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WEEK 3

Should it be subsequently found that the


incorporators were guilty of fraud in
procuring the certificate of incorporation, the
same may be revoked by the SEC, after
proper notice & hearing.

III. FORMATION AND ORGANIZATION OF A. Submission of articles of incorporation;


A PRIVATE CORPORATION contractual significance
STEPS COMMENTS
B. Contents and form of the Articles of
a. Promotional Promoter
Stage (See SEC.  brings together persons who become
Incorporation (Sec. 14 & 15, CC)
2. Definitions) interested in the enterprise Section 14. Contents of the articles of incorporation. - All corporations
organized under this code shall file with the Securities and Exchange Commission
 aids in procuring subscriptions and sets in articles of incorporation in any of the official languages duly signed and
motion the machinery which leads to the acknowledged by all of the incorporators, containing substantially the following
formation of the corporation itself matters, except as otherwise prescribed by this Code or by special law:

 formulates the necessary initial business and 1. The name of the corporation;
financial plans and, if necessary, buys the 2. The specific purpose or purposes for which the corporation is being
rights and property which the business may incorporated. Where a corporation has more than one stated
need, with the understanding that the purpose, the articles of incorporation shall state which is the primary
corporation when formed, shall take over the purpose and which is/are the secondary purpose or purposes:
same. Provided, That a non-stock corporation may not include a purpose
which would change or contradict its nature as such;
3. The place where the principal office of the corporation is to be
b. Drafting AoI (see chart below) located, which must be within the Philippines;
(See SEC. 14) 4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less than five
(5) nor more than fifteen (15);
c. Filing of  AOI & the treasurer’s affidavit duly signed &
7. The names, nationalities and residences of persons who shall act as
articles; payment acknowledged directors or trustees until the first regular directors or trustees are
of fees.  must be filed w/ the SEC & the
duly elected and qualified in accordance with this Code;
corresponding fees paid 8. If it be a stock corporation, the amount of its authorized capital stock
 failure to file the AOI will prevent due in lawful money of the Philippines, the number of shares into which it
incorporation of the proposed corporation & is divided, and in case the share are par value shares, the par value
will not give rise to its juridical personality. It of each, the names, nationalities and residences of the original
will not even be a de facto corp.
subscribers, and the amount subscribed and paid by each on his
 Under present SEC rules, the AOI once filed , subscription, and if some or all of the shares are without par value,
will be published in the SEC Weekly Bulletin such fact must be stated;
at the expense of the corp. (SEC Circular # 9. If it be a non-stock corporation, the amount of its capital, the names,
4, 1982). nationalities and residences of the contributors and the amount
contributed by each; and
10. Such other matters as are not inconsistent with law and which the
d. Examination of Process: incorporators may deem necessary and convenient.
articles; approval a) SEC shall examine them in order to
or rejection by determine whether they are in conformity w/ law. The Securities and Exchange Commission shall not accept the articles of
SEC. b) If not, the SEC must give the incorporation of any stock corporation unless accompanied by a sworn statement
incorporators a reasonable time w/in w/c to correct of the Treasurer elected by the subscribers showing that at least twenty-five
or modify the objectionable portions. (25%) percent of the authorized capital stock of the corporation has been
subscribed, and at least twenty-five (25%) of the total subscription has been
Grounds for rejection or disapproval of AOI: fully paid to him in actual cash and/or in property the fair valuation of which is
equal to at least twenty-five (25%) percent of the said subscription, such paid-
a) AOI /amendment not substantially in up capital being not less than five thousand (P5,000.00) pesos.
accordance w/ the form prescribed
b) purpose/s are patently
unconstitutional, illegal, immoral, or contrary to 1. Corporate name
government rules & regulations;
c) Treasurer’s Affidavit is false; a. statutory limitations on the use of corporate name
d) required percentage of ownership has
not been complied with (Sec. 17) (Sec. 18, CC)
e) corp.’s establishment, organization or Section 18. Corporate name. - No corporate name may be allowed by the
operation will not be consistent w/ the declared Securities and Exchange Commission if the proposed name is identical or
national economic policies (to be determined by deceptively or confusingly similar to that of any existing corporation or to any
the SEC, after consultation w/ BOI, NEDA or any other name already protected by law or is patently deceptive, confusing or
appropriate government agency -- PD 902-A as contrary to existing laws. When a change in the corporate name is approved, the
amended by PD 1758, Sec. 6 (k)) Commission shall issue an amended certificate of incorporation under the
amended name. (n)
Decisions of the SEC disapproving or
CORPORATE NAME (Aquila Legis Fraternity)
rejecting AOI may be appealed to the CA by
petition for review in accordance w/ the ROC. A corporation cannot use a name which is:
1. identical or deceptively or confusingly similar to that of any existing
corporation or to any other name protected by law; or
e. Issuance of Certificate of Incorporation will be issued if:
certificate of 2. patently deceptive, confusing or contrary to law.
incorporation. a) SEC is satisfied that all legal
requirements have been complied with; and The law gives a corporation no express or implied authority to assume another
name that is unappropriated; still less that of another corporation, which is
b) there are no reasons for rejecting or expressly set apart from it and protected by law. (Red Line Transportation Co.
disapproving the AOI. vs. Rural Transit Co.)
A word or phrase originally incapable of exclusive appropriation with reference
It is only upon such issuance that the to an article on the market, because geographically or otherwise descriptive,
corporation acquires juridical personality. might nevertheless have been used so long and so exclusively by one producer
(See Sec. 19. Commencement of corporate with reference to his article that, in that trade and to that branch of the
existence) purchasing public, the word or phrase has come to mean that the article was his
product. (Doctrine of secondary meaning, Lyceum of the Philippines, Inc. vs.CA)
A corporation's right to use its corporate and trade name is a property right, a 3. So that anyone who deals with the company may ascertain whether a
right in rem, which it may assert and protect against the world in the same contract or transaction into which he contemplates entering is one within
manner as it may protect its tangible property, real or personal, against trespass the general authority of the management.
or conversion. It is regarded, to a certain extent, as a property right and one
If the corporate purpose or objective includes any purpose under the
which cannot be impaired or defeated by subsequent appropriation by another
supervision of another government agency, prior clearance and/or approval of
corporation in the same field. (Philips Export B.V. vs. CA)
the concerned government agencies or instrumentalities will be required.
To come within the scope of the prohibition of Sec. 18, two requisites must be
General limitations on the purpose clause:
proven, namely:
1. The purpose must be lawful.
1. That the complainant corporation acquired a prior right over the use of
such corporate name; and 2. The purpose must be specific or stated concisely although in broad or
general terms. / Purpose or purposes must be stated with sufficient clarity
2. The proposed name is either: (a) identical or (b) deceptively or
confusingly similar to that of any existing corporation or to any other name 3. If there is more than one purpose, the primary as well as the secondary
already protected by law; or (c) patently deceptive, confusing or contrary to ones must be specified.
existing law. (Philips Export B.V. vs. CA)
4. The purpose must be capable of being lawfully combined.
In determining the existence of confusing similarity in corporate names, the
test is whether the similarity is such as to mislead a person using ordinary care Significance:
and discrimination. Proof of actual confusion need not be shown. It suffices that a. A person who intends to invest his money in the business corporation will
confusion is probably or likely to occur. (Philips Export B.V. vs. CA) know where and in what kind of business or activity his money will be
invested;
A corporation has an exclusive right to the use of its name, which may be b. The directors and the officers of the corporation will know within what
protected by injunction upon a principle similar to that upon which persons are scope of business they are authorized to act; and
protected in the use of trademarks and tradenames. (Philips Export B.V. vs. CA) c. A third person who has dealings with the corporation may know by
perusal of the articles whether the transaction or dealing he has with the
A mere change in the name of a corporation, either by the legislature or by the
corporation is within the authority of the corporation or not.
corporators or stockholders under legislative authority, does not, generally
speaking, affect the identity of the corporation, nor in any way affect the rights,
privileges or obligations previously acquired or incurred by it. 3. Principal office
The articles of incorporation must state the place where the principal office of
b. SEC guidelines on the use of corporate name the corporation is to be established or located, which place must be within the
Philippine (Sec. 14 [3]).
Statutory limitation:
The proposed name must not be:
Purpose: To fix the residence of the corporation in a definite place, instead of
a. identical; or
allowing it to be ambulatory (Young Auto Supply Co. vs. CA, 223 SCRA 670).
b. deceptively or confusingly similar to that of any existing corporation or to
any other name already protected by law; or
It is now required by the SEC that all corporations and partnerships applying for
c. patently deceptive, confusing or contrary to law.
registration should state in their Articles of Incorporation the specific address of
their principal office, which shall include, if feasible, the strict number; street
Remedies of corporation whose name has been adopted by another:
name; barangay; city or municipality; and specific residence address of each
1. Injunction
incorporator, stockholder, director or trustee in line with the full disclosure
2. De-registration
requirement of existing laws (SEC Circ. No. 3, Series of 2006)

