THE CORPORATION CODE

2018 BAR EXAMINATIONS SYLLABUS

A. Corporation
1. Definition
 Sec. 2 of the Corporation Code provides that “[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 incidental to its existence.”
2. Attributes of a Corporation
 It is an artificial being;
 It is created by operation of law;
 It has the right of succession; and
 It has the powers, attributes and properties expressly authorized by
law or incident to its existence.

B. Classes of Corporations
 Aggregate or sole corporation, public or private or quasi-public
corporation, corporation created by special law or under a general law
or by prescription, de jure or de facto corporation or corporation by
estoppel, stock or non-stock corporation, domestic or foreign
corporation, close or special corporation, ecclesiastical or law,
charitable or civil, subsidiary or affiliate or parent corporation
 GOCCs are different from Government Instrumentalities – the former
must be organized as a stock or non-stock corporation while the latter
are merely vested with corporate powers to perform efficiently their
governmental functions
 PNRC as sui generis – the structure of the PNRC is sui generis, being
neither strictly private nor public in nature; it is supposed to be a private
institution and at the same time a public service institution that is
auxiliary of the government in the humanitarian field in accordance with
its commitments under the international law.

C. Nationality of Corporations
1. Place of Incorporation Test
 Sec. 123 of the Corporation Code provides that a foreign corporation
is one formed, organized, or existing under any laws other than those
of the Philippines and whose laws allow Filipino citizens and
corporations to do business in its own country or state.
 The sovereignty by which a corporation was created, under whose
laws it was organized, determines its national character, and the fact
that some of its incorporators were residents and citizens of a foreign
country does not change its rule.
2. Control Test
 Also called the Aggregate Test which requires looking into the
nationality, domicile, or residence of the individuals who control the
corporation
 This test can be applied when a law makes an activity partly
nationalized – “Shares belonging to corporations or partnerships at
least 60% of the capital of which is owned by Filipino citizens shall
be considered as of Philippine nationality.”

1
  Wartime Control Test – the place of incorporation may be
disregarded in times of war; Court will look into the nationality of
the controlling stockholders in wartime. If they are citizens of the
enemy state then the corporation will also be deemed a public enemy
corporation.
3. Grandfather Rule
 It is a method of determining the nationality of corporation, which in
turn is owned by another corporation by breaking down the equity
structure of the shareholders of the corporation.
 The percentage of shares held by the second corporation in the first
is multiplied by the latter’s own Filipino equity, and the product of
these percentages is determined to be the ultimate Filipino
ownership of the subsidiary corporation.
 It is a corollary rule – even if the 60-40 Filipino to foreign equity
ratio is apparently met by the subject or investee corporation, a
resort to the Grandfather Rule is necessary if doubt exists as to the
locus of the beneficial ownership and control.
 Doubt exists if the following indicators are present: (1) that the
foreign investors provide practically all the funds for the investment
jointly undertaken with Filipinos; (2) that the foreign investors
undertake to provide practically all the technological support for the
venture; and (3) that the foreign investors, while being minority
stockholders, manage the company and prepare all economic
viability studies.

D. Corporate Juridical Personality

 Doctrine of Separate Juridical Personality
 A corporation has a personality separate and distinct from the
persons composing it as well as from that of any other entity t which
it may be related.
 Art. 44 of the Civil Code specifies corporations as among those
considered as juridical persons with juridical personality, separate,
and distinct from that of each shareholder or member.
 Rights can be enforced for and against the corporation and the filing
of a complaint against the stockholder is not ipso facto a complaint
against the corporation.

a. Liability for Torts and Crimes

 A corporation is civilly liable in the same manner as a natural
person for torts.
 A principal or a master is liable for every tort that he
expressly directs or authorizes.
 A corporation is liable whenever a tortious act is committed
by an officer or agent under express direction or authority
from the stockholders or members acting as a body, or
generally, from the directors as a governing body.
 The liability of corporations may either be vicarious or direct
personal obligation.

b. Recovery of Moral Damages

2
  As a rule, a corporation is not entitled to moral damages
because, not being a natural person, it cannot experience
physical suffering or sentiments like wounded feelings,
serious anxiety, mental anguish and moral shock.
 The only exception is when the corporation has a reputation
that is debased, resulting in the humiliation in the business
realm.

