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 incident to its existence. (Sec 2)

Attributes:

1. Artificial being;
2. Created by operation of law;
3. Right of succession; and
4. Powers, attributes and properties
5. Expressly authorized by law or incident to its existence.

Advantages of corporate form of business:

1. Capacity to act as a single unit;

2. Limited shareholder’s liability;
3. Continuity in existence;
4. Feasibility of greater undertaking;
5. Transferability of shares;
6. Centralized management; and
7. Standardized method of organization, management and finance

Disadvantage of corporate form of business:

1. To have valid and binding corporate act, formal proceedings, such as board meetings are required.
2. The business transactions of a corporation is limited to the State of its incorporation and may not
act as such corporation in other jurisdiction unless it has obtained a license or authority from the
foreign state.
3. The shareholders‟ limited liability tends to limit the credit available to the corporation as a separate
legal entity.
4. By the very nature of shares of stock which are personal properties, transferable at will by the
owners thereof, transfers of share may result to uniting incompatible and conflicting interests.
5. The minority shareholders have practically no say in the conduct of corporate affairs.
6. In large scale enterprises, stockholders‟ voting rights may become merely fictitious and theoretical
because of disinterest in management, wide-scale ownership and inaccessible place of meeting.
7. Double taxation may be imposed on corporate income.
8. Corporations are subject to governmental regulations supervision and control including submission
of reportorial requirements not otherwise imposed in other business form
Classes of corporations:

1. Stock (Sec 3)
2. Non-stock (Sec 87)

Requisites to be classified as a stock corporation:

3. That they have a capital stock divided into shares; and

4. That they are authorized to distribute dividends or allotments as surplus profits to its stockholders
on the basis of the shares held by them

Non-stock corporations – no part of their income is distributable as dividends to its members, trustees or
officers subject to the provisions on dissolution. (Sec. 87)
Stages in the life of a corporation:
1. Creation
2. Reorganization or quasi-reorganization
3. Dissolution and winding up

Steps in creation:
1. Promotional stage
2. Process of incorporation
3. Organization and commencement of business

PROCESS OF INCORPORATION

Process of incorporation:
1. Drafting the articles of incorporation
2. Preparation and submission of additional and supporting documents
3. Filing with the SEC
4. Subsequent issuance of certificate of incorporation

CORPORATE NAME
A corporation cannot use a name which is:
1. identical or deceptively or confusingly similar to that of any existing corporation or to
any other name protected by law; or
2. patently deceptive, confusing or contrary to law.

PURPOSE CLAUSE

Doctrine of Limited Capacity. A corporation has only such powers as are expressly granted to it
by law and by its articles of incorporation including those which are incidental to such conferred
powers, those reasonably necessary to accomplish its purpose and those which may be incidental
to its existence.

Reasons for requiring a statement of purposes or objects:

1. In order that the stockholder who contemplates on an investment in a business enterprise shall
know within what lines of business his money is to be put at risk.
2. So that the board of directors and management may know within what lines of business they are
authorized to act.
3. So that anyone who deals with the company may ascertain whether a contract or transaction into
which he contemplates entering is one within the general authority of the management.

If the corporate purpose or objective includes any purpose under the supervision of another government
agency, prior clearance and/or approval of the concerned government agencies or instrumentalities will be
required.

General limitations on the purpose clause:

1. The purpose must be lawful.
2. The purpose must be specific or stated concisely although in broad or general terms.
3. If there is more than one purpose, the primary as well as the secondary ones must be specified.
4. The purpose must be capable of being lawfully combined.
THE PRINCIPAL OFFICE
The residence of the corporation is the place of its principal office as may be indicated in its articles
of incorporation and may, therefore, be sued only at that place.

TERM OF EXISTENCE
SEC. 11. Corporate Term. – 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, unless the corporation, upon a vote of its
stockholders representing a majority of its outstanding capital stock, notifies the Commission that
it elects to retain its specific corporate term pursuant to its articles of incorporation: Provided, That
any change in the corporate term under this section is without prejudice to the appraisal right of
dissenting stockholders in accordance with the provisions of this Code.

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 three (3) 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 Commission: Provided, further, That such extension of the corporate
term shall take effect only on the day following the original or subsequent expiry date(s).

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. Upon approval by the Commission, the corporation
shall be deemed revived and a certificate of revival of corporate existence shall be issued, giving it
perpetual existence, unless its application for revival provides otherwise.

