Rules Covering the Corporation Code and it's Amendments

Prepared by : Brett Carlo Y. Boco

 The Law on Corporations

Background of the Corporation Code

The law governing private corporations is the Corporation Code of the Philippines (Batas Pambansa
Blg. 68) which took effect on May 1, 1980. However, revision and update of the corporation law have
now been realized with the passage of the Revised Corporation Code of the Philippines (RCC) or RA
11232 which addresses the current concerns of corporations and would-be corporations.

Concept and Attributes of corporations

A corporation is an artificial being created by operation of law, having the right of succession and
powers, attributes and properties expressly authorized by law or incident to its existence. (sec. 2)

Attributes of a corporation

1. It is an artificial being.

Under the law, there are two kinds of persons: natural persons and artificial persons. A corporation
falls under the second kind. It has a personality separate and distinct from the stockholders or members
and which commences upon the issuance of its certificate of incorporation.

As a consequence of this legal concept of a corporation:

a. The debts of the corporation are not the debts of its stockholders, nor are the debts of the
stockholders the debts of the corporation.

b. It may acquire and possess property of all kinds, as well as incur obligations and bring civil and
criminal actions on its own name in the same manner as a natural person.

c. The stockholders are not the owners of assets of the corporation but have only an indirect interest
therein.

d. All contracts entered into in its name by its regular appointed officers and agents are the contracts
of the corporation and not those of the stockholders.

e. In connection with corporate property or affairs, stockholders cannot maintain actions in their own
name and they have no right to recover possession of property belonging to the corporation or to
recover damages for injury thereto.

f. In taxation, the income of the corporation is not the income of the stockholders who may still be
required to pay taxes on the dividends that they may derive from such income

Doctrine of piercing the veil of corporate entity or corporate fiction

This is the doctrine to the effect that separate personality of a corporation may be disregarded if such
entityis used to defeat public convenience, justify a wrong doing, protect fraud, or defend crime (koppel
vs. Yatco, 77 Phil 496). Where the separate personality of the corporation is disregarded, the
corporation will be treated merely as an association of persons and stockholders or members will be
considered as the corporation.

Instances where fiction is disregarded.

a. Where the corporation functions for the benefit of a single person who has complete control over the
funds and the said person is the sole owner thereof.

b. Where the corporation is a mere instrumentality of the individual stockholder, the latter must
individually answer for corporate obligations.

c Where domestic or Philippine corporation is controlled by aliens.

d. Where a corporation is organized by an insolvent debtor to defraud his creditors and he transfers his
properties to it.

e. Where a subsidiary company is created by a parent company merely as an agency of the latter.

f. where a corporation is formed by a person for the purpose of evadinh his individual contract.

g. Where a corporation is dissolved and its assets are transffered to another to avoid a financial liability
of the first corporation to its employees.

2. It is created by operation of law.

A corporation does not come into existence by the mere agreement of the parties. Requirements of
the law governing its creation must be complied with.

3. It has the right of succession.

A corporation continues to exist for the period which it has been formed regardless of the changes in
the ownership of its stocks or in its membership.

4. It has the powers, attributes and properties expressly authorized by law or incident to its existence

Doctrine of limited capacity- A corporation can exercise only the powers conferred upon it by law and
its articles of incorporation, those implied from such powers expressly granted, and those that are
incident to its existence.

Similarities between a corporation and a partnership

1. Both have separate juridical personality.

2. Both are artificial persons.

3. Both are composed of a group of persons.

Distinctions between a corporation and a partnership

1. A corporation is created by operation of law, while a partnership is created by mere agreement of

partners.

2. A corporation with a single stockholder may now be formed and shall be considered a one person
corporation, while a partnership may be formed by two or more persons (Sec 10 RCC, Art 1767).

3. A corporation can exercise only the powers expressly authorized by law or incident to its existence. A
partnership may exercise any power provided it is authorized by the partners and it is not contrary to
law, morals, good customs, public order or public policy (Sec.2, Art. 1306).
4. A corporation has the right of succession, while a partnership has no such right (Sec 2, Art 1828).