2. Doctrine of Piercing the Corporate Veil

 All corporations exist behind the “corporate veil” and are entitled to
a legal assumption that the acts of the corporation are independent
from the acts of its shareholders. This ensures that shareholders, or
another corporation, are exempt from liability for the corporation’s
actions. This assumption of limited liability is “the rule not the
exception.”
 While a corporation may exist for any lawful purpose, the law will
regard it as an association of persons or, in case of two corporations,
merge them into one, when its corporate legal entity is used as a
cloak for fraud or illegality.
 It refers to “assertion of facts and circumstances which will persuade
the court to impose the corporate obligation on its owners.”
 Reverse Piercing – Whereas traditional piercing holds an individual
liable for the acts of a corporation, or a parent liable for the acts of a
subsidiary, reverse piercing imposes liability on a corporation for the
obligations of an individual shareholder, or on a subsidiary
corporation for the acts of a parent corporation.
o Outsider Reverse Piercing – the plaintiff, an “outside” third
party, seeks to pierce the corporate veil to impose liability on
the corporation to satisfy the debt of an individual shareholder
o Insider Reverse Piercing – a corporate insider attempting to
pierce the corporate veil to take advantage of corporate claims
that she would be unable to bring in her individual capacity

a. Grounds for Application of Doctrine

 Cases where public convenience may be defeated, as when
the corporate fiction is used as a vehicle for the evasion of an
existing obligation;
 Fraud cases or when the corporate entity is used to justify
wrong, protect fraud, or defend a crime; or
 Alter Ego cases, where a corporation is merely a farce since it
is a mere alter ego or business conduit of a corporation, or
where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another
corporation.

b. Test in Determining Applicability

 The Instrumentality Rule or the Three-Pronged Control
Test is the primary test in the application of the doctrine.
 It requires the concurrence of three requisites:

3
 o Control – complete domination, not only of finances,
but also of policy and business practice in respect to
the transaction attacked so that the corporate entity as
to this transaction had at the time no separate mind,
will or existence of its own;
o Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiffs legal right; and
o The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained
of.

E. Incorporation and Organization

1. Number and Qualifications of Incorporators
 Sec. 5 of the Corporation Code provides that incorporators are those
stockholders or members mentioned in the Articles of Incorporation
as originally forming and composing the corporation and who are
signatories thereof.
 There is only one set of incorporators – those appearing in the
Articles of Incorporation will remain to be incorporators up to the
termination of the life of the corporation.
 Sec. 10 of the Corporation Code provides for the basic qualifications
of incorporators:
o They must be natural persons;
o There must be not less than five but not more than fifteen;
o They must be of legal age;
o The majority must be residents of the Philippines; and
o If the corporation is a stock corporation, each incorporator
must own or be a subscriber to at least one share.
2. Corporate Name; Limitations on Use of Corporate Name
 The right to use a corporate name, is just like other privileges, part of
the franchise granted to the corporation and cannot be levied upon
because it is inseparable from the primary franchise.
 The very law of their creation and continued existence requires each
corporation to adopt and certify a distinctive name, hence, a
corporation has the power of succession under such corporate name.
 A corporation’s right to use its corporate or trade name is a property
right, a right in rem which it may assert and protect against the
world.
 Pursuant to the Revised Guidelines on the Approval of Corporate
and Partnership Names issued by the SEC: 1) a corporate name shall
not be identical, misleading or confusingly similar to one already
registered by another corporation with the Commission; and 2) the
name which contains a word identical to a work of a registered name
shall not be allowed if such word is coined or already appropriated
by a registered firm, unless there is consent from this registered firm,
or the registered firm is one of the stockholders or partners of the
entity to be registered.
3. Corporate Term

