REVISED CORPORATION

CODE
ATTY. CHRISTIAN GEORGE LLANES MELITANTE, BSBA, JD, MBA, REALTOR
 2

CLASSIFICATION OF CORPORATIONS

The authorized capital stock in the Articles of

Incorporation of ABC Corporation is 1 Billion. Is it
a stock or non-stock corporation?

It is not non-stock unless the Articles of

Incorporation indicates one of the purposes of
a non-stock corporation.

It is neither stock corporation because it is not

divided into shares.
 3

What will make a Stock Corporation?

Its authorized stock must be divided into shares

and must be authorized to distribute dividends.

In BCDA vs BIR, BCDA is neither stock or non-

stock. It is not stock because its ACS is not
divided into shares. It is neither non-stock
because its purpose is not one of those
enumerated.

So, it is a government instrumentality.

 4

The AOI states that the ACS is
Shares. However, it silent on the
The AOI further provides that
corporation, its assets shall be
institution.
100M divided into 100M
declaration of dividends.
upon dissolution of the
donated to a charitable

Is this a non-stock corporation?

No. For a corporation to be non-stock, it must be

prohibited from distributing dividends. Silence in the AOI
as to the distribution of dividends does not meat
prohibition. When the AOI is silent on distribution, the
presumption is it is allowed to distribute.
 5

Does the provision of donation of assets to

charitable institution upon dissolution make
the corporation non-stock?

No.

Because upon dissolution, the assets of the

corporation become assets of the SH and
therefore, they are free to dispose of them
however they may want.
 6

ABC Corporation, a private corporation, was

established by act of Congress. It is allowed to
operate, enter into contract, and incur
obligation.

What is the status of the Corporation?

At the very least, it is a corporation by

estoppel. It is not de facto nor de jure because
the law creating it is invalid.
 7

Is Philippine Red Cross a GOCC?

It is sui generis. (Liban vs Gordon)

If an employee of Red Cross is illegally

removed, where must the action be filed?

It must be filed with the CSC. With respect to

the enforcement of penal statutes and labor
laws, Red Cross is deemed to be a GOCC,
therefore under CS. (Torres vs De Leon)
 8

What is a non-stock corporation?

It is a corporation that does not have the

features of a stock corporation
 9

What is a stock corporation?

It is a corporation whose capital stock is

divided into shares and is authorized to
distribute dividends. It is the default class.
Anything that does not fall under it is non-
stock.
 10

What is a stock corporation?

It is a corporation whose capital stock is

divided into shares and is authorized to
distribute dividends. It is the default class.
Anything that does not fall under it is non-
stock.

What are the purposes that are not allowed

for a non-stock corporation?

Political and profit purposes.

 11

Is a condominium corporation as stock

corporation?

No.

It is non-stock corporation because it does

not have capital stock divided into shares. It is
merely organized to manage the common
areas of the condominium building.
 12

Is a non-stock corporation prohibited form

making profits, considering that a non-stock
corporation cannot be incorporated for
purposes?

No.

What is prohibited is the distribution of profit to

its members. The profit gained by the non-stock
corporation must be used for the furtherance
of the purpose for which the non-stock
corporation was incorporated.
 13

What law governs a GOCC?

If the GOCC has its own charter, then it’s

charter govern primarily, and suppletorily, the
Revised Corporation Code.

What about a Non-Chartered GOCC, what law

governs?

The Revised Corporation Code governs.

 14

When do you say that a corporation is a GOCC?

1. It must be organized as a stock or non-stock

corporation
2. At least 51% owned by the government if stock
3. Organized for a public purpose

In Gonzales vs PNB, a SH wants to inspect the records of

PNB (which is a GOCC at that time) as this is provided
as his right in the corporation code. The SC denied
because the charter of PNB listed only certain
individuals who can inspect the records and the SH are
not part of the enumeration.
 15

What if there is an issue about extent of government ownership ins

the GOCC? Is it a GOCC?

The answer is pending final determination of the ownership of the

government, it cannot be deemed a GOCC.

In Carandang vs Desierto, Benedicto owned about 75% of IBC13.

Then, it was sequestered by the government so he ceded control
to PCGG. Then, he recanted saying its nor 75% but only 30%.
While the determination was pending the GM was illegally
dismissed.

Where will the GM file the complaint? Labor Arbiter or CSC?

It should be the Labor Arbiter because pending the

determination of the government ownership, it cannot be
deemed GOCC.
 16

What about MECO (Manila Economic Cultural

Office)? Is it a GOCC?

No.

Because it is a non-stock corporation that is

not controlled by the government. But, the
fees it collects such as VISA application fees
partake of public funds and therefore subject
to COA audit.
 17

Is Boy Scouts a GOCC?

