Wakas, Bocaue, bulacan

CORPORATION LAW
Summer 2015

FUNDAMENTALS AND CONCEPTS

FORMS OF BUSINESS ORGANIZATION
A. SOLE PROPRIETORSHIP
A sole proprietorship is the oldest, simplest, and most prevalent form of business enterprise. It is unorganized
business owned by one person who has full control/authority of its own and owns the assets, personally owes and
answers all liabilities or suffers all losses but enjoys all the profits to the exclusion of others.
A sole proprietorship must apply for a Business Name and be registered with the Department of Trade and Industry
(DTI).
In the case of Mangila v. Court of Appeals (435 Phil. 870, 886 [2002], the Supreme Court held that:
In fact, there is no law authorizing sole proprietorship to file a suit in court.
A sole proprietorship does not possess a juridical personality separate and distinct from the personality of the owner
of the enterprise. The law merely recognizes the existence of a sole proprietorship as a form of business
organization conducted for profit by a single individual and requires its proprietor or owner to secure licenses and
permits, register its business name, and pay taxes to the national government. The law does not vest a separate
legal personality on the sole proprietorship or empower it to file or defend an action in court.
B. PARTNERSHIP
Under the Civil Code of the Philippines, by the contract of partnership two or more persons bind themselves to
contribute money, property or industry to a common fund, with the intention of dividing the profits among themselves.
Two or more persons may also form a partnership for the exercise of a profession.
Partnerships may either be general partnerships, where the partners have unlimited liability for the debts and
obligation of the partnership, or limited partnerships, where one or more general partners have unlimited liability and
the limited partners have liability only up to the amount of their capital contributions.
Article 1768 (Civil Code of the Philippines) also provides that a partnership has a juridical personality separate and
distinct from that of each of the partners.
A partnership may be constituted in any form except when real property or real rights are contributed thereto, in
which case a public instrument is necessary. Further, a contract of partnership having a capital of three thousand
pesos (Php 3,000.00) or more, in money or property, must register with the Securities and Exchange Commission
(SEC).

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C. CORPORATION
Corporations are artificial beings 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. Corporations are juridical persons
with personality separate and distinct from that of its stockholders. The liability of the shareholders of a corporation is
limited to the amount of their share capital. It consists of at least five (5) to fifteen (15) incorporators each of who
must hold at least one share and must be registered with the Securities and Exchange Commission (SEC). The
minimum paid up capital required is not less than five thousand pesos (Php 5,000.00).
RESEMBLANCES OF CORPORATION AND PARTNERSHIP
1. Both are association of persons or both are composing of group or persons.
2. Both are regarded by law as juridical persons or artificial beings.
3. Both exist only by legal fiction and can only act through its legitimate representatives.
4. Both as having possessed a personality separate and distinct from the person composing it.
5. Both are subject to the same corporate income tax rates subject to the provisions of the National Internal Revenue
Code.
DISTINCTIONS OF CORPORATION AND PARTNERSHIP
POINTS OF COMPARISON
CORPORATION
PARTNERSHIP
1. As to law that governs
Corporation Code of the Philippines
Civil Code of the Philippines
2. As to creation
By operation of law
By agreement
3. As to formation
At least five (5)
At least two (2)
4. As to purpose
For profit or not
For profit
5. As to exposure or liability
Stockholders are not liable beyond General parties are liable
their contribution
6. As to period or life
50 years subject to extension
By agreement of partners
7. As to birth
Upon issuance of Certificate of Meeting of the minds of the partners
Incorporation by the SEC
8. As to transfer of interest
Even without
Must be with the consent of the
partners
9. As to succession
Yes
No
10. As to management
Board
of
Directors/Board
of Partners
Trustees
11. As to dissolution
Must be with the consent of the Even without the consent of the state
state

DEFINITION OF CORPORATION
A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes
and properties expressly authorized by law or incident to its existence. [Sec. 2, Corporation Code]

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ATTRIBUTES OF CORPORATION
Based upon the definition of a corporation stated in Section 2 of the Corporation Code, the following are the attributes
of a corporation:

It is an artificial being;
Created by operation of law;
With the right of succession;
Has only the powers, attributes, and properties as expressly authorized by law or incident to its existence.

A. CORPORATION AS AN ARTIFICIAL BEING (1st attribute)

The law recognizes two types of persons:
(a) Natural (human beings); and
(b) Juridical
Corporations come under the latter in accordance with Article 44(3) of the Civil Code which provides the following
as juridical persons, to wit: Corporations, partnerships and associations for private interest or purpose to which
the law grants a juridical personality, separate and distinct from that of each shareholder, partner or member.
A juridical person is a being of legal existence, susceptible of rights and obligations, or of being the subject of
juridical relations. A corporation is a juridical person. It may acquire and possess property of all kinds, as well as
incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of their organization.
It is, of course, not in fact and in reality a person but the law treats it as though it were a person by process of
fiction or by regarding it as an artificial person distinct and separate from its individual members or stockholders. It
is a live thing with a separate existence which cannot be swept aside as a technicality. It is, however, only a
creature of the law and does not have a physical existence, but exists only in contemplation of law.
A corporation, being an artificial person, is entitled to 1. Due process of law
Chapter II, Section 1 of the Philippine Constitution provides that no person shall be deprived of life, liberty or
property without due process of law, nor shall any person be denied equal protection of the laws.
The due process clause is universal in its application to all persons without regard to any differences of race, color,
or nationality. Private corporations, likewise, are persons within the scope of the guaranty insofar as their
property is concerned. (Smith Bell & Co. vs. Natividad, 40 Phil. 136, 144).
According to Daniel Webster, due process is a law which hears before it condemns, which proceeds upon inquiry
and renders judgment only after trial.

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Due Process of law implies the right of the person affected thereby to be present before the tribunal which
pronounces judgment upon the question of life, liberty, or property, in its most comprehensive sense; to be heard,
by testimony or otherwise, and to have the right of controverting, by proof, every material fact which bears on the
question of right in the matter involved. If any question of fact or liability be conclusively presumed against him, this
is not due process of law. (Blacks Law Dictionary, 6th Edition, page 500)
2. Equal protection of the law
It refers to the right of all persons to have the same access to the law and courts and to be treated equally by the
law and courts, both in procedures and in the substance of the law. It is akin to the right to due process of law, but
in particular applies to equal treatment as an element of fundamental fairness.
The Philippine Constitution provides in its Bill of Rights that no person shall be denied the equal protection of the
laws. Equal protection has been traditionally defined by the Philippine Supreme Court as a guarantee that laws will
treat alike persons who are similarly situated, and treat differently those who are differently situated. Classic
examples of laws that mean to attain equal protection are tax laws. Everyone earning an income is taxed and the
rates of tax are based on the same standards for persons similarly situated.
The equal protection of the law clause is against undue favor and individual or class privilege, as well as hostile
discrimination or the oppression of inequality. It is not intended to prohibit legislation, which is limited either in the
object to which it is directed or by territory within which is to operate. It does not demand absolute equality among
residents; it merely requires that all persons shall be treated alike, under like circumstances and conditions both as
to privileges conferred and liabilities enforced.
The equal protection clause is not infringed by legislation which applies only to those persons falling within a
specified class, if it applies alike to all persons within such class, and reasonable grounds exists for making a
distinction between those who fall within such class and those who do not. (Ichong vs. Secretary of Finance and
City Treasure of Manila, G.R. No. L-7995, 31 May 1957)
C. Against unreasonable Searches and Seizure
Corporations are protected by the constitutional guarantee against unreasonable searches and seizures, but that
the officers of a corporation from which documents, papers and things were seized have no cause of action to
assail the legality of the seizures, regardless of the amount of shares of stock or of the interest of each of them in
said corporation, and whatever the offices they hold therein may be, because the corporation has a personality
distinct and separate from those of said officers. The legality of a seizure can be contested only by the party whose
rights have been impaired thereby; and the objection to an unlawful search is purely personal and cannot be
availed of by such officers of the corporation who interpose it for their personal interests. (Stonehill vs. Diokno, 20
SCRA 383)
A corporation is but an association of individuals under an assumed name and with a distinct legal entity. In
organizing itself as a collective body it waives no constitutional immunities appropriate for such body. Its property