4
  Sec. 11 of the Corporation Code provides that a corporation shall
exist for a period not exceeding 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
incorporation may be extended for periods not exceeding fifty (50)
years in any single instance by an amendment of the articles of
incorporation, in accordance with the Code.
 No extension can be made earlier than five (5) 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
Securities and Exchange Commission.
4. Minimum Capital Stock and Subscription Requirements
 Under Sec. 15 of the Corporation Code, the sworn statement of the
Treasurer elected by the subscribers must show that at least 25% of
the authorized capital stock of the corporation has been subscribed,
and at least 25% of the total subscription has been fully paid to him
in actual cash and/or property the fair valuation of which is equal to
at least 25% of the said subscription, such paid-up capital being not
less than 5,000 pesos.
5. Articles of Incorporation
 Sec. 14 of the Corporation Code provides that all corporations
organized under said code shall file with the Securities and
Exchange Commission (SEC) articles of incorporation in any of the
official languages duly signed and acknowledged by all of the
incorporators and contain substantially the matters enumerated in the
said provision, except as otherwise prescribed by the Code and by
Special laws.
a. Nature and Function of Articles
 The Articles of Incorporation is a document that defines the
charter of the corporation.
 It also defines the contractual relationships between the State
and the corporation, the stockholders and the State, and
between the corporation, and its stockholders.
 Hence, it serves as a charter and a contact of the corporation.
b. Contents
 Sec. 14 enumerates the contents of the Articles which must be
substantially complied: name of the corporation, purpose(s)
which may be primary or secondary, place of the principal
office which must be within the Philippines, term for which
the corporation is to exist, information of the incorporators,
number of directors or trustees which shall not be less than 5
but not more than 15, information of the persons acting as
directors or trustees until the first regular directors or trustees
are duly elected and qualified, capital stock or the capital, and
such other matters which the incorporators may deem
necessary and convenient.
c. Amendment
 Sec. 16 of the Corporation Code imposes certain requirements
for the amendment of the Articles of Incorporation:

5
 o It must be for legitimate purpose(s) and must not be
contrary to other provisions of the Code and Special
law
o It must be approved by a majority of the vote of the
board of directors or trustees
o There must be vote or written assent of the
stockholders representing at least 2/3 of the
outstanding capital stock, or the vote or written assed
of at least 2/3 of the members if it be a non-stock
corporation
o The original and amended articles must be set out in
the Articles of Incorporation, indicated by
underscoring the change(s) made
o A copy thereof duly certified under oath by the
corporate secretary and a majority of the directors or
trustees stating the fact that the amendment(s) have
been duly approved by the majority of the stockholders
or members, submitted to the SEC
o The amendment(s) must be approved by the SEC

d. Non-Amendable Items
 Sec. 17 of the Corporation Code provides the following
grounds for such rejection or disapproval:
o That the articles of incorporation or any amendment
thereto is not substantially in accordance with the form
prescribed herein;
o That the purpose or purposes of the corporation are
patently unconstitutional, illegal, immoral, or contrary
to government rules and regulations;
o That the Treasurer’s Affidavit concerning the amount
of capital stock subscribed and/or paid if false;
o 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 existing laws or the
Constitution.
6. Registration and Issuance of Certificate of Incorporation

7. Adoption of By-laws
a. Nature and Functions of By-laws
b. Requisites of Valid By-laws
c. Binding Effect
d. Amendment or Revision

F. Corporate Powers
1. General Powers; Theory of General Capacity
2. Specific Powers; Theory of Specific Capacity
a. Power to Extend or Shorten Corporate Term
b. Power to Increase or Decrease Capital Stock or Incur, Create,
Increase Bonded Indebtedness
c. Power to Deny Pre-Emptive Rights
d. Power to Sell or Dispose of Corporate Assets

6
 e. Power to Acquire Own Shares
f. Power to Invest Corporate Funds in Another Corporation or
Business
g. Power to Declare Dividends
h. Power to Enter Into Management Contracts
i. Ultra Vires Acts
i. Applicability of Ultra Vires Doctrine
ii. Consequences of Ultra Vires Acts
3. How Exercised
a. By the Shareholders
b. By the Board of Directors
c. By the Officers
4. Trust Fund Doctrine

G. Board of Directors and Trustees

1. Doctrine of Centralized Management
2. Business Judgment Rule
3. Tenure, Qualifications, and Disqualifications of Directors or Trustees
4. Elections
a. Cumulative Voting/Straight Voting
b. Quorum
5. Removal
6. Filling of Vacancies
7. Compensation
8. Rules on Fiduciaries’ Duties and Liabilities
9. Responsibility for Crimes
10. Inside Information
11. Contracts
a. By Self-Dealing Directors with the Corporation
b. Between Corporations with Interlocking Directors
12. Executive Committee
13. Meetings
a. Regular or Special
i. When and Where
ii. Notice
b. Who Presides
c. Quorum
d. Rule on Abstention