c. Doctrine of secondary meaning The residence of the corporation is the place of its principal office as may be
A word or phrase originally incapable of exclusive appropriation with reference to indicated in its articles of incorporation and may, therefore, be sued only at that
an article on the market, because geographically or otherwise descriptive, might place. (CRS vs. Antillon)
nevertheless have been used so long and so exclusively by one producer with
reference to his article that, in that trade and to that branch of the purchasing 4. Term of existence
public, the word or phrase has come to mean that the article was his product.
Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding
(DOCTRINE of secondary meaning, Lyceum of the Philippines, Inc. vs.CA)
fifty (50) years from the date of incorporation unless sooner dissolved or unless
said period is extended. The corporate term as originally stated in the articles of
d. Change of corporate name incorporation may be extended for periods not exceeding fifty (50) years in any
A corporation can change the name originally selected by it after complying with single instance by an amendment of the articles of incorporation, in accordance
the formalities prescribed by law, to wit: amendment of the articles of with this Code; Provided, That no extension can be made earlier than five (5)
incorporation and filing of the amendment with the SEC (Sec. 16). years prior to the original or subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may be determined by the
An authorized change in the name of the corporation, whether effected by a Securities and Exchange Commission. (6)
special act or under a general law, has no more effect upon its identity as a The corporation shall exist for the term specified in the articles of incorporation
corporation than a change of name of natural person not exceeding 50 years, unless sooner legally dissolved or unless its registration
upon his identity. It does not affect the property, rights, or liabilities of the is revoked upon any of the grounds provided by law.
corporation, nor lessen or add to its obligations. It is in no sense a new
corporation, nor the successor of the original corporation. It is the same The corporate life may be reduced or extended by amendment of the articles of
corporation with a different name and its character is in no respect changed incorporation by complying with the procedural requirements laid down in Sec.
(Rep. Planters Bank vs. CA, 216 SCRA 738) 37.

A mere change in the name of a corporation, either by the legislature or by the The extension of corporate term is subject to the following limitations:
corporators or stockholders under legislative authority, does not, generally a. The term shall not exceed 50 years in any one instance;
speaking, affect the identity of the corporation, nor in any way affect the rights, b. The amendment is effected before the expiration of the corporate term of
privileges or obligations previously acquired or incurred by it. existence, for after dissolution by expiration of the corporation term there is
no more corporate life to extend (Alhambra Cigar vs. SEC, 24 SCRA 269).
A change in the name of the corporation does not affect the identity of the c. The extension cannot be made earlier than 5 years prior to the expiration
corporation, nor in any way affect the rights, privileges, or obligations previously date unless there are justifiable reasons therefore as may be determined by
acquired or incurred by it. (Philippine First Insurance Co. vs. Hartigan) the SEC.

2. Purpose clause The mere extension of the corporate term of existence made before the
expiration of the original term constitutes a continuation of the old, and not the
PURPOSE CLAUSE (Aquila Legis Fraternity)
creation of a new corporation. (The Corporation Code of the Philippines, Hector
A corporation has only such powers as are expressly granted to it by law and S. De Leon & Hector M. De Leon, Jr., 2006 ed.)
by its articles of incorporation including those which are incidental to such
conferred powers, those reasonably necessary to accomplish its purpose and The expiration of the term for which the corporation was created does not,
those which may be incidental to its existence. however, produce its immediate dissolution for all purposes (Sec. 122).

Reasons for requiring a statement of purposes or objects:


1. In order that the stockholder who contemplates on an investment in a
a. Doctrine of relation
business enterprise shall know within what lines of business his money is to The filing and recording of a certificate of extension after the term cannot relate
be put at risk. back to the date of the passage of the resolution of the stockholders to extend
the life of the corporation. However, the doctrine of relations applies if the failure
2. So that the board of directors and management may know within what to file the application for extension within the term of the corporation is due to
lines of business they are authorized to act. the neglect of the officer with whom the certificate is required to be filed or to a
wrongful refusal on his part to receive it (Philippine Corporate Law 6. Outstanding shares in exchange for stocks in the event of reclassification
Compedium,Timoteo Aquino, 2006 ed.) or conversion.
Stocks shall not be issued in exchange of promissory notes or future services.
5. Incorporators
Sec. 10. Number and qualifications of incorporators. - Any number of natural 8. Shares of stock (Sec. 6, CC)
persons not less than five (5) but not more than fifteen (15), all of legal age and
a majority of whom are residents of the Philippines, may form a private Section 6. Classification of shares. - The shares of stock of stock corporations
corporation for any lawful purpose or purposes. Each of the incorporators of a may be divided into classes or series of shares, or both, any of which classes or
stock corporation must own or be a subscriber to at least one (1) share of the series of shares may have such rights, privileges or restrictions as may be stated
capital stock of the corporation. in the articles of incorporation: Provided, That no share may be deprived of
General rule: Only natural persons can be incorporators. voting rights except those classified and issued as "preferred" or "redeemable"
shares, unless otherwise provided in this Code: Provided, further, That there
Exception: Cooperatives and corporations primarily organized to hold equities shall always be a class or series of shares which have complete voting rights.
in rural banks. Any or all of the shares or series of shares may have a par value or have no par
value as may be provided for in the articles of incorporation: Provided, however,
Minors are not qualified to become incorporators.
That banks, trust companies, insurance companies, public utilities, and building
and loan associations shall not be permitted to issue no-par value shares of
6. Directors and trustees stock.
General rule: There must be at least 5 but not more than 15 directors or Preferred shares of stock issued by any corporation may be given preference in
trustees in a private corporation. the distribution of the assets of the corporation in case of liquidation and in the
Exceptions: distribution of dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions of this Code:
1. Educational corporations registered as a non-stock corporation whose Provided, That preferred shares of stock may be issued only with a stated par
number of trustees, though not less than 5 and not more than 15 should be value. The board of directors, where authorized in the articles of incorporation,
divisible by 5; may fix the terms and conditions of preferred shares of stock or any series
thereof: Provided, That such terms and conditions shall be effective upon the
2. In close corporations where all the stockholders are considered as
filing of a certificate thereof with the Securities and Exchange Commission.
members of the board of directors thereby effectively allowing 20 members
in the board; and Shares of capital stock issued without par value shall be deemed fully paid and
non-assessable and the holder of such shares shall not be liable to the
3. Corporation sole.
corporation or to its creditors in respect thereto: Provided; That shares without
The by-laws may provide for additional qualifications and disqualifications. par value may not be issued for a consideration less than the value of five
However, it may not do away with the minimum disqualifications laid down by (P5.00) pesos per share: Provided, further, That the entire consideration
the Code. received by the corporation for its no-par value shares shall be treated as capital
and shall not be available for distribution as dividends.
Qualifications:
A corporation may, furthermore, classify its shares for the purpose of insuring
1. Directors must own at least one (1) share of the capital stock of the
compliance with constitutional or legal requirements.
corporation. Trustees must be members.
Except as otherwise provided in the articles of incorporation and stated in the
2. A majority of the directors or trustees must be residents of the
certificate of stock, each share shall be equal in all respects to every other share.
Philippines.
Where the articles of incorporation provide for non-voting shares in the cases
Disqualifications:
allowed by this Code, the holders of such shares shall nevertheless be entitled to
1. Conviction by final judgment of an offense punishable by imprisonment vote on the following matters:
for a period exceeding six (6) years, or a violation of this Code committed
1. Amendment of the articles of incorporation;
within five (5) years prior to the date of election or appointment.
2. Adoption and amendment of by-laws;
2. Other disqualifications under applicable special laws.
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
A by-laws may validly provide that no person may be elected as director unless
substantially all of the corporate property;
he owns a specified number of shares required for the directorate qualification.
4. Incurring, creating or increasing bonded indebtedness;
It may likewise disqualify a stockholder from being elected into office if he has
a substantial interest in a competitor corporation to avoid any possible adverse 5. Increase or decrease of capital stock;
effects of conflicting interest of a director.
6. Merger or consolidation of the corporation with another corporation or
In order to be eligible as a director, what is material is the legal title to, not other corporations;
beneficial ownership, of the stock as appearing on the books of the corporation.
(Lee vs. CA) 7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
If no election is conducted or no qualified candidate is elected, the incumbent
director shall continue to act as such in a hold over capacity until the election 8. Dissolution of the corporation.
is held and a qualified candidate is so elected. (Detective and Protective Bureau Except as provided in the immediately preceding paragraph, the vote necessary
vs. Cloribel) to approve a particular corporate act as provided in this Code shall be deemed to
refer only to stocks with voting rights. (5a)
7. Capitalization
Authorized capital – the maximum amount fixed in the articles to be
Shares of stock designate the interest or right which the stockholder has in the
subscribed and paid-in or secured to be paid by the subscribers.
management of the corporation, and in the surplus profits and, in case of
Subscribed capital stock – the total number of shares and its total value for distribution, in all assets remaining after the payment of its debts.
which there are contracts for their acquisition or subscription.
Stock certificate is a doc ument or instrument evidencing the interest of a
Paid-up capital stock – the actual amount or value which has been actually stockholder in the corporation.
contributed or paid to the corporation in consideration of the subscriptions made
The shares of stock of stock corporations may be divided into classes or series
thereon.
of shares, or both, any of which classes or series of shares may have such rights,
Stocks shall not be issued for a consideration less than the par or issued privileges or restrictions as may be stated in the articles of incorporation.
price thereof.
Purpose of classification:
Consideration for the issuance of stock may be any or a combination of any
1. To specify and define the rights and privileges of the stockholders.
two or more of the ff:
2. For regulation and control of the issuance of sale of corporate
1. Actual cash paid to the corporation; securities for the protection of purchasers and stockholders.
3. As a management control device.
2. Property, tangible or intangible, actually received by the corporation and 4. To comply with statutory requirements.
necessary or convenient for its use and lawful purposes at a fair valuation 5. To better insure return on investment.
equal to the par or issued value of the stock issued; 6. For flexibility in price.
3. Labor performed or services actually rendered to the corporation; Except as otherwise provided in the articles of incorporation and stated in the
4. Previously incurred indebtedness by the corporation; certificate of stock, each share shall be equal in all respects to every other share.

