UNIVERSITY OF SANTO TOMAS-LEGAZPI

COLLEGE OF LAW
Corporation Law

Notes and Comments ATTY. MARYLOU DUKA-CASTILLO

(17 February 2021) Lecturer

This document contains notes and comments on the introduction and the general provisions
of the Revised Corporation Code of the Philippines to supplement the course outline that will
educate the students on the statutory rules and jurisprudence on the corporate form.

Topics: TITLES I and II – General Provisions and Incorporation

TITLE I
GENERAL PROVISIONS

Section 1 of the RCC provides for the title of the Code

Section 2 defines the word “Corporation” and presented the different concepts,
attributes
and doctrines.
a. An Artificial Being: “A corporation having been is granted a juridical capacity by
the State can act or exercise powers just like any natural person. It has the
capacity to own properties, it can sue and be sued and it has the capacity to
contract and enter into legal relationships with individuals and other entities”.
b. A Creature of the Law: “Each corporation is created by operation of law pursuant
to a covenant to pursue a business enterprise”
-Corporations cannot be created nor exist, nor corporate powers be assumed by
mere agreement of the parties; they require the authority of the sovereign
power.
It owes its life to the state, its birth being purely dependent on its will.
-A corporation is a creature without any existence until it has received the
imprimatur of the State acting according to law.
c. With a Right of Succession: “A corporation has a juridical personality separate
and
distinct from the persons comprising it, like the stockholders or members, officers
and director or trustees.”

This is the “Doctrine of Juridical Entity or the Doctrine of Separate Personality

- Its existence remains unchanged and unaffected in its identity by the changes in
the ownership or in its individual membership.
- A corporation continues to exist. The death or withdrawal of a shareholder does
affect the corporate existence, whether limited or perpetual
- this corporate attribute protects the stockholders from being personally liable for
debts or obligations of the corporation.
-the corporation cannot be liable for the debts or obligations of the stockholders.

Doctrine of Piercing the Veil of Corporate Fiction

-the grant of legal or juridical personality, being a mere privilege, can be revoked
anytime by the sovereign power that granted the said privilege.
-If the corporate fiction is used as a means to defeat public convenience, justify a
 wrong, protect fraud or defend a crime; or if the veil is used as a vehicle to evade
an obligation or a debt, the veil maybe pierced and disregarded and the courts
will treat the corporation as a mere aggrupation of persons and the liability
directly attach to them.

c. Creature of limited Powers

“a corporation has only such powers, attributes and properties as are expressly
authorized by law or incident to its existence”
-a corporation has no powers except those that are expressly conferred to it by
the
Code or by the provisions of the Articles of Incorporation.
d. A centralized management
- a corporation exercises its powers through its board of directors or trustees
and/or
Its duly authorized officers and agents (Pascual and Santos, Inc. v. Member
of the Tramo Wakas Neighborhood Assn., Inc. 442SCRA 438 (2004)

A corporation as a “Person before the law”

a. Entitled to invoke due process and equal protection clauses: insofar as their
properties are concerned
b. Protected under the Unreasonable Searches and Seizure: by the Constitutional
guarantee against unreasonable searches and seizures, but its officers have no cause
of action to assail the legality of the seizures, regardless of the amount of shares of
stock of each in said corporation because the corporation has a personality separate
and distinct from those of said officers.
c. Not entitled to invoke the right against self-incrimination being a juridical person
d. Cannot engage in the practice of profession since they lack the moral and technical
competence required by the PRC, unless authorized by law (EO No. 65 – 11th Regular
Investment Negative list)
e. Corporations are not entitled to moral damages: artificial beings cannot experience
physical sufferings, serious anxiety, sleepless nights, wounded feelings, moral
shock,
or social humiliation which are bases for moral damages.
However, a corporation may have a good reputation which, if besmirched, may be
a ground for the award of moral damages
(Mambulao Lumber Co. v. PNB, 22 SCRA 359 (1968).
( Filipinas Broadcasting Network, Inc .v. AGO Medical and Educational Center-Bicol,
et.al G.R. No 141994, January 17, 2005 448 SCRA 513)

Section 3. Classes of Corporation

1. Stock Corporation: have capital stock divided into shares and are authorized to
distribute to holders of such shares, dividends, or allotments of the surplus profits on
the basis of the shares held.
2. Non-stock: do not have shares of stock and do not distribute dividends to its
members

