Section 1: - its continued existence is not affected by any

Title of the Code changes in the composition of corporators.

Revised Corporation Code (RCC)
Signed: Feb 21, 2019 4) the powers, attributes, and properties
Took effect: Feb 23, 2019 expressly authorized by law or incidental to its
existence
Section 2:
Corporation Defined - a corporation is an artificial - the powers that a corporation can exercise are
being created by operation of law, having the right only those which are granted by the law of its
of succession and the powers, attributes, and creation. All powers which may be implied from
properties expressly authorized by law or incidental those expressly provided by law and those which
to its existence. are incidental or essential to the corporation’s
existence may also be exercised.
Attributes:
TEST: Whether the act of the corporation is in
1) Artificial being direct and immediate furtherance of its business,
- it is a juridical person fairly incidental to the express powers and
- may own properties, exercise rights, incur reasonably necessary to their exercise.
obligation s independent of the persons comprising Examples:
it. - a corporation engaged in mining cannot acquire
- may sue for moral damages as it may acquire properties for urban development.
goodwill or reputation of its own, which, if - a corporation organized as a lending investor
besmirched or tarnished, entitles the corporation to cannot engage in pawnbroking.
moral damages.
- may be criminally prosecuted if the imposable Distinguishing a corporation from other forms
penalty is not imprisonment (fine, forfeiture of of businesses
license, revocation of franchise)
a. Sole proprietorship v. Corporation
Sole Corporation
Stonehill v. Diokno:
proprietorship
a corporation may invoke the right against
unreasonable searches and seizure. however, it Does not possess a Possess a legal
cannot invoke the right against self-incrimination. juridical personality personality
separate from the separate and
2) created by operation of law personality of the distinct from its
- there ought to be a law from which the corporation owner of the owners
derives its legal existence provided by the a) RCC enterprise.
and b) special laws to create GOCCs
The personal
Sec 16. Art XII of the 1987 Constitution: assets of the
The Congress shall not, except by general law, proprietor may be
provide for the formation, organization, or held to answer for
regulation of private corporations. Government- the obligations
owned or controlled corporations may be created or incurred by the sole
established by special charters in the interest of the proprietorship in
common good and subject to the test of economic conducting a
viability. business.
- this means that any law enacted by the legislature
to create a private corporation is unconstitutional.

3) right of succession
- the power to exist continuously, either by opting to
have perpetual existence or to extend its corporate
life if a fixed term is specified in its articles of
incorporation.
 General partners The liability of the
may be liable stockholders is
beyond their limited to their
b. Partnership v. Corporation
contribution to the subscription to the
partnership if the capital stock of the
Partnership Corporation assets thereof are corporation
not sufficient to
As to definition answer for
creditors’ claims
an agreement an artificial being
whereby two or created by the
more persons operation of law,
bind themselves having the right of As to transfer of shares or rights
to contribute succession and
A partner cannot A stockholder may
money, property, the powers,
assign his interest sell his fully-paid
or industry to a attributes, and
in the partnership shares of stock
common fund, properties
in favor of a third without the
with the intention expressly
party without the necessity of
of dividing the authorized by law
consent of the securing the
profits among or incidental to its
partners consent of the
themselves. existence.
corporation and/or
the other
n As to the manner of creation stockholders

By agreement By law
As to the management
As to composition
Managed by the The business of a
At least 2 parties One person may Managing Partner corporation is
comprise a designated in the generally
corporation Articles of conducted by the
Partnership, or in Board of Directors
As to commencement of juridical the absence of
personality designation, by
anyone of the
Acquires juridical From the date the general partners.
personality from SEC issues a
the moment two Certificate of
or more parties Incorporation
agree to form a under its official as to the exercise of powers:
partnership seal.
Note: partnership
with the SEC is May perform any Cannot exercise
not a condition act unless it is powers except
sine qua non, it is contrary to laws, those conferred by
only necessary for good morals, law and its articles
administrative custom, public of incorporation,
convenience. order, and public those implied from
policy the expressly-
conferred powers
and those
As to liability incidental to its
existence
Other forms of business organization:
The ostensible All general partners
partner manages its have the right of
Joint venture
business management.
- a corporation may enter into a joint venture
operations.
- under the RCC< it may also enter in to a
partnership and joint venture Liquidation thereof Liquidation may, by
- has no precise legal definition can only be done agreement, be
- may take various forms: simple pooling of by the ostensible entrusted to a
resources for a specific project, purpose or partner. partner or partners.
undertaking for a limited time. May also involve the
creation of a more formal structure and the
formation of a corporation to carry out the terms of
Advantages and disadvantages of a
the joint venture agreement.
corporation
nture, within the concept of Philippine law, is Advantages disadvantages
organized or established only for some
transient or temporary business objective.  It The capacity to act More complicated
is often characterized as being similar to a as a legal unit in formation and
partnership in the sense that there exists management
among the joint venturers, commonality of
interest and mutual right of control, not to Limitation of, or Higher cost of
mention the mode by which profits or losses exemption from formation and
are shared.  Joint ventures are usually liability of operation
resorted to by corporations - domestic or shareholders
foreign-based - which are not allowed to
form partnerships or become partners in a Continuity of Lack of personal
partnership.  Only individual, natural persons Existence element
are permitted to form partnerships
Transferability of Greater
Joint account shares government control
- a transaction of merchants where other and regulation
merchants agrees to contribute the amount of
capital agreed upon and participating in the Centralized Management and
favorable or unfavorable results thereof in the management of control are separate
proportion they may determine. BOD from ownership

Joint account v. Partnership Standardized Stockholders have

Joint account Partnership method of little voice in the
organization and conduct of business
finance
Has no firm name Has a firm name.
and is conducted in
the name of the Doctrine of Separate Legal Entity
ostensible partner. - the corporation has a legal personality
separate and distinct from the stockholders,
directors, and officers composing it.