5. Amounts transferred from unrestricted retained earnings to stated capital;


and
a. Doctrine of equality of shares (ii) voting and non-voting
Where the articles of incorporation do not provide for any distinction of the Voting shares – gives the holder thereof the right to vote and participate in the
shares of stock, all shares issued by the corporation are presumed to be equal management of the corporation through the exercise of such right, either at the
and enjoy the same rights and privileges and are also subject to the same election of the board of directors, or in any manner requiring the stockholder‟s
liabilities (Sec. 6, par. 5). approval.
Non-voting shares – do not grant the holder thereof the right to vote except
b. Classes of shares under the penultimate paragraph of Sec. 6.
Common and preferred shares Only preferred and redeemable shares may be denied the right to vote.
Common stock – a stock which entitles its owner to an equal pro-rata There must always be a class or series of shares which have complete voting
division of profits, if there be any, but without any preference or advantage in rights.
that respect over any other stockholder or class of stockholders.
Preferred stock – a stock that gives the holder a preference over the holder
of common stocks with respect to the payment of dividends and/or with respect Non-voting shares shall nevertheless be entitled to vote on the following
to distribution of capital upon liquidation. matters:

Limitations on preferred stock: 1. Amendment of the articles of incorporation;

1. Must be issued with a stated par value; and 2. Adoption and amendment of by-laws;

2. The preferences must be stated in the articles of incorporation and in the 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
certificate of stock, otherwise, each share shall be, in all respect, equal to every substantially all of the corporate property;
other share.
4. Incurring, creating or increasing bonded indebtedness;
The guarantee to preference as to dividends does not create a relation of
5. Increase or decrease of capital stock;
debtor and creditor between the corporation and the holders of such stock. The
board has the discretion to determine whether or not to declare dividends. 6. Merger or consolidation of the corporation with another corporation or
other corporations;
Preferred shares are presumed to be non-participating.
7. Investment of corporate funds in another corporation or business in
Participating preferred shares – the holders thereof are still given the right to
accordance with this Code; and
participate with the common stockholders in dividends beyond their stated
preference. 8. Dissolution of the corporation.
Cumulative preferred share – those that entitle the owner thereof to Except as provided in the penultimate paragraph of Sec. 6, the vote necessary
payment not only of current dividends but also back dividends not previously to approve a particular corporate act as provided in this Code shall be deemed to
paid whether or not, during the past years, dividends were declared or paid. refer only to stocks with voting rights.
In absence of express stipulation, preferred shares are presumed to be non-
cumulative.
(iii) common and preferred (see above notes)
Non-cumulative preferred shares – those which grant the holders of such
shares only to the payment of current dividends but not back dividends, when
and if dividends are paid, to the extent agreed upon before any other (iv) redeemable, treasury and founder's shares
stockholders are paid the same. Founders’ shares
Types of non-cumulative preferred shares: Sec. 7. Founders‟ shares. - Founders' shares classified as such in the articles
of incorporation may be given certain rights and privileges not enjoyed by the
1. Discretionary dividend type – gives the holder of such shares the right to have
owners of other stocks, provided that where the exclusive right to vote and be
dividends paid thereon in a particular year depending on the judgment or voted for in the election of directors is granted, it must be for a limited period
discretion of the board of directors.
not to exceed five (5) years subject to the approval of the Securities and
2. Mandatory if earned type – impose a positive duty on directors to declare Exchange Commission. The five-year period shall commence from the date of
dividends every year when profits are earned. the aforesaid approval by the Securities and Exchange Commission.

3. Earned cumulative or dividend credit – gives the holder thereof the right to Redeemable shares
arrears in dividends if there were profits earned during the previous years but
Redeemable shares may be issued by the corporation when expressly so
dividends were not declared.
provided in the articles of incorporation.
Unless the right to vote is clearly withheld, a preferred stockholder has the
They may be purchased or taken up by the corporation upon the expiration of
right to vote.
a fixed period, regardless of the existence of unrestricted retained earnings in
Preference upon liquidation must be clearly indicated otherwise they shall be the books of the corporation, and upon such other terms and conditions as may
placed on equal footing with other shares. be stated in the articles of incorporation, which terms and conditions must also
be stated in the certificate of stock representing said shares.