Section 4. Corporation created by special laws or charters

Government-owned-or- controlled corporations are governed by GOCC
Governance
 Act
Section 5. Corporators
a) Stockholders in stock corporation and Members of non-stock corporation
b) Incorporators are those stockholders or members mentioned in the Articles of
Incorporation as originally forming and composing the corporation and who are
signatories thereof.
- All incorporators are corporators but not all corporators are incorporators;
- corporators may also be called subscribers, shareholders, transferors or
transferees
of shares of stock of the corporation
Section 6. Classification of shares
Preferred Shares
1. Preferred shares have no voting rights but enjoy preferential rights in the
distribution of dividends and/or assets upon liquidation;
2. Issued only with a stated par value;
3. Terms and conditions of these shares should be clearly stated in the Articles of
Incorporation
4. preferred shares, although non-voting, shall nevertheless be entitled to vote in
the
following matters:
a. amendment of the articles of incorporation;
b. adoption and amendment of by-laws’;
c. sale, lease, exchange, mortgage, pledge, or other disposition of all or
substantially all of the corporate property; (Sec. 39)
d. Incurring, creating, or increasing bonded indebtedness; (Sec. 37)
e. Increase or decrease of authorized capital stock ()Sec.m37)
f. Merger or consolidation of the corporation with another corporation or
other
Corporations (Sec. 75)
g. Investment of corporate funds in another corporation or business in
accordance with this Code (Sec. 41)
h. Dissolution of the corporation

Common Shares
- Shares of stock with no preferences
- Have full voting rights
- Holders of this shares are residual owners
- In a failing business, they run the risks of not receiving anything, even their
capital contributions. The creditors and preferred shareholders who assume
lesser risks earn interest
-. Common shareholders reap residual profits.
- In a successful business, common shareholders receive most of the venture’s
Profits

Par Value Shares

- These are shares of stock that have assigned money value that are stated in
the articles of incorporation
- The money value of each unit of share is determined by:
a) The incorporators during the incorporation period or
 b) By the directors, after incorporation
The money value of these shares would vary depending on the viability of the business as the
incorporators or directors would decide
- 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 always issue par
value shares

No par value shares

- Shares issued with no money value but has an issued value
- Once issued, they are deemed to be fully paid and non-assessable.

Section 7. Founder’s Shares

- Holders of these shares enjoy certain rights and privileges not enjoyed by
other stockholders.
- where exclusive right to vote and be voted for in the election of directors is
granted, it must be for a limited period not to exceed five (5) years from the
date of incorporation
- once redeemed, they can no longer be re-issued
- would result to decrease of capital stock

Section 8. Redeemable shares

- should be expressly provided in the Articles of Incorporation
- these are shares which were originally issued to stockholders but were
repurchased or bought by the corporation upon the expiration of a fixed
period.
- The redemption can be made regardless of the existence of unrestricted
retained earnings
- When corporations issue these kinds of shares with mandatory redemption
features, they are required to set up or maintain a sinking fund
- The sinking fund will be deposited with a trustee bank and should not be
invested in risky or speculative ventures.
- Exception from the rule of maintaining a sinking fund to purchase
redeemable shares: “may still be allowed for as long as the “trust Fund “ for
creditors remain unimpaired”
THE TRUST FUND DOCTRINE
The principle that corporate assets are held as a TRUST FUND for the benefit of
shareholders and creditors and that the corporate officers have the fiduciary duty to
keep them intact and unimpaired.

Section 9. Treasury Shares

- Issued and fully paid for but subsequently reacquired by the issuing
corporation through purchase, redemption, donation or some other legal
means.
- once reacquired, will be place in the treasury and not considered
outstanding
- it maybe re-issued at a premium or over the par value stated in the Articles
- of Incorporation or it could be resold even below the stated par value.
 TITLE II
INCORPORATION

INCORPORATION is the performance of conditions, acts, deeds and writings by

incorporators, and the official acts, certifications or records, which give the corporation
its existence.(Fletcher 445)
Effects if not incorporated.
-It is only through incorporation and registration with the Securities and Exchange
Commission ( S.E.C.) that the private corporation can acquire juridical personality under
the Corporation Code. Mere signing of the Articles of Incorporation by the incorporators
does not give life to the corporation. The corporate existence of the corporation
commences once the S.E.C. issues the Certificate of Registration.

