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Sec. 2. Corporation Defined.
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.
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Four Attributes of Corporation
1. Artificial being
 The law treats it as a person
 It may own properties etc.
2. Created by operation of law
 It will not exist unless the State gives
its consent
 Special authority or grant by the state
is required.
 It can only come into existence in the
manner prescribed by law.
3. Having the right of succession
 It has the capacity of continuous
existence irrespective of death,
withdrawal, insolvency, or incapacity
of the individual stockholders or
members, and regardless of the
transfer of their interests or shares of
stocks.
 Life of a corporation is perpetual.
(unless otherwise indicated in the
Articles of Incorporation (AIO)
4. Powers, attributes, and properties
expressly authorized by law or incidental to
its existence
 It could only perform powers
expressly granted by the Corporation
Code or AIO. If the corporation acts
outside its authority or powers, then
such act is ultra vires.
Separate Personality
A corporation is a legal or juridical person with a personality separate and apart from its individual
SH/M from any other legal entity to which it may be connected.
Significance: It has liability for acts or contracts. It has the right to bring actions. (Art. 46, NCC) It has
the right to acquire and possess property. It may be subject to tax exemption.
Good Earth Emporium v CA
The stockholder's debt or credit is not the debt or credit of the corporation, nor is the debt or credit
of the latter that of the former.
Stockholders or members are in no legal sense the owners of corporate property (or credits) which
is owned by the corporation as a distinct person.
Cruz v Dalisay
The power to “pierce the veil of corporate entity” belongs to the court and a sheriff usurps this
power when he enforces a writ of execution, not against the property of the corporation, the
judgment debtor, but against that of its president on the ground that they are one and the same.
Doctrine of Piercing the Veil of Corporate Entity
The legal fiction must be disregarded when it is used as a cloak or cover for fraud, illegality, or to
defeat public convenience, justify wrong, protect fraud, or defend crime.
Effect: Liability will directly attach to the persons composing the corporation.
 When you pierce the corporate veil, there must always be a ground and such ground is
that the cloak or cover is being used for any illegality or fraud
 If the cloak is not used for such [i.e. it is only used to collect attorney’s fees], the veil
cannot be pierced
Bank of America v CA
Lack of personality to sue can be used as a ground for Motion to Dismiss if the complaint, on its
face, evidently states no cause of action and the plaintiff is not the real-party-in-interest.
However, in this case, private respondents who are shareholders of foreign corporation have the
personality to sue because the corporation is wholly owned by them. The doctrine of separate
entity does not apply.
Forum Non-conveniens “the forum is inconvenient” is not a ground for Motion to Dismiss. A
Philippine Court may assume jurisdiction over the case if it chooses to do so, provided:
1. The Philippine court is one to which the parties may conveniently resort to
2. The Philippine court is in a position to make an intelligent decision as to the laws and facts
3. The Philippine court has the power to enforce its decision
All these requisites are present in this case.
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Avon Dale Garments, Inc. v CA

Where a corporation is dissolved, and its assets are transferred to another corporation to avoid a
financial liability of the first corporation to its employees, both firms being owned and controlled by
the same persons with the result that the second corporation should be considered a continuation
and successor of the first entity.

Concept Builders, Inc. v NLRC

Probative Factors of Identity that will justify the piercing of the corporate veil:
1. Stock ownership by one or common ownership of both corporation
2. Identity of directors and officers
3. Manner of keeping corporate books and records
4. Methods of conducting the business

Instrumentality Rule
Where one corporation is so organized and controlled and its affairs are conducted so that it is in
fact a mere instrumentality or adjunct of the other.

Alter ego Rule

The parent corporation has complete domination over the finances, policies, and conduct of
business of another corporation so much so that the latter corporation has no mind of its own.

3 Tests of Alter Ego Rule

(1) Control, not mere majority or complete stock control, but complete dominion, not only of
finances but of policy and business 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;
(2) Such control must have been used by the defendant to commit fraud or wrong, violation of a
statutory or other positive duty, or dishonest and unjust act in contravention of plaintiff's
legal rights; and
(3) Such control and breach of duty must proximately cause the injury or unjust loss complained of.

