Custodio_Notes_Corporation Law

DEFINITION AND ATTRIBUTES

 What is a corporation?

A corporation is an artificial being, created by operation of law, that has the right of succession
and possesses powers, attributes, and properties granted to it by law and are incidental to its
existence.

o Artificial being – It has juridical personality which is separate and distinct from the
persons composing it

o Created by operation of law – the State’s consent, through compliance with the
requirement of laws and regulations, is vital for the creation of a corporation

o Right of succession – Meaning, the death, incapacity, or civil interdiction of persons

composing the corporation will not result to its dissolution. Its existence is
independent from the members composing it

o Possesses powers, attributes, and properties granted to it by law and are incidental to
its existence – the corporation is limited only to what its enabling statute grant,
unlike natural persons who can do anything as they please

 To whom transactions are made in corporation?

Transactions are made in corporations through its board of directors

 Transfer of rights by a shareholder

Shareholders of a corporation may alienate, transfer or assign their rights in the corporation
without the consent of other stakeholders. Unlike in partnerships that require the consent of the
other partners.

 Shareholders have limited liability

Shareholders are only liable for their subscription or promised contribution. While in partnership,
the partners are liable, pro rata with all their properties and after all partnership properties are
exhausted, for all partnership liability.

 Due process for protection of corporations

A corporation is protected by the due process clause. Meaning, its rights and properties cannot be
deprived without due process of law

 SEC supervises corporations

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Every corporation, domestic or foreign, doing business in the Ph are controlled and supervised
by the SEC.

 Are corporations entitled to moral damages?

Generally, no, because corporations and other artificial beings are not entitled to recover moral
damages. Except in libel, slander, or any other form of defamation cases (Besmirched
reputation). Article 2219 of the Civil Code does not qualify whether the plaintiff should be a
natural or juridical person.

 Can a corporation enter into a partnership?

Generally, no, because once the corporation enters into a partnership, its identity is lost or
merged. The control of which is then handed to persons not authorized by law to manage
corporations.

Exception: If the following conditions are met

1. AOI expressly authorizes the corporation to enter into a contract of partnership

2. AOP must expressly provide that all partners will manage the partnership
3. AOP must stipulate that all partners are jointly and severally liable for the obligations of
the partnership

CLASSIFICATION OF CORPORATIONS

 What are stock corporations?

Stock corporations are those corporations that have capital stock, divided into shares, and are
authorized to distribute to the holders of such shares, dividends or surplus profit, on the basis of
the shares held.

o Capital stock - amount of common and preferred shares that a company is

authorized to issue, according to its corporate charter.

 What are non-stock corporations?

Non-stock corporations are corporations where no part of their income is distributable as

dividends to its members, trustees or officers, subject to the provisions on dissolution.

Non-stock corporations can make profit if incident to their operations, although they exist for
purposes other than profit.

Non-stock corporations may use their profit only in the furtherance of their purpose or purposes.
They are not authorized to distribute it.

 CIR v Club Filipino

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It has been held that the liability for fixed percentage taxes as provided for in the tax code does
not ipso facto attach by mere reason of the operation of a bar and restaurant. For liability to
attach, the operator must be engaged in the business as a barkeeper and restaurateur. The
plain and ordinary meaning of BUSINESS is restricted to activities or affairs where profit is the
purpose or livelihood is the motive.

In the case at bar, it is concocted that the club derived profits from the operation of its bar and
restaurant, but such facts does not necessarily convert it into a profit making enterprise.
The bar and restaurant are necessary adjunct of the club to foster its purpose and the profits
derived therefrom are necessarily incidental to the primary object of developing and cultivating
sports for healthful and recreational and entertainment of the stockholders and members.

The fact that the capital of the club is divided into shares does not detract from the finding of the
trial court that it is not engaged in the business of operator of bar and restaurant. What is
determinative of whether or not the club is engaged in the business is its purpose or object as
stated in its articles and by-laws.

Moreover, for a stock corporation to exist, two requisites must be complied with, to wit:

That they have a capital stock divided into shares; and That they are authorized to
distribute dividends or allotments as surplus profits to its stockholders on the basis of the shares
held by them. In the case at bar nowhere in its articles of incorporation or by-laws
could be found an authority for the distribution of its dividends or surplus profits.