Has no juridical Has juridical
personality and can personality and
sue or be sued only may sue or be sued
in the name of the under its firm name
ostensible partner. Legal consequences of the doctrine of
separate legal entity
Has no common Has a common a) properties assigned in the name of the
fund. fund. corporation are owned by it as an entity separate
and distinct from its corporators. Similarly,
properties that the corporators own do not belong
tom and cannot be used by, the corporation without
the former’s consent.
b) As a general rule, directors, officers, or
agents of a corporation cannot be held personally
liable for the obligations incurred by the
corporation, unless it can be shown that such
director/officer/agent is guilty of gross negligence or
bad faith or committed an unlawful act and that the
same was clearly and convincingly proven.
c) The cause of action available to the
corporation cannot be generally enforced by its
director, officer, or stockholder and vice-versa
d) Note: it is different with an action against a
person that wholly owns or controls another
corporation and uses this wholly-owned or
controlled corporation to evade his or its obligation
or liability to hide the ill-gotten wealth of any or all of
the persons impleaded therein, a judgment against
any or all of the impleaded defendants may be
enforced against any or all of the said corporations
which have not been formally impleaded as
defendants in the case. But the shareholders who
were neither charged nor impleaded as defendants
are innocent until found guilty by a court of
competent jurisdiction. Consequently, even if the
corporate veil of the corporation is pierced, they
can never be divested of their shares of stock until
shown to have engaged in illicit activities in
acquiring those shares.
e) The sale of shares at the level of the
stockholder resulting in a change of ownership of
the corporation does not extinguish the separate
legal personality of the corporation
Doctrines of Separate Juridical Personality and
Limited Liability
The doctrine of separate juridical personality is a
principle of law which ordains that the corporation
has a separate legal personality from the
stockholders, directors, and officers composing it.
The limited liability rule means that the liability of a
stockholder who is not a director, officer, or agent
of the corporation, is limited to his subscription to
the capital stock of the corporation.
Factors or circumstances which are insufficient
to disregard the doctrine of separate legal
entity:
a. Mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital
stock of a corporation.
b. The existence of interlocking directors,
corporate officers, and shareholders.
c. The fact that the businesses are related.
May a corporation be liable for torts?
A corporation is civilly liable in the same
manner as natural persons for torts because the
rules governing the liability of a principal or
master for a tort committed by an agent or
servant are the same whether the principal or
master be a natural person or a corporation,
and whether the servant or agent ne a natural
or artificial person.
A corporation is liable for whenever a tortuitous
act is committed by an officer or agent under
express direction or authority from the
stockholders or members acting as a body, or
generally, from the directors as the governing
body.
May a corporation be criminally prosecuted?
It cannot be prosecuted for a crime punishable
by imprisonment, however, it may be charged
and prosecuted for a crime if the imposable
penalty is a monetary fine or forfeiture or
revocation of the corporate franchise.
May a corporation claim moral damages?
Generally, moral damages cannot be awarded
in favor of a corporation because being an
artificial person and having existence only in
legal contemplation, it cannot experience
physical suffering or such sentiments as
wounded feelings. However, moral damages
may be awarded when the corporation
sufficiently showed that its reputation was
tarnished. Moral damages may also be
awarded in case of a tortouis act against the
corporation.
What is the doctrine of piercing the veil of
corporate fiction?
It is the doctrine that allows the State to
disregard, for certain justifiable reasons, the
notion or fiction that the corporation has a
separate legal personality from thise composing
it. The doctrine of separate legal entity is only a
fiction to promote public convenience. If this
fiction is misused or abused, then the Stae shall
pierce the corporate veil and treat the
corporation and the persons composing it as
one and the same entity.
In what areas does the doctrine apply?
1) Defeat of public convenience as when the
corporate fiction is used as a vehicle for the
evasion of an existing obligation
2) Fraud cases or when the corporate entity is
used to justify a wrong, protect fraud, or defend a
crime
3) 3) alter ego cases, where a corporation is
merely a farce since it is a mere alter ego or
business conduit of a person, or where the
corporation is so organized and controlled and its
affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of
another corporation.
4) When two businesses are owned, conducted
and controlled by the same parties, both law and
equity will, when necessary to protect the rights of
third parties, disregard the legal fiction that two
corporations are distinct entities and treat them as
identical or one and the same.
5) When the complaint alleges that the directors
and/or officers committed bad faith or gross
negligence in conducting the affairs of the
corporation.
Instances where the Court applied the doctrine
of piercing the corporate veil because the
fiction of separate legal personality was used to
defeat public policy
A. An operator of a bus transportation sold his
two certificates of public convenience to another
corporation with the condition, among others 10
years from the date, that he shall not, for a period
of 10 years from the date of the sale, apply for any
transportation public utility service identical or
competing with the buyer. The operator organized a
corporation, barely 3 months after the sale, with the
wife of the operator and his brother and sister-in-
law as the incorporators, is a clear violation of the
condition.
In this case, the fiction was used to avoid and go
around a contractual restriction.
B. When the fiction was used to circumvent the
rule against non-forum shopping by filing a
derivative suit in behalf of a corporation and in a
second case filed by the stockholders in
representation of the said corporation.
C. When there was a sale of agricultural land
covered by the agrarian reform law by the owner to
a corporation owned and controlled by the same
owner and his family.
The corporate vehicle cannot be used to shield the
owner from the agricultural claims of the tenant-
beneficiary.
The veil of corporate ought to be pierced when it is
used to subvert a public policy, in this case, the
agrarian reform policy.
Instances where the Court applied the doctrine of
piercing the corporate veil because the fiction was
used to perpetuate fraud
• When a second corporation was organized
to seek the protective shield of a corporate fiction
as it was deliberately and maliciously designed to
evade its financial obligation to its employees.
• The sale of the corporation’s franchise, as
well as most of its bus units, to a company owned
by the daughter and family members of the
controlling stockholder of the seller-corporation,
right in the middle of a labor dispute, yielded the
conclusion that the transaction as made to remove
the corporation’s remaining assets from the reach
of any judgment that may be rendered in the unfair
labor practice cases filed against it.