De Leon v NLRC
When the concept of separate legal entity is used to defeat public convenience, protect fraud or
defend crime, the law will regard the corporation as an association of persons, or in case of two
corporations merge them into one.

The separate juridical personality may also be disregarded when such corporation is a mere alter
ego or business conduit of another person. In this case, FISI which changed its name to MISI was a
mere adjunct of FTC, having the same owners and business address.

Francisco Motors v CA
Where the corporate fiction is being used as a cloak or cover for fraud or illegality, or "to defeat
public convenience, justify wrong, protect fraud, or defend crime”, or for ends subversive of the
policy and purpose behind its creation, this fiction will be disregarded and the individuals composing
it or two corporations will be treated as identical.
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Sec. 3. Classes of Corporation.
Corporations formed or
organized under this Code may
be stock or nonstock
corporations. Stock corporations
are those which have capital
stock dividend into shares and
are authorized to distribute to
the holders of such shares held.
All other corporations are
nonstock corporations.
SEC. 4. Corporations Created by
Special Laws or Charters. –
Corporations created by special
laws or charters shall be
governed primarily by the
provisions of the special law or
charter creating them or
applicable to them,
supplemented by the provisions
of this Code, insofar as they are
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What are the classes of Corporation?
1. Stock corporation—are those which have
a. capital stock dividend into shares and
b. are authorized to distribute to the
holders of such shares held
 ordinary business corporation created and
operated for the purpose of making a
profit, which may be distributed in the
form of dividends to stockholders on the
basis of their invested capital.
2. Non-stock corporation
 Do not issue stock and distribute dividends.
They are created for public good and
welfare. They have no capital stock which
can be subscribed by their members. Their
capital is sourced from contributions and
donations.
Example: San Beda, Red Cross, and other
NGOs which are incorporated to serve the
public
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PNB v Andrada Electric & Engr. Co.
Rule: A corporation that purchases the assets of another will not be liable for the debts of the
selling corporation, provided the former acted in good faith and paid adequate consideration for
such assets
Exceptions:
(1) where the purchaser expressly or impliedly agrees to assume the debts,
(2) where the transaction amounts to a consolidation or merger of the corporations,
(3) where the purchasing corporation is merely a continuation of the selling corporation, and
(4) where the transaction is fraudulently entered into in order to escape liability for those debts.
Lipat v Pacific Banking Corp.
Where the practice of the corporation had been to allow its general manager to negotiate and
execute contracts in its copra trading activities for and in the corporation's behalf without prior
board approval, it was held that the board itself, by its acts and through acquiescence, practically
laid aside the by-laws' requirement of prior approval.
Reynoso v CA
First Phil. International Bank v CA
The corporate fiction has also been disregarded in other cases as where it was used to shield a
violation of the prohibition against forum shopping.
Capital stock v Authorized Capital Stock
Illustration:
A, B, C, D, E  5 friends want to form a corporation
They contributed P20k each
20k (x5) = P100k  capital stock – will be divided into shares, and assign par value
10k shares at P10 each  authorized capital stock – it will be subscribed by the shareholders
A, B, C, D, and E has 2k shares each.
Capital stock is the amount stated in the AOI constituting the initial capitalization of the
incorporations. You convert it to Authorized capital stock when you divide it and assign a par value.
The authorized capital stock will be distributed to the incorporators.
Sole Proprietorship Partnership Corporation
Created at will Created by agreement of the Created by agreement of the
parties subject to recording of parties subject to approval of
SEC. SEC.
No separate entity is A separate entity is created. A separate entity is created.
created.
Unlimited liability. Unlimited liability. Limited liability.
Duration is determined by Terminated by agreement of the With a perpetual term, unless
owner partners otherwise provided in its
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applicable. charter.