In BSP vs CA, BSP is owned by private individuals and

not owned by government. But the SC said just
because it is not owned by the government does not
automatically mean it is private. BSP is organized with
a public purpose, therefore, it is deemed public
corporation. (Actually, it is supposed to be a quasi-
public corporation)

This is an aberration. This should only apply to BSP but

not all other corporations. Public purpose is not what
makes a corporation public. Otherwise, all GOCCs
should be deemed public corporations.
 18

In Baluyot vs Ganza, an officer of Red Cross

was dismissed because of misuse of funds.

Where will he go to assail the dismissal?

SC Said it should be with the CSC because

Red Cross is a GOCC with its own charter.
There comes Liban vs Gordon. Liban asks the court to order 19

Gordon to vacate his Senate seat because the moment he was

elected Chairman of Red Cross, he was deemed to have
automatically forfeited his Senate seat as provided in the
Constitution which includes positions in the GOCCs.

Is this Correct?

No. Because Red Cross is not owned and controlled by the

government. The funds do not come from the government but
come from donations. The law creating Red Cross is therefore
unconstitutional as it created a private corporation.

In the motion for reconsideration, the SC rectified its earlier ruling

regarding the unconstitutionality of the charter of Red Cross. The
SC said Red Cross is sui generis. It is an important ally of the
government in providing services to the nation.
 20

CORPORATORS - INCORPORATORS
How do you distinguish corporators and
incorporators?

Corporators are those who compose the

corporation, whereas, incorporators are the
signatories in the AOI. Corporators are not
necessarily signatories in the AOI, and may
not be one of the original organizers of the
corporation. Incorporator is always a
corporator while not vice versa.
 21

What are the changes in the RCC in relation to

requirements for an incorporation?

1. RCC no longer requires an incorporator to

be a natural person. A juridical person is
allowed.
2. RCC no longer has residency requirement.
Old Code requires majority of incorporators
must be residents of PH.
3. RCC no longer requires minimum of 5
incorporators. RCC allows even 1
incorporator but 15 max is still present.
 22

Can the incorporators be the first board of the

corporation?

Yes.

Usually, the incorporators also constitute as the

first board of directors. But the term is limited
only for 1 year.
 23

CLASSIFICATION OF SHARES
What are the kinds of shares in the RCC?

1. Common and Preferred

2. Voting and Non-Voting
3. Par Value and No Par Value
4. Founder Shares
5. Redeemable Shares
6. Treasury Shares
7. Watered Shares
8. Covertible Shares
9. Escrow Shares
 24

Can you have a corporation without common

shares?

NO.

Common shares are management shares.

They cannot be denied the right to vote. They
are the ones who elect the directors of the
corporation.
 25

What is the Doctrine of Equality of Shares?

All shares have the same rights and privileges,

unless otherwise provided in the AOI.
 26

Can preferred shares vote?

YES

Unless such right is denied by the AOI.

 27

ABC Bank issues redeemable preferred shares. Every

year, ABC must pay the holders of preferred shares
equivalent to 10% of the par value of shares. Payment
is on a guaranteed basis. Furthermore, after 3 years,
ABC must redeem such shares. Thereafter, ABC
experienced liquidity problems.

Can the holders of the redeemable preferred shares

compel ABC to pay given that the payment is on a
guaranteed basis?

No. Because the right to receive dividends is subject to

the right of the board whether or not to declare
dividends.
 28

Is interest bearing stock valid?

YES. But this is always construed to mean subject

to the availability of surplus profits.

Is guaranteed dividend feature of a preferred

share valid?

YES. But this is always construed to mean subject

to the availability of surplus profits.
 29

Why are they called preferred shares?

Because they have priority in the distribution of

dividends when there are retained earnings or
surplus profit.

Are holders of preferred shares creditors of the

corporation?

No. They are still stockholders, and their right to

payment of dividend, despite being a
guaranteed is subject to availability of surplus
profit.
 30
What if the corporation issues bonds, and not shares? Are the
holders of such bond entitled to payment despite not having
surplus profit?

YES. Because these are not shares, but bonds. Bonds are loans,
but shares are not loans, rather they are called equities.

Can the holders of the redeemable shares compel the

corporation to redeem the shares after 3 years given that the
redeemability feature is mandatory or compulsory?

No. Despite being mandatory. The corporation cannot be

compelled to redeem the shares if the corporation is insolvent or
if redemption will bring about the insolvency of the corp.
 31

Can the Corporation be compelled to redeem

shares despite lack of surplus profits?

YES. The only time it cannot be compelled is

when the corporation is insolvent or payment
will bring about insolvency.

What is a sinking fund?

It is a fund set aside by the corporation from

time to time so that it can redeem shares by
the time they become due.
 32
Regarding founder shares, what is the reckoning date of the 5
year limit for the right to be voted as director?

It is reckoned from the date of incorporation, under the RCC.

Under the Old Code, it is reckoned from the date of approval
of the SEC.