• Piercing the veil of corporate fiction is
warranted when a corporation ceased to exist only
in name as it re-emerged in the person of another
corporation, for the purpose of evading its
unfulfilled financial obligation under a compromise
agreement. Thus, if the judgment for money claim
could not be enforced against the employer
corporation, an alias writ may be obtained against
the other corporation considering the indubitable
link between the closure of the first corporation and
incorporation of the other.
What is the three-pronged test to determine the
application of the alter ego theory, which is also
known as the instrumentality theory?
a. INSTRUMENTALITY OR CONTROL
TEST. 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.
b. FRAUD TEST. 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 right
c. HARM TEST. The aforesaid control and
breach of duty must have proximately
caused the injury or unjust loss
complained of.
What does each test require to show?
a. INSTRUMENTALITY OR CONTROL
TEST. This test requires that the
 subsidiary be completely under the
control and domination of the parent. It
inquires whether a subsidiary
corporation is so organized and
controlled and its affairs are so
conducted as to make it a mere
instrumentality or agent of the parent
corporation such that its separate
existence as a distinct corporate entity
will be ignored. In addition, the control
must be shown to have been exercised
at the time the acts complained of took
place.
b. FRAUD TEST. This test requires that
the parent corporation’s conduct in using
the subsidiary corporation be unjust,
fraudulent, or wrongful.
c. HARM TEST. This test requires the
plaintiff to show that the defendant’s
control, exerted in a fraudulent, illegal,
or otherwise unfair manner toward it,
caused the harm suffered. A casual
connection between the fraudulent
conduct committed through the
instrumentality of the subsidiary and the
injury suffered or the damage incurred
by the plaintiff should be established.
What are the probative factors and
circumstances that may render a subsidiary an
instrumentality of the parent company?
A combination of any of the following common
circumstances may also render a subsidiary an
instrumentality, of the parent company, to wit:
a. The parent corporation owns all or most
of the capital stock of the subsidiary
b. The parent and subsidiary corporations
have common directors or officers
c. The parent corporation finances the
subsidiary
d. The parent corporation subscribes to all
capital stock of the subsidiary or
otherwise causes its incorporation
e. The subsidiary has grossly inadequate
capital
f. The parent corporation pays the salaries
and other expenses or losses of the
subsidiary
g. The subsidiary has substantially no
business except with the parent
corporation or no assets except those
conveyed to or by the parent corporation
h. In the papers of the parent corporation
or in the statements of its officers, the
subsidiary is described as a department
or division of the parent corporation, or
its business or financial responsibility is
referred to as the parent corporation’s
own
i. The parent corporation uses the
property of the subsidiary as its own
j. The directors or executives of the
subsidiary as its own
k. The directors or executives of the
subsidiary do not act independently in
the interest of the subsidiary but take
their orders form the parent corporation;
and
l. The formal legal requirements of the
subsidiary are not observed
Instances where the Court applied the doctrine
of piercing the corporate veil based on the alter-
ego or instrumentality test
• Where the business affairs of a subsidiary
corporation are so controlled by the mother
corporation to the extent that it becomes an
instrument or agent of its parent. In this case, not
only are the finances and policies of the subsidiary
dictated by the parent company, the hiring, and
termination of its officers, as well, is subject to the
approval of the parent company.
• The commonality of directors, officers, and
stockholders and even sharing of office between
the parent and the subsidiary corporations,
including certain financing and management
arrangements where the parent company is
allowed to handle the funds of the subsidiary; the
virtual domination, if not control, wielded by the
parent over the finances, business polices, and
practices of the subsidiary are circumstances which
justify the conclusion that the subsidiary is just an
instrumentality of the parent. Thus, the payee of a
promissory note issued by the subsidiary could
enforce payment against the parent company.
• When there was a permanent closure of the
business as a result of an intended sale fo the
assets to an undisclosed corporation, however, the
buyer of the assets was a corporation owned by the
same employer and members of his family.
Furthermore, the business re-opened in less than a
month under the same management.
• When the president was the majority owner
who exercised complete control of the corporation;
the principal office of the president and the
corporation are the same; the corporation never
operated to perform any business but for the
benefit of its president; and the president allowed
the corporation to be used as a pawn of an
investment house in avoiding its legal duty to pay
investors under a failed investment scheme.
Instances when the Court pierced the corporate veil
when two or more business are owned, controlled,
and conducted by the same parties.
• The doctrine of piercing the veil of corporate
fiction applies not only to corporations but also to a
single proprietorship as when the corporation
transfers its employees to the company owned by
the controlling stockholder of the corporation and
yet despite the transfer, the employee’s DTRs,
reports, daily income remittances and schedule of
work were all made, performed, filed and kept in
the corporation.
• When three companies are owned by one
family, such that majority of the officers of these
companies are the same, the companies are
located in one building and use the same
mesenterial services, and there was no showing
that the employee was paid separation pay when
he resigned from one company and then
transferred to the other.
• Where it appears that three business
enterprises are owned, conducted, and controlled
by the same family which were all engaged in the
construction business and which used the same
equipment, services and workers, both law and
equity will, when necessary to protect the rights of
third persons, disregard the legal fiction that the 3
corporations are distinct entities, and treat them as
identical.
• When two corporations, one engaged in the
coconut plantation and the other into the operation
of leisure resorts, have basically the same
incorporators and directors; are headed by the
same official; used only one office and payroll; are
under one management and their laborers
interchanged work in the 2 corporations and are
under the supervision and control of a common
managing director of both corporations, any attempt
to make the 2 corporations appear as 2 separate
entities, insofar as the workers are concerned,
should be viewed as a devious but obvious means
to defeat the ends of the law.
• When 2 corporations are characterized by
the oneness of operations vested in the person of
their common president and unity in the keeping
and maintenance of their corporate books and
records through their common account ant and
bookkeeper.
• Three companies engaged in a work-
pooling scheme, in which their workers were
constantly rotated and periodically assigned among
the three establishments to perform the same or
similar tasks; they operated and hired employees
through a common human resource department;
and they were under the control and management
of the same party.
