Part II – Incorporation and Organization of Private Corporations

A. Number and qualifications of incorporators (Sec. 10)

Section 10. Any person, partnership, association or corporation, singly or jointly with others but not more than 15 in number,
may organize a corporation for any lawful purpose.

1. Capital stock – refers to the shares of ownership that have been issued by a corporation
2. Capital – properties and assets of the corporation that are used for its business or operation
3. Authorized capital stock – the amount fixed in the articles of incorporation to be subscribed and paid by the stockholders
of the corporation
4. Subscribed capital stock – that portion of the authorized capital stock that is covered by subscription agreements whether
fully paid or not
5. Outstanding capital stock -the total shares of stock issued to subscribers or stockholders, whether or not fully or partially
paid except treasury shares so long as there is a binding subscription agreement
6. Paid-up capital stock -the portion of the authorized capital stock which has been subscribed and actually paid
7. Unissued capital stock - that a publicly-traded company is authorized to issue but has not
8. Legal capital – amount of company’s equity that cannot be distributed through a dividend or any other means. The intent
of legal capital was to create a reserve that could be accessed by company’s creditors in the event of default
9. Par value – face value; stated value per share
10. Certificate of stock – evidence of the holder’s ownership of the stock and of his right as a shareholder and up to the extent
specified therein; it is concrete and tangible; may be issued only if the subscription is finally paid

B. Minimum capital stock and subscription requirements

1. Incorporation and organization

a. Promoter – a self-constituted organizer who finds an enterprise or venture and helps to attract investors, forms a
corporation and launches it in business, all with a view to promotion profits
1. The corporation is not bound by the contract entered into by the promoter before incorporation unless the contract is
ratified
2. The promoter is personally liable for the contracts or agreements with third persons contracted in behalf of the future
corporation if the corporation does not ratify the same or unless the agreement was expressly made subject to such
approval or ratification
3. The promoter should remit to the corporation profits that he derived that properly pertains to the corporation

2. Subscription contract – any contract for the acquisition of unissued stock in an existing corporation or a corporation still to
be formed, notwithstanding the fact that the parties refer to it as a purchase or some other contract (Section 59)

How does one become a shareholder in a corporation?

A person becomes a shareholder the moment he

1. Enters into a subscription contract with an existing corporation (he becomes stockholder upon acceptance of the corporation of
his offer
2. Purchases treasury shares from the corporation
3. Acquires shares from existing shareholders by sale or any other contract, or acquires shares by operations of law like
succession

Jaka Investments Co vs. CIR

1. In 1994, petitioner sought to invest in JAKA Equities Corporation (JEC), which was then planning to undertake an initial public
offering (IPO) and listing of its shares of stock with the PSE
2. JEC increased its authorized capital stock from One Hundred Eighty-Five Million Pesos (P185,000,000.00) to Two Billion
Pesos (P2,000,000,000.00).
3. Petitioner proposed to subscribe to P508,806,200.00 out of the increase in the authorized capital stock of JEC through a tax-
free exchange
4. This was effected by the execution of a Subscription Agreement and Deed of Assignment of Property in Payment of
Subscription.
5. The intended IPO and listing of shares of JEC did not materialize.
6. However, JEC still decided to proceed with the increase in its authorized capital stock and petitioner agreed to subscribe
thereto, but under different terms of payment.
7. Thus, petitioner and JEC executed the Amended Subscription Agreement
8. A DST inclusive of 25% surcharge for late payment on the Amended Subscription Agreement was paid in the amount of
P1,003,895.65
9. Revenue District Officer issued three certifications. In the certificate, the total amount of documentary stamps were
P593,528.15
 10. Petitioner, after seeing the RDO's certifications, the total amount of which was less than the actual amount it had paid as
documentary stamp tax, concluded that it had overpaid Hence a claim for refund was filed

Issue: Whether petitioner is entitled to a partial refund of the documentary stamp tax and surcharges it paid on the execution of the
Amended Subscription Agreement.