 Corporations created by special law or charter

These are corporations made through a legislative act. Also known as GOCC.

 Corporations created by special laws or charter are governed by the law creating
them. Corporation Code is suppletory.

Effects:

1. Registration with SEC is not necessary for them to be considered as corporations, since
they are not created by compliance in RCC;
2. They are not immune from suit, except when provided by law
3. The rights of their officers and employees are governed by Civil Service Law

 PNOC v NLRC

The doctrine that “employees of government owned or controlled corporations, whether

created by special law or formed as subsidiaries under the general corporation law are governed
by the civil service law and not by the labor code,” has been SUPPLANTED by the present
Constitution. THUS, under the present state of law, the TEST in determining whether a GOCC is
subject to CSL is the manner of its creation, such that GOCC created by special charter or law
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are subject to its provisions, while those incorporated under the general corporation law
are NOT within its coverage. The PNOC-EDC having been incorporated under the General
Corporation Law was held to be a GOCC whose employees are subject to the provisions of the
Labor Code.

 Distinction between public and private corporations

Public Corporations Private Corporations

They are formed or organized for the purpose Formed for some private reason, benefit, or
of the: aim, that will benefit individuals composing
it.
1. Government;
2. Portion of the State; or
3. Any of its political subdivisions

For the purpose of:

1. General good and welfare

2. Accomplishment of its own public
purpose

Public corporations have the authority to Private corporations do not have authority to
perform governmental purpose perform government purpose

 Examples of purposes not governmental in nature

1. Banking
2. Refining of oil
3. Coal industry

 National Coal Corporation v CIR

The plaintiff is a private corporation. The mere fact that the government happens to be a majority
stockholder does not make it a public corporation. As a private corporation, it has no greater
rights, powers, and privileges than any other corporation which might be organized for the same
purpose under the corporation law, and certainly it was not the intention of the
legislature to give preference or right or privilege over other legitimate private corporations in
the mining coal.

 Aggregate corporations and Corporation Sole

Aggregate Corporations Corporation Sole

Corporations composed of individuals vested Corporations composed of one person,
with corporate powers serving as the bodies corporate and politic, to
give them some capacity and advantage as a
natural person
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Composed of more than one incorporators Composed of a single incorporator

 One Person Corporation v Corporation Sole

One Person Corporations are composed of a single stockholder, while Corporation Soles are
composed of a single incorporator.

 One Person Corporations

Only a natural person, trust, or an estate may form a One Person Corporation. It cannot be
organized by a juridical person.

 What cannot be One Person Corporations?

1. Banks and quasi-banks;

2. Preneed;
3. Trust;
4. Insurance;
5. Public and publicly listed companies;
6. Non-chartered government owned and controlled corporations; and
7. Natural person licensed to exercise a profession

 Exercise of profession cannot be a One Person Corporation

Because the exercise of profession is reserved to professional partnerships, not corporations.

 What is a Close Corporation?

A Close Corporation is one, whose articles of incorporation provides that:

1. Issued stocks, except treasury shares, are held of record by not more than a specified
number of persons, not exceeding twenty;
2. Issued stocks, except treasury shares, are subject to one or more specified restrictions on
transfer;
3. Corporation shall not list in any stock exchange or make any public offering of any of its
stock of any class

Even If all the above are present, a corporation cannot still be considered as a close corporation
when:

1. At least 2/3 of its voting stock or voting rights is owned or controlled by another
corporation that is not a close corporation
2. When the corporation is a mining or oil company, stock exchange, bank, insurance
company, public utilities, educational institutions and corporations declared to be vested
with public interest
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 Role of shareholders in a close corporation

Each shareholder shall be deemed as a director. They will be active in the conduct of corporate
affairs.

 Domestic v foreign corporations

Domestic Corporation Foreign Corporation

Organized and created under Ph laws, either Corporations formed or existing under anly
by legislative act or the corporation code. laws other than of the Ph, and whose laws
allow Filipino citizens and corporations to do
business in its own country or State.

 When can a foreign corporation transact business in Ph?