Can the holders of the founders shares exercise the right to be

voted as directors even though they do not have enough
shares to be assured of a board seat?

Yes. Because it is not a matter of how many shares are being

held, but the fact that you hold that right to be voted.
Let’s say foreigners own 40% of the mining corporation. There 33
are 10 directors so they are entitled to 4 seats. Can they take a
5th seat on the ground that one foreigner is a holder of a
founder shares?

No. Because the rights of founder shares are subject to Anti

Dummy Law.

What about if the right given to the founder shares is to be

given preference in payment of dividends ahead of all shares,
is that subject to the 5 year limitation?

No. the 5 year limit applies only to the right to vote and be
voted as a director.
Can a par value share be issued for 1 centavo? 34

YES. Because the aw does not require minimum as far as par value
shares are concerned. The 5 peso limit applies only to no par value
shares.

What are the limitations to the issuance of no par value shares?

1. It is deemed fully paid

2. It cannot be issued less than 5 Pesos
3. Special Corporations are not allowed to issue no par value
shares
4. Preferred shares cannot be no par value shares
5. Entire consideration received shall not be available for
dividend distribution.
6. Entire consideration must form part of the capital
 35

Why does the law allow no par value shares?

To allow the corporation flexibility in assigning a price on a

share which is responsive to the demands of the prevailing
circumstances.

What are the types of preferred shares?

1. Preferred as to dividends
a. Cumulative and Non-Cumulative
b. Participating and Non-Participating
2. Preferred as to assets
3. Other Preferences as classified in the AOI
 36

What do you mean by cumulative preferred shares?

It means the holder of the preferred shares is entitled to

dividend all thru out the term of the preferred shares.

As opposed to non-cumulative, which means the right of

holder to dividends is extinguished when the corporation does
not declare dividends for that year.

What about participating preferred shares?

The holder thereof can still participate in the distribution of

residual balance of profits after the initial distribution.
 37

What is the Par Value?

It is the arbitrary assigned value to a share in the AOI.

What is the significance of the Par Value?

It signified the minimum amount that a share can be issued without

violating the trust fund doctrine.

If the par value is 5 pesos, what happens if it is issued below 5

pesos?

It becomes watered and it is unlawful.

Can it be issued higher that 5 Pesos?

Yes. The excess is called additional paid in capital.

 38

What is book value?

It is the intrinsic value of the shares determined by the following

formula: capital (or net worth) divided by the number of outstanding
shares.

What about Fair Market Value?

It means the price a seller is willing to sell to a buyer willing to buy.

Can the creditors enforce payment for unpaid subscription for no

par value shares?

No. Because once issued, no par value shares are deemed fully
paid, despite the fact that the subscriber did not in fact pay the
same in full.
 39

What are the shares that can be denied the right to vote?

Only 2 shares can be denied the right to vote: preferred and

redeemable shares

What about treasury shares?

There need not be a denial of the right to vote because by the

nature of treasury shares, they are not entitled to vote.

What are Treasury Shares?

Shares issued and fully paid and reacquired by the corporation and
are allowed to be reissued at a later time. While in the treasury of the
corporation, they cannot vote, and not entitled to dividend.
 40

What are those cases when even non-voting shares allowed to

participate in the voting?

1. Amendment of the AOI

2. Amendment of BL
3. Substantial disposition of corporate property
4. Incurring or increasing bonded indebtedness
5. Increasing Capital Stock
6. Merger or Consolidation
7. Investment of Fund for secondary purpose
8. Dissolution

Any share that cannot vote in the 8 cases, is considered not part
of the outstanding capital stock.
 41

FOUNDERS’ SHARES
What are Founders’ Shares?

These are shares given to the founders with certain rights classified
in the AOI.

With respect to the right to vote and be voted, what are the
limitations?

1. 5 year period limitation – reckoned from the date of

incorporation
2. Anti-Dummy Law and Foreign Investment Act
 42
What does the right to vote and be voted mean?

It means to insist upon the corporation to be given director seat

despite not having enough shares to guarantee the same.

Can a foreign stockholder insist upon a mass media corporation

to be voted as a director because he is a holder of a founders’
share?

No.

Because it violate the Anti-Dummy Law.

 43

REDEEMABLE AND TREASURY SHARES

What are redeemable shares?

These are shares classified as such in the AOI. It

is mandatory that the AOI classify them as
redeemable. If they are so classified, the
corporation may reacquire them after the
expiration of the redemption period.
 44

What are the kinds of redeemable shares?

1. Compulsory
2. Optional

If the AOI is silent as to the kind of

redeemable share, what is the
presumption?

It is optional.
 45

Is surplus profit required for a corporation to

redeem shares?

No.

But SEC says the very least, the corporation

must have assets to make such redemption.
It must be solvent, in other words.
 46

Can redeemable shares be reissued?

