Lecture

Title I
General Provisions, Definitions and Classifications

Elements
A corporation is defined as 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 (Sec.
2).

From this definition the elements needed for a corporation to exist are traditionally derived. First, it is an
artificial being with its own personality separate and distinct from the people who form it. By fiction of
law, a corporation is considered a person albeit an artificial one with its own rights and capacity to enter
into legal transactions. This is also known as the doctrine of separate corporate personality, and it makes
the corporation a preferred mode of doing business because the personalities and properties of the
incorporators are kept apart from those of the corporation entity. So the liabilities of the company and
the incorporators are separate, and the latter are only made to answer for corporate liabilities only up to
the extent of what they put in or invested.

This separation of liability is expressed as the legal metaphor of the corporate veil. But as in real life, the
veil is thin and precarious and law can pierce through it to reach the incorporators for further liability in
particular circumstances, such as when the corporate entity is engaged in illegal activity, was fraudulently
formed, or is so inadequately capitalized that one cannot think but that the incorporators are only using
the corporate personality doctrine as a cover and are in fact acting in and for their own personalities.

Then, Sec. 2 says that a corporation is created by operation of law. This is to distinguish it from entities
(sometimes also referred to as corporations) that are directly created by law (e.g., the Home Mutual
Development Fund and the National Power Corporation which are government-owned or -controlled
corporations, or the City of Manila which is a public corporation). The latter are given legal personalities
by the laws that create them. They are usually created for a public purpose or an activity vested with
public interest, such as overseeing power distribution, or in the case of local government units,
governance of a particular portion of Philippine territory. Corporations created by operation of law are
private in character and are usually formed for the purpose of conducting a business. They only need one
general law that sets the rules of formation and the principles of corporate governance up to dissolution.
That law that operates to cause this creation is the Revised Corporation Code.

Next, Sec 2 mentions that corporations have the right of succession. This means that they can be the
subject of transfers of interest, and this right is available internally among stockholders, allowing
companies to exist practically in perpetuity.

Finally, corporations are said to have powers, attributes, and properties, when these are provided for by
law, including and aside from the Revised Corporation Code, or when these are incidental to a
corporation’s existence. This means that a corporation is authorized to perform actions with legal
consequences and to own and deal with properties as long as these are stated under the Revised
Corporation Code and special laws, or when it is logical for an existing corporation to perform other,
unlisted and often more minute actions and details as long as these are connected with its business.

Classes of Corporations (Sections 3 and 4)

Those corporations that are formed under and using the provisions of the Revised Corporation Code
maybe stock or non-stock corporations. Other kinds of corporations are only sub-classifications under
either of these two. Stock corporations are those whose capital is divided into shares, or units of
investment that may be availed by the incorporators and corporators later on. As the investment and
ownership is divided, so are the profits, into what we know as dividends, which are distributed on the
basis of the shares. If a corporation does not divide its capital into shares for the above purpose, it is a
non-stock corporation.

As mentioned earlier, special laws can also create corporations. The law that creates them becomes the
corporate charter and will inevitably govern how those corporations are run. However, the Revised
Corporation Code supplements those laws insofar as matters not expressly and directly covered are
concerned.

Shares
For stock corporations, it is necessary to have shares. As mentioned, these are units of investment derived
by deciding how many parts the total authorized capital stock should be in, for purposes of getting
investors. The investors who avail of shares while the company is under formation are called
incorporators; all investors thereafter are corporators. For non-stock corporations, the people who form
them are also called incorporators, in the sense that the non-stock corporation becomes a corporate
entity, but as contributors of its capital, they are simply known as members. (Sec. 5)

As to the shares themselves, the corporation may decide to have as many classifications of shares as they
want, with each classification having its own set of rules of availment, rights, privileges, restrictions, and
par value,1 if any. These rule sets must be set forth in the Articles of Incorporation, and without such
classifications, the shares are equal to each other in all respects. (Sec. 6) Shares that are not specially set
aside or classified in terms of the abovementioned characteristics are common shares.