Foreign corporations may transact business in Ph when:

1. Their laws allow Filipinos citizens and corporations to do business in their own country
2. The foreign corporation must have secured a license for the purpose of transacting
business in the Ph
3. It must obtain a certificate of authority from the appropriate government agency

 Differences of Parent company, subsidiaries, and affiliates

Parent Company Subsidiary Affiliate

Company whose activities are One whose majority of shares One whose stocks are owned
confined to owning stock and are owned by a parent by another corporation, but
managing other companies company not substantial enough to give
controlling interest

 What is controlling interest?

This refers to the power and authority to elect management. More than fifty percent of the voting
stock in the company must be held by the parent company.

 Quasi-public corporations v Quasi corporations

Quasi-public corporations Quasi corporations

Private corporations granted with franchise or Primarily political subdivisions organized by
contract by the State to perform a public duty statute or immemorial usage. Ex. Townships,
counties, school districts.

The two do not possess all general powers of a corporation. Corporate functions are limited only
to enable them to perform public duties.

 De Jure and De Facto Corporations

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De Jure Corporations De Facto Corporations

Organized in strict or substantial compliance Corporations with colorable compliance with
with the requirements of incorporations an irregularity or defect in organization
Cannot be attacked via quo warranto Can only be attacked through a quo warranto
proceedings proceeding

 Corporation by estoppel

All persons who assume to act as a corporation without authority to do so shall be liable as
general partners for all the debts, liabilities, and obligations arising or as a result of said act.

They are not allowed to use “lack of corporate personality” as a defense.

FORMATION AND ORGANIZATION OF CORPORATION

 Stages in the life of a corporation

1. Creation
a. Promotional stage
b. Incorporation
c. Organization and Commencement of business
2. Organization/Re-organization
3. Dissolution and winding up

 Promotional Stage

This is the stage of a corporation’s creation where:

1. It is organized; and
2. Subscription to its capital is raised.

 Promoter

The Promoter, brings persons to unite in forming a corporation. He enters into contracts in his
own name/ or in the proposed name of the corporation.

 Liability of Promoter

Contracts entered into by the Promoter cannot make a corporation, whose existence is yet to be
formed, liable for the duties and obligations arising from them. The contracts entered into by the
Promoter are his, and not of the corporation.

 How can the corporation make such contract its own?

A corporation, once granted legal personality, are bound by the contracts entered into by the
promoter once it:
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1. Adopt
2. Ratify
3. Accept benefits with knowledge of the terms

Note: The binding of the corporation to the contract does not relieve the promoter of any
liability. There must be novation or agreement to release him in the said contract.

 Remedies of the promoter to relieve him of liability from contracts entered into in
the promotional stage

The promoter can resort to three remedies:

1. Continuing offer on behalf of the corporations. Basically, there is still no contract until
and unless the corporation is formed;
2. There is a stipulation in the contract that he is relieved from responsibility when the
corporation is formed and adopts the terms of the contract; and
3. He may look after the corporation and personally bind himself, for reimbursement

 Process of incorporation

Process of incorporation includes the following:

1. Drafting of AOI;
2. Preparation and submission of supporting documents;
3. Filing with the SEC; and
4. Issuance of certificate of incorporation

 What is the prefatory paragraph of the AOI?

It specifies the nature of the corporation to prevent difficulties in administration and supervision.

 The name of the corporation

The following are the requisites for a valid corporation name:

1. The name must be distinguishable from those reserved or registered for use of another
corporation; and
2. The name must not be protected by existing laws
3. Must not be contrary to laws, rules, and regulations

 Why should corporation names be distinguishable the others?

This is to distinguish the corporation from the other firms and it is through the name which it
can:
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1. Act and perform legal acts

2. Sue and be sued
 Corporations cannot use names, other than what is provided in its AOI

No, corporations cannot use names, other than what is provided in its AOI. Corporation cannot
go beyond what the granting authority has given it.

If the corporation wants to change its name, it must do so by amending its AOI based on the
following grounds:

1. Name will result in confusion

2. May open doors to fraud and evasion
3. Difficulty in administration and supervision.

Note: When the name is distinguishable from those reserved or registered, is not protected
by law, or not contrary to law, rules, and regulations, the SEC shall reserve the name in
favor of the incorporation.