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cannot be taken without compensation; can only be proceeded against by due process of law; and is protected
against unlawful discrimination. (Bache & Co. (Phil.), Inc. vs. Ruiz, 37 SCRA 823, 837)

B. CREATED BY OPERATION OF LAW (2nd attribute)

It means that, it is not really the Corporation Code that creates the corporation. The law is the only authority that
allows a corporation to be created. It is the process of putting into course of action, in accordance or in substantial
compliance of the law that makes the operation, or simply, the creation of the corporation.
From the registration requirements, to the filing of the articles of Incorporation and by-laws, until the time a
certificate of incorporation is issued, it encompasses the creation of a corporation by operation of law.
The right to be and act as a corporation is not a natural right or a civil right of any person. The right to be and act
as a corporation, and to enjoy the immunities and privileges resulting from incorporation constitute a franchise
given by the state. A corporation, therefore, cannot be created except by or under special authority from the state.
Such authority is granted by the state through its legislative department by special law which directly creates the
corporation or by a general law under which persons desiring to be and act as a corporation may incorporate.
A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent on its will," it is "a
creature without any existence until it has received the imprimatur of the state acting according to law." A
corporation will have no rights and privileges of a higher priority than that of its creator and cannot legitimately
refuse to yield obedience to acts of its state organs. (Tanyag v. Benguet Corporation)
C. RIGHTS OF SUCCESSION (3rd attribute)
It simply means that the death of any stockholder or director does not dissolve the corporation. Mere death by the
stockholder or director cannot end the life of the corporation. Its life continues to exist until the term expires or
unless sooner dissolved in accordance with law.
Upon the death of the shareholder or director, the heir is called upon by operation of law or through succession to
inherit the corresponding stocks or shares of the decedent-stockholder or director.
As distinguished from a partnership, death of a partner dissolves the partnership. This is because, in a
partnership, the relationship is personal, more of a fiduciary in nature and likewise, it is founded under the principle
of delectus personae [(Latin, Choice of the person) This phrase is applied to show that partners have the right to
select their co-partners; and that no set of partners can take another person into the partnership, without the
consent of each of the partners.]
By succession is not meant that the corporation is immortal. It simply means that a corporation has a continuity of
existence independent of that of its members or shareholders. This continued existence of a corporation is,
however, limited to the period stated in its articles of incorporation or in the act creating it. Subject only to this

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limitation, the death or withdrawal of the members or shareholders of a corporation does not affect its corporate
existence.

D. HAS ONLY THE POWERS, ATTRIBUTES, AND PROPERTIES AS EXPRESSLY AUTHORIZED BY LAW OR
INCIDENT TO ITS EXISTENCE (4th attribute)
As a corollary of the theory that a corporation is a fictitious entity created by law, the doctrine has been established
that a corporation has no powers except those conferred upon it by the state or those incident to its existence.
Thus, under the law a corporation can have only the powers, attributes and properties expressly authorized by law
or incident to its existence, and of course, those implied therefrom. This means that a corporation cannot act or
enter into a contract unless the act or contract is within the powers, attributes and properties expressly authorized
by law or incident to its existence. This is what has been called the doctrine of limited or special capacities.

THEORIES ON FORMATION OF CORPORATION

A. THEORY OF CONCESSION
To organize a corporation that could claim a juridical personality of its own and transact business as such, is not a
matter of absolute right but a privilege which may be enjoyed only under such terms as the State may deem
necessary to impose (Ang Pue & Co. v. Sec. of Commerce and Industry, 5 SCRA 645 [1962]).
Before a corporation may acquire juridical personality, the State must give its consent either in the form of a
special law or a general enabling act, and the procedure and conditions provided under the law for the acquisition
of such juridical personality must be complied with. The failure to comply with the statutory procedure and
conditions does not warrant a finding that such association achieved the acquisition of a separate juridical
personality, even when it adopts sets of constitution and by-laws. (International Express Travel & Tour Services,
Inc. v. Court of Appeals, 343 SCRA 674).
Since all corporations, big or small, must abide by the provisions of the Corporation Code, then even a simple
family corporation cannot claim an exemption nor can it have rules and practices other than those established by
law (Torres v. Court of Appeals, 278 SCRA 793 [1997]).
B. THEORY OF ENTERPRISE ENTITY
Corporations are composed of natural persons and the legal fiction of a separate corporate personality is not a
shield for the commission of injustice and inequity, such as the use of separate personality to avoid the execution
of the property of a sister company. (Tan Boon Bee & Co., Inc. v. Jarencio, 163 SCRA 205).
A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with
a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities and
perquisites appropriate to such a body. (Philippine Stock Exchange, Inc. v. Court of Appeals, 281 SCRA 232).

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DISADVANTAGES OF INCORPORATION
1. The limited liability of the stockholders serves to limit the credit available to the corporation.
2. The transferability of shares permits the uniting of incompatible and conflicting elements in one venture.
3. The minority stockholders are subservient to the wishes of the majority.
4. In large corporations, stockholders voting rights have become largely theoretical because of widespread
ownership, disinterest in management, and inaccessible meeting places.
5. In large corporations, management and control has been separated from ownership.
6. By virtue of its statutory character, the corporation is limited in the transaction of its business to the state of its
incorporation, unless it qualifies in other states as a foreign corporation.
7. Corporations are subject to governmental restrictions, controls, and report requirements not imposed on other
forms of business organizations.

ADVANTAGES OF INCORPORATION
1. The capacity to act as a legal unit. This affords the important convenience of being able to acquire, hold and
convey property, to contract, to sue and be sued, and generally to act, as a single distinct unit under its own name.
2. Limited shareholder liability. This is sometimes said to be the most essential privilege, which enables a
corporation to attract investors and assemble large capital. Thus, the stockholder may contribute as much or as
little as he sees fit, but he does not risk more.
3. Continuity of existence. This arises from the corporate right of perpetual succession. It enables the corporation
to exist either perpetually or for a fixed period, notwithstanding the death or change of its members. If a
shareholder dies, his shares pass like other personal property to a successor. If he transfers his shares, the
transferee becomes a member in his place.
4. Transferability of shares. As already stated, shares of stock can be transferred without the consent of the other
stockholders.
5. Centralized management. The vesting of the powers of management and of appointing officers and agents in a
board of directors gives to a corporation the benefits of centralized administration which is a practical business
necessity in any large organization.
6. Standardized methods. In the corporation, there is standardization of its constitution, management, finance,
liabilities and remedies which is provided under a well-drawn general corporation law. The corporation statutes
enter into the charter contract and these are constantly being interpreted by the courts. An established system of
regulation of management and of protection of shareholders and creditors rights has thus been and is being
evolved.