What are the necessary steps and the documentary requirements for Incorporation?
Note: manual filing is no longer accepted by the S.E.C.
Steps:
Log in into the S.E.C. website at www.sec. gov.ph. then click CRS. In this site the filer
will
be guided and informed on the necessary steps to follow in filing the documents for
registration.
Documentary requirements:
a. For Stock Corporation.
1. Name Verification Slip;
2. Articles of Incorporation and By-laws;
- The old Corporation Code requires the submission of the Treasurer’s
affidavit , but the RCC has already incorporated its contents in the Articles of
Incorporation
- The undertaking to change corporate name, should there be another
corporation who has acquired prior right to said name, is likewise
incorporated in the Articles of Incorporation. It used to be a separate
documentary requirement;
- Both the Articles of Incorporation and By-laws, if filed at the same time
should be signed by all the incorporators who should indicate their Tax
Identification Numbers for the notarization;
3. Indorsements and clearances from other government agencies, if applicable;
4. For corporations with more than 40% foreign equity—application form required by
the Foreign Investment Act of 1991 plus filing fee;
5. Such other documents that the business and the S.E.C. processor may require.
6. Order of payment which is issued by the S.E.C. when the Filer-corporation is ready
to pay the filing/registration fee.
Note: Registration fee is computed based on the amount of authorized capital
stock
stated in the Articles of Incorporation
7. Receipt of payment /deposit slip of the registration fee.

Note: payment of registration fee maybe made at the nearest Landbank of the
Philippines and at the S.E.C. cashier
 All the abovementioned requirements should be scanned and filed
electronically.
b. For Non-Stock Corporation
1. Name Verification slip
2. Articles of Incorporation and By-laws
3. Order of Payment as mentioned in item No. 6 requirement for stock corporation.

Section 10. Number and Qualifications of Incorporators

-Any person, partnership, association or corporation, singly or jointly with others but
not more than 15.
-While the law limits the maximum number of incorporators, it does not limit the
number of subscribers or contributors.
-The Old Corporation Code is specific that only natural persons can be incorporators.
-Under the RCC, partnerships and associations or corporations may become
incorporators
But they should designate their authorized agents or representatives to sign the Articles of
Incorporation.
-in all cases, the incorporators must be subscribers to at least one (1) share of the
capital stock. They must have financial interest in the corporation
-Natural persons, partnerships or associations may only form a corporation for the
exercise of profession if so authorized by law.
- No residency requirement for incorporators
-natural persons who form the corporations should be of legal age and have the legal
capacity to enter into a contract.

Section 11. Corporate Term

-the old Code provides 50 years as the maximum term of existence at one single time, and
can be extended for another 50 years. It operated on the premise that the parties in the
corporate relations, like in any contract intended
-RCC prescribes perpetual existence for corporations unless its articles of incorporation
provides otherwise; corporations registered prior to the effectivity of the RCC shall have a
perpetual existence unless the corporation elects to retain its specific corporate term
pursuant to its Articles of Incorporation.
-if the term of existence is for a specific period, it may be extended or shortened by
amending the Articles of Incorporation
-if the term is extended, amendment should be made not earlier than 3 years prior to the
original or subsequent expiry date(s) unless an earlier extension is allowed by the S.E.C
-the corporation can elect to retain its specific corporate term through a vote of the
stockholders representing majority of the outstanding capital stock ; no explicit provision that
requires the majority vote of the Board of Directors
-any dissenting stockholder may exercise his appraisal right in accordance with the provisions
of this Code.

*A very significant change incorporated in the RCC: REVIVAL OF A CORPORATION WHOSE

TERM HAS ALREADY EXPIRED.
Under this provision, if a corporation whose term has already expired applies for the revival
of its existence and the S.E.C. approves the application, the revival of the corporate life
includes the restoration of its rights and privileges under its Article of Incorporation, subject
to its duties, debts and liabilities prior to its revival.
*It would also be assessed by the S.E.C. such penalties for deficiencies in annual reports;
*applications for revival of banks, banking and quasi-banking institutions, preneed, insurance
and trust companies, non-stock savings and loan associations, pawnshops corporations
engaged in money service business, and other financial intermediaries shall be approved
unless
accompanied by a favorable recommendation of the appropriate government agency.
* Bangko Sentral ng Pilipinas regulates banks, and other financial institutions
*Insurance Commission regulates preneed and insurance companies

Section 12. Minimum Capital Stock not required of Stock Corporation

* While this provision does not require any minimum capital stock, some corporations,
by the nature of their businesses require specific amount of minimum paid-up capital stock.

What is the Authorized capital stock?

* The capital stock that is stated in the Articles of Incorporation which is divided into
units
of shares and subscribed and paid by stockholders of the corporation ;
* the total number of shares that the corporation is allowed to issue under its charter;
* the basis for the computation of the filing/registration fees;
* it may be increased or decreased at any point in the corporation’s corporate life upon
the approval by the board of Directors and stockholders and finally by the S.E.C.

What is the Subscribed Capital Stock?