Sec. 5. Corporators and Who is a corporator? Corporators are those who Corporator v Incorporator
Incorporators, compose a corporation, whether If you are an incorporator, you are also a corporator. If you are a corporator, it’s not automatic that
Stockholders and a) as stockholders or shareholders in a stock you are also an incorporator.
Members. – Corporators corporation or
are those who compose a b) as members in a nonstock corporation. Who is a subscriber?
corporation, whether as They are persons who have agreed to take and pay for the original, unissued shares of a corporation
stockholders or Who is an incorporator? formed or to be formed. He may not be a shareholder; he becomes one only from the time his
shareholders in a stock subscription is accepted, or he accepts the corporation’s offer.
corporation or as a) those stockholders or members mentioned in
members in a nonstock the articles of incorporation as What is an outstanding capital stock? Portion of the authorized capital stock that has already been
corporation. b) originally forming and composing the issued and held by persons other than the corporation.
Incorporators are those corporation and who are signatories thereof.
stockholders or members What is a share of stock? It represents the interest in the corporation.
mentioned in the articles Who is a stockholder?
of incorporation as Corporator in a stock corporation. What is a certificate of stock? Document evidencing the stock ownership.
originally forming and
composing the Who is a member? What are the rights given to a stockholder?
corporation and who are Corporator in a non-stock corporation. 1. To participate in management or choose the BOD who will manage the corporation
signatories thereof. 2. To the dividends, and capital/assets of the corporation after dissolution and liquidation
(whatever is remaining after settling all the liabilities shall be distributed to them)
 Dividends are return of investment of SH
3. To inspect the books of the corporation

SEC. 6. Classification of Shares. – The classification of shares, their corresponding rights, privileges, or What is a par value share?
restrictions, and their stated par value, if any, must be indicated in the articles of incorporation. Each Share with specific money value.
share shall be equal in all respects to every other share, except as otherwise provided in the articles of
incorporation and in the certificate of stock. What is a no par value share?
Share without specific money value.
The shares in stock corporations may be divided into classes or series of shares, or both. No share may be
deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares, unless What is a certificate of stock?
otherwise provided in this Code: Provided, That there shall always be a class or series of shares with Document evidencing the stock ownership.
complete voting rights.
What is a preferred share?
Holders of nonvoting shares shall nevertheless be entitled to vote on the following matters: Preferred shares enjoy certain privilege or preference over common share:
(a)Amendment of the articles of incorporation; 1. Preference in the distribution of dividends
(b)Adoption and amendment of bylaws; 2. Preference in the distribution corporate assets in case of liquidation
(c)Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of the corporate
property; RULES on Preferred Shares:
(d)Incurring, creating, or increasing bonded indebtedness; 1. Only preferred and redeemable shares may be deprived of voting rights.
(e)Increase or decrease of authorized capital stock; 2. Preferred shares must be issued only with a stated par value.
(f)Merger or consolidation of the corporation with another corporation or other corporations; 3. (Even if deprived of voting rights) Holders of preferred share may still vote on
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(g)Investment of corporate funds in another corporation or business in accordance with this Code; and
(h)Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote required under this Code to approve
a particular corporate act shall be deemed to refer only to stocks with voting rights.
The shares or series of shares may or may not have a par value: Provided, That banks, trust, insurance,
and preneed companies, public utilities, building and loan associations, and other corporations authorized
to obtain or access funds from the public, whether publicly listed or not, shall not be permitted to issue
no-par value shares of stock.
Preferred shares of stock issued by a corporation may be given preference in the distribution of dividends
and in the distribution of corporate assets in case of liquidation, or such other preferences: Provided, That
preferred shares of stock may be issued only with a stated par value. The board of directors, where Types of Preferred Shares
authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock
or any series thereof: Provided, further, That such terms and conditions shall be effective upon filing of a
certificate thereof with the Securities and Exchange Commission, hereinafter referred to as “Commission”.
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 corporation or to its creditors in respect thereto: Provided,
That no-par value shares must be issued for a consideration of at least Five pesos (P5.00) per share:
Provided, further, That the entire consideration received by the corporation for its no-par value shares
shall be treated as capital and shall not be available for distribution as dividends.
A corporation may further classify its shares for the purpose of ensuring compliance with constitutional or RULES on Issuance of no-par value shares:
legal requirements.
matters enumerated in Sec. 6.
a. Amendment of the articles of incorporation;
b. Adoption and amendment of bylaws;
c. Sale, lease, exchange, mortgage, pledge, or other disposition of all or
substantially all of the corporate property;
d. Incurring, creating, or increasing bonded indebtedness;
e. Increase or decrease of authorized capital stock;
f. Merger or consolidation of the corporation with another corporation or
other corporations;
g. Investment of corporate funds in another corporation or business in
accordance with this Code; and
h. Dissolution of the corporation.
1. Cumulative— share entitles its holder the stipulated dividend, even for the
years when the corporation did not declare dividends
2. Non-cumulative— dividend is limited to the stipulated amount corresponding
to the year of declaration
3. Participating—its holder may proportionately claim with other shareholders
the remaining dividends, following the satisfaction of his basic stipulated
dividends
4. Non-participating— limited to the basic stipulated dividends
1. It must be fully paid and non-assessable (meaning, the holder of such
shares shall not be liable to the corporation or to its creditors)
2. It must be issued for a consideration of not less than five (5) pesos per
share
3. It shall be treated as capital and shall not be available for distribution as
dividends.
4. Banks, trust, insurance, and preneed companies, public utilities, building
and loan associations, and other corporations authorized to obtain or
access funds from the public, whether publicly listed or not, shall not be
permitted to issue no-par value shares of stock.