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7. Feasibility of great undertakings. As a consequence of the aforementioned factors and reason of the flexibility
allowed in the choice of securities, the corporation is ideally suited to serve as a medium of gathering together for
a common project the separate funds of many investors. Thus, the modern corporation makes great undertakings
feasible since it enables many individuals to cooperate in order to furnish the large amounts of capital necessary to
finance the gigantic enterprises of modern times.

CLASSIFICATION OF CORPORATIONS
Corporations formed or organized under the Corporation Code (Sec. 3) may be:
A. STOCK CORPORATIONS
Corporations 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.
B. NON-STOCK CORPORATIONS
It is a corporation organized principally for public purposes such as charitable, religious, educational, professional,
cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like
chambers, or any combination thereof. No part of its income is distributable as dividends to its members, trustees, or
officers. Further, any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized.
STOCK vs. NON-STOCK CORPORATIONS

Stock

Non-Stock

Corporations which have capital stock

divided into shares and
are authorized to distribute to the
holders of shares dividends or
allotments of the surplus profits on the
basis of the shares (Sec. 3)

All other private corporations (Sec. 3)

Purpose

Primarily to make profits for its

shareholders

May be formed or organized for

charitable, religious, educational,
professional, cultural, fraternal,
literary, scientific, social, civic service,
or similar purposes like trade,
industry, agricultural and like
chambers, or any combination
thereof. (Sec. 88)

Distribution of Profits

Profit is distributed to shareholders

Whatever incidental profit made is not

distributed among its members but is
used for furtherance of its purpose.
AOI or by-laws may provide for the
distribution of its assets among its
members upon its dissolution. Before
then, no profit may be made by

Definition

One where no part of its income is

distributable as dividends to its
members, trustees or officers. (Sec.
87)

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members.

Composition

Stockholders

Members

Scope of Right to Vote

Each stockholder votes according to

the proportion of his shares in the
corporation. No shares may be
deprived of voting rights except those
classified and issued as "preferred" or
"redeemable" shares, and as
otherwise provided by the Code.
(Sec. 6)

Each member, regardless of class, is

entitled to one (1) vote UNLESS such
right to vote has been limited,
broadened, or denied in the AOI or
by-laws. (Sec. 89)

Voting by Proxy

May be denied by the AOI or the bylaws. (Sec. 89)

Cannot be denied. (Sec. 58)

Voting by Mail

May be authorized by the by-laws,

with the approval of and under the
conditions prescribed by the SEC.
(Sec. 89)

Not possible.

Who Exercises Corporate

Powers

Board of Directors or Trustees

Members of the corporation

Governing Board

Board of Directors or Trustees,

consisting of 5-15 directors / trustees.

Board of Trustees, which may consist

of more than 15 trustees unless
otherwise provided by the AOI or bylaws. (Sec. 92)

Directors / trustees shall hold office

for 1 year and until their successors
are elected and qualified (Sec. 23).

Board classified in such a way that

the term of office of 1/3 of their
number shall expire every year.
Subsequent elections of trustees
comprising 1/3 of the board shall be
held annually, and trustees so elected
shall have a term of 3 years. (Sec.
92)

Election of Officers

Officers are elected by the Board of

Directors (Sec. 25), except in close
corporations where the stockholders
themselves may elect the officers.
(Sec. 97)

Officers may directly be elected by

the members UNLESS the AOI or bylaws provide otherwise. (Sec. 92)

Place of Meetings

Any place within the Philippines, if

provided for by the by-laws (Sec. 93)

Generally, the meetings must be held

at the principal office of the
corporation, if practicable. If not, then
any place in the city or municipality
where the principal office of the
corporation is located. (Sec. 51)

Transferability of interest
or membership

Transferable.

Term of
Trustees

Directors

or

Generally non-transferable since

membership and all rights arising
therefrom are personal. However, the

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AOI or by-laws can provide
otherwise. (Sec. 90)

THE CORPORATE ENTITY

Q: What is the difference between Articles of Incorporation and By Laws?
ANSWER: By way of summary, articles of incorporation are also sometimes called a certification of formation
or a charter. The articles of incorporation contain general information about a corporation, such as the name
and location of the business. Bylaws, on the other hand, contain information about the rules and regulations
that govern a corporation. In addition, corporate bylaws help to establish the roles and duties of the company's
directors and officers.
Corporate by-laws are created for internal governance whereas articles of incorporation are required by law to
be filed in order to create a corporation. Although by-laws are also required by law, they are a non-public
document. Articles of Incorporation have to be filed with the Securities and Exchange Commission (SEC) and
be publicly available for review. Articles are also more difficult to change than by-laws. Therefore, it is always
desirable to keep Articles filled to minimum, while putting more provisions in the by-laws.
Articles of Incorporation typically deal with the fundamental organizational aspects of the corporation. They will
usually include the name of the corporation, stipulations about the amount of directors the corporation may
have, the address of the corporations registered office, the name(s) and address(es) of the first director(s),
any restrictions on the corporations business, classes and maximum number of shares, and any other
fundamental stipulations the incorporators feel are necessary.
By-laws will typically deal with less permanent and less fundamental aspects of the corporations organization
and are adopted at meetings of the directors and shareholders of the corporation. Usually, a corporation will
have a first meeting within six months of its incorporation in order to adopt any by-laws it may feel are
important to have. By-laws will usually set out the requirements to be a director, where and when the directors
and shareholders will meet, the remuneration of the companys directors, officers, and accountant, stipulations
around issuing shares and dividends, the corporations fiscal year end date, and any other important corporate
governance provisions that the corporation wishes to be governed by.
Q: When does the corporations existence as a legal entity commence?
ANSWER: Upon issuance by the SEC of the certificate of incorporation (Sec. 19)
Q: What rights does the corporation acquire?
ANSWER: The right to:
(a) sue and be sued
(b) hold property in its own name;
(c) enter into contracts with third persons; and
(d) perform all other legal acts.

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Since corporate property is owned by the corporation as a juridical person, the stockholders have no claim on
it as owners, but have merely an expectancy or inchoate right to the same should any of it remain upon the
dissolution of the corporation after all corporate creditors have been paid. Conversely, a corporation has no
interest in the individual property of its stockholders, unless transferred to the corporation. Remember that the
liability of the stockholders is limited to the amount of shares.