No.

Because once redeemed, they are deemed

retired. Unless, the reissuance is provided for in
the AOI, in which case they are considered as
treasury shares.
 47

ABC has 500M Capital Stock. 100M are preferred shares

redeemable after 3 years. Once the shares are redeemed, what
happens now?

Amend the Article of Incorporation to reduce capital stock

subtracting the 100M shares redeemed.

What if the AOI does not indicate the period within which to
redeem the shares? What is the presumption?

The presumption is the corporation can redeem it anytime.

 48

How do we distinguish redeemable from treasury shares?

1. Redeemable shares may be denied the right to vote,

whereas, treasury shares cannot be denied because by their
nature they are not entitled to vote.
2. Redeemable shares are those classified as such in the AOI,
while treasury shares are those not classified in the AOI.
3. Redeemable shares may not be reissued, treasury shares
may be reissued.
4. Redeemable shares can be redeemed despite lack of
surplus profit, whereas treasury shares cannot be acquired
by the corporation unless there is surplus profit.
 49

What are the modes by which a corporation

may acquire its own shares?

Any mode of disposition, including

redemption and donation.

What are the condition before a corporation

may acquire its own shares?

1. For legitimate purposes

2. Availability of retained earnings or surplus
profit
 50

Why are there conditions for a corporation to

acquire its own shares?

Because a corporation cannot be a

stockholder of its own.

What is an example of Legitimate Purpose?

Buying Back shares because it is trading

below book value.
 51

What if the mode of acquisition is donation,

does corporation still need to have surplus
profit?

No.

Because it does not make sense to require

surplus profit when it does not need it on
account that the transfer is gratuitous.
 52

What if the mode of acquisition is redemption?

Section 8 does not require surplus profit
because Section 9 requires surplus profit.

This is how it is reconciled. If upon redemption,

the shares are to be retired, then no need for
surplus profit, however, if the share will be
reissued, then there should be surplus profit.
What about in case of Dacion en Pago, is 53

surplus profit required?

No. It is absurd to require surplus profit when

the corporation is the one getting paid.

So is the requirement that there must be surplus

profit for the corporation to reacquire its own
shares absolute?

No. The only time it is required is when it will

spend for the acquisition. If the acquisition
does not entail expenditure on the part of the
corporation, then it is not required.
 54

What are these modes that do not require

surplus profit?

1. Redemption for purposes of retiring the

shares
2. Donation
3. Dacion en Pago
 55

What are the other purposes whereby the

corporation may acquire its own shares?

Section 40 provides for the other purposes:

1. Eliminate fractional shares

2. Collect or compromise indebtedness in
case of delinquent shares
3. Pay dissenting stockholder exercising
appraisal rights
 56
When can there be fractional shares?

In case of Stock Dividends.

Why is there a need to reacquire fractional shares?

Because a fractional share cannot vote. But if you add it to

another fractional share to make a component of 1 share, then it
can already vote.

Note: That there must be a board resolution authorizing buying

back of shares. It is not self-executory. So when you declare stock
dividends, always include a provision on buying back fractional
shares.
 57

A subscribed to 100k shares of ABC Corporation. He paid 25%.

When Should he pay the balance?

Generally, the contractual stipulation shall govern. He must pay

upon the arrival of the due date. In the absence of which, he
must pay upon call or demand of the corporation.

The due date if August 15. On August 19, the balance was not
paid. After 1 week, the corporation called a special stockholder’s
meeting. Can the stockholder vote?

Yes.
 58
Who may vote?

The entire 100k shares. The standing of a stockholder is

based on his subscription, not on his paid in subscription.

What about the fact that he did not pay on the due date?

He can still vote because a stockholder enjoys all the rights

of SH despite failure to pay on due date provided that the
shares are deemed delinquent.
 59
Can the corporation apply cash dividends against unpaid
subscription?

No.

Because set-off is not possible as they are not creditors and

debtors of each other. Additionally, there is no provision in
the RCC that allows cash dividends to be applied to unpaid
shares, unless they are already delinquent. Only in case of
delinquent shares is the corporation allowed to apply cash
dividends.

Note: However, that the contract may provide for allowing

the application of cash dividends even to unpaid
subscription.
 60

When are the shares deemed delinquent?

If the shares are not paid 30 days after due

date.

What are the remedies of the corporation in

case of delinquent shares?

1. Collection suit – Judicial

2. Cause the sale of delinquent shares -
extrajudicial
 61

What if the corporation does not have

enough surplus profits? Can the corporation
acquire the delinquent shares on a piece
meal basis?

No.

Because the contract of subscription is

indivisible which is why it cannot be sold on a
piece meal basis.
 62

ABC obtained loan from XYZ secured by mortgage. Loan was

not paid. For fear of foreclosure of mortgage, ABC’s board
approved the sale of its treasury shares below par value. The
consideration thereof will be used to pay the loan. A, the
stockholder of ABC demanded a stockholder’s meeting to
discuss the matter.