• ABS CBN Broadcasting Corporation vs.
Honorato Hilario, G.R. No. 193136, July 10, 2019
Instances when the corporate veil may be pierced if
the complaint alleges that the directors and/or
officers committed bad faith or gross negligence in
conducting the affairs of the corporation
• The President’s casual manner,
insouciance, and nonchalance, indifference, to the
predicament of the distressed corporation, as
gleaned from his court testimony, glaringly
exhibited a lackadaisical attitude from a top officer
of a corporation, a conduct totally abhorrent in the
corporate world constitute gross negligence that will
impute liability to the corporate officer for corporate
obligations. Under these circumstances, the
investor who made placement with the corporation
could recover the same from the grossly negligent
officer.
• The president of a family-owned corporation
who committed fraud in selling its vehicle to a
customer and collected down payment from the
latter knowing fully well that the vehicle was already
sold to another cannot hide behind the separate
corporate personality of the corporation to escape
from liability.
Should the court first acquire jurisdiction over
the corporation involved before its separate
legal personality may be disregarded?
CASE:
Kukan International Corporation v. Judge
Reyes, G.R. No. 182729, September 29, 2010
The SC held that the court must first acquire
jurisdiction over the corporation or corporations
involved before its or their separate personalities
are disregarded, and the doctrine of piercing the
veil of corporate entity can only be raised during a
full-blown trial over a cause of action duly
commenced involving parties duly brought under
the authority of the court by way of service of
summons or what passes as such service and
jurisdiction cannot be acquired by mere motion to
pierce the veil of corporate fiction.
CASE: Gold Line Tours vs. Lacsa
If the RTC had sufficient factual basis to conclude
that the 2 corporations are one and the same
entityu as when they have the same president and
controlling sharehodler, and it is genrally known in
the place where they do business that they are one,
the third-party claim field by the other corporation
was properly set aside and the levy on its property
held valid even though the latter was not made a
party to the case. The judgment may be enforced
against the other corporation to prevent multiplicity
of suits and save the parties unnecessary
expenses and delays.
CASE:
Livesay v. Binswanger, G.R. No. 177493, March 19
2014
Piercing the veil is warranted when a corporation
ceased to exist only in name as it re-emerged in the
person of another corporation for the purpose of
evading its unfulfilled obligation under a
compromise agreement. Thus, if the judgment for
money claim could not be enforced against the
employer corporation, an alias writ may be
enforced against the other corporation considering
the indubitable link between the closure of the
corporation and the opening of the other. In this
case, the other corporation was not impleaded in
the case.
CASE:
Pacific Rehouse Corporation vs. CA, G.R. 199687,
March 24, 2014
An alias writ could not be enforced against its
parent company because the court has not
acquired jurisdiction over the latter and while the
parent company owns and controls the brokerage
firm, there is no showing that the control was used
to violate the rights of the plaintiff.
CASE:
Pioneer Insurance Surety Corporation vs. morning
Star Travel and Tours, G.R. No. 198436
The recognized modes of acquisition of jurisdiction
cannot be dispensed with in piercing the veil of
corporate fiction in a subsequent case. It was held
that the insurer cannot hold an impleaded
corporation liable as it would offend due process.
CASE:
Mayor v. Tiu, G.R. No. 203770, November 23, 2016
(reiterated Kukan ruling)
Piercing the veil of corporate entity applies to the
determination of liability not of jurisdiction. Hence,
before this doctrine can be even applied, based on
the evidence presented, it is imperative that the
court must frist have jursidiciton over the
corporation.
A corporation not impleaded in a suit cannot be
subject to the court’s process of piercing the veil of
its corporate fiction. Resultantly, any proceedings
taken against the corporation and its properties
would infringe on its right to due process.
DIVINA:
“For academic purposes, it depends on the
similarity with the facts of each case. The author,
though, believes that the corporate veil may be
pierced without having to conduct a full-blown trial
as long the corporation, whose veil the court wants
to pierce, is given the opportunity to be heard and
based on the hearing, albeit summary in nature,
evidence exists to warrant the application of the
doctrine. This is necessary to prevent multiplicity of
suits and save on expenses. Due process, after all,
can be afforded to the corporation even without a
full-blown hearing.
Is the doctrine of piercing the corporate veil
applicable to a non-stock non-profit corporation
and natural persons?
Yes, the fact that the corporation involved is a non-
stock non-profit corporation does not by itself
preclude the court from applying the equitable
remedy of piecing the corporate veil. The equitable
character of the remedy permits a court to look to
the substance of the organization and its decision is
not controlled by the statutory framework under
which the corporation was formed and operated.
While it may appear to be impossible for a person
to exercise ownership control over a non-stock non-
profit corporation, a person can be held personally
liable under the alter ego theory if the evidence
shows that the person controlling the corporation
did in fact exercise control even though there was
no stock ownership.
What is the doctrine of reverse piercing of the
corporate veil?
The plaintiff seeks to reach the assets of the
corporation to satisfy claim against corporate
insider. Reverse piecing flows in the opposite
direction (of traditional corporate veil-piercing) and
makes the corporation liable for the debt of the
shareholders or members.
Does reverse piercing the corporate veil
doctrine find jurisprudential basis?
In International Academy of Management and
Economics (I/AME) Litton and Company, Inc. vs.
Litton and Company Inc., the SC applied the
reverse piercing doctrine and made a non-stock
corporation liable for the debts of its members.
Is there a hard and fast rule when to apply the
doctrines of legal entity and piercing the veil of
corporate fiction?
No. Each case must be judged based on its own
peculiar factual circumstances. The undeniable
yardstick though is that lacking any harm or injury
to another, or in the absence of abuse of the legal
fiction of the corporation, the doctrine of separate
legal entity stands.
Does tax avoidance justify piercing the veil of
corporate fiction?
No. Tax avoidance being valid and legitimate, does
not justify piercing the veil of corporate fiction.
Does piercing the corporate veil result in the
dissolution of the corporation?