Descriptive Cases:
SAN JUAN STRUCTURAL & STEEL FABRICATORS v. CA (296 SCRA 631)
A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the
property of the corporation is not the property of its stockholders or members and may not be sold by the
stockholders or members without express authorization from the corporation's Board of Directors.
In this case, the sale of a piece of land belonging to Motorich Corporation by the corporation treasurer
(Gruenberg) was held to be invalid in the absence of evidence that said corporate treasurer was
authorized to enter into the contract of sale, or that the said contract was ratified by Motorich. Even
though Gruenberg and her husband owned 99.866% of Motorich, her act could not bind the
corporation since she was not the sole controlling stockholder.
STOCKHOLDERS OF F. GUANZON V. REGISTER OF DEEDS (6 SCRA 373)
Properties registered in the name of the corporation are owned by it as an entity separate and distinct
from its members. While shares of stock constitute personal property, they do not represent property
of the corporation. A share of stock only typifies an aliquot part of the corporation's property or the
right to share in its proceeds to that extent when distributed according to law and equity, but its holder
is not the owner of any part of the capital of the corporation. Nor is he entitled to the possession of
any definite portion of its property or assets.
The act of liquidation made by the stockholders of the corporation of the latters assets is not and
cannot be considered a partition of community property, but rather a transfer or conveyance of the
title of its assets to the individual stockholders. Since the purpose of the liquidation, as well as the
distribution of the assets, is to transfer their title from the corporation to the stockholders in proportion
to their shareholdings, that transfer cannot be effected without the corresponding deed of conveyance
from the corporation to the stockholders. It is, therefore, fair and logical to consider the certificate of
liquidation as one in the nature of a transfer or conveyance.
PIERCING THE CORPORATE VEIL
Q: What is the theory of corporate entity?

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ANSWER: That a corporation has a personality distinct from its shareholders, and is not affected by the personal
rights, obligations and transactions of the latter. The entity theory maintains the assumption that the economic
activities of a corporation is distinct from those of its shareholders. And that the activities of a corporation can be
accounted for separately from the activities of its shareholders, therefore the shareholders are not personally
responsible for the debts or other liabilities taken on by the corporation.

Q: What does the phrase piercing the corporate veil means?

ANSWER: The phrase piercing the corporate veil is used to describe the action of a court to hold corporate
shareholders personally liable for the debts and liabilities of a corporation.
Corporations are separate entities from their shareholders and in normal circumstances, if a corporation is sued, the
individual shareholders and officers cannot be brought into the lawsuit. But there are cases in which the corporation's
officers and shareholders could be sued for negligence or for debts; the action of bringing in these shareholders to be
sued is called "piercing the corporate veil" or "lifting the corporate veil."
Q: What are the instances when the veil of corporate entity be pierced?
ANSWER: Instances in which the corporate veil might be pierced by the court, allowing shareholders to be
sued are when it is used as:
1. a shield to
1.1 further an end subversive of justice; or
1.2 further purposes that could not have been intended by law that created it; or
1.3 defeat public convenience, justify wrong, protect fraud or defend crime; or
1.4 perpetuate fraud; or
1.5 confuse legitimate issues; or
1.6 circumvent the law; or
1.7 perpetuate deception
2. an alter ego, adjunct or business conduit for the sole benefit of the stockholders.
Q: What are the effects of disregarding the corporate veil?
ANSWERS:
(a) Stockholders would be personally liable for the acts and contracts of the corporation whose existence at
least for the purpose of the particular situation involved is ignored.
(b) Court is not denying corporate existence for all purposes but merely refuses to allow the corporation to use
the corporate privilege for the particular purpose involved.

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CORPORATE POWERS
GENERAL POWERS OF CORPORATION (SEC. 36)
(a) To sue and be sued in its corporate name;
(b) Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate
of incorporation;
(c) To adopt and use a corporate seal;
(d) To amend its articles of incorporation in accordance with the provisions of the Corporation Code;
(e) To adopt by-laws not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with
The Corporation 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 The Corporation Code; and to admit members to the corporation if it be a non-stock corporation;
(g) To purchase, receive, take, 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;
NOTE: There are two (2) general restrictions on the power of the corporation. to acquire and hold properties:
(g.1) that the property must be reasonable and necessarily required by the transaction of its lawful business,
and
(g.2) that the power shall be subject to the limitations prescribed by other special laws and the Constitution.
(h) To adopt any plan of merger or consolidation as provided in this Code;
(i) To make reasonable donations, including those for the public welfare of for hospital, charitable, cultural, scientific,
civic, or similar purposes. Provided that: no corporation, domestic or foreign, shall give donations in aid of any
political party or candidate or for purposes of partisan political activity;
(j) To establish pension, retirement and other plans for the benefit of its directors, trustees, officers and employees;
and

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(k) To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in
its articles of incorporation.
SPECIFIC POWERS OF CORPORATION
(a) Extension or shortening of the corporate term (Sec. 37)
(b) Increase or decrease of the capital stock (Sec. 38)
(c) Incur, create or increase bonded indebtedness (Sec. 38)
(d) Denial of the pre-emptive right (Sec. 39)
The pre-emptive right is the right belonging to existing shareholders of a corporation to avoid involuntary dilution of
their ownership stake by giving them the chance to buy a proportional interest of any future issuance of common
stock. The anti-dilutive pre-emptive right has also been called the subscription right or subscription privilege.
For example: The Terra Firma Coffee Company has 100 shares of stock outstanding. You own 10 of these shares,
or 10% of the entire company. To raise capital to expand, the Board of Directors decides to sell another 100 shares
in the company for Php50 each. If the pre-emptive right did not exist, this would dilute your ownership to 5% (10
shares divided by 200 shares outstanding). You exercise your pre-emptive right to maintain your proportional
interest and agree to buy (or "subscribe") to 10 shares of the new stock. You promptly cut a check for Php500 (10
new shares x Php50 offering price = Php500) and now you own 20 shares out of 200 outstanding; the same 10%.
(e) Sale or other disposition of substantially all its assets. (Sec. 40)
A sale is deemed to substantially cover all the corporate property and assets if such sale renders the corporation
incapable of continuing the business or accomplishing the purpose for which it was incorporated.
(f) Acquisition of its own shares. (Sec. 41)
(g) Investment in another corporation or business. (Sec. 42)
(h) Declaration of dividends. (Sec. 43)
A dividend is a distribution of profits of a corporation to its shareholders. A dividend is paid as an amount per share
of stock the shareholder owns. Corporations typically pay dividends quarterly. The dividend is paid to shareholders
according to the shares they own on a specific date.
(i) Entering into management contracts with another corporation. (Sec. 44)
Management contract refers to any contract whereby a corporation undertakes to manage or operate all or
substantially all of the business of another corporation, whether such contracts are called service contracts or
operating agreements.
Section 44 refers only to a management contract with another corporation.
management contracts entered into by a corporation with natural persons.
IMPLIED POWERS

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Hence, it does not apply to

CORPORATION LAW
Summer 2015
Under Sec. 36, a corporation is given such powers as are essential or necessary to carry out its purpose or purposes
as stated in the articles of incorporation. This phrase gives rise to such a wide range of implied powers, that it would
not be at all difficult to defend a corporate act versus an allegation that it is ultra vires.
A corporation is presumed to act within its powers and when a contract is not its face necessarily beyond its authority;
it will, in the absence of proof to the contrary, be presumed valid.