Is SH approval required for the sale of the treasury shares?

No. Because it is not one of those enumerated acts which

requires SH approval.
 63

Is the sale of treasury share below par value valid? Are these
watered stocks?

No. Because these are not watered shares. Watered shares

pertain to the issuance below par value. It does not pertain to sale
below par value. There is a difference between issuance and sale
of shares.

You do not issue treasury shares, you only sell them.

Treasury sales partake of the nature of the assets of the

corporation and therefore, can be disposed of however, the
corporation may decide.
 64

Who are liable for the issuance of watered

shares?

The following are solidarily liable for the

difference between the par value and the
issued value:

1. Directors who consented to the issuance

2. Directors who did not object
3. Subscribers to the shares
 65

Who can enforce payment on the difference?

1. The Corporation
2. Creditors under the Trust Fund Doctrine

What is the Trust Fund Doctrine?

The aggregate par value of subscription are funds held in trust

for the benefit of the creditors.

The creditors have the right to expect that the share will not be
issued below par value.
 66

What do you mean by scriptless shares?

Shares that are even sold without Stock

Certificate.
 67
How do you sell shares?

You indorse the stock certificate, and deliver it to the buyer. The
buyer will present the indorsed stock certificate to the Corporate
Secretary. The Corporate Secretary will cancel the certificate and
issue a new one to the current holder.

If the intention is to keep on trading the shares, then this process

becomes tedious, which is why we have scriptless shares.

The SH will lodge the certificate in the name of the broker. The
broker holds it for the benefit of the actual current owner. The
broker therefore is able to certify who the current owner of the
stocks are.

Note that the ultimate buyer can always go to the corporate

secretary and have the stock certificate cancelled and the new
one issued to him.
 68

What do you mean by convertible shares?

These share can be converted to other types of shares.

This is typical of redeemable shares, as it can be provided
that if not redeemed after the redemption period, they
are converted to common shares.

What if the authorized capital stock is fully subscribed,

can the redeemable shares be converted to common
shares?

Not immediately. The AOI must first be amended to

increase capital stock to allow the conversion to
common shares. This will require approval of SH.
 69

CORPORATE TERM
What is the Status of Corporations formed under
the Old Corporation Code and continues to
exists under the RCC?

They shall be deemed to have perpertual

existence without having to do anything. It is
only when the SHs elect to retain the corporate
term, which the corporation has to do
something, which is to manifest the intent to
retain the specific term.
 70

Should the Corporation call a Stockholder

Meeting to determine whether to extend or
retain the term?

The SEC says NO. But the RCC says

modification of term is subject to appraisal
right. So, how can the stockholder dissent if
there is no meeting?
What are the remedies available to a 71

Corporation whose term has expired?

1. Revival of Corporate Existence

2. Reincorporation

What is the effect of Reincorporation?

It is deemed a new corporation at the same

time, the corporation with expired term is
deemed defunct. The name of the defunct
corporation can be used by the new
corporation as long as approved by the majority
of the SH of the defunct corporation.
Can the new corporation be composed of the 72

same SH, directors, officers?

YES.

What happens to the assets of the defunct

corporation?

They are not automatically transferred to the

new corporation upon reincorporation. But
because the defunct corporation is dissolved,
the properties become properties of the SH and
therefore, they can assign them to the new
corporation as payment to their subscription to
the new corporation.
Is this subject to tax? 73

As of now, Yes. By virtue of a BIR order, the SEC

cannot approve reincorporation unless the taxes
are paid first. But, it can be argued that it should
not be subject to tax because there is in fact no
taxable gains.

What is the requirement for the revival of

corporate existence?

The Corporation must pay first all its liabilities and

obligations.
 74

Can the SEC grant the petition for extension of

a corporation whose term already expired?

No. Because, there is nothing more to extend.

Extension must be done during the lifetime of
the corporation

What is now the better option?

You compute first. Will you pay more for

penalty versus paying the filing fee for new
corporation. Bottom line, it depends on which
route is cheaper.
 75

What are the limitations on the power to extend

the corporate term?

1. Must be done during the lifetime

2. Cannot be done during liquidation period
3. Extension should not be earlier that 3 years
than original or subsequent expiry date
4. AOI must be amended
5. Endorsement by appropriate agencies for
special corporations
 76

CONTENTS OF AOI
What is the Articles of Incorporation?

It is the basic law of the corporation. It is where

you will find the purposes and the powers of
the corporation.

Note that the powers of the corporation are

not confined to what are stated in the AOI.
Not everything is expected to be captured
therein.
 77

Why is there a need to specify the purpose of

the corporation in the AOI?

Because it serves as the barometer for

determining the powers of the corporation of
the corporation.