No. The piercing of the corporate veil does not
dissolve the corporation. It simply means that the
stockholder and/or director and/or officer, whose
action/s became the basis for the application of the
doctrine, and the corporation shall eb treated as
one and the same entity.
SECTION 3. CLASSES OF CORPORATIONS
Corporations may be classified as follows
A. As to the Existence of Shares of Stock
a. Stock Corporation: has a capital stock
divided into shares and is authorized to distribute to
the holders of such shares, dividends or allotments
of the surplus profits based on the shares held.
b. Non-stock Corporation: has no capital stock
and/or not authorized to distribute dividends to its
members.
NOTE: A non-stock corporation may be organized
for any purposes except for profit and political ends.
B. As to Organizers
a. Public: organized by the State only.
b. Private: organized by private persons alone
or with the State.
C. As to Function
a. Public: organized for the government of a
portion of the State.
b. Private: usually organized for profit
D. As to Governing Law
a. Government-owned and controlled
corporation: governed by the special law creating it
and the provisions of the RCC suppletory, to the
extent applicable. In case of conflict, the special law
prevails.
b. Private: governed by the RCC. The RCC is
also the governing law for non-chartered GOCC.
E. As to legal Status
a. De jure: is one that has fulfilled all the
requirements mandated by law and can
successfully resist a suit by the State to challenge
its existence.
NOTE: De jure means “a matter of law” that
validates the corporation as a legal entity.
b. De Facto: is one organized with colorable
compliance with the requirements of a valid law
c. By Estoppel: It exists when two or more
persons assume to act as a corporation knowing it
to be without authority to do so. They are liable as
general partners for all debts, liabilities, and
damages incurred or arising as a result thereof:
d. By Prescription: one which has exercised
corporate powers for an indefinite period without
interference on the part of the sovereign power,
e.g. Roman Catholic Church.
F. As to relationship of management and control
a. Holding corporation: A corporation that
holds stocks in other companies for purposes of
control rather than for mere investment.
b. Subsidiary Corporation: A company that is
owned or controlled by another company, called the
parent company.
c. Affiliates: Two companies are affiliates
when one company owns less than the majority of
the voting stock of the other.
d. Parent Company: A corporation that owns
enough voting stock in another company to control
management and operation by influencing or
electing its board of directors. Companies that
operate under this management are deemed
subsidiaries of the parent company.
G. As to Place of Incorporation
a. Domestic: formed, organized, or existing
under Philippine laws.
b. Foreign: formed, organized, or 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 or
state.
H. Other Classification
a. Closed Corporation: is one whose articles of
incorporation provides that all of the corporation’s
issued stock of all classes exclusive of treasury
shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty;
subject to specified restrictions on transfers; and it
shall not list in any stock exchange or make any
public offering of its stocks of any class.
b. Special Corporations: These include
educational corporations and religious corporations
. Religious corporations include corporations sole
and religious societies .
c. One-Person Corporation: A corporation
wherein all of the stocks are held directly or
indirectly by one person.
It is NOT necessarily illegal for as long as it follows
and observes the law throughout its existence and
conducts its business affairs lawfully, otherwise, the
doctrine of piercing the veil may be applied in such
a case.
What is the status of the articles of
incorporation which only specifies the amount
of authorized capital stock, without stating the
number of shares by which it is divided?
It is not valid.
Does the silence in the articles of incorporation
and/or bylaws on the authority of the
corporation to declare dividends make it a non-
stock corporation?
No. The provision of the RCC on the power of the
corporation to declare dividends should be deemed
read into the articles of incorporation.
Does the fact that the articles of incorporation
authorizes the stockholders of the corporation
to distribute the assets to a non-stock non-
profit corporation make it a non-stock
corporation?
No, provided that the twin elements of a stock
corporation represent, because at the time of
dissolution, the stockholders, not the corporation,
own the assets and determine their disposition.
Does the existence of a de facto corporation be
inquired in a collateral attack?
No. Its existence cannot be inquired collaterally.
Such inquiry may be inquired only by a direct attack
by the State through a quo warranto proceedings.
Can an ostensible corporation or corporation
by estoppel allowed to use as a defense its lack
of corporate personality?
No. When any such ostensible corporation is sued
on any transaction entered it by it as a corporation
or on any tort committed by it as such, it shall not
be allowed to use as a defense its lack of corporate
personality.
Can one who assumes an obligation to an
ostensible corporation resist performance
thereof on the ground that there was, in fact, no
corporation?
No.
When is a corporation said to be going public?
When its shares are being made available for listing
in the stock exchange and for public
offering/trading.
When is a corporation said to be going private?
When it is adopting the features of a closed
corporation.
QUESTION: The law creating the Bases
Covnersion and Development Authority (BCDA)
provides that it ahs an authorized capital of
P100,000,000.00 which may be fully subscribed by
the Republic of the Philippines and shall either be
paid up from the proceeds of the sales of its land
assets.
It is created, among others, to won, hold and/or
administer military reservations in the country and
implement its conversion to other productive use.
Is it a stock or non-stock corporation?
Ans:
It is neither a stock nor a non-stock corporation, but
a governmental authority vested with corporate
powers.
While it has an authorized capital of P100 billion, it
is not divided into shares of stock. It has no voting
shares. There is likewise no provision which
authorizes the distribution of dividends and
allotment of surplus profits to BCDA stockholders.
Hence, it is not a stock corporation.
It does not qualify as a non-stock organization
because it is not organized for any of the purposes
mentioned under S87 of the RCC.
What are GOCCs?
GOCCs are stock or non-stock corporations vested
with functions relating to public needs that are
owned and controleld by the government directly or
through instrumentalities.
What are the three attributes that makes an entity a
GOCC?
1. Its organization as stock or non-stock
corporation
2. The public character of its function
3. Government ownership of the same.
Possession of all 3 attributes is necessary to deem
an entity a GOCC.
What if the Government is considered the sole
member of a corporation, will it make it a non-stock
corporation, since it satisfies the requirement that a
non-stock corporation must have members?
No.