 Other guidelines in names of corporations

1. Append the word “corporation” or “incorporated” in full or abbreviate;

2. Adding two (2) other different and distinct words, in case a name is already
registered or protected by law;
3. If name or surname of a person, there must be a basis;
4. If name of person NOT in accordance with the previous, consent of the latter or
heirs (if deceased), must be secured and submitted to SEC; and
5. Subsidiary of foreign entity must contain “Philippines” or “Phils

 Red Line v Rural Transit

A corporation cannot change its name except in the manner provided by the statute. By
that name alone is it authorized to transact business. The law gives a corporation no
express or implied authority to assume another name that is unappropriated: still less that of
another corporation, which is expressly set apart for it and protected by the law. If any
corporation could assume at pleasure as an unregistered trade name the name of another
corporation, this practice would result in confusion and open the door to frauds and
evasions and difficulties of administration and supervision.

 Universal Mills v Universal Textile Mills

The corporate names in question are not identical, but they are indisputably so similar. Even
under the test of "reasonable care and observation” as the public generally are capable of using
and may be expected to exercise, the Court is apprehensive that confusion will arise,
considering that both are engaged in manufacturing, dyeing, finishing, and selling of fabrics of
all kinds. We cannot perceive why of all names, it had to choose a name already being
used by another firm engaged in practically the same business for more than a decade
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enjoying well-earned patronage and goodwill, when there are so many other appropriate names it
could possibly adopt without arousing any suspicion as to its motive and, more
importantly, any degree of confusion in the mind of the public which could mislead even its
own customers, existing or prospective.

 Lyceum of the Ph v CA

We do not consider that the corporate names of private respondent institutions are
"identical with, or deceptively or confusingly similar" to that of the petitioner institution. True
enough, the corporate names of private respondent entities all carry the word "Lyceum" but
confusion and deception are effectively precluded by the appending of geographic names to
the word "Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by
the general public for the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan"
would be confused with the Lyceum of the Philippines.

 Requisites of the doctrine of secondary meaning?

The requisites are:

1. Word or phrase is incapable of exclusive appropriation

2. Corporation had used it for so long and exclusively
3. That the word or phrase has become to mean that the article was his product

 May a foreign corporation take shelter under the doctrine of secondary meaning?

Yes, a foreign corporation can take shelter under the doctrine of secondary meaning. The Paris
convention, protects such without the obligation to file or register the same.

 Philips Export v CA

A corporation's right to use its corporate and trade name is a property right, a right in rem, which
it may assert and protect against the world in the same manner as it may protect its tangible
property, real or personal, against trespass or conversion.

In determining the existence of confusing similarity in corporate names, the test is whether the
similarity is such as to mislead a person using ordinary care and discrimination. Proof of actual
confusion need not be shown. It suffices that confusion is probably or likely to occur. Standard
should have been ordered to delete the word Philips. The following requisites are needed in
Sec. 18:

1. A prior right to use the name; and

2. Proposed name is identical, deceptively or confusingly similar, or patently deceptive,
confusing, or contrary to existing laws.
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In accordance with the priority of adoption, Philips was in use of such word twenty six
(26) years prior. Furthermore, under the purpose of Standard, they are engaged in the
production of electrical products, which is the same line of Philips.
Note: A name change will not affect the rights of the corporation because it is not a new
corporation nor a successor of the original.

 Three-fold importance of the purpose clause

1. For the stockholders to know what business lines to invest into;

2. For the board of directors to know their scope of authority in managing the corporation;
and
3. For any other person to know whether the contract they are entering into is within the
general authority of the management.

 Requisites for a valid purpose

1. Must be lawful
2. Must be specified and concise
3. Secondary purposes must be specified in the AOI
4. All purposes must be capable of being lawfully combined
5. Corporate name should not contradict the purpose

Else, application is dismissed by the SEC.

 Where is the principal office of a corporation?

The location of the principal office of the corporation should be stated in the AOI. This is
important to know where the venue for actions are in filing actions for or against corporations.
The municipality/city must be stated, together with the province.

Filing of actions for or against the corporation is not made in the areas where branches are
located for it may result to confusion and inconveniences.

 Where is the residence of the corporation?

The residence of the corporation is its principal office. Actions must be filed in the place of
residence of corporation, which is the place where principal office is located.