Any act that is germane or in furtherance of the

purposes of the corporation cannot be deemed
ultra vires.
CORPORATE NAME 78

What names cannot be appropriated?

1. Generic Words
2. Words reserved for the Government

Is Lyceum generic?

Yes. It means facility for learning. Therefore, it

cannot be appropriated. However, there is a
case where the SC applied the doctrine of
secondary meaning, and allowed appropriation
of Lyceum.
How about La Salle, is it also generic? 79

No. It is unique, fanciful and arbitrary, so it can

be appropriated.

Can you use the word National as part of the

Corporation?

No. Because it connotes being owned by the

government.

What about National Bookstore?

It is allowed because it is not a corporate name

but business name.
PURPOSE 80

Corporation must have 1 primary purpose but

may have many secondary purposes.

What is the requirement when investing for

secondary purpose?

No need to amend AOI, just approval of SHs.

What about investment in primary purpose?

Only requirement is Board Approval.

PRINCIPAL OFFICE 81

What is the Principal Office?

It is the place indicated as such in the AOI. It is not

the place where the books are kept nor the
actual place of operation.

Why significant?

Because the venue of suits usually is the city

where the principal office is located. Additionally,
summons is served in the principal office of the
corporation. (Intra Corporate – venue is
jurisdictional)
 82

Do you need to amend the AOI when you

change the principal office?

YES.

There is a need to amend the Articles of

Incorpotaion.
INCORPORATORS 83

Is citizenship a requirement?

No. Except in cases of nationalized activities.

Are the nominees of the juridical persons who are

directors required to be SHs of the corporation?

Under the RCC, it is silent. But in the case of Lim vs,

Moldex (2017), the nominees to qualify must
likewise be SHs of the corporation.
 84

ARBITRATION CLAUSE

Is the Arbitration Agreement Mandatory?

No. It is merely permissive. Once in the AOI, it

becomes binding upon the SHs of the
corporation.
 85

AMENDMENT OF AOI
How do you amend any item or matter in the AOI?

1. By following what is provided in the AOI for its

amendment
2. If silent, by majority vote of the entire board and
2/3 vote or assent of the OCS.

Is there a need to hold a SH meeting for

amendment of AOI

No. Because the law says it can be by written

assent.
What are the corporate acts which require SH 86

meeting?

1. Modifying corporate term – extension or

shortening
2. Bonded Indebtedness – incurring and
increasing
3. Capital Stock – increasing and decreasing
4. Sale of Corporate Assets – all or substantially all
5. Investment of funds for secondary purpose
6. Declaration of stock dividends
7. Creating a management contract
8. Merger or Consolidation
9. Voluntary dissolution
How about those provisions which allow 87

appraisal right, is SH meeting required?

No. So long as the SH is given the chance to

dissent, then it is ok, but not necessarily in a
meeting.

How about if you amend the AOI to deny

preemptive right, is SH meeting required?

No. Because the RCC does not require SH

meeting. What is merely required is to allow the
SH to dissent, but it does not have to be in a
meeting.
When is appraisal right available? 88

It is only available in those instances where the law

expressly provides for it.

What are those instances?

1. Amendment of AOI for modifying the term

2. Changing or restricting rights of SH of any class of shares
3. Authorizing preferences superior to any class of shares
4. Merger or consolidation
5. Disposition of all or substantially all corporate properties
6. Investment of funds for secondary purpose

Other than above-mentioned, appraisal right cannot be

exercised.
 89

What is the exception?

In a close corporation, appraisal right is available any

time.

Is there appraisal right in non-stock corporations?

No. The language of the code makes reference to

stock corporation. The essence of appraisal right is
the withdrawal of the fair market value of the shares,
which in effect is a distribution of assets. In non-stock
corporation, assets may be only distributed upon the
liquidation of the non-stock corporation.
 90

How do you submit amendment of the AOI to SEC?

You submit the old AOI and the amended AOI

together, with references ti the amendments.

When will amendment will take effect?

It takes effect either by action or inaction of the SEC.

Either upon approval of the SEC, or upon the
expiration of 6 months from filing, for reasons not
attributable to the corporation.
Are there matters that cannot be amended in the 91

AOI?

Yes. These are matters of accomplished fact, like

the names of the incorporators, date of
incorporation and place of incorporation. “Once an
Incorporator, always an Incorporator”

If there is an error in the AOI, made by mere

inadvertence, such as exclusion of a purpose that
was originally present because it was lost in
translation, what is your remedy?

You do not amend the AOI, because that would

require SH approval again. You can just file a
petition to correct AOI with the SEC. Here, only
Board Resolution is needed.
 92

GROUNDS FOR DISAPPROVAL

What are the grounds to reject the AOI or
amendment thereto?