5. A corporation acts through a board of directors while a partnership acts through all the general
partners. (Sec. 23, Art 1803)

6. The stockholders are not liable for the obligatons of the corporation, while the general partners in a
partnership are liable with their separate assets for partnership debts. (Sec 1, Art 1816)

7. A corporation commences to have jiridical personlity on the date of the issuance of the certificate of
incorporation. A partnership commences to have a juridical personality upon the execution of the
partnership contract unless a different date is set by the partners. (Sec 19, Art. 1784)

8. In a corporation, a stockholder can transfer his shares to another person without the consent of the
other stockholders. In a partnershsip, a partner can not tansfer his interest without the consent of the
other partners. (Sec 60, Art. 1813)

9. A corporation cannot be dissolved without the consent of the state while a partnership may be
dissolved by the partners. (Sec 117-122, Art. 1830)

Classification of corporations

1. As to whether shares of stocks are issued or not

a. Stock corporation- One that has capital stock divided into shares and is authorized to
distribute dividends or allotments of the surplus profits on the basis of shares held. (sec 3)

b. Non-stock corporation- One no part of the income of which is distributable as dividends to its
members, trustees of officers. (sec 87)

2. As to the state or country under whose laws it was created

a. Domestic corporation- one incorporated under the Philippine laws.

b. foreign corporation- one formed, organized and existing under any laws other than those of
the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country
(sec. 123)

Tests to determine nationality of a corporation

a. Incorporation test- The nationality of a corporation follows that of the country under whose laws it
was incorporated. (sec 123)

b. Control test- The nationality of a corporation follows that of the stockholders owning the controlling
interest.

The Grandfather Rule

This is a method by which the percentage of Filipino equity in corporations engaged in

nationalized and/or partly nationalized areas of activities, provided for under the Constitution and other
nationalization laws, is accurately computed, and the diminution of said equity prevented. ( SEC opinion,
1977)
3. as to number of persons composing them

a. Corporation aggregate-One that is composed of more than one corporator.

b. COrporation sole- One composed of only one person

4. as to whether its purpose is public or private

a. Public corporation- One that is organized for the government of a portion of the state.

b. Private corporation- One that is formed for private purpose or end

1, Government-owned or controlled corporations- These refers to corporations created

under special laws. (sec 4). They may perform governmental or proprietal functions.

2. Quasi-public corporation- Those organized for profit whic are granted a franchise by
the state to perform public service.

5. As to whether its purpose is religious or not

a. Ecclesiastical or religous corporation- One that is formed for the religous purpose

b. lay corporation- One that is formed for the purpose other than ecclesiastical or religious.

6. As to whether its purpose is charitable or not

a. Eleemosynary corporation- organized for public charity.

b. Civil corporation- organized for business or profit

7. As to their legal roght to corporate existence

a. De jure corporation- has been created in strict compliance with all legal requirements and
whose right to exist as a corporation cannot be successfully attacked in a direct proceeding for that
purpose by the state.

B. De facto corporation- One that is defectively created but there is an exercise of corporate
rights and franchise resulting from an attempt in good faith to incorporate on the part of its members.

Conditions:

1. there must be a valid law under which it is incorporated

2. there must be an attempt in good faith to incorporate

3. there must be an actual exercise of the corporate powers.

4. a certificate of incorporation is issued despite a defect in its incorporation.

8. As to their relation to another corporation or other corporations

a. Parent or holding corporation-one which owns rhe shares od another corporation and having
power, directly or indirectly, over the latter including the election of directors therefore.
 b. subsidiary corporation- one whose shares of stock are owned by another corporation called
the parent corporation, which has the power to elect its directors.

9. As to whether its shares may be held by the public or not

a. close corporation- one whose shares are limited to a few and restricted as to their transfer,
and not listed in any stock exchange (sec 96)

b. open corporation- One whose shares are open to the public such as those whose shares are
listed in the stock exchanges.

10. Other classifications

a. corporation by prescription- pne which has exercised corporate powers for such a length of
time without interference by the state, and which, by fiction of law, is given the status if a corporation.

b. corporation by estoppel- one which is in reality not a corporation but is considered as one
with respect to those who are precluded by their admission or conduct from denying its existence.