What are the two kinds of GOCCs?
a. Chartered: created by a special law. It is
governed primarily by the special law creating it
while the RCC has a suppletory application.,
b. Non-chartered: governed by the RCC. The
Civil Service Commission has jurisdiction over
employees of chartered GOCCs, while the Labor
Arbiter has jurisdiction over the employees of non-
chartered GOCCs.
What is an acquired-asset corporation?
It is a corporation under private ownership, the
voting or outstanding shares of which were
conveyed to the Government in the satisfaction of
debts.
What are the various tests to determine the
nationality of a corporation?
a. Place of incorporation test
b. Control test
c. Grandfather rule
What is the place of incorporation test?
The nationality of the corporation is determined by
the state of incorporation. Under this test then, a
corporation is a Philippine national if it is organized
and existing under Philippine laws, regardless of
the nationality of the shareholders. It is applied if
the corporation is not engaged in areas of activities
reserved, in whole or in part, for Filipinos.
What is the control test?
It is a mode of determining the nationality of a
corporation engaged in nationalized areas of
activities, provided for under the Constitution and
other applicable laws, where corporate
shareholders with foreign shareholdings are
present, by ascertaining the nationality of the
controlling stockholder of the corporation.
If the capital of the investing Corporation is at least
60% owned by Filipinos, then the entire
shareholdings of the investing Corporation shall be
recorded as Filipino-owned thus making both the
investing and investee—corporations Philippine
national.
What is the Grandfather Rule?
This is the method by which the percentage of
Filipino equity in a corporation engaged in
nationalized and/or partly nationalized areas of
activities, provided for under the Constitution and
other applicable laws, is accurately computed, in
cases where corporate shareholders with foreign
shareholdings are present, by attributing the
nationality of the second or even subsequent tier of
ownership to determine the nationality of the
corporate shareholder.
Thus, to arrive at the actual Filipino ownership and
control in a corporation, both the direct and indirect
shareholdings in the corporation are determined. IN
the case of a multi-tiered corporation, the stock
attribution rule must be allowed to run continuously
along the chain of ownership until it finally reaches
the individual stockholders.
Purpose: To trace the nationality of the stockholder
of investor corporations to ascertain the nationality
of the corporation where the investment is made.
What are the common conditions for the application
of the control test and grandfather rule?
a. The corporation is engaged in economic
activities that are reserved, in whole or in part, for
Filipinos, otherwise known as nationalized
activities.
b. Stockholders include corporation/s. If
stockholders are all natural persons, the nationality
of the corporation, under this test, is ascertained by
simply computing the percentage of stock
ownership by Filipino and foreigners.
Ex. In case of a corporation engaged in advertising,
the capital of which, under the Philippine
Constitution, is required to eb 70% owned by
Filipinos, it shall be considered a Philippine national
if the Filipino stockholders own at least 70% of total
shares issued.
c. Foreign stockholders are present either by
owning shares directly in the corporation or owning
shares in a corporation that invested in the equity of
the corporation whose nationality is in issue.
What is the prevailing the prevailing mode of
determining the nationality of corporations engaged
in nationalized activities?
The “Control Test” is the prevailing mode of
determining the nationality of corporations engaged
in nationalized activities. However, when in the
mind of the Court there is doubt as to where
beneficial ownership and control reside, based on
the attendant facts and circumstances of the case,
then it may apply the “grandfather rule”.
Is the control test and the grandfather rule
incompatible ownership-determinant methods that
can only be applied alternative to each other?
No. These methods can, if appropriate, be used
cumulatively in the determination of the ownership
and control of corporations engaged in fully or
partly nationalized activities.
Is the Grandfather Rule applied if the subject
corporation’s Filipino equity falls below the
threshold of 60%corporation is immediately
considered foreign-owned?
No. The need to resort to the Grandfather Rule
disappears. It is only when the Control Test is
complied with that the Grandfather Rule may be
applied.
Can the Grandfather Rule, standing alone, be used
to determine the Filipino ownership and control in a
corporation?
No, as it could result in an otherwise foreign
corporation rendered qualified to perform
nationalized or partly nationalized activities.
NOTE: When the 60% Filipino ownership, is never
in doubt, the control test prevails. The application of
the control test will already yield the result that the
company is a Philippine national. The grandfather
rule no longer applies.
Indicators that would warrant the application of
the Grandfather Rule
1) The presence of a common major investor;
2) The similarities of the corporate structures
of the Corporations;
3) The presence of the same nominal
shareholders in the corporations; and
4) The paid-in capital of the corporate owners
being paid only by foreign investor.
When is the grandfather rule applied?
The grandfather rule is applied in the following
case:
1. Under the Grandfather Rule proper, if the
percentage of Filipino ownership in the
corporation or partnership is less than 60%,
only the number of shares corresponding to
such percentage shall be counted as of
Philippine nationality.
2. Under the Strict Rule or Grandfather Rule
Proper, the combined totals in the Investing
Corporation and the Investee Corporation
when traced to determine the total
percentage of Filipino ownership, show less
than 60% requirement.
3. If based on records, Filipinos own at least
60% of the investing corporation but there is
doubt as to where control and beneficial
ownership in the corporation really reside.