1. Does not conform with the form and style

prescribed
2. Purpose is contrary to law
3. Certification as to amount paid up is false
4. Filipino ownership in nationalized activities is
not compliant
5. Lack of endorsement from appropriate
government agencies – for special
corporations
 93

Is the enumeration exclusive?

No. The SEC is given the power to promulgate rules to be

complied with. The SEC may reject the amendment using the
grounds for revoking the franchise of a corporation. Almost
always, the SEC will disapprove if there is an element of fraud.

What are these additional grounds?

1. Fraud in procuring the original certificate of incorporation

2. Misrepresentation as to the purpose of the corporation
3. Non-payment of fines for certain violations.
4. Violation of any law administratively by the SEC
5. Non-compliance with any conditions imposed by SEC
 94

SPECIFIC RULES ON CORPORATE NAME

What are the requisites before a corporation
may bar another corporation from using a
name?

1. Prior Right – corporation must have

acquired prior right over the name by
registering the same
2. Lack of distinguishability – name is not
unique enough to be distinguishable from
another corporate name
 95

What are the remedies if the corporate name is not

distinguishable with another corporate name?

1. Under the RCC, petition with the SEC to compel the

corporation to change corporate name
2. If the corporation refused, SEC may impose sanctions
– criminal, civil and administrative

On appeal, the lawyer of the corporation filed the same

using the old name of the corporation instead of the new
name. Is that valid?

Yes. So long as it can be established that they are one

and the same corporation. The change in name does
not make it a different corporation.
 96

INCORPORATION
What is the procedure to form a corporation?

Under the old Code:

1. Execution of AOI that substantially conforms

with the requirements
2. Submission of BL
3. Treasurer’s Affidavit
4. Verification
5. Undertaking to change corporate name
6. Endorsement of appropriate government
agency
 97

Under the New Code:

1. Treasurer’s Affidavit – minimum submission

and payment no longer required, except
when provided by special law
2. Undertaking to change corporate name – this
is already built in the pro forma template

Can the SEC reject the application for

incorporation if everything is in order?

No. The SEC has no choice as long as the

application is substantially compliant with the
requirements.
 98

Can mandamus therefore lie to compel SEC to

approve?

YES. So long as there is substantial compliance.

Can the SEC inquire further as to the purpose of

the corporation? Can the SEC second guess the
purpose of a corporation?

No. It must take as gospel truth the

representations made by the corporation and
so it cannot inquire further. However, it can
revoke the franchise, if thereafter, there is
finding of misrepresentation.
When do you submit the BL?
99

Generally, it must be submitted prior to

incorporation.

What are the documents you have to get from

SEC for incorporation?

1. Certificate of Incorporation
2. Certificate of Filing of the AOI
3. Certificate of Filing of BL

What is the verification slip?

To verify the proposed name from other

distinguishable name
 100

There is a corporation named My Health. Then

a new corporation emerged with the name
My.Health. What then is the remedy of My
Heath?

The remedy is too file a petition with the SEC

to compel the new corporation to change its
name pursuant to its understanding to
change the corporation name if so found that
it is not distinguishable. Quo warranto is not
the remedy.
 101

What is the doctrine of unrelated goods?

Two corporations who use the same

corporation names may be allowed provided
that they offer or pertain to different products
or services, such as Equitable Bank and
Equitable Discotheque

Absent the endorsement from government

agencies, can the SEC deny you application for
incorporation?

Yes, if your corporation is one of those

enumerated such as banks.
 102

DE FACTO AND ESTOPPEL

5 Friends agreed to organize ABC Corporation. JDL was
chosen to be the President of the would-be corporation.
They entrusted the filing of the AOI, BL and other
documents with the lawyer. The lawyer prepared the AOI
and BL, but unfortunately, the lawyer pocketed the filing
fees and did not file the AOI and Bl. Further, the lawyer
produced a fake certificate of incorporation. Believing in
good faith that they are a Corporation, they entered into
contracts, incurred obligations, and acquired rights in the
process. Thereafter, they learned of the non-filing of the
AOI.
What is the status of ABC Corporation? 103

At the very least, it is a corporation by estoppel.

Is the execution of AOI not enough to make it a de facto

corporation?

No.

What is the operative act that would constitute bona fide on the
part of ABC to make it de facto?

At the very least, the SEC must have issued a certificate of

incorporation. Absent that, the corporation cannot be said to be
in good faith.

Can the 5 incorporators invoke good faith?

No. Good Faith is not a defense.

So will all of the 5 incorporators be held liable as general 104

partners?

Not all. Only those:

1. Who are guilty of active misrepresentation

2. Who did not actively misrepresent, but not received benefits
therefrom

That ABC Corporation did not materialize, is there a partnership

created?

No. Because, intention to create partnership is lacking.

Does the failure of the incorporation automatically bring about

corporation by estoppel?