*It is that portion of the authorized capital stock that is covered by a subscription
contract between the corporation and the stockholders

What is the paid-up capital stock?

* It is the amount fully paid by the stockholders for the value of the shares he/she
subscribed. It may be at a premium or the amount of par value stated in the Articles
of Incorporation

What is the Outstanding Capital Stock?

* It is that 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
contract.

What is Capital?
*Includes properties and assets of the corporation that are used for its business or
operation

Section 13. Contents of the Articles of Incorporation

Articles of Incorporation
*main contract
a. between and among the shareholders or members;
b. between any or all of such shareholders or members and the corporation about to
be formed; and upon the approval by the SE.C. with the issuance of a Certificate of
Registration;
c. the corporation and the State insofar as it concerns the corporation’s franchise or
right to exist as legal entity
 *an entry in the Articles of Incorporation is evidence of the factual stipulations therein.
a. The name of the Corporation
b. For Stock Corporation -- Specific Purpose; but if there are two or more purposes,
the
Articles of Incorporation should indicate the primary
purpose
and the secondary purposes
For Non-Stock Corporation- may not include purposes that would change its nature
as
such and should not classify its purposes to primary or
secondary
c. Principal office: must be within the Philippines
d. term of existence
e. names, nationalities and residence addresses of incorporators
f. number of directors: not more than 15 (for stock)
may be more than 15 (for non-stock)
g. names, nationalities, addresses of Directors or trustees
h. Stock: capital structure: Authorized Capital Stock, no. of shares, par value ‘
names, nationalities and addresses of the original subscribers, amount subscribed
and paid ;
i. Non-stock: capital contribution

Article 14. Form of Articles of Incorporation

(should be in A4 size bond paper)
Refer to Art. 13

Article 15. Amendment of Articles of Incorporation

1. Stock corp: Votes required: majority vote of the BOD or BOT and vote or written
assent
of 2/3 of the outstanding capital stock
2. Non-Stock: vote or written assent of the BOT and 2/3 of the members
3. Amendments shall take effect upon approval by S.E.C or from date of filing if S.E.C.
fails
to act on the amendment within 6 months from date of filing

Article 16. Grounds when Articles of Incorporation or Amendments may be disapproved

1. Articles not compliant with the requirements of the Code;
2. Purposes are unconstitutional, illegal, immoral or contrary to government rules and
Regulations;
3. Certification concerning the amount of capital stock, subscribed an paid is false; and
4. the required percentage of Filipino ownership of the capital stock under existing
laws
or the Constitution has not been complied with

Article 17. Corporate Name

*not allowed if it is not distinguishable from that already reserved or registered for the
use of another corporation
 *not distinguishable even if it contains one or more of these words:
“Corporation ”; “Company”
“ Incorporated”; “Limited; Limited Liability”
if it is a one person corporation, “OPC”
* Just like any natural person, a corporation is identified by its name.
* a corporation transacts business, enter into a contract and exercises powers under its
corporate name

Power of the S.E.C. to summarily order to cease and desist from using such name and
require the corporation to register a new one.

Read SEC MC no. 13 s. 2019

Amended Guidelines and Procedures on the Use of Corporate and Partnership
Names

Article 18. Registration , Incorporation and Commencement of Corporate Existence

Issuance of the Certificate of Incorporation.

Article 19. De Facto Corporation

* defective corporations
* Shall not be inquired collaterally in any private suit
* inquiry may be made by the Solicitor General in a quo warranto proceeding
* there is the attempt in good faith to incorporate; a colorable compliance of the
requirements for incorporation;
* there is a valid law
* there is the actual use of corporate powers

As distinguished from a De Jure corporation: has complied with all the requirements to
be a valid corporation.

Article 20. Corporation by Estoppel

* Ostensible Corporation
* not a corporation in the real sense
* there is bad faith on the part of the persons misrepresenting to be a corporation
* there must be a third party who believed in the misrepresentation
* persons representing themselves as a corporation shall be liable as general partners
* third persons who contracted and assumes and obligation with this ostensible
corporation is estopped to resist performance thereof on the ground that there
was in fact no corporation.

Article 21. Effects of non-use of corporate charter and continuous inoperation

* License deemed revoked- if not formally organized and has not commence
business 5 years from date of incorporation.
* Certification deemed revoked the day following the end of 5 -year period
* a corporation that commence operation but subsequently become inoperative
shall be place under delinquent status
* Delinquent corporations have 2 years to resume operations and comply with the
requirements; once complied, the Commission shall lift delinquent status
* Failure to comply within the period granted can be a ground for revocation