Ruling:

HELD:

1. Petitioner failed to show that it is entitled to refund.

2. The rights and obligations between petitioner JAKA Investments Corporation and JAKA Equities Corporation are established
and enforceable at the time the Amended Subscription Agreement and Deed of Assignment of Property in Payment of
Subscription were signed by the parties and their witness, so is the right of the state to tax the aforestated document
evidencing the transaction.
3. DST is a tax on the document itself and therefore the rate of tax must be determined on the basis of what is written or
indicated on the instrument itself independent of any adjustment which the parties may agree on in the future.
4. The DST upon the taxable document should be paid at the time the contract is executed or at the time the transaction is
accomplished. The overriding purpose of the law is the collection of taxes.
5. DST attaches upon acceptance of the stockholder's subscription in the corporation's capital stock regardless of actual or
constructive delivery of the certificates of stock.
6. DST is imposed on the original issue of shares of stock. The DST, as an excise tax, is levied upon the privilege, the
opportunity and the facility of issuing shares of stock.

What are the kinds of subscription contracts?

1. Pre-incorporation subscription – entered into before the incorporation and irrevocable for a period of 6 months from the date of
subscription, unless all of the other subscribers consent or if the corporation failed to materialize within the same or longer
period stipulated in the subscription contract.
It cannot be revoked after the Articles of Incorporation is submitted to the Commission.

2. Post-incorporation subscription – entered into after incorporation

Ong Yong vs Tiu

1. In 1994, the construction of Masagana Citimall in Pasay was threatened with stoppage because its owner company First
Landlink Asia Development Corporation owned by the Tiu’s encountered financial difficulties
2. What Tiu did is he mortgaged the 2 lands where the mall was being erected and used the money to erect the building.
3. Since the construction is taking too long and to prevent the foreclosure of the land, Tius invited the Ongs to invest
4. Both families entered a Pre-Subscription Agreement and under this agreement the Ongs and the Tius contracted to maintain
equal shareholdings in FLADC. The Ongs were to subscribe to 1 Million shares at a par value of P100.00 each while the Tius
were to subscribe to an additional approximately half a million shares at P100.00 each in addition to their already existing
subscription of roughly half a million. Furthermore, they agreed that the Tius were entitled to nominate the Vice-President and
the Treasurer plus 5 directors while the Ongs were entitled to nominate the President, the Secretary and 6 directors (including
the chairman) to the board of directors of FLADC. Moreover, the Ongs were given the right to manage and operate the mall.
5. The business harmony between the Ongs and the Tius in FLADC, however, was shortlived because the Tius, on 23 February
1996, rescinded the Pre-Subscription Agreement. They accused the Ongs of 1. refusing to credit FLADC shares covering their
real property contribution. 2. Preventing two of the Tius from assuming positions as VP and Treasurer.

Issue: Whether the pre-Subscription Agreement executed by the Ongs is actually a subscription contract.

Ruling:

1. FLADC was originally incorporated with an authorized capital stock of 500,000 shares with the Tius owning 450,200 shares
representing the paid-up capital.
2. When the Tius invited the Ongs to invest in FLADC as stockholders, an increase of the authorized capital stock became
necessary to give each group equal (50-50) shareholdings as agreed upon in the Pre-Subscription Agreement. The authorized
capital stock was thus increased from 500,000 shares to 2,000,000 shares with a par value of P100 each, with the Ongs
subscribing to 1,000,000 shares and the Tius to 549,800 more shares in addition to their 450,200 shares to complete
1,000,000 shares.
3. Thus, the subject matter of the contract was the 1,000,000 unissued shares of FLADC stock allocated to the Ongs. Since
these were unissued shares, the parties' Pre-Subscription Agreement was in fact a subscription contract as defined under
Section 60, Title VII of the Corporation Code. A subscription contract necessarily involves the corporation as one of the
contracting parties since the subject matter of the transaction is property owned by the corporation — its shares of stock
4. Thus, the subscription contract (denominated by the parties as a Pre-Subscription Agreement) whereby the Ongs invested
P100 million for 1,000,000 shares of stock was, from the viewpoint of the law, one between the Ongs and FLADC, not
 between the Ongs and the Tius. Otherwise stated, the Tius did not contract in their personal capacities with the Ongs since
they were not selling any of their own shares to them. It was FLADC that did
5. Considering therefore that the real contracting parties to the subscription agreement were FLADC and the Ongs alone, a civil
case for rescission on the ground of breach of contract filed by the Tius in their personal capacities will not prosper

Whether the rescission of Pre-Subscription Agreement would result in unauthorized liquidation.