(i) par and no par Treasury shares


Par value shares – those whose value are fixed in the articles of incorporation. Treasury shares are shares of stock which have been issued and fully paid for,
but subsequently reacquired by the issuing corporation by purchase, redemption,
Par value shares cannot be issued nor sold by the corporation at less than par.
donation or through some other lawful means. Such shares may again be
No par value shares – those whose issued price are not stated in the certificate disposed of for a reasonable price fixed by the board of directors.
of stock but which may be fixed in the articles of incorporation, or by the board
Treasury shares may again be issued for a price less than par.
of directors when so authorized by the said articles or by the by-laws, or in the
absence thereof, by the stockholders themselves. Treasury shares have no voting and dividend rights. Such rights are only
granted to outstanding shares of stock. (CIR vs. Manning)
Limitations of no par value shares:
1. Such shares, once issued, are deemed fully paid and thus, non CAPITAL REQUIREMENT
assessable; Sec. 12. Minimum capital stock required of stock corporations. - Stock
corporations incorporated under this Code shall not be required to have any
2. The consideration for its issuance should not be less than P5.00;
minimum authorized capital stock except as otherwise specifically provided for by
3. The entire consideration for its issuance constitutes capital, hence, not special law, and subject to the provisions of the following section.
available for dividend declaration;
Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of
4. They cannot be issued as preferred stock; and incorporation. - At least twenty-five percent (25%) of the authorized capital
stock as stated in the articles of incorporation must be subscribed at the time of
5. They cannot be issued by banks, trust companies, insurance companies,
incorporation, and at least twenty-five (25%) per cent of the total subscription
public utilities and building and loan associations.
must be paid upon subscription, the balance to be payable on a date or dates
Advantages to the issuance of no par value shares: fixed in the contract of subscription without need of call, or in the absence of a
fixed date or dates, upon call for payment by the board of directors: Provided,
1. Flexibility in price; however, That in no case shall the paid-up capital be less than five Thousand
2. Evasion of the danger of liability upon watered stock; and (P5,000.00) pesos.