Since you can classify shares depending on the rights and privileges they have, or restrictions as to their
availment or use, you can, in making those classifications, remove certain rights from certain shares, for

1 Par value is derived by dividing the authorized capital stock by the number of shares. Sec. 6 provides for the
possibility of shares not having par value, meaning they are created without considering this computation. They are
deemed “paid” and non-assessable, with the holder free from liability to the corporation or its creditors. They do
have a price – at least P5.00 each. Depending on the size of the company and its capital, that may be a big amount
per share. There is a reason for that – no par value shares are treated only as capital. They are not even used as basis
for distribution of shares.

But entities in finance such as banks, trust, insurance, and preneed companies, or those vested with public interest
like public utilities and building and loan associations are not allowed to issue no-par value stock. The reason is that
the par value locks in a value per share and that is what can at least be expected from an investor in a share. Financial
viability is important for these kinds of companies.
as long as these are detailed for that class of shares in the Articles. But you cannot remove the right to
vote, unless the class of shares you are dealing with are “redeemable” or “preferred.” Otherwise stated,
all shares have voting rights unless you remove these, and only from those two classes of shares. (ibid.)

Shares that are redeemable or preferred have other values that make them specifically vulnerable to
deprivation of voting rights. Redeemable shares, going by their name, may be sold back to or reacquired
by the corporation after a contracted or fixed period (Sec. 8). So in a sense, they are more susceptible to
liquidation, and for investors who do not intend to stay with a corporation for longer than necessary, this
is a premium quality. For added spice, the Revised Corporation Code states that they can be sold back to
the corporation even when the latter is suffering losses, for as long as the reacquisition does not result
into actual insolvency. For this privilege, or for the limited engagement, they may be kept from voting,
especially since the results of company votes may last beyond the engagement of such investors. 2

Preferred shares, also going by the designation, have privileges not available to other shares. These
preferences may refer to priority in the distribution of dividends or even better rates of dividend. Like
redeemable shares, then, they may be kept from voting. In practice, preferred shares are issued to entice
investors into buying them, and buying as many as possible. It’s a way to raise needed capital. But for the
volume of shares involved as well as the urgency of such investment offers, the corporation should
sweeten the deal by giving more to holders of these shares than other classes of shares.

If a class of shares has no voting rights as in the case above, that class of shares are nevertheless allowed
by the Revised Corporation Code to vote in crucial matters that may affect the very existence of those
shares, or any detail involving the business of the corporation which was the primary reason investors
(including buyers of non-voting shares) invested. These situations are:

1. Changing anything in the company charter (the Articles);

2. Creating or changing the internal rules of corporate governance (bylaws);
3. Disposition or transfer of all or substantially all corporate property;
4. Getting any sort of loans secured by bond instruments;
5. Increasing or decreasing the authorized capital stock;
6. Merging or consolidating with another corporation;
7. Investing in another corporation or business; and
8. Dissolving the corporation

Sec. 7 also allows a special class of shares that is available only for the incorporators – Founders’ Shares.
As they are for founders, they may be given certain rights and privileges not available to others, too, like
preferred shares. Unlike preferred shares, they can vote. In fact, it may be provided that they have the

2The redeemed or reacquired shares go to the “treasury” and become treasury shares. Under Sec. 9, treasury shares
are owned by the corporation and are treated as capital, not available for investment and not counted for dividends,
too. That said, treasury shares do not just consist of reacquired redeemable shares, as there are other situations
where the corporation may purchase its own shares, e.g., to get rid of fractional shares, and when the corporation
wants to pay up the entire capital stock. The stockholders themselves may transfer the shares back to the
corporation, such as through donation or assignment. While they are treated as capital, treasury shares may also be
released to be sold again to raise liquidity.
sole right to vote or be voted for directorship for the company’s first five years from incorporation, to the
exclusion of all other shares, even those with the right to vote (which, incidentally, may vote for any other
matter together with the Founders’ Shares). 3

In closing, while a corporation is allowed to classify shares, it is not allowed to classify them in such a way
as to defeat constitutional or legal requirements. In corporations with foreign equity caps, for example,
such companies cannot create share classes that are available only to overseas investors if this will go
above the amount of foreign investment allowed in that company. (Sec. 6, last para)

3 The Revised Corporation Code, however, makes sure that this exclusivity is not given to frustrate the provisions of
other laws, like the Anti-Dummy Law and the Foreign Investments Act. These laws were passed to protect the
interest of Philippine businesses, investors, and the public.