1. The rescission of the Pre-Subscription Agreement will effectively result in the unauthorized distribution of the capital assets
and property of the corporation, thereby violating the Trust Fund Doctrine and the Corporation Code, since rescission of a
subscription agreement is not one of the instances when distribution of capital assets and property of the corporation is
allowed. Rescission will, in the final analysis, result in the premature liquidation of the corporation without the benefit of prior
dissolution in accordance with Sections 117, 118, 119 and 120 of the Corporation Code.

What are the valid considerations for subscription agreements?

Sec 61. Consideration for stocks – Stocks shall not be issued for a consideration less than the par or issued price thereof.
Consideration for the issuance of stock may be:

a. Actual cash paid to the corporation

b. Property, tangible or intangible actually received by the corporation and necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or issued value of the stock issued
c. Labor performed for or services actually rendered to the corporation
d. Previously incurred indebtedness of the corporation
e. Amounts transferred from unrestricted retained earnings to state capital
f. Outstanding shares exchanged for sticks in the event of reclassification or conversion
g. *Shares of stock in another corporation; and/or
h. *Other generally accepted form of consideration

Where the consideration is other than actual cash or intangible property (patents, copyrights), the valuation thereof shall initially be
determined by the stockholders or BOD subject to the approval of SEC

Shares of stock shall not be issued in exchange of promissory note or future services

Underwriting agreement – an agreement between a corporation and a third person, termed the underwriter by which the latter agrees
for a certain compensation to take a stipulated amount of stock or bonds specified in the underwriting agreement, if such securities are
not taken by those to whom they are first offered

Doctrine of Individuality and Indivisibility of Subscription – A subscription is one, entire and indivisible whole contract even if two or more
shares are covered. The subscriber is not entitled to the certificate or part or all certificates covered until full payment of the subscription
price

C. Corporate Term (Sec 11)

Section 11 – A corporation shall have perpetual existence unless its articles of incorporation provides otherwise; Corporations with
certificates of incorporation issued prior to the effectivity of this Code, and which continue to exist, shall have perpetual existence, upon
a vote of its stockholders representing a majority of its outstanding capital stock, notifies the Commissioner that it elects to retain its
specific corporate term pursuant to its articles of incorporation; Provided that any change in the corporate term is without prejudice to
the appraisal right of dissenting stockholders

A corporate term for a specific period may be extended or shortened by amending the articles of incorporation: Provided that no
extension may be made earlier than 3 years prior to the original or subsequent expiry date unless there are justifiable reasons for an
earlier extension; provided that such extension shall take effect only on the day following the original or subsequent expiry date

A corporation whose term has expired may apply for a revival of its corporate existence, together with all the rights and privileges under
its certificate of incorporation and subject to all of its duties, debts and liabilities existing prior to its revival

Alhambra Cigar & Cigarette Manufacturing Company, Inc. v. SEC

FACTS:

1. Petitioner Alhambra was duly incorporated under Philippine laws on January 15, 1912.
2. By its corporate articles it was to exist for fifty years from incorporation
3. Its term of existence expired on January 15, 1962.
4. On that date, it ceased transacting business, entered into a state of liquidation.
5. Thereafter, a new corporation. — Alhambra Industries, Inc. — was formed to carry on the business of Alhambra.
 6. On June 20, 1963 — within Alhambra's three year statutory period for liquidation Republic Act 3531 was enacted into law.
7. It amended Section 18 of the Corporation Law; It empowered domestic private corporations to extend their corporate life
beyond the period fixed by the articles of incorporation for a term not to exceed fifty years in any one instance. Previous to RA
3531, the maximum non extendible term of such corporations was fifty years.
8. On July 15, 1963, at a special meeting, Alhambra's board of directors resolved to amend its articles of incorporation to extend
its corporate life for an additional fifty years, or a total of 100 years from its incorporation.
9. On August 26, 1963, Alhambra's stockholders, representing more than two thirds of its subscribed capital stock, voted to
approve the foregoing resolution
10. On October 28, 1963, Alhambra's articles of incorporation as so amended were filed with respondent SEC.
11. On November 18, 1963, SEC, however, returned said amended articles of incorporation.

Issue: Whether a corporation under liquidation may still amend its articles of incorporation to extend its lifespan

Ruling:

Alhambra relies on Republic Act 3531, which amended Section 18 of the Corporation Law. RA 3531 provides that a corporation may
amend its articles of incorporation "by a majority vote of its board of directors or trustees and ... by the vote or written assent of the
stockholders representing at least two-thirds of the subscribed capital stock ..

But prior to amendment, an explicit prohibition existed in Section 18, “. Provided, however, That the life of said corporation shall not be
extended by said amendment beyond the time fixed in the original articles” This was displaced by Republic Act 3531 which
enfranchises all private corporations to extend their corporate existence.

As we look in retrospect at the facts, we find these: From July 15 to October 28, 1963, when Alhambra made its attempt to extend its
corporate existence, its original term of fifty years had already expired (January 15, 1962); it was in the midst of the three-year grace
period statutorily fixed in Section 77 of the Corporation Law, thus: .

SEC. 77. Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate
existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three years
after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and of enabling
it gradually to settle and close its affairs, to dispose of and convey its property and to divide its capital stock, but not for the purpose of
continuing the business for which it was established.

Upon its dissolution, a corporation became legally dead for all purposes. Statutory authorizations had to be provided for its continuance
after dissolution "for limited and specified purposes incident to complete liquidation of its affairs

"Since the privilege of extension is purely statutory, all of the statutory conditions precedent must be complied with in order that the
extension may be effectuated. And, generally these conditions must be complied with, and the steps necessary to effect the extension
must be taken, during the life of the corporation, and before the expiration of the term of existence as original fixed by its charter or the
general law, since, as a rule, the corporation is ipso facto dissolved as soon as that time expires. So where the extension is by
amendment of the articles of incorporation, the amendment must be adopted before that time. And, similarly, the filing and recording of
a certificate of extension after that time cannot relate back to the date of the passage of a resolution by the stockholders in favor of the
extension so as to save the life of the corporation. The contrary is true, however, and the doctrine of relation will apply, where the
delay is due to 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. And statutes in some states specifically provide that a renewal may be had within a specified time before or after the time
fixed for the termination of the corporate existence

Doctrine of relations back. That principle of law by which an act done at one time is considered by a fiction of law to have been done at
some antecedent period. It is a doctrine which, although of equitable origin, has a well recognized application to proceedings at law; a
legal fiction invented to promote the ends of justice or to prevent injustice end the occurrence of injuries where otherwise there would
be no remedy. The doctrine, when invoked, must have connection with actual fact, must be based on some antecedent lawful rights. It
has also been referred to as “the doctrine of relation back.” [Allied Banking Corp. v. CA, GR 85868. Oct. 13, 1989]. Also called Doctrine
of relation back.