THE ULTRA VIRES DOCTRINE

Blacks Law Dictionary Definition:
Ultra vires acts are those acts beyond the scope of the powers of the corporation, as defined by its charter or laws of
state of incorporation. The term has a broad application and includes not only acts prohibited by the charter, but acts
which are in excess of powers granted and not prohibited, and generally applied either when a corporation has no
power whatever to do an act, or when the corporation has the power but exercises it irregularly.
Q: What are the consequences of ultra vires acts?
ANSWERS:
(a) The corporation may be dissolved under a quo warrranto proceeding.
(b) The Certificate of Registration may be suspended or revoked by the SEC.
(c) Parties to the ultra vires contract will be left as they are, if the contract has been fully executed on both
sides. Neither party can ask for specific performance, if the contract is executory on both sides. The
contract, provided that it is not illegal, will be enforced, where one party has performed his part, and the
other has not with the latter having benefited from the formers performance.
(d) Ultra vires acts may become binding by the ratification of all the stockholders, unless third parties are
prejudiced thereby, or unless the acts are illegal.
(e) Any stockholder may bring an individual or derivative suit to enjoin a threatened ultra vires act or contract.
If the act or contract has already been performed, a derivative suit for damages against the directors
maybe filed, but their liability will depend on whether they acted in good faith and with reasonable diligence
in entering into the contracts. When the suit against the injured party who had no knowledge that the
corporation was engaging in an act not included expressly or impliedly in its purposes clause.

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CONTROL AND MANAGEMENT

ALLOCATION OF POWER AND CONTROL
Q: What are the three levels of corporate control/power?
ANSWERS:
(a) Board of directors or trustees- responsible for corporate policies and the general management of the
business and affairs of the corporation.
(b) Officers- execute the policies laid down by the board.
(c) Stockholders or members- have residual power over fundamental corporate changes like amendments of
articles of incorporation.
CORPORATE OFFICERS AND AGENTS
A. Minimum set of officers and their qualifications (Sec. 25)
1. President (who shall be a director)
2. Corporate Secretary (who shall be a resident and Filipino citizen); and
3. Treasurer (who may or may not be a director)
The by-laws, however, may provide for other officers.
Any 2 or more positions may be held concurrently by the same person, except that no one shall act as
(a) president and secretary, or
(b) president and treasurer at the same time.
B. Disqualifications (Sec. 27)
1. Conviction by final judgment of an offense punishable by imprisonment > 6 yrs.
2. Violation of Corporation Code committed within 6 yrs. prior to the date of election or

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appointment
C. What is the doctrine of apparent authority?
The doctrine of apparent authority provides that a corporation will be liable to innocent third persons for the acts of
its agent where the representation was made by the agent in the course of business and acting within his/her
general scope of authority even though, in the particular case, the agent is secretly abusing his authority and
attempting to perpetrate a fraud upon his/her principal or some other person for his/her own ultimate benefit.
BOARD COMMITTEES
The By-laws of the corporation may create an executive committee, composed of not less than 3 members of
the Board, to be appointed by the Board. The executive committee may act, by majority vote of all its
members, on such specific matters within the competence of the board, as may be delegated to it in either (1)
the By-laws, or (2) on a majority vote of the board.

However, the following acts may never be delegated to an executive committee:

a. Approval of any action for which shareholders' approval is also required.
b. Filling of vacancies in the board (Sec. 29).
c. Amendment or repeal of by-laws or the adoption of new by-laws.
d. Amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable.
e. Distribution of cash dividends to the shareholders.
STOCKHOLDERS OR MEMBERS
In the following basic changes in the corporation, although action is usually initiated by the board of directors or
trustees, their decision is not final, and approval of the stockholders or members would be necessary:
a. Amendment of articles of incorporation
b. Increase and decrease of capital stock
c. Incurring, creating or increasing bonded indebtedness
d. Sale, lease, mortgage or other disposition of substantially all corporate assets
e. Investment of funds in another business or corporation or for a purpose other than the primary purpose for which
the corporation was organized
f. Adoption, amendment and repeal of by-laws
g. Merger and consolidation
h. Dissolution of corporation

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In all of these cases, even non-voting stocks, or non-voting members, as the case may be, will be entitled to vote.
(Sec. 6)
DUTIES OF DIRECTORS AND CONTROLLING STOCKHOLDERS
A. Duties and Liabilities of Directors
1. What is the 3-fold duty that directors owe to the corporation?
a. Diligence
b. Loyalty
c. Obedience
Obedience - directors must act only within corporate powers and are liable for damages if they
acted beyond their powers unless in good faith. Assuming that they acted within their powers,
liability may still arise if they have not observed due diligence or have been disloyal to the
corporation.

2. When does liability on the part of directors, trustees or officers arise?

In general, liability of directors, trustees or officers arises when they either:
a. willfully and knowingly vote for or assent to patently unlawful acts of the corporation; or
b. are guilty of gross negligence or bad faith in directing the affairs of the corporation; or
c. acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees.
In such cases, the directors or trustees shall be liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders or members and other persons.
3. Duty of Diligence: Business Judgment Rule
a. What is the business judgment rule?
As a general rule, directors and trustees of the corporation cannot be held liable for mistakes or
errors in the exercise of their business judgment, provided they have acted in good faith and with
due care and prudence.
Contracts intra vires* entered into by the board of directors are binding upon the corporation, and
the courts will not interfere unless such contracts are so unconscionable and oppressive as to
amount to a wanton destruction of the rights of the minority.
*Latin for within powers, in the law of corporations, referring to acts of a
corporation and/or its officers within the powers and/or authority allowed under
the Corporation Law. Acts that are intra vires may equivalently be termed
valid

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However, if due to the fault or negligence of the directors the assets of the corporation are wasted or
lost, each of them may be held responsible for any amount of loss which may have been proximately
caused by his wrongful acts or omissions. Where there exists gross negligence or fraud in the
management of the corporation, the directors, besides being liable for damages, may be removed by
the stockholders in accordance with Sec. 28 of the Code.
Summary of Rule
General Rule: Contracts intra vires entered into by BoD are binding upon the corporation and
courts will not interfere.
Exception:

When such contracts are so unconscionable and oppressive as to amount to a

wanton destruction of the rights of the minority.

b. What kind of diligence is expected of directors?

Directors are expected to manage the corporation with reasonable diligence, care and prudence, i.e.
the degree of care and diligence which men prompted by self-interest generally exercise in their own
affairs. Thus, they can be held liable not only for willful dishonesty but also for negligence.

Although they are not expected to interfere with the day-to-day administrative details of the business
of the corporation, they should keep themselves sufficiently informed about the general condition of
the business.
c. What factors should be considered in determining whether reasonable diligence has been
exercised?
The nature of the business, as well as the particular circumstances of each case. The court should
look at the facts as they exist at the time of their occurrence, not aided or enlightened by those
which subsequently took place.
B. The Self-Dealing Director
1. What is a self-dealing director? (sec. 32)
A self-dealing director is one who enters into a contract with the corporation of which he is a
director.
2. What is the nature of contracts entered into by self-dealing directors?
Voidable at the option of the corporation, whether or not it suffered damages. It is possible that
the self-dealing director may have the greatest interest in its welfare and may be willing to deal
with it upon reasonable terms.
However, such contract may be upheld by the corporation if all of the following conditions are present:
a. The presence of the self-dealing director or trustee in the board meeting for which the contract was
approved was not necessary to constitute a quorum for such meeting.