SEC. 7. Founders’ Shares. – Founders’ shares may be given certain rights 1. May be given certain rights and privileges not enjoyed by the owners of other stocks.
and privileges not enjoyed by the owners of other stocks. Where the 2. Where the exclusive right to vote and be voted for in the election of directors is granted
exclusive right to vote and be voted for in the election of directors is Limitation: It must be for a limited period not to exceed 5 years from the date of incorporation
granted, it must be for a limited period not to exceed five (5) years from the
date of incorporation: Provided, That such exclusive right shall not be
allowed if its exercise will violate Commonwealth Act No. 108, otherwise
known as the “Anti-Dummy Law”; Republic Act No. 7042, otherwise known
as the “Foreign Investments Act of 1991”; and other pertinent laws.

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SEC. 8. Redeemable Shares. – Redeemable shares may be issued by the
corporation when expressly provided in the articles of incorporation. They
are shares which may be purchased by the corporation from the holders of
such shares upon the expiration of a fixed period, regardless of the
existence of unrestricted retained earnings in the books of the corporation,
and upon such other terms and conditions stated in the articles of
incorporation and the certificate of stock representing the shares, subject
to rules and regulations issued by the Commission.
SEC. 9. Treasury shares. – Treasury shares are shares of stock which have
been issued and fully paid for, but subsequently reacquired by the issuing
corporation through purchase, redemption, donation, or some other lawful
means. Such shares may again be disposed of for a reasonable price fixed
by the board of directors.
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5 Limitations: Rules and Regulations prescribed by the SEC:
1. The issuance of redeemable shares must be 1. There must be sufficient assets to cover the debts
expressly provided in the AOI. and obligations of the corporation although it
2. Its terms and conditions must be stated in the does not require the unrestricted retained
AOI earnings in the books of the corporation.
3. Its terms and conditions must be stated in the  Unrestricted retained earnings—net income
stock certificate. or surplus profit; income that can be freely
4. It may be purchased by the corporation from the disposed by the corporation
holders of such shares upon the expiration of a
fixed period. 2. Sinking fund requirement— a fund set up by the
5. It is subject to the rules prescribed by the corporation where cash is gradually set aside in
Commission. order to accumulate the amount necessary to
meet the redemption price of redeemable shares
at special dates in the future
 Not indispensable. Even if there is no sinking
fund, the corporation mays still redeem the
shares provided that it will not violate the
trust fund doctrine.
What is the trust fund doctrine? The capital stock
should remain unimpaired for the benefit of the
creditors.
What are treasury shares?
Shares of stock which have been issued and fully paid for but subsequently reacquired by the issuing corporation
through purchase, redemption, donation, and other lawful means.
Is it correct to say that redeemable shares, once redeemed, becomes treasury shares? No.
When redeemable shares are redeemed, they are not being reissued, unless otherwise provided in the AOI.
As compared to treasury share which may be disposed of or be reissued for a reasonable price.
Do treasury shares have the right to vote? No, because a corporation cannot be a shareholder to itself.
(Remember that these are bought by the corporation back to itself)
Does it have the right to dividends? No, because a corporation cannot be a shareholder to itself.
The only right granted to treasury is the right to dispose it or reissue it at a price fixed.
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