3. Disappearance of personal liability on the part of the holder thereof for


unpaid subscription. RESTRICTIONS AND PREFERENCES ON TRANSFER OF SHARES
General rule: Corporations may or may not provide for restrictions and It is only from the time of the issuance of the certificate of incorporation that a
preferences regarding the transfer, sale or assignment of shares in the articles of corporation acquires juridical personality and legal existence.
incorporation. It is discretionary.
Prior to incorporation, a corporation has no juridical personality to enter into
Exception: Close corporations are required to subject their shares to specified contracts. (Cagayan Fishing Development vs. Sandiko)
restrictions as required in Sec. 96.
ORGANIZATION AND COMMENCEMENT OF BUSINESS
General rule: Restrictions or preferences must be contained in the articles of
Sec. 22. Effects on non-use of corporate charter and continuous inoperation of
incorporation and in all stock certificates to be issued by the corporation.
a corporation. - If a corporation does not formally organize and commence the
Exception: In close corporations, such restrictions and preferences must also transaction of its business or the construction of its works within two (2) years
be embodied in the by-laws. from the date of its incorporation, its corporate powers cease and the
corporation shall be deemed dissolved. However, if a corporation has
commenced the transaction of its business but subsequently becomes
NO TRANSFER CLAUSE continuously inoperative for a period of at least five (5) years, the same shall be
a ground for the suspension or revocation of its corporate franchise or certificate
No transfer of stock or interest which will reduce the ownership of Filipino of incorporation.
citizens to less than the required percentage of the capital stock as provided by
existing laws shall be allowed or permitted to be recorded in the books of the
corporation and this restriction shall be indicated in all of the stock certificates to
This provision shall not apply if the failure to organize, commence the
be issued by the corporation.
transaction of its businesses or the construction of its works, or to continuously
operate is due to causes beyond the control of the corporation as may be
determined by the Securities and Exchange Commission.
GROUNDS FOR DISAPPROVAL
Organization – the election of officers, providing for the subscription and
Only substantial and not strict compliance is required. payment of capital stock, the adoption of by-laws, and such other steps as are
Grounds for disapproval: necessary to endow the legal entity with the capacity to transact the legitimate
business for which it was created.
1. The articles of incorporation or any amendment thereto is not substantially in
accordance with the form prescribed; Failure of the corporation to organize within the prescribed period would result
in its automatic dissolution, unless its failure to do so is due to causes beyond its
2. The purpose or purposes of the corporation are patently unconstitutional, control.
illegal, immoral, or contrary to government rules and regulations;
Substantial compliance is sufficient.
3. The Treasurer‟s Affidavit concerning the amount of capital stock subscribed
and/or paid is false; Subsequent inoperation is merely a ground for suspension or revocation of
corporate franchise. Dissolution is not automatic.
4. The percentage of ownership of the capital stock to be owned by citizens of
the Philippines has not been complied with as required by existing laws or the
Constitution, E. Amendment of the articles of
5. The articles of incorporation of corporations subject to government
supervision are not accompanied by a favorable recommendation from the
incorporation (Sec. 16, CC)
appropriate government agency. Section 16. Amendment of Articles of Incorporation. - Unless otherwise
prescribed by this Code or by special law, and for legitimate purposes, any
The grounds are not exclusive. provision or matter stated in the articles of incorporation may be amended by a
majority vote of the board of directors or trustees and the vote or written assent
9. treasurer's affidavit of the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, without prejudice to the appraisal right of dissenting stockholders
in accordance with the provisions of this Code, or the vote or written assent of at
C. Grounds for rejection of the Articles of least two-thirds (2/3) of the members if it be a non-stock corporation.
The original and amended articles together shall contain all provisions required
Incorporation (Sec. 17, CC) by law to be set out in the articles of incorporation. Such articles, as amended
Section 17. Grounds when articles of incorporation or amendment may shall be indicated by underscoring the change or changes made, and a copy
be rejected or disapproved. - The Securities and Exchange Commission may thereof duly certified under oath by the corporate secretary and a majority of the
reject the articles of incorporation or disapprove any amendment thereto if the directors or trustees stating the fact that said amendment or amendments have
same is not in compliance with the requirements of this Code: Provided, That the been duly approved by the required vote of the stockholders or members, shall
Commission shall give the incorporators a reasonable time within which to be submitted to the Securities and Exchange Commission.
correct or modify the objectionable portions of the articles or amendment. The The amendments shall take effect upon their approval by the Securities and
following are grounds for such rejection or disapproval: Exchange Commission or from the date of filing with the said Commission if not
1. That the articles of incorporation or any amendment thereto is not acted upon within six (6) months from the date of filing for a cause not
substantially in accordance with the form prescribed herein; attributable to the corporation.
2. That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government rules and
regulations; CHAPTER 5: THE CORPORATE CHARTER AND ITS AMENDMENTS (Aquila
3. That the Treasurer's Affidavit concerning the amount of capital stock Legis Fraternity)
