power to extend or shorten corporate term
- Perpetual Existence is now provided in the RCC unless otherwise
provided by the Articles of Incorporation of a specific corporation

2.Increase / Decrease Corporate Stock – Authorized Capital Stock

- A corporation increases its Capital Stock in order to facilitate expansion
and invite other investors to be their Stockholders.

3.Incur, Create Bonded Indebtedness

Refers to the power of the Corporation to contract Loans and raise funds by
ISSUING BONDS/SHARES OF STOCK to pay to another a specified sum of
money, at a specified date or dates in the future.

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 Special Powers
4.Sell, Dispose. Lease, Encumber all or substantially all of corporate assets
–

-When the Corporation sells all or almost of its assets and properties thereby
rendering the juridical entity incapable of continuing its business or
accomplish the purpose for which it was incorporated

5.Purchase or acquire own shares provided:

(i) there is an unrestricted retained earnings
(ii) for legitimate purpose

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 Special Powers

6. Invest corporate funds in another corporation or business for other

purpose other than primary purpose

e.g. SMC can invest in MERALCO

7. Power to declare dividends out of unrestricted retained earnings

- Dividends are declared when there are profits earned by the

Corporation

8. Enter into management contract

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 Management Contract

Contract entered into between two corporations whereby one

corporation undertakes to manage all or substantially all of the
business of the other corporation for certain period of time,
whether such be a service contract, operating agreement or
otherwise.

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Who exercises these Powers?
Unless otherwise provided by the Code, the corporate powers of all
corporation shall be exercised, all business conducted and all property of
such corporations controlled and held by the board of directors or trustees
to be elected from among the members of the corporation, who shall hold
office for one year and until their successors are elected and qualified.

Except:
1. Executive Committee; or
2. The corporation enters into a management contract.

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Executive Committee
A body created by the By-Laws and composed of not less
than three (3) members appointed by the Board of Directors
to act on Matters as expressly authorized by the Board

However, It cannot act on the following:

1. Matters needing stockholder approval;
2. filling up of board vacancies
3. amendment, repeal or adoption of by-laws;
4. amendment or repeal of any resolution of the Board which by its
express terms is not amendable or repealable and
5. cash dividend declaration

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What is an Ultra Vires Act?

It is an Act committed outside the object for which a

corporation was created as defined by the Articles of
Incorporation and therefore beyond the powers conferred by
the Revised Corporation

Distinguished from an Illegal Act:

An ultra vires act is merely VOIDABLE, which can be

enforced ratification or estoppel, while an Illegal act is VOID
from the beginning and cannot be validated.

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Ultra Vires Act v. Unauthorized Act

An act may be within the purposes by which a Corporation was created but
not within the powers of a particular corporate officer

Example:

A IT Company is authorized to purchase additional equipment related to IT

Maintenance. However, its Corporate Secretary purchased P500,000 worth
of equipment from third party supplier

Here the act of purchase may be valid but it was done by an Unauthorized
individual.

Hence it is not an Ultra Vires Act of the Corporation but an Ultra Vires Act
of a Corporate Officer.

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Questions and Comments