No. the corporation must have contracted with third persons to

the latter’s prejudice, the element of third party injury must be
present
Who among themselves are liable as partners? 105

No. Estoppel is always with respect to third persons and does not
apply among guilty partners.

What is de jure corporation?

It is one which is compliant with the corporation code, and

therefore, it can resist any attack by the state questioning its
existence.

What is a de facto corporation?

It is one organized with colorable compliance with corporation

code, and therefore, can exercise the powers of a de jure
corporation, until the state questions its corporate existence.
What is corporation by estoppel? 106

It is one where 2 or more persons hold themselves out as a

corporation to third persons, whereby the latter depended on
such misrepresentation to the latter’s prejudice.

Why is it estoppel?

Because those who misrepresented are estopped from denying

the existence of the corporation to evade obligation.

What about if there is only one who misrepresented, instead of at

least 2?

It is not corporation by estoppel, but akin to a sole proprietor.

However, it can be argued that it can still be corporation by
estoppel given that the RCC now allows one person corporation.
What are the elements of a De Facto Corporation? 107

1. Valid Law
2. Bona Fide attempt to incorporate
3. Actual assumption of corporate powers

Can an unconstitutional law give rise to a de facto corporation?

NO.

What is the status of a corporation organized for the practice of

law?

It is a corporation by estoppel. The law does not allow a

corporation to exercise profession.
Can there be a De Facto Corporation if the SEC did 108

not issue a Certificate of Incorporation?

No. Attempt in good faith is manifested thru the

issuance of the certificate of incorporation. The
execution of AOI and BL does not amount to good
faith.

What are the rights and liabilities of a De Facto

Corporation?

Whatever a de jure corporation can do, the de facto

corporation can do. So whatever rights, privileges
and obligations may apply to de jure may also apply
to de facto.
What is the liability of SHs in a De Facto Corporation? 109

The same as in de jure. It is incorrect to say that they are

liable as general partners.

ABC filed a suit against JDL. ABC turned out to be a De

Facto Corporation. JDL moved to dismiss the suit on the
ground that since ABC is De Facto, it has no power to
sue.

Is that correct?

No. First, a de facto can exercise same powers as a de

jure, hence it can sue and be sued. Second, you
cannot attack the existence of a corporation
collaterally, it must be in a direct proceeding on a quo
warranto action
What may be examples of a defect that would give rise 110

to de facto existence?

1. False Certification as to the payment of subscription

by the treasurer
2. Failure to comply with Filipino ownership
requirement

What about if the Corporation failed to obtain an

endorsement from the appropriate government
agency. Is it a de facto corporation?

No. Because the SEC will not issue the Certificate of

Incorporation without endorsement. It is therefore, a
corporation by estoppel, if it is exercised corporate
powers.
Supposed that the President discovered that the AOI 111

was not filed. So, he filed the same and obtained

certificate of incorporation. Thereafter, the business
collapsed so the creditors sued.

Can the corporation use “by Estoppel” and “de

facto” as defenses?

No. Estoppel and De Facto cannot be used by the

offender, but only by the offended.

In Macasaet vs. Francisco, Abante Tonite was sued

for libel, together with the author and publisher.
Abante filed a motion to drop Abante as defendant
because it is not registered with SEC, and therefore,
no legal personality to sue and be sued. Judge
denied the motion.
Can you sue a corporation by estoppel? 112

Yes. A corporation by estoppel possess some of the

attributes of a corporation and unless, it is impleaded
as defendant, it cannot be held liable for all of the
obligation it incurred.

In actuality, can you ever levy upon the assets of a

corporation by estoppel?

No. Because it will never have assets. It is only a

corporation by representation. Hence, any judgment
against it is futile. That is why you sue those who
misrepresented and hold them liable as general
partners.
 113

In Our Lady of Fatima vs. Alzona, a 3rd person

donated to OLF knowing it is not a corporation. 2
days after donation, it was organized as a
corporation. Thereafter, the donor sought to
invalidate the donation on the ground that at the
time of donation, it was not a corporation.

Was there a valid donation?

Yes. First, because at the time of the donation, it is a

corporation by estoppel. Second, because estoppel
not only applies to corporation but also to persons
who deal with the corporations knowing the latter to
be unincorporated.
 114

EFFECT OF NON-USE OF CHARTER

What are the grounds to suspend or revoke
franchise?

1. Failure to organize within 2 years

2. Non-operation for a period of 2 years

These 2 must concur. Unlike in the old Doe, where it

allowed the corporation to organize within 2 years
but not operate. Under the RCC, the corporation
must organized within 2 years AND must commence
business within 5 years from incorporation, otherwise,
it will result in suspension or revocation.
 115

What if the corporation commences business

but becomes inoperative for a period of 5
years?

Upon notice and hearing, it shall be placed

on delinquent status. It has to resume
operations in 2 years, otherwise, it is deemed
revoked.
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