subscribed and/or paid is false;
CORPORATE CHARTER
4. That the percentage of ownership of the capital stock to be owned by
citizens of the Philippines has not been complied with as required by Corporate charter – an instrument or authority from the sovereign power,
existing laws or the Constitution. bestowing rights and power.
No articles of incorporation or amendment to articles of incorporation of banks, The corporate charter is a three-fold contract:
banking and quasi-banking institutions, building and loan associations, trust
companies and other financial intermediaries, insurance companies, public 1. Between the corporation and the state insofar as it concerns its primary
utilities, educational institutions, and other corporations governed by special laws franchise to be and act as a corporation;
shall be accepted or approved by the Commission unless accompanied by a 2. Between the corporation and the stockholders or members insofar as it
favorable recommendation of the appropriate government agency to the effect governs their respective rights and obligations; and
that such articles or amendment is in accordance with law. (n)
3. Between and among the stockholders or members themselves as far as
D. Commencement of corporate their relationship with one another is concerned.
The charter of corporations created under the Corporation Code consists of the
existence (Sec. 19, CC) articles of incorporation and the Corporation Code inclusive of the by-laws
adopted thereunder and all pertinent provisions of any statute governing them.
Section 19. Commencement of corporate existence. - A private
corporation formed or organized under this Code commences to have corporate The charter of corporations created by special laws consists of the special law
existence and juridical personality and is deemed incorporated from the date the creating the same and any and all laws, rules and regulations affecting or
Securities and Exchange Commission issues a certificate of incorporation under applicable to them.
its official seal; and thereupon the incorporators, stockholders/members and
Franchise – the right or privilege itself to be and act as a corporation or to do
their successors shall constitute a body politic and corporate under the name
stated in the articles of incorporation for the period of time mentioned therein, a certain act.
unless said period is extended or the corporation is sooner dissolved in
accordance with law. (n)
Kinds of franchises:
COMMENCEMENT OF CORPORATE EXISTENCE
1. Primary franchise – the right or privilege of being a corporation which the 3. Ratification by the stockholders representing at least 2/3 of the
state confers upon the applicant for this faculty. outstanding capital stock or 2/3 of the members in case of non-stock
corporations.
2. Secondary franchise – the powers and privileges vested in, and to be
exercised by the corporate body as such. 4. In case of extension of corporate term, the extension should be for
periods not exceeding 50 years in any single instance, and provided that no
extension can be made earlier than 5 years prior to the original or
CORPORATE ENTITY THEORY subsequent expiry date(s) unless there are justifiable reasons for an earlier
extension as may be determined by the SEC.
The corporation is possessed with a personality separate and distinct from the
individual stockholders or members. 5. In cases of extension of corporate term, a dissenting stockholder may
exercise his appraisal rights.
A corporation is a distinct legal entity to be considered as separate and apart
from the individual stockholders or members who compose it, and is not affected Extension may be made only before the term provided in the corporate charter
by the personal rights, obligations and transactions of its stockholders or expires. (Alhambra Cigar & Cigarette Mfg. Co., Inc. vs. SEC)
members. Conversely, a corporation has no interest in the individual property of
its stockholders unless transferred to the corporation, even in case of a one-man
corporation. (Sulo ng Bayan, Inc. vs. Gregoria Araneta, Inc.) F. Effects of non-use of corporate charter
A bona fide corporation should alone be liable for its corporate acts as duly (Sec. 22, CC)
authorized by its directors and officers. (Caram vs. CA)
Section 22. Effects on non-use of corporate charter and continuous inoperation
The president and manager of a corporation who entered into and signed a of a corporation. - If a corporation does not formally organize and commence the
contract in his official capacity, cannot be made liable thereunder in his individual transaction of its business or the construction of its works within two (2) years
capacity in the absence of stipulation to that effect due to the personality of the from the date of its incorporation, its corporate powers cease and the
corporation being separate and distinct from the person composing it. (Rustan corporation shall be deemed dissolved. However, if a corporation has
Pulp and Paper Mills, Inc. vs. IAC) commenced the transaction of its business but subsequently becomes
continuously inoperative for a period of at least five (5) years, the same shall be
A corporation has a personality distinct and separate from its individual a ground for the suspension or revocation of its corporate franchise or certificate
stockholders or members. The mere fact that one is president of a corporation of incorporation. (19a)
does not render the property he owns and possesses the property of the
corporation, since the president, as an individual, and the corporation are This provision shall not apply if the failure to organize, commence the
separate entities. (Cruz vs. Dalisay) transaction of its businesses or the construction of its works, or to continuously
operate is due to causes beyond the control of the corporation as may be
Mere ownership by a single stockholder or by another corporation of all or determined by the Securities and Exchange Commission.
nearly all of the capital stock of a corporation is not, of itself, sufficient ground
for disregarding the separate corporate personality. (Palay Inc. vs. Clave) (see notes above)