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According to Robert's Rules, a quorum is the minimum number of voting members who must be present at
a properly called meeting in order to conduct business in the name of the group. There are corporations
which set majority as quorum.
b. The vote of such self-dealing director or trustee was not necessary for the approval of the contract.
c. The contract is fair and reasonable under the circumstances.
d. In the case of an officer, the contract has been previously authorized by the Board of Directors.

CORPORATE BOOKS AND RECORDS

AND
THE RIGHT OF INSPECTION
A. WHAT BOOKS AND RECORDS MUST A CORPORATION KEEP? (Sec. 74)
1.
2.
3.
4.

Record of all business transactions

Minutes of all meetings of stockholders or members
Minutes of all meetings of Board of Directors or Trustees
Stock and Transfer book
4.1 What is a stock and transfer book? (Sec. 75)
A stock and transfer book is a record of all stocks in the names of the stockholders alphabetically
arranged. It likewise contains the following information:
4.1.1 Installments paid and unpaid on all stock for which subscription has been made, and the date of any
installment;
4.1.2 A statement of every alienation, sale or transfer of stock made, the date thereof, and by
whom and to whom made;
4.1.3 Such other entries as the by-laws may prescribe
The stock and transfer book shall be kept in the principal office of the corporation or in the office of its
stock transfer agent, and shall be open for inspection by any director or stockholder of the corporation
at reasonable hours on business days.

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4.2 Who is a stock transfer agent? (Sec. 75)
A stock transfer agent is one who is engaged principally in the business of registering transfers of
stocks in behalf of a stock corporation. He or she must be licensed by the SEC; however, a stock
corporation is not precluded from performing or making transfer of its own stocks, in which case all
the rules and regulations imposed on stock transfer agents, except the payment of a license fee,
shall be applicable.
B. WHAT IS THE BASIS OF THE RIGHT OF INSPECTION?
Ordinary stockholders, the beneficial owners of the corporation, usually have no say on how business affairs of the
corporation are run by the directors. The law therefore gives them the right to know not only the financial health of
the corp. but also how its affairs are managed so that if they find it unsatisfactory, they can seek the proper remedy
to protect their investment.
1. What is the nature of the right to inspect?
1.1 Preventive : Deterrent to an ill-intentioned management knowing its acts are subject to
scrutiny; and
1.2 Remedial:

A dissatisfied stockholder may avail of this right as a preliminary step towards

seeking more direct and appropriate remedies against mismanagement.

C. WHO IS THE CUSTODIAN OF CORPORATE RECORDS?

In the absence of any provision to the contrary, the corporate secretary is the custodian of corporate
records. Corollarily, he keeps the stock and transfer book and makes the proper and necessary entries.
(Torres, et al. vs. CA, 278 SCRA 793; 1997)
D. WHAT IS MEANT BY THE PHRASE CORPORATE RECORDS?
1. Records of ALL business transactions
This includes book of inventories and balances, journal, ledger, book for copies of letters and
telegrams, financial statements, income tax returns, vouchers, receipts, contracts, papers pertaining to
such contracts, voting trust agreements (sec. 59)
2. By-laws
These are expressly required to be open to inspection by stockholders/members during office hours
(Sec. 46). Note: There is no similar provision as to AOI, but these are filed with the SEC anyway.
3. Minutes of directors meetings
This is to inform stockholders of Board policies. Such right arises only upon approval of the minutes,
however.
4. Minutes of stockholders' meetings
5. Stock and transfer books

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These are records of all stocks in the names of the stockholders alphabetically arranged. Contain all
names of the stockholders of record. Useful for proxy solicitation for elections. SEC has however
ruled that a stockholder cannot demand that he be furnished such a list but he is free to examine corp.
books.
6. Most recent financial statement
Sec. 75 of the Code provides that within 10 days from the corporation's receipt of a written request
from any stockholder or member, the corporation must furnish the requesting party with a copy of its
most recent financial statement, which shall include a balance sheet as of the end of the last taxable
year and a profit or loss statement for said taxable year.
E. EXTENT AND LIMITATIONS ON RIGHT

1. The exercise of this right is subject to reasonable limitations similar to a citizens exercise of the right to
information. Otherwise, the corporation might be impaired, its efficiency in operations hindered, to the
prejudice of stockholders.
2. Such limitations to be valid must be reasonable and not inconsistent with law (Sec. 36[5] and 46).
3. A corporation may regulate time and manner of inspection but provisions in its by-law which gives directors
absolute discretion to allow or disallow inspection are prohibited.
Limitations as to time and place:
3.1 Exercise of right only at REASONABLE HOURS on BUSINESS DAYS.
3.2 Such business days should be THROUGHOUT THE YEAR. Board of Director cannot limit such to merely
a few days within the year. (Pardo v. Hercules Lumber)
4. By-laws cannot prescribe that authority of president must first be obtained.
5. Inspection should be made in such a manner as not to impede the efficient operations
6.

Place of inspection: Principal office of the corporation.

taken out of the principal office.

Stockholder cannot demand that such records be

7. As to purpose:
7.1 PRESUMPTION: that stockholders purpose is proper. Corporation cannot refuse on the mere belief that
his motive is improper (sec 74).
7.2 BURDEN OF PROOF: lies with corporation which should show that purpose was illegal.
7.3 To be legitimate, the purpose for inspection must be GERMANE to the INTEREST of the stockholder as
such, and it is not contrary to the interests of the corporation.
7.3.1 Legitimate:
7.3.2 Not legitimate:

inquiry about failure to declare dividend

for mere satisfaction or speculation.

7.4 Belief in good faith that a corp. is being mismanaged may be given due course even if later, this is proven
unfounded.

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7.5 If motive can be clearly shown as inimical to corp., right may be denied.
F. WHO MAY EXERCISE RIGHT
Every director, trustee, stockholder, member may exercise right personally or through an agent who can better
understand and interpret records (impartial source, expert accountant, lawyer).

DERIVATIVE SUITES
A. NATURE AND BASIS
An action brought by a stockholder on behalf of the corporation to enforce corporate rights against the
corporations directors, officers, or other insiders.
A stockholder may sue for mismanagement, waste or dissipation of corporate assets because of a special injury to
him for which he is otherwise without redress.
In a derivative suit 1) Cause of action belongs to the corporation and not to the stockholder
2) Under Sections 23 and 36 of the Corporation Code, the directors or officers, as provided under the bylaws, have the right to decide whether or not a corporation should sue. Since these directors or
officers will never be willing to sue themselves, or impugn their wrongful or fraudulent decisions,
stockholders are permitted by law to bring an action in the name of the corporation to hold these
directors and officers accountable. Thus, the stockholder is given the right to sue on behalf of the
corporation.
3) An effective remedy of the minority against the abuses of management

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Summer 2015
4) An individual stockholder is permitted to bring a derivative suit to protect or vindicate corporate rights,
whenever the officials of the corporation refuse to sue or are the ones to be sued or hold the control of
the corporation.
5) The real party in interest is the corporation, while the stockholder is a mere nominal party.
6) A stockholder can only bring suit for an act that took place when he was a stockholder; not before.