 Term of existence

Corporations have perpetual existence, unless its AOI provides for a specific term.

A corporate term for a specific period may be extended or shortened by amending the
articles of incorporation.
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No extension may be made earlier than three (3) years prior to the original or subsequent
expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined
by the Commission: Provided, further, That such extension of the corporate term shall take effect
only on the day following the original or subsequent expiry date(s).

 Who are incorporators?

They are those stockholders or members mentioned in the AOI as originally forming or
composing the corporation.

 Who may be incorporators?

The following can be incorporators:

1. Persons;
2. Partnerships;
3. Associations; and
4. Corporations

 Number of incorporators

Number of incorporators must not exceed 15. If incorporator is only one, it shall be deemed as an
OPC.

 Qualifications of incorporators

Incorporators must possess the following:

1. Holds at least one share of capital;
2. Must be of legal age
a. Minors can however be stockholders provided that they are represented by their
parents or guardians
3. Need not be citizens or residents of the Ph, but majority must be residents of Ph
4. Must not exceed 15

Note: Corporations organized for practice of profession are not allowed because the
practice of profession is reserved for professional partnerships.

 Exceptions to the rule that directors must not exceed 15

1. Educational corporations registered as non-stock whose directors must not be less than 5
nor more than 15, and number of trustees is in multiples of five
2. Close corporations since all stockholders are members of the board of directors
3. In non-stock corporations where there may be more than 15 members of the board of
trustees

 Powers of Board of Directors or Trustees

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1. Exercise corporate powers

2. Conduct all business
3. Control all properties of corporation

 Term of Board of Directors or Trustees of Corporations

Directors are elected for a term of one year from among the stockholders registered in the books
of corporation. If he ceases to own a stock, he ceases to be director.

Trustees are elected for a term not exceeding three years from among the members of the
corporation. If he ceases to be a member, he ceases to be a trustee.

 Who is an independent director?

He is a director, who apart from shareholdings and fees received from the corporation, is
independent of management and free from any business or other relationship which could
perceive to materially interfere with the exercise of independent judgment in carrying out the
responsibilities of directors.

 At least 20% of independent directors must constitute the board for the following:

1. Corporations covered by “The Securities Regulation Code”

a. Namely those whose securities are registered with the Commission; and
b. Corporations listed with an exchange or with assets of at least 50M and having 200 or
more holders of shares, each holding at least one hundred 100 shares of a class of its
equity shares

2. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money

service business, pre-need, trust and insurance companies, and other financial
intermediaries; and

3. Other corporations engaged in business vested with public interest similar to the above,
as may be determined by the Commission

 May aliens be elected as directors?

Yes, aliens may be elected as directors since there is no citizenship requirement in becoming a
director. But the residency requirement of the Code must be met (majority of directors must be
residents of Ph)

Exceptions:

Aliens, whether or not residents of the Philippines, may not qualify or be elected as
such, in any activity or business undertaking exclusively reserved to Filipino citizens.
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1. Management of educational institutions other than those established by charitable

institutions, religious groups and mission boards
2. Those governed by the Retail Trade Law
3. Mass media company

Nevertheless, if the business undertaking is only partially nationalized, aliens can be elected as
such directors, unless the law provides otherwise, but their number shall only be in
proportion to their equity or participation in the capital stock of the corporation.

 Disqualification of directors or trustees

A person shall be disqualified from being a director if 5 years prior his election or appointment,
the person was:

1. Convicted by final judgment

a. Crime with penalty of imprisonment for more than 6 years
b. Violating the code
c. Violating the Securities Regulation Code
2. Found administratively liable for any offense involving fraud
3. Found liable for cases similar to the above, by a foreign court

Corporate by laws may provide additional disqualifications.

 Anti-dummy law allows foreigners to be elected as directors for corporations

allowed by law to be partially nationalized

If undertaking is only partially nationalized, aliens can be elected as directors, unless the law
provides otherwise, but their number shall only be in proportion to their equity or participation in
the capital stock of the corporation. (If law requires 60% owned by Filipinos, 6 out of 10
members must be Filipinos.

CAPITALIZATION

 Authorized Capital Stock

Refers to the maximum number of shares, authorized in the AOI, that the corporation can issue.
If corporation wants to issue more, amend AOI.