No application for revival of certificate of incorporation of banks, banking and quasi- banking
institutions, preneed, insurance and trust companies, non-stock savings and loan associations
(NSSLAs), pawnshops, corporations engaged in money service business, and other financial
intermediaries shall be approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency.

ORGANIZATION AND COMMENCEMENT OF BUSINESS

SEC. 21. Effects of Non-Use of Corporate Charter and Continuous Inoperation. – If a corporation
does not formally organize and commence its business within five (5) years from the date of its
incorporation, its certificate of incorporation shall be deemed revoked as of the day following the
end of the five-year period.

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

A delinquent corporation shall have a period of two (2) years to resume operations and comply
with all requirements that the Commission shall prescribe. Upon compliance by the corporation,
the Commission shall issue an order lifting the delinquent status. Failure to comply with the
requirements and resume operations within the period given by the Commission 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 companies under
their special regulatory jurisdiction.

INCORPORATORS

SEC. 10. Number and Qualifications of Incorporators. – Any person, partnership, association or
corporation, singly or jointly with others but not more than fifteen (15) in number, may organize a
corporation for any lawful purpose or purposes: Provided, That natural persons who are licensed to
practice a profession, and partnerships or associations organized for the purpose of practicing a
profession, shall not be allowed to organize as a corporation unless otherwise provided under
special laws. Incorporators who are natural persons must be of legal age.

Each incorporator of a stock corporation must own or be a subscriber to at least one (1) share of
the capital stock.

A corporation with a single stockholder is considered a One Person Corporation as described in

Title XIII, Chapter III of this Code.

THE DIRECTORS/TRUSTEES

Section 138 of the Corporation Code provides that NON-STOCK or SPECIAL corporations may,
through their articles of incorporation or their by-laws, designate their governing boards by any
name other than as board of trustees.

Qualifications:
1. Directors must own at least one (1) share of the capital stock of the corporation. Trustees must
be members.
2. A majority of the directors or trustees must be residents of the Philippines.

Disqualifications:
1. Conviction by final judgment of an offense punishable by imprisonment for a period exceeding
six (6) years, or a violation of this Code committed within five (5) years prior to the date of election
or appointment.
2. Other disqualifications under applicable special laws.

POWERS OF THE BOARD

SEC. 22. The Board of Directors or Trustees of a Corporation; Qualification and Term. – Unless
otherwise provided in this Code, the board of directors or trustees shall exercise the corporate
powers, conduct all business, and control all properties of the corporation.

Directors shall be elected for a term of one (1) year from among the holders of stocks registered in
the corporation’s books, while trustees shall be elected for a term not exceeding three (3) years
from among the members of the corporation. Each director and trustee shall hold office until the
successor is elected and qualified. A director who ceases to own at least one (1) share of stock or a
trustee who ceases to be a member of the corporation shall cease to be such.
 The board of the following corporations vested with public interest shall have independent directors
constituting at least twenty percent (20%) of such board:

a. Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise known as “The
Securities Regulation Code”, namely those whose securities are registered with the Commission,
corporations listed with an exchange or with assets of at least Fifty million pesos (P50,000,000.00)
and having two hundred (200) or more holders of shares, each holding at least one hundred (100)
shares of a class of its equity shares;

b. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service business,
pre-need, trust and insurance companies, and other financial intermediaries; and

c. Other corporations engaged in business vested with public interest similar to the above, as may
be determined by the Commission, after taking into account relevant factors which are germane to
the objective and purpose of requiring the election of an independent director, such as the extent of
minority ownership, type of financial products or securities issued or offered to investors, public
interest involved in the nature of business operations, and other analogous factors.

An independent director is a person who, apart from shareholdings and fees received from the
corporation, is independent of management and free from any business or other relationship which
could, or could reasonably be perceived to materially interfere with the exercise of independent
judgment in carrying out the responsibilities as a director.

Independent directors must be elected by the shareholders present or entitled to vote in absentia
during the election of directors. Independent directors shall be subject to rules and regulations
governing their qualifications, disqualifications, voting requirements, duration of term and term
limit, maximum number of board memberships and other requirements that the Commission will
prescribe to strengthen their independence and align with international best practices.