B. REQUIREMENTS RELATING TO DERIVATIVE SUITS

In Hi-Yield Realty, Incorporated v. Court of Appeals, the Supreme Court enumerated the requisites for filing a
derivative suit, as follows:
(1) the party bringing the suit should be a shareholder as of the time of the act or transaction complained of, the
number of his shares not being material;
(2) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the
appropriate relief but the latter has failed or refused to heed his plea; and
(3) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being
caused to the corporation and not to the particular stockholder bringing the suit. Lisam Enterprises, Inc.,
represented by Lolita A. Soriano and Lolita A. Soriano vs. Banco de Oro Unibank, Inc., et al., G.R. No. 143264,
April 23, 2012.

C. SAMPLE CASE
Atlantis Realty Corporation (ARC), a local firm engaged in real estate development, plans to sell one of its prime
assets -a three-hectare land valued at about P100- million. For this purpose, the board of directors of ARC
unanimously passed a resolution approving the sale of the property for P75-million to Shangrila Real Estate Ventures
(SREV), a rival realty firm. The resolution also called for a special stockholders meeting at which the proposed sale
would be up for ratification.
Atty. Edric, a stockholder who owns only one (1) share in ARC, wants to stop the sale. He then commences a
derivative suit for and in behalf of the corporation, to enjoin the board of directors and the stockholders from approving
the sale.
QUESTIONS:
1. Can Atty. Edric, who owns only one (1) share in the company, initiate a derivative suit? Why or why not?
2. If such a suit is commenced, would it constitute an intra-corporate dispute? If so, why and where would such a suit
be filed? If not, why not?
3. Will the suit prosper? Why or why not?
ANSWERS:

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1. Yes Atty. Edric can file a derivative suit. Regardless of the number of shares held, a stockholder may file a derivative
suit for and in behalf of the corporation when by virtue of a corporate act the interest of the corporation will be
prejudiced and the shareholder has no other remedy either because the board refuses to act or the board itself is
involved in the corporate act being questioned. In this case, the corporation will obviously incur loss if the sale of its
asset will prosper and since the board itself was the one who initiated the sale Atty. Edric has no other effective remedy
but to file a derivative suit.
2. Yes a derivative suit is considered an intra- corporate dispute and such falls under the jurisdiction of the RTC acting
as a special commercial court.
3. Yes the suit will prosper. A derivative suit is one commenced by a stockholder for and in behalf of the corporation to
question or enjoin a corporate act which is prejudicial to the interest of the corporation and the stockholder/s has left
with no other remedy because the board itself which is supposed to safeguard the interest of the corporation refuses to
act or is the one involved in the questioned corporate act. All the requisites for a derivative suit to prosper is present in
this case, the sale of the corporate asset for a lower amount is obviously prejudicial to the corporation considering that
the buyer is the rival corporation. Since the board itself was the one who initiated and authorized the sale and if such
would be approved in the stockholders meeting Atty. Edric has no other remedy but to file a derivative suit because his
share is obviously not sufficient to enjoin the sale of the property. (2009 Bar Question)

DISSOLUTION AND LIQUIDATION

A. WHAT IS DISSOLUTION?
The term dissolution as applied to a corporation signifies the extinguishment of its franchise to be a corporation
and the termination of its corporate existence. It denotes the complete destruction of the corporation. And within
contemplation of law, is equivalent to its death, being sometimes likened to the death of a natural person.

B. HOW MAY A CORPORATION BE DISSOLVED?

1. Failure to organize and commence business within two years from date of incorporation (Sec. 22);
2. Continuous inoperation for 5 years (Sec. 22);
3. Expiration of original, extended, or shortened corporate term;
4. Voluntary dissolution (Sec. 118-119);
a) Where no rights of any creditor having a claim against a corporation are affected (Sec. 118)

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This is effected by majority vote of the BOD and a 2/3 vote of the OCS or members. (Note the
special notice requirements.) The copy of the resolution authorizing the dissolution shall be
certified by a majority of the Board of Directors and countersigned by the corporate secretary of
the corporation. The SEC shall thereupon issue the certificate of dissolution.
b) Where rights of creditors are prejudice (Sec. 119)
b.1. Filing of petition for dissolution with SEC
A petition for dissolution must be filed with the SEC after having been signed by a majority of
the BOD, verified by the president or secretary or one of the directors, and resolved upon by
the affirmative vote of 2/3 of the stockholders or members. The petition must set forth all
claims and demands against the corporation, and the fact that the dissolution was approved
by the stockholders with the requisite 2/3 vote.
b.2 Fixing of date by SEC for filing of objections to petition
If the petition is sufficient in form and substance, the SEC shall fix a date on or before which
objections thereto may be filed by any person.
Date:

Not less than 30 days nor more than 60 days after the entry of the order

b.3 Publication of order

Before the date fixed by the SEC, the SEC order shall be published and posted accordingly.
b.3.1.

Newspaper:

b.3.2. Posting:

Once a week for 3 weeks in a newspaper of general circulation

published in the municipality or city where the corporation's principal
office is situated, or there be no such newspaper, in a newspaper of
general circulation in the Philippines.
For 3 consecutive weeks in 3 public places in the city or municipality
where the corporation's principal office is situated.

b.4 Hearing of the petition for dissolution

Upon 5 days notice, given after the date on which the right to file objections to the order has
expired, the SEC shall proceed to hear the petition and try any issue made by the objections
filed.
If no objection is sufficient, and the material allegations are true, the SEC shall render
judgment dissolving the corporation and directing such disposition of its assets as justice
requires.
Note: The SEC may appoint a receiver to collect such assets and pay the debts of the
corporation.
5. Involuntary dissolution (Sec. 121):
5.1 Revocation of Certificate of Registration by SEC (Sec. 121)

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A corporation may be dissolved by the SEC upon filing of a verified complaint and after proper
notice and hearing on grounds provided by existing laws, rules and regulations.
5.2 Quo Warranto proceeding
A quo warranto proceeding is a special civil action commenced by a verified petition in the name
of the Republic of the Philippines against an association which acts as a corporation within the
Philippines without being legally incorporated or without lawful authority so to act.
6. Shortening of corporate term (Sec. 120)
NOTE: The simplest and most expedient way of effecting dissolution is by shortening the corporate
term and waiting for such term to expire.

C. WHAT ARE THE EFFECTS OF DISSOLUTION?

1. Corporation ceases to be a juridical person and consequently can no longer continue transacting its
business.

2. Corporate existence continues for 3 years following dissolution for the following purposes only:
2.1 winding up of affairs; and
2.2 liquidation of corporate assets.
3. Corporation can no longer continue its business, except for winding up.

D. WHAT IS LIQUIDATION?
It refers to the collection of all assets of the corporation, payment of all its creditors, and the distribution of
the remaining assets, if any, among the stockholders thereof in accordance with their contracts, or if there
be no special contract, on the basis of their respective interests.