PNB vs CFI

1. Private respondents entered into a contract of lease with Philippine Blooming Mills, Co., Inc., (PBM for brevity) whereby the
letter shall lease the aforementioned parcels of land as factory site.
2. The contract of lease provides that the term of the lease is for twenty years beginning from the date of the contract and "is
extendable for another term of twenty years at the option of the LESSEE should its term of existence be extended in
accordance with law."
3. On October 11, 1963, PBM executed in favor of PNB a deed of assignment.
4. PBM also executed in favor of PNB a real estate mortgage for a loan of 100,000.
5. PBM filed a petition for registration of improvements in the titles of real property owned by private respondents
6. On October 7, 1981, PNB filed a motion in the same proceeding to cancel the annotations on respondents’ certificate of title on
the ground that the contract of lease entered by them had already expired by the failure of PBM to exercise its option to renew
 the second 20-year lease commencing on March 1, 1974 and also by the failure of PBM to extend its corporate existence in
accordance with law.
7. CFI an order directing the cancellation of the inscriptions on respondents' certificates of title

Whether the cancellation of the entries on respondent's certificates of title is valid and proper

Whether or not the corporate life of PBM was extended by the continuance of the lease and subsequent registration of the title to the
improvements under its name.

1. Yes. The contract of lease expressly provides that the term of the lease shall be twenty years from the execution of the
contract but can be extended for another period of twenty years at the option of the lessee should the corporate term be
extended in accordance with law.
2. Clearly, the option of the lessee to extend the lease for another period of twenty years can be exercised only if the lessee as
corporation renews or extends its corporate term of existence in accordance with the Corporation Code which is the applicable
law
3. Records show however, that PBM as a corporation had a corporate life of only twenty-five (25) years which ended an January
19, 1977
4. Section 11 of 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.
5. Upon the expiration of the period fixed in the articles of incorporation in the absence of compliance with the legal requisites for
the extension of the period, the corporation ceases to exist and is dissolved ipso facto
6. When the period of corporate life expires, the corporation ceases to be a body corporate for the purpose of continuing the
business for which it was organized. But it shall nevertheless be continued as a body corporate for three years after the time
when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it
gradually to settle and close its affairs, to dispose of and convey its property and to divide its assets

Articles of Incorporation Sec 14

The life of a corporation commences from the issuance of the Certificate of Registration by the SEC upon filing of the Articles of
Incorporation and other documents

What are the contents of the AI

1. Name of the corporation

2. Purpose/s indicating the primary and secondary purpose
3. Place of principal office
4. Term for which the corporation is to exist, if the corporation has not elected perpetual existence
5. The names, nationalities and residence addresses of the incorporators
6. The number of directors, which shall not be more than 15 or the number of trustees which may be more than 15
7. The names, nationalities, and residence addresses of directors or trustees until first regular election
8. If it be a stock corporation the amount of its authorized capital stock, number of shares into which it is divided, the par value of
each, name, nationalities and residence addresses of the original subscribers, amount subscribed and paid by each and a
statement that some or all of the shares are without par value, if applicable
9. If it be a nonstock corporation, the amount of its capital, the name, nationalities and residence addresses of the contributors,
and amount contributed by each; and
10. Such other matters consistent with law, and which the incorporators may deem necessary and convenient

*An arbitration agreement may be provided in the AI

*The AI and applications for amendments may be filed with SEC in the form if an electronic document in accordance with the
Commission’s rules and regulations on electronic filing

Amendment of AI

Unless otherwise prescribed, and for legitimate purposes, any provision or matter stated in the AI may be amended by

1. A majority vote of the BOD or BOT and

2. The vote or written assent of the stockholders representing at least 2/3 if the outstanding capital stock
3. Without prejudice to the appraisal right of dissenting stockholders

AI of nonstock corporation may be amended by the vote or written assent of majority of the trustees and at least 2/3 of the members

Amendments shall be indicated by underscoring the change made and a copy duly certified under oath by the corporate secretary and
majority of the BOD or BOT, with the statement that the required vote of the ss or members, shall be submitted with the SEC

The amendment shall take effect upon their approval by the SEC or from the date of filing with the SEC if it was not acted upon within 6
months from the date of filing for a cause not attributable to the corporation
Non-amendable items

1. Amendment of Name – changing the corporate name does not result in the extinguishment of the corporation. The personality
continues
2. Accomplished Fact Rule – there are entries in the AI that cannot be amended because they are accomplished facts (EX: The
names of incorporators and original directors)