A corporation is bound by the acts of its corporate officers if they act within the scope of the 5 classifications
of powers of corporate agents:
1. Those expressly conferred or those granted by the articles of incorporation, the corporate by-
laws or by the official act of the board of directors.
2. Those that are incidental or those acts as are naturally and ordinarily done which are reasonable
and necessary to carry out the corporate purpose or purposes.
3. Those that are inherent or acts that go with the office.
4. Those that are apparent or those acts which although not actually granted, the principal
knowingly allows or permits it to be done.
5. Powers arising out of customs, usage or emergency.

CAPITALIZATION

Authorized capital – the maximum amount fixed in the articles to be subscribed and paid-in or
secured to be paid by the subscribers.

Subscribed capital stock – the total number of shares and its total value for which there are contracts
for their acquisition or subscription.
 Paid-up capital stock – the actual amount or value which has been actually contributed or paid to
the corporation in consideration of the subscriptions made thereon.

Consideration for the issuance of stock may be any or a combination of any two or more of the ff: 1. Actual
cash paid to the corporation;

1. Actual cash paid to the corporation;

2. 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;
3. Labor performed or services actually rendered to the corporation;
4. Previously incurred indebtedness by the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares in exchange for stocks in the event of reclassification or conversion.
7. Shares of stock in another corporation; and/or
8. Other generally accepted form of consideration.

CORPORATE ENTITY THEORY

The corporation is possessed with a personality separate and distinct from the individual stockholders or
members.

PIERCING THE VEIL OF CORPORATE FICTION

Piercing the veil of the corporate fiction is resorted to only in cases where the corporation is used or being
used to defeat public convenience, justify wrong, protect fraud, defend crime, confuse legitimate issues, or
to circumvent the law or perpetuate deception, or an alter-ego, adjunct or business conduit for the sole
benefit of a stockholder or a group of stockholders or another corporation.

Test in determining the applicability of the doctrine of piercing the veil of corporation fiction:
1. Control, not mere majority or complete stock control, but complete domination, not only of
finances but 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;

2. 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
plaintiff's legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.

LIABILITY OF CORPORATE OFFICERS

The general rule is that unless the law specifically provides, a corporate officer or agent is not civilly
or criminally liable for acts done by him as such officer or agent.

Personal liability of a corporate director, trustee or officer along with the corporation may validly attach,
as a rule, only when:
 1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, gross negligence
in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its
stockholders or other persons;
2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action.

DERIVATIVE SUIT

Suits that stockholders may bring against erring directors or officers:

1. Individual or personal suit – one brought by the shareholders for direct injury to his rights, such
as denial of his right to inspect corporate books and records or pre-emptive right;
2. Representative of class suit - ; and
3. Derivative suit – an action based on injury to the corporation – to enforce a corporate right
– wherein the corporation is joined as a necessary party, and recovery is in favor of the corporation.

CORPORATE POWERS AND AUTHORITY

A corporation merely exists by virtue of a grant by the State and may, therefore, only exercise
such powers, authority or functions that the State allows it to do.

Classification:
1. Those expressly granted or authorized by law inclusive of the corporate charter or articles of
incorporation
2. Those impliedly granted as are essential or reasonably necessary to the carrying out of the express
powers
3. Those that are incidental to its existence.

The statement of the objects, purpose or powers in the Articles of Incorporation results practically in
defining the scope of the authorized corporate enterprise or undertaking. This statement both confers and
also limits the actual authority of the corporation.

Powers expressly granted:

1. Power to sue and be sued (Sec. 36)
2. Power of succession (Sec. 36)
3. Power to adopt and use a corporate seal (Sec. 36)
4. Power to amend its articles of incorporation (Sec. 36)
5. Power to adopt, amend or repeal by-laws (Sec. 36)
6. Power to issue or sell stocks/ to admit members (Sec. 36)
7. Power to acquire or alienate real or personal property (Sec. 36)
8. Power to enter into merger or consolidation (Sec. 36)
9. Power to make reasonable donations (Sec. 36)
10. Power to establish pension, retirement, and other plans (Sec. 36)
11. Power to extend or shorten corporate term (Sec. 37)
12. Power to increase or decrease capital stock (Sec. 38)
13. Power to incur, create or increase bonded indebtedness (Sec. 38)
14. Power to deny pre-emptive right (Sec. 39)
 15. Power to sell or dispose corporate assets (Sec. 40)
16. Power to acquire own shares (Sec. 41)
17. Power to invest corporate funds in another corporation or business or for any other purpose
(Sec. 42)
18. Power to declare dividends (Sec. 43)
19. Power to enter into management contract (Sec. 44)

ULTRA-VIRES ACTS

Those acts that cannot be executed or performed by a corporation because they are not within its express,
inherent or implied powers as defined by its charter or articles of incorporation and neither are they
necessary nor incidental thereto.