E. WHAT ARE THE METHODS OF LIQUIDATION OF A CORPORATION?

1. Liquidation by the corporation itself through its board of directors
Although there is no express provision authorizing this method, neither is there any provision in the
Corporation Code prohibiting it.
2. Conveyance of all corporate assets to trustees who will take charge of liquidation (Liquidation
by Trusteeship)
If this method is used, the 3-year limitation will not apply provided the designation of the trustees is
made within said period. There is no time limit within which the trustee must finish liquidation, and he

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may sue and be sued as such even beyond the 3-year period unless the trusteeship is limited in its
duration by the deed of trust. (See Nat'l Abaca Corp. v. Pore, supra)
3. Liquidation is conducted by the receiver who may be appointed by the SEC upon its decreeing
the dissolution of the corporation (Liquidation by Receivership)
As with the previous method, the three-year rule shall not apply. However, the mere appointment of a
receiver, without anything more, does not result in the dissolution of the corporation nor bar it from the
exercise of its corporation rights.

F. FOR HOW LONG MAY THE LIQUIDATION OF A CORPORATION BE UNDERTAKEN?

Generally, a corporation may be continued as a body corporate for the purpose of liquidation for 3 years
after the time when it would have so dissolved. (Sec. 122) However, it was held in the case of Clemente
v. CA (supra) that if the 3-year period has expired without a trustee or receiver having been expressly
designated by the corporation itself within that period, the BOD itself may be permitted to so continue as
"trustees" by legal implication to complete the corporate liquidation.

G. WHAT CAN AND SHOULD BE DONE DURING THE PERIOD OF LIQUIDATION?

1. Collection of corporate assets and property;
2. Conveyance of all corporate property to trustees for the benefit of stockholders, members, creditors,
and other persons in interest;
3. Payment of corporation's debts and liabilities;
4. Distribution of assets and property.

MERGER AND CONSOLIDATION

A. DEFINITION OF CONSOLIDATION
It is the union of two or more existing corporation to form a new corporation called the consolidated corporation.
It is a combination by agreement between two or more corporations by which their rights, franchises, and property
are united and become those of a single, new corporation, composed generally, although not necessarily, of the
stockholder of the original corporations.
(Corporation A + Corporation B = Corporation C)

B. DEFINITION OF MERGER

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It is a union whereby one corporation absorbs one or more existing corporation, and the absorbing corporation
survives and continuous the combined business.
(Corporation A + Corporation B = Corporation A or Corporation B)

C. EFFECT OF MERGER OR CONSOLIDATION

The parties to a merger or consolidation are called constituents corporations.
1. Effects of Consolidation
a. All the constituents are dissolved and absorb by the new consolidated corporation.
b. No liquidation of assets of the dissolved corporations, the consolidated corporation acquires all the
properties, rights, and franchises.
c. The consolidated corporation assumes automatically the liabilities of the dissolved corporations regardless
of whether the creditors have consented or not to such consolidation.
2. Effects of Merger
a. All the constituents are dissolved except the surviving corporation.
b. No liquidation of assets of the dissolved corporations, the surviving corporation acquires all the properties,
rights, and franchises.
c. The surviving corporation assumes automatically the liabilities of the dissolved corporations regardless of
whether the creditors have consented or not to such consolidation.

OTHER CORPORATIONS
CLOSE CORPORATIONS
A. DEFINITION OF CLOSE CORPORATION
A close corporation is one whose articles of incorporation provides that
1. Its stockholders are limited in number, not exceeding twenty (20).
2. Transfer of shares of stocks is subject to the following restrictions:
2.1 Restrictions on the right to transfer shares must appear in the AoIBL as well as in the certificate of stock;
otherwise, the same shall not be binding on any purchaser thereof in good faith.

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2.2 The restriction pertains to granting the existing stockholders or the corporation the option to purchase the
shares of the transferring stockholder to purchase the shares of the transferring stockholder within a
reasonable period of time.
2.3 If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the
option to purchase, the transferring stockholder may sell his shares to any third person.
2.4 Any of its stocks shall not be listed in any stock exchange or offered to the public.

B. NEED FOR SPECIAL RULES FOR CLOSE CORPORATIONS

The existence of close corporations can be attributed to the desire of intimate groups of business associates to
obtain the advantages of a corporate organization, like that of limited liability. However, the identity and personality
of each shareholder are important to his associates. So, although, they may consider their business as a
corporation in their dealings with third persons, among themselves the stockholders act and feel as partners.

C. ANY CORPORATION MAY BE INCORPORATED AS A CLOSE CORPORATION, EXCEPT :

1.
2.
3.
4.
5.
6.
7.

Mining or oil companies

Stock exchanges
Banks
Insurance companies
Public utilities
Educational institutions
Corporations declared to be vested with public interest.

NON-STOCK CORPORATIONS
A. DEFINITION OF NON-STOCK CORPORATION
A non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or
officers.

B. TREATMENT OF PROFIT
Any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or
proper, be used for the furtherance of the purpose or purposes for which the corporation was organized.

C. PURPOSES
Non-stock corporations may be formed or organized for:
1.
2.
3.
4.
5.
6.

Charitable
Religious
Educational
Professional
Cultural
Fraternal

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7. Literary
8. Scientific
9. Social
10. Civil Service
11. Similar purposes like trade, industry, agricultural and like chambers, or any combinations thereof.

EDUCATIONAL CORPORATION
A. DEFINITION OF EDUCATIONAL CORPORATION
An educational corporation is a stock or non-stock corporation organized to provide facilities for teaching or
instruction.
Such corporation normally maintain a regular faculty and curriculum and normally have a regular organized body
of pupils or students, or attendance at the place where the educational activities are regularly carried on.

B. BOARD OF TRUSTEES
1. For non-stock educational corporation
1.1 The number of trustees shall not be less five (5) nor more than fifteen (15)
1.2 It shall be in multiples of five (5), i.e., their member shall be five (5), ten (10), or fifteen (15).
2. For stock educational corporation
The number and term of directors shall be governed by the provisions on stock corporations.

C. INCORPORATION
Philippine law expressly require the approval by the Securities and Exchange Commission of the articles of
incorporation of an educational corporation.

RELIGIOUS CORPORATION
A. DEFINITION OF RELIGIOUS CORPORATION
A religious corporation has been defined as a corporation composed entirely of spiritual persons and which is
erected for the furtherance of a religion or for perpetuating the rights of the church or for the administration of the
church or religious work or property.

B. KINDS OF RELIGIOUS CORPORATION

1. Corporation Sole
It is incorporated by one person and consists of one member or incorporator only and his successors, such as
a bishop.

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It may be formed by the chief archbishop, bishop, priest, minister, or rabbi or other presiding elder of a
religious denomination, sect or church for the purpose of administering and managing, as trustee, the affairs,
property and temporalities* of such religious denomination, sect or church.
*The money revenues of a church, derived from pew rents, subscriptions, donations, collections, cemetery
charges, and other sources.
2. Religious Societies
Religious societies are aggregate religious corporations consisting of two or more persons, as distinguished
from the corporation sole which consists of a single member.
The following may incorporate as aggregate religious corporations: any
2.1
2.2
2.3
2.4
2.5

Religious society
Religious order
Diocese
Synod
District organization of any religious denomination, sect or church

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