Doctrine of Substantial compliance

Grounds when AI or Amendment may disapproved

1. The AI or any amendment thereto is not substantially in accordance with the form prescribed therein
2. The purpose or purposes of the corporation are patently unconstitutional, illegal, immoral or contrary to government rules and
regulations
3. The certification concerning the amount of capital stock subscribed and or paid is false
4. The required percentage of Filipino ownership of the capital stock has not been complied with

Corporate name that cannot be used

1. If it is not distinguishable from that already reserved or registered for the use of another corporation
2. Name already protected by law
3. Name which is contrary to existing law, rules and regulations

A name is not distinguishable even if it contains one or more of the following:

a. The word “corporation”, “company”, or “incorporated”, “limited”, “limited liability”, or abbreviation of such words
b. Punctuations, articles, conjunctions, contractions, prepositions, abbreviations, different tenses, spacing or number of the same
word or phrase

The Commission upon determination that the corporate name is (1) (2) (3), may summarily order the corporation to immediately cease
and desist from using such name and require the corporation to register a new one. It will also order removal of signages,
advertisements etc bearing such corporate name. Upon approval, the SEC shall issue a certificate of incorporation under the amended
name

If failed to comply, the Commission may hold the corporation and its directors of officers in contempt and hold them administratively,
civilly and/or criminally liable and/or revoke their registration

Commencement of corporate existence (Sec 18)

1. A person or group desiring to incorporate shall submit the intended corporate name to the Commission for verification
2. If allowed, the SEC shall reserve such in favor of the incorporators
3. The incorporators then submit their AI and bylaws to the Commission
4. If submitted documents were fully compliant, the SEC shall issue Certificate of incorporation
5. A private corporation commences its corporate existence and juridical personality from the date the Commission issues
certificate of incorporation under its official seal

Genossenchaft theory - is the reality of the group as a social and legal entity, independent of state recognition and concession

Theory on concession – it is a principle in the creation of corporations, under which a corporation is an artificial creature without any
existence until it has received the imprimatur of the State acting according to law, through the SEC

Theory of Corporate Enterprise or Economic Unit - The corporation is not merely an artificial being, but more of an aggregation of
persons doing business, or an underlying business unit

De Facto corporation (Sec 19)

The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate
powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by
the SolGen in a quo warranto proceeding
De Jure corporation is one created in strict or substantial conformity with the statutory requirements for incorporation while De Facto
corporation is one which actually exits for all practical purposes as a corporation but which has no legal right to corporate existence as
against the State

De Jure corporation’s right to exist cannot be successfully attacked even in a direct proceeding by the State while De Facto
corporation’s right to exist can be successfully attacked in a direct proceeding by the State

Corporation by prescription – a corporation that was not formally organized as such, but has been duly recognized by immemorial
usage as a corporation, with rights and duties maintainable at law (Roman Catholic Church)

Corporation by estoppel (Sec 20)

All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof; Provided that when any such corporation is sued on any
transaction entered by it as a corporation or any tort committed by it as such, it shall not be allowed to use its lack of corporate
personality as a defense

Effects of Non-use of corporate charter and continuous inoperation (Sec 21)

If a corporation does not formally organize and commence its business within 5 years from the date of the incorporation, its certificate of
incorporation shall be deemed revoked as of the day following the end of the 5 year period

However, if a corporation has commenced its business but subsequently becomes inoperative for a period of at least 5 consecutive
years, the Commission may, after due notice and hearing, place the corporation under delinquent status

*A delinquent corporation shall have period of 2 years to resume operations and comply with all requirements that the Commission shall
prescribe. Upon compliance, the Commission shall issue an order lifting the delinquent status

Failure to comply with the requirements and resume operations within the period given shall cause the revocation of the corporation’s
certificate of incorporation

The Commission shall give reasonable notice to, and coordinate with the appropriate regulatory agency prior to the suspension or
revocation of the certificate of incorporation of the companies under their special regulatory jurisdiction