Consequences of ultra-vires acts:

1. On the corporation itself – the proper forum may suspend or revoke, after proper notice and hearing, the
franchise or certificate of registration of the corporation for serious misrepresentation as to what the
corporation can do or is doing to the great damage or prejudice of the general public.

2. On the rights of the stockholders – a stockholder may either an individual or derivative suit to enjoin a
threatened ultra-vires act or contract.

3. On the immediate parties – (a) if the contract is fully executed on both sides, the contract is effective; (b)
if the contract is executory on both sides, neither party can maintain an action for its non-performance; and
(c) if the contract is executory on one side only, and has been fully performed on the other, the party who
has received the benefits is estopped to set up that the contract is ultra-vires.

BY-LAWS

Rules and ordinances made by a corporation for its own government; to regulate the conduct and define the
duties of the stockholders or members towards the corporation and among themselves.

They are rules and regulations or private laws enacted by the corporation to regulate, govern and control its
own actions, affairs and concerns and its stockholders or member and directors and officers with relation
thereto and among themselves in their relation to it.

RIGHTS AND LIABILITIES OF STOCKHOLDERS

Certain basic rights for the protection of stockholders:

1. Participation in the management of the corporate affairs by exercising their right to vote and be
voted upon either personally or by proxy;
2. To enter into a voting trust agreement;
3. To receive dividends and to compel their declaration if warranted;
4. To transfer shares of stock subject only to reasonable restrictions inclusive of the right of the
transferee to compel the registration of the transfer in the books of the corporation;
5. To be issued a certificate of stock for fully paid-up shares;
6. To exercise pre-emptive rights;
7. To exercise their appraisal right;
 8. To institute and file a derivative suit;
9. To recover shares of stock unlawfully sold for delinquency;
10. To inspect the books of the corporation;
11. To be furnished the most recent financial statements of the corporation;
12. To be issued a new stock certificate in lieu of the lost or destroyed one;
13. To have the corporation dissolved;
14. To participate in the distribution of the assets of the corporation upon dissolution;
15. In the case of a close corporation, to petition the SEC to arbitrate a deadlock; and
16. In the case of a close corporation, to withdraw therefrom, for any reason, and to compel the
purchase of his shares.

Certain obligations and liabilities of stockholders:

1. To pay the corporation the balance of his unpaid subscriptions;
2. To pay interest on his unpaid subscription if required by the by-laws or by the contract of
subscription;
3. To answer to creditors for the unpaid portion of their subscription;
4. To answer the “water” in their stocks;
5. To be liable, as general partners, for all debts, liabilities and damages of ostensible corporations;
and
6. In case of a close corporation, to be personally liable for corporate torts when they actively
participate in the management of the corporation.

CORPORATE BOOKS AND RECORDS

Records to be kept and maintained by the corporation:

1. Records of all business transactions – which include, among others, journals, ledgers, contracts,
vouchers and receipts, financial statements and other books of accounts, income tax returns, and
voting trust agreement which must be kept and carefully preserved at its principal office.

2. Minutes of all meetings of stockholders or members and of the directors or trustees - setting forth
in detail the time and place of holding the meeting, how authorized, the notice given, whether the
meeting was regular or special, if special its object, those present and absent, and every act done or
ordered done thereat which must likewise be kept at the principal office of the corporation.

3. Stock and transfer book – showing the names of the stockholders, the amount paid or unpaid on
all stock for which subscription has been made, a statement of every alienation, sale or transfer of
stock made, the date thereof, and by and to whom made which must be kept either in the principal
office of the corporation or in the office of its stock transfer agent.

MERGER AND CONSOLIDATION

Merger – a union effected by absorbing one or more existing corporations by another which survives and
continues the combined business; the uniting of two or more corporations by the transfer of property to one
of them which continues in existence, the other or others being dissolved and merged therein.