Examples of economic activities which are
reserved in whole or in part, for Filipinos
The 11th Foreign Investment Negative List adopted
on October 29, 2008 contains the comprehensive
list of economic activities reserved, in whole or in
part, to wit:
List A: Foreign Ownership is limited by mandate of
the constitution and specific laws
1. Mass media
2. Practice of professions
3. Retail trade enterprises with paid-up capital
of less than $2,500,000
4. Cooperatives
5. Organization and operation of private
detective, watchmen or security guards
agencies
6. Small-scale mining
7. Utilization of marine resources in
archipelagic waters, territorial sea and EEZ,
as well as small-scale utilization of natural
resources in rivers, lakes, bays and lagoons
8. Ownership, operation and management of
cockpits
9. Manufacture, repair, stockpiling and/or
distribution of nuclear weapons
10. Manufacture, repair, radiological weapons
and anti-personnel mines
11. Manufacture of firecrackers and other
pyrotechnic devices
Up to 25% Foreign Equity
a. Private recruitment, whether for local or
overseas employment
b. Contracts for the construction of defense-
related structures
Up to 30% Foreign Equity
a. Advertising
Up to 40% Foreign Equity
 a. Subject to applicable regulatory frameworks,
contracts for the construction and repair of
locally-funded public works
b. Exploration, development and utilization of
natural resources
c. Ownership of private lands
d. Operation of public utilities
e. Educational institutions other than those
established by religious groups and mission
boards for feoreign diplomatic personnel and
their dependents, and other foreign
temporary residents
f. Culture, production, milling, processing,
trading except retailing, of rice and corn and
acquiring, by barter, purchase or otherwise,
rice and corn and the by-products thereof
g. Contracts for the supply of materials, goods
and commodities to GOCC, company,
agency or municipal corporation
h. Operation of deep sea commercial fishing
vessels
i. Ownership of condominium units
j. Private radio communications network
List B: Foreign Ownership is Limited by Reasons of
Security, Defense, Risk to Health and Morals, and
Protection of SMSE
a. Manufacture, repair, storage, and/or
distribution of products and/or ingredients
requiring PNP clearance
b. Manufacture, repair, storage, and/or
distribution of products and/or ingredients
requiring DND clearance
c. Manufacture and distribution of dangerous
drugs
d. Sauna and steam bathhouses, massage
clinics and other like activities regulated by
law because of risks posed to public health
and morals except wellness centers
e. All forms of gambling except those covered
by investment agreements with PAGCOR
f. Domestic market enterprises with paid -in
equity capital of less than the equivalent of
$200,000
g. Domestic market enterprises which involve
advanced technology or employ at least 50
direct employees with paid-in equity capital
of less than the equivalent of $100,000
SECTION 4: CORPORATIONS CREATED BY
SPECIAL LAWS OR CHARTERS
How are corporations created by special laws or
charters governed?
Corporations created by special laws or charters
shall be governed primarily by the provisions of the
special law or charter creating them or applicable to
them, supplemented by the provisions by RCC,
insofar as they are applicable.
NOTE: In the case of conflict, the charter prevails.
May the congress enact law to create a private
corporation?
Congress cannot enact law to create a private
corporation. Such legislation would be
unconstitutional.
NOTE: Private corporations may exist only under a
general law. That general law id the RCC.
Constitution authorizes Congress to create GOCCs
through special charters. Since private corporations
cannot have special charters, it follows that
Congress can create corporations with special
charters only if such corporations are government-
owned or controlled.
SECTION 5: CORPORATORS AND
INCORPORATORS, STOCKHOLDERS AND
MEMBERS
Who composes a corporation?
a. Corporators are those who compose a
corporation, whether a stockholders or
shareholders in a stock corporation, or as
members in a 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
c. Board of Director are generally elected by
their fellow directors to conduct the
business, control the property, and exercise
corporate powers. Directors may also be
elected by their fellow directors in the cases
and under the conditions specified in Sec. 28
 of RCC. They are called the Board of Distinctions between Corporators and
Trustees in a non-stock corporation, Incorporators
d. Officers are those appointed to assist the Incorporators Corporators
Board to manage the affairs of the Mentioned in the Not mentioned in
corporation articles of the articles of the
What is promoter? incorporation as incorporation and
Promoter is a person who brings about or causes those originally are not signatories
to bring about the formation and organization of form part of the
a corporation by: corporation and are
- bringing together the incorporators of the signatories
persons interested in the enterprise, Incorporators are Corporators are not
- procuring subscriptions or capital to the corporators necessarily
corporation; and incorporators
- setting in motion the machinery which leads to Incorporators in a May exceed 15
the incorporation of the corporation itself. stock corporation taking into account
should not exceed the number of
Under the Securities Regulation Code: promoter 15 authorized shares of
is a person who, acting alone or with other, takes the corporation
initiative in founding and organizing the business or
enterprise of the Issuer and receives consideration Under the OCC, majority of the incorporators
therefor. should be residents of the Philippines while no such
GR: Corporation should have full and complete requirement is imposed on corporators under the
organization and existence as an as entity before it RCC.
can enter into any kind of contract or transact any Similarly, except for corporation sole, the number
business. of incorporators should not be less than 5.
XPN: Contract made by promoters of the NOTE: These distinctions no longer hold under the
corporation on its own behalf may be adopted, RCC because requirement of residency for
accepted, or ratified by the corporation when incorporators was removed and a one-person
organized. corporation is now allowed.

What is the tri-level hierarchy of authority in the SECTION 6: CLASSIFICATION OF SHARES

corporation?
1. The board of directors, which is responsible
for corporate policies and the general
management of the business affairs of the
corporation;
2. The officers who in theory execute the
policies laid down by the board, but in
practice often have wide latitude in
determining the course of business
operations; and
3. The stockholders who have the residual
power over fundamental corporate changes,
like amendments of the articles of
incorporation.
What are the revisions under the RCC on the
classification of shares?
a. Preneed companies and other corporations
authorized to obtain or access funds from the
public, whether publicly listed or not, were
included in the enumeration of corporations
that are not be permitted to issue no-par
value shares of stock.
b. The word “authorized” was prefixed before
the term “capital stock”
What are shares of stock?
Shares of stock are forms of securities representing
equity ownership in a corporation, divided up into
units. They are the measure of the stockholder’s
proportionate interest in the corporation in terms of
the right to vote and to receive dividends, as well as
the right to share in the assets of the corporation
when distributed in accordance with law and equity.
What is the doctrine of equality of shares?
It means that all stocks issued by the corporation are
presumed equal, with the same privileges and
liabilities, provided that the articles of incorporation
is silent on such differences.
All shares have the same rights and privileges
unless classified differently in the Articles of
Incorporation, and such classification is not contrary
to law.
Preferred shares have the same voting rights similar
to common shares unless the preferred shares are
denied such right in the articles of incorporation.