1. 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, liablities and damages incurred arising as a result
thereof. (sec 21)

2 any person who assumes an obligation to an ostensibke corporation as such cannot

resist performace thereof on the ground that there was in fact no corporation.

Components of a Corporation

1. Corporators- Those who compose the corporation whether as stockholders or members..

2. Incorporators- Those stockholders or members mentioned in the articles of incorporaton as

originally forming and composing the corporation and who are signatories of such documents.

3. Stockholders- The corporators of a stock corporation.

4. Members- The corporators of a non-stock corporation.

Promoters- A promoter is a person, natural or juridical, who usually discoers a prospective business
and brings persons interested to invest in it through the formation of a corporation. Although the
law does not require the service of a promoter as a precondition to incorporation, a promoter
facilitates the creation of the corporation by negotiating contracts for its initial operations including
subscription to its capital stock, incorporating the business, and helping management operations.

Promoter’s liability on contracts- A promoter is personally liable for contracts made for the benefit
of the proposed corporation. If the incorporation of the corporation does not materialize, the
promoter remains personally liable. If the corporation is formed, he remains liable until the
corporation ratifes or adopts such contracts, or releases him from liability. The third persons must
also agree to absolve him from liability.

Corporation’s Liability on contracts entered into by a promoter- A newly formed corporation is not
automatically liable for pre-incorporation contracts entered into by a promoter in its behalf. It will
become liable only by the adoption or novation of such contracts.
 Capital Stock- The amount specified in the articles of incorporation paid in, or procured to be paid in
for carrying on the business of the corporation.

1. Authorized capital stock- This is the total amount of shares which a corporation is allowed to
issue if the shares have a par value. If the shares do not have a par value, the corporation does
not have an authorized capital stock but it has an authorized number of shares which it may
issue. Once issued, the corporation shall have a capital stock but not an authorized capital stock.

2. Subsribed capital stock- This is the part of capital stock which is subscribed, whether paid or
unpaid.

3. Outstanding capital stock- refers to the total shares of the stock issued to subscribers or
stockholders, whether or not fully or partially paid.

4. Paid-up capital stock- that part of the capital stock which is not issued or subscribed.

Legal capital- refers to the total par value of all issued par value shares, or the total cash or
consideration received for all issued no par value shares.

Stated capital- refers to the capital with which a corporation whose shares are wtihout par value
commences its business and increased or diminished by subsequent capital transactions

Capital- refers to actual property of the corporation in money and kind.

Shares of stock- one of the units into which the capital stock of the corporation is divided. It
represents the intangible interest or right which an owner has in the management, profits and
assets of the corporation.

Stock certificate- the written acknowledgement by the corporation of the shareholder’s interest in
the corporation and its property.

Classes of shares of stock

1. Common stock- pro rata division of profits

2. Preferred stock- preferences over other stock holders

a. Preferred stock as to asset- preference as to distribution of assets

b. Preffered as to dividends- preference in the distribution of dividends

Kinds of preffered stock as to dividends

- Cumulative preferred stock

- Non cumulative preferred stock

- Participating preferred stock

- Non-participating peferred stock

3. Par value stock- nominal value

4. No par value stock- without nominal or par value

5. Redeemable shares- grant the issuing corporation the power to redeem or purchase them after
a certain period.

Rules on redeemable shares

a. They may be issued by the corporation only if expressly provided in the articles of
incorporation (sec. 8)

b. They may be deprived of voting rights (sec. 10)

c. They may be purchased or taken up by the corporation upon the expiration of a fixed
period, regardless of the existence of unrestricted retained earnings in the books of
corporation.

d. The terms and conditions for their redemption must be stated in the articles of
incorporation and the stock certificate representing the said shares. (sec. 8)

Ammendment- the terms and conditions for the issuance of redeemable shares must not only
be stated in the articles of incorporation but in the certificate of stock as well (sec. 7, RCC)

6. Founder’s shares- grant the founders certain rightd and previleges not enjoyed byother share