 No Minimum Requirement

There is no more requirement for minimum capital stock. Unless special law provides.

There is no more minimum requirement for subscribed capital stock.

There is no more minimum requirement for Paid up capital stock.

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 Subscribed Capital Stock

Total number of shares and their value which there are contracts for their acquisition or
subscription.

They are those shares which are paid or promised to be paid or subscribed by stockholders.

 Paid-up Capital Stock

Actual amount or value which has been paid to the corporation in consideration of the
subscription.

 Outstanding Capital Stock

Total shares of stock issued under binding subscription contracts to subscribers or stockholders,
whether fully or partially paid, except treasury shares.

 Consideration for stocks

Consideration for stocks may be in any of the following:

1. Cash;
2. Property necessary or convenient for its use and lawful purposes;
3. Services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts from unrestricted retained earnings to stated capital;
6. Outstanding shares exchanged for stocks in the event of reclassification or
conversion;
7. Shares of stock in another corporation (RCC); and
8. Other generally accepted form of consideration (RCC)

Promissory notes and future service may not be considerations of stocks.

 Incorporator unable to pay subscribed capital stock.

Corporation may file an action for specific performance. If still unable to pay, it becomes
delinquent shares and corporation may order for the sale thereof. Corporation may buy the share
themselves and can be treated as treasury shares.

SHARE OF STOCK AND THEIR CLASSIFICATION

 Shares of stock

Shares of stock designate the units into which the proprietary interest in a corporation is
divided. It is the interest or right which the stockholder has in the management of the
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corporation, and in the surplus profits and, in case of dissolution, in all of its assets remaining
after the payment of its debts.

 Certificate of Stock

A document or instrument evidencing the interest of a stockholder in the corporation.

 May shares be deprived of voting rights?

No share may be deprived of voting rights except those classified as preferred or redeemable
shares, unless otherwise provided by the Corporation Code.

 When are holders of nonvoting shares entitled to vote?

The following are the instances when holders of nonvoting shares are entitled to vote:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of bylaws;
3. Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of
the corporate property;
4. Incurring, creating, or increasing bonded indebtedness;
5. Increase or decrease of authorized capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in accordance
with this Code; and
8. Dissolution of the corporation.

 Rule on equality of shares

In case there is more than 1 kind of share issued, irrespective of classification, these shares are
all equal in all respects. Except when the AOI and Certificate of Stock provide otherwise.

 Common stocks

Common stocks is described as one which entitles its owner to an equal pro rata division
of profits, if there are any, but without any preference or advantage in that respect over any other
stockholder or class of stockholders. A common share usually carries with it the right to vote,
and frequently, the exclusive right to do so.

 Preferred shares

Preferred shares of stock give the holder a preference over the holder of common stocks with
respect to dividend payments and/or distribution of capital upon liquidation.

 Limitations imposed on preferred shares

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1. They must be issued with respect to a stated par value; and

2. Preference must be stated in the AOI and COS, otherwise, preferred stocks shall be
deemed equal to every other share

 Participating and non-participating preferred shares

Participating preferred shares Non-participating preferred shares

Holders are still given the right to Holders shall be entitled only to their
participate with the common stockholders stated preference and will not participate in
in dividends beyond their stated preference. the dividends.

 Cumulative and non-cumulative preferred shares

Cumulative preferred shares Non-cumulative preferred shares

Entitle the owner to payment not only of Those which grant the shareholders only to
current dividends but also back dividends not the payment of current dividends but not back
previously paid whether or not, during the dividends.
past years, dividends were declared or paid.

 Types of non-cumulative preferred shares

Discretionary dividend Mandatory if earned Earned cumulative or

dividend credit
Holder entitled to dividends Imposes a positive duty on Holder has right to arrears if
on a particular year directors to declare profits are earned but NOT
depending on the judgment dividends every year when declared.
or discretion of the BoD. profits are earned.

 Difference between cumulative dividend and earned cumulative

In cumulative, arrearages apply even in years when no profit was earned. In the other, arrearages
apply only in years when profits were earned.