NOTE: any restriction on shares should also be
stated in the articles of incorporation, otherwise, it
is not valid.
What are the classes of shares?
a. Common Shares
b. Preferred Shares
c. Par Value Shares
d. No Par Value Shares
e. Voting Shares
f. Non-Voting Shares
g. Classification to comply with Constitutional
or legal requirements
h. Founder’s Shares
i. Treasury Shares
j. Redeemable Shares
k. Watered Shares
l. Other classification as may be provided in
the articles of incorporation; provided it is
not contrary to law
Common Shares of Stock – basic class of stock
ordinarily and usually issued without privileges or
advantages except that they cannot be denied the
right to vote. Owners are entitled to a pro-rata share
in the profits of the corporation and in its assets
upon dissolution and liquidation and in the
management of its affairs.
Preferred Shares of Stock – given certain
preferences as may be provided in the articles of
incorporation but may be denied the right to vote.
Preferences that may be given to preferred
shares of stock:
1. Preferred shares to assets; and
2. Preferred shares as to dividends
They may also be given other preferences as
may be provided in the articles of incorporation.
NOTE: board of directors , where authorized in
the articles of incorporation may also fix the
terms and conditions of preferred shares of stock
or any series thereof; provided that such shall be
effective upon the filing of a certificate thereof
with the SEC.
**Shareholders, both common and preferred
are considered risk-taker who invest capital in
the business and who can look only to what is
left after corporate debts and liabilities are fully
paid.
Kinds of Preferred Shares as to Dividends
1. Cumulative Preferred Shares: Stipulated
dividend on its type of preferred shares, if
not paid on any given year, shall be added to
the dividends which shall be due the
following year/s, and holders of said
preferred shares shall be paid the
accumulated dividends during the
accumulated period before dividends are
paid to the holders of common shares.
2. Non-Cumulative Preferred Shares: If the
dividends are not declared for a particular
year within the covered period, the right to
receive dividend for such year is
extinguished.
3. Participating Preferred Shares: After
payment of the dividends due to the shares,
the holder thereof is entitled to participate in
the remaining dividends with the holders of
the common shares based on the amount
specified in the agreement.
4. Non-Participating Preferred Shares: After
receiving the dividend due on the shares, the
remaining dividends are distributed
proportionately to holders of the common
shares.
NOTE: Preferred shares may also have a 1. Preferred shares od stock may be issued only
combination of the foregoing features. with stated par value.
2. Shares of capital stock issued without par
Par Value Shares – those with a fixed arbitrary value shall be deemed fully paid and non-
amount specified in the articles of incorporation and assessable and the holder of such shares
shall not be liable to the corporation or its
in the stock certificate. It represents the minimum
creditors in respect thereto.
amount of consideration for the issuance of shares.
3. No par value shares must be issued for
NOTE: Shares issued below par value are consideration of at least P5.00/share.
considered watered stocks. Shares of stock may also 4. The entire consideration received by the
be issued above par value. The amount over the par corporation for its no par value shares shall
value forms part of the additional paid-up capital of be treated as capital and shall not be
the corporation. available for distribution as dividends.
Is par value the actual value of the shares?
Distinction of liability of the holders of par value
Par value is neither the book value nor the fair
with holders of no par value shares against the
market value of the shares. Par value is an arbitrary
corporation and its creditors.
amount that the corporation, through the
While both of them are liable only to the extent of
incorporators or the board of directors, has fixed.
their subscription, the corporation or its creditors
Book value is the market ratio that weighs
may proceed against holders of par value shares for
stockholders’ equity against outstanding shares.
any unpaid subscription, under the trust fund
Sometimes referred to as stockholder’s equity.
doctrine, but they cannot run against the holders of
Formula: company’s assets minus
no par value shares because such shares are deemed
liabilities/number of outstanding shares.
fully paid and non-assessable.
Fair market value is the price for which a seller
could sell his shares to a willing buyer when neither
Voting Shares – those shares which can vote on all
of them has to sell or buy and both of them know
corporate acts requiring stockholders’ approval. The
relevant facts.
corporation should always have voting shares.
No Par Value Stock – stock value without par value
These are the common shares of stock.
on the face of the stock certificate. This type of
Are sequestered shares voting shares
stock is adopted to give the corporation flexibility in
Yes, sequestered shares have voting rights if they
the determination of the issue value of the shares.
are common shares, of if they are
preferred/redeemable shares that are not denied the
NOTE: No par value shares can be issued for
right to vote in the articles of incorporation.
varying amounts provided that the value or price for
Who may vote these shares?
every issuance is not less than P5.00/share.
GR: The registered owner of the shares of a
Who determines the issued price of no par value
corporation, even if they are sequestered by the
shares?
government through PCGG, exercises the right and
It may be fixed in the articles of incorporation or by
the privilege of voting on them. The PCGG as a
the board of directors pursuant to authority
mere conservator cannot, as a rule, exercise acts of
conferred by the articles of incorporation or the
dominion by voting these shares.
bylaws, or if not fixed, by the stockholders
XPNs: (“Two-Tiered Test” in determining whether
representing at least a majority if the outstanding
the PCGG may vote sequestered shares)
capital stock at a meeting duty called for the
1. If there is a prima facie evidence showing
purpose.
that the said shares are ill-gotten and thus
What are the limitations on the issuance of no
belong to the State; and
par value shares?
 2. There is an imminent danger of dissipation
thus necessitating the continued
sequestration of the shares and authority to
vote thereupon by the PCGG while the main
issue is pending before the Sandiganbayan
NOTE: These two-tiered test does not apply in
cases involving funds of “public character”.
In such cases, the government is granted the
authority to vote said shares namely:
1. Where government shares are taken over by
private persons or entities who/which
registered them in their own names; and
2. Where the capitalization or shares that were
acquired with public funds somehow landed
in private hands.
In sum, when sequestered shares registered in the
names of private individuals or entities are shown,
prima facie, to have been (1) originally government
shares; or (2) purchased with public funds or those
affected with public interest, then two-tiered test
does not apply.