Consolidation – the uniting or amalgamation of two or more existing corporations to form a new corporation
and the termination of existence of the old ones.
Outline of Process:
1. Plan of merger or consolidation
2. Approval of the Board or Trustee (majority)
3. Notice for meeting, at least 2 weeks
4. Meeting duly called for the purpose
5. Approval of the stockholders or members (two-thirds)
6. Dissenting, appraisal right
7. Amendment, approved and ratified
8. Agreement of merger or consolidation
9. Articles of merger or consolidation
10. Submission to the SEC of Articles
11. Favorable recommendation, if required
12. Certificate of merger or consolidation
13. If not approved, notice (at least 2 weeks) and hearing

Effects of merger or consolidation:

1. There will only be one single corporation. In case of merger, the surviving corporation, or in case of
consolidation, the consolidated corporation;

2. Termination of the corporate existence of the constituent corporations, except that of the surviving or the
consolidated corporation;

3. The surviving or the consolidated corporation will possess all the rights, privileges, immunities and
powers and shall be subject to all the duties and liabilities of a corporation organized under the Code;

4. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and
franchises of the constituent corporations; and all property and all receivables due on whatever account,
including subscriptions to shares and other choses in action, and all and every other interest of, or belonging
to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed, automatic; and

5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and
obligations of each of the constituent corporations; and any pending claim, action or proceeding brought
by or against any of such constituent corporations may be prosecuted by or against the surviving or
consolidated corporation. The rights of creditors or liens upon the property of any of such constituent
corporations shall not be impaired by such merger or consolidation.

APPRAISAL RIGHT

The method of paying a shareholder for the taking of his property; the statutory means whereby a
stockholder can avoid the conversion of his property into another property not of his own choosing. The
purpose of the right is to protect the property rights of dissenting stockholders from actions by the majority
shareholders which alters the nature and character of their investment. It is a right granted to dissenting
stockholders on certain corporate or business decisions to demand payment of the fair market value of their
shares.
Instances when a stockholder may have the right to dissent and demand payment of the fair value of his
shares:
1. In case any amendment to the articles of incorporation has the effect of:
a. Changing or restricting the rights of any stockholder or class of shares;
b. Authorizing preferences in any respect superior to those of outstanding shares of any
class; or
c. Extending or shortening the term of corporate existence.

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Code; and

3. In case of merger or consolidation.

Other instances provided for in the Code:

1. Investment of corporate funds in another corporation or business or for any other
purpose;
2. In a close corporation, a stockholder has the right to compel the corporation for any
reason to purchase his shares at their fair value which shall not be less than the par or issued
value when the corporation has sufficient assets to cover it debts and liabilities, exclusive
of capital stock.

Requirements and procedure for the exercise of the appraisal right:

1. The stockholder must have voted against the proposed corporate action in any of the instances allowed
by law for the exercise of the appraisal right;

2. A written demand for payment must be made by the dissenting stockholder within 30 days after the date
on which the vote was taken. Failure to make the demand within the said period shall be deemed a waiver
of the appraisal right;

3. Surrender of the certificate of stock by the dissenting stockholder for notation in the corporate books and
payment by the corporation of the fair market value of said shares as of the day prior to the date on which
the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action. If
the stockholder and the corporation cannot agree on the fair market value thereof, the same shall be
determined by appraisers;

4. The corporation must have unrestricted retained earnings in it books to cover the payment of the fair
value of the shares of the dissenting stockholder;

5. Upon payment of the shares by the corporation, the dissenting stockholder shall transfer his shares to the
corporation.

Effects of demand for payment of the fair value of a stockholder’s shares:

1. From the time of demand for payment – all rights accruing to such shares, including voting and dividend
rights, are suspended, except the right to receive payment.

2. After either the right ceases or the purchase of the said shares by the corporation – all rights accruing to
such shares are restored and all dividend distributions which would have accrued on the shares shall be paid
to the holder thereof.
Pre-emptive Right vs Right of Appraisal
Pre-emptive Right (Section 38)
Right to acquire additional
shares.
To avoid dilution of the holdings
of the stockholders. To protect
his interest.
In any issuances of shares subject
to limitations as provided in
Section 38 and 102.
Appraisal Right (Section 80)
ESSENCE Right to sell or dispose of shares.
PURPOSE So that the stockholder will
receive the fair value of his
shares when he no longer wants
to participate in the ventures of
the corporation.
WHEN MAY BE Available only in cases provided
EXERCISED? for in Section 80 and other
specific provisions of the code.