 Par and non-par value shares

Par value shares are those whose value are fixed in the articles of incorporation. Its primary
function is to fix a minimum subscription or original issue price of the shares and indicate the
amount which the original subscribers are supposed to contribute to the capital.

No par value shares are those whose issued price are not stated in the certificate of stock but
which may be fixed in the articles of incorporation, or by the board of directors when
so authorized by the said articles or the by-laws, or in the absence thereof, by the stockholders
themselves. They do not purport to represent any stated proportionate interest in the capital stock
measured by value, but only an aliquot part of the whole number of such shares of the
corporation issuing it.
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 Code allows stock corporations issuance of no par value shares

1. Such shares, once issued, are deemed fully paid and thus, non-assessable
2. The consideration for its issuance should not be less than P5.00
3. The entire consideration for its issuance constitutes capital, hence, not available for
dividend declaration
4. They cannot be issued as preferred stock
5. They cannot be issued by banks, trust companies, insurance companies, public
utilities and building and loan associations.

 Voting and non-voting shares

Voting shares Non-voting shares

The holders have the right to vote on all Do not grant the holders thereof a voice in the
matters affecting the corporation. election of directors and some matters
requiring stockholders’ vote.
The holders have the right to vote and
participate in the management of the
corporation through the exercise of such right,
either in the election of the board of directors,
or in any matter requiring stockholders’
approval

 Constitutional requirement on “Capital” on nationalization laws

For purposes of compliance with the nationalization laws, the word “capital” refers only
to shares of stock entitled to vote.

It was explained that the constitutional provision reserving to Philippine Nationals the
operation of public utilities or to corporations of which 60% of the outstanding capital
stock is owned by the citizens of the Philippines, refers only to shares with voting rights.

 May the holders of common stocks be denied the right to vote?

NO. Only preferred and redeemable shares may be denied the right to vote.

 May the holders of common stocks be effectively denied the right to vote?

YES. If the corporation issues founders’ shares.

 Right to elect and be elected as BOD through Founders shares

When a right to elect and be elected as a BoD is provided in the founders’ share, it shall be
for a limited period of five (5) years.
 Custodio_Notes_Corporation Law

 After the lapse of five years.

It results to an almost perpetual disqualification of the founder’s shareholder to elect and

be elected. Hence, in effect, it becomes a non-voting share.

Under the RCC, the period of five (5) years shall commence from the date of incorporation.

The five year period is non-extendible.

 Instances when the right to elect and be elected cannot be given

It shall not be allowed if it violates:

1. Anti-Dummy Law (CA 108);
2. Foreign Investments Act of 1991 (RA 7042); and
3. Other pertinent laws

 Redeemable shares

Grants the corporation the right to purchase or reacquire the shares at the option of the:

1. Corporation; or
2. Holder, based on the face or issued value plus a specified premium.

 Treasury shares

Shares which have been:

1. Issued and fully paid for;
2. Subsequently reacquired by the issuing corporation, by
a. Purchase;
b. Redemption;
c. Donation; or
d. Other lawful means

They can be reissued, even less than the issuance price.

 Effect of treasury shares

It shall have no dividend or voting rights. Voting and dividend rights are granted ONLY TO
OCS. Treasury shares ARE NOT PART OF the OCS, as these shares are in the hands of
the corporation and not any other person.

 Can treasury shares be declared as dividends?

Yes, because they are properties of the corporation.

 CIR v Manning
 Custodio_Notes_Corporation Law

Although authorities may differ on the exact legal and accounting status of so-called
"treasury shares," they are more or less in agreement that treasury shares are stocks issued and
fully paid for and re- acquired by the corporation either by purchase, donation, forfeiture or
other means. Treasury shares are therefore issued shares, but being in the treasury they
do not have the status of outstanding shares. Consequently, although a treasury share, not
having been retired by the corporation re-acquiring it, may be re-issued or sold again, such
share, as long as it is held by the corporation as a treasury share, participates neither in
dividends, because dividends cannot be declared by the corporation to itself, nor in the
meetings of the corporation as voting stock, for otherwise equal distribution of voting powers
among stockholders will be effectively lost and the directors will be able to perpetuate their
control of the corporation, though it still represents a paid- for interest in the property of the
corporation. The foregoing essential features of a treasury stock are lacking in the questioned
shares.