In a right of action against the corporation, the officers may not be held
personally liable as long as they act within the scope of their authority. (Soriano
vs. CA)

AMENDMENT OF THE CORPORATE CHARTER


Steps to be followed for an effective amendment of the articles of
incorporation:
1. Resolution by at least a majority of the board of directors or trustees.
2. Vote or written assent of the stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of the members in case of non-stock
corporation.
3. Submission and filing of the amendments with the SEC as follows:
a. The original and amender articles together shall contain all the provisions
required by law to be set out in the articles of incorporation. Such articles, as
amended, shall be indicated by underscoring the change or changes made.
b. A copy thereof, duly certified under oath by the corporate secretary and a
majority of the directors or trustees stating the fact that such amendments have
been duly approved by the required vote of the stockholders or members.
c. Favorable recommendation of the appropriate government agency concerned
in the case where the corporation is under its supervision.
Time when the amendments shall take effect:
1. Upon approval of the SEC; or
2. From the date of filing with the SEC if not acted upon with 6 months from
the date of filing for a cause not attributable to the corporation. (Note: not
applicable to special amendments)
Special amendments:
1. Extension or shortening of corporate term (Sec. 37)
2. Increase or decrease of capital stock (Sec. 38)
3. Incurring, creating or increasing bonded indebtedness (Sec. 38)

PROVISIONS SUBJECT TO AMENDMENT


Matters which are fait accompli are not subject to change.
A change in the name of the corporation does not affect the identity of the
corporation, nor in any way affect the rights, privileges, or obligations previously
acquired or incurred by it. (Philippine First Insurance Co. vs. Hartigan)

AMENDMENT OF THE CORPORATE TERM


Procedure to amend the corporate term:
1. Approval by a majority vote of the board or directors or trustees.
2. Written notice of the proposed action and the time and place of meeting
shall be served to each stockholder or